Case Study: McDonald's Food Chain

"Our growth plan for the next three years is more a function of getting our logistics and cold chain right rather than going to far off places."
- Amit Jetia, managing director, McDonald's India, Mumbai Joint Venture, in 2000.

Introduction
It was early evening and one of the 25 McDonald's outlets in India was bustling with activity with hungry souls trooping in all the time. No matter what one ordered - a hot Maharaja Mac or an apple pie - the very best was served every time. But did anyone ever wonder as to how this US giant managed the show so perfectly? The answer seemed to lie in a brilliantly articulated food chain, which extended from these outlets right up to farms all across India. US-based fast food giant, McDonald's success in India had been built on four pillars: limited menu, fresh food, fast service and affordable price. Intense competition and demands for a wider menu, drive-through and sit-down meals - encouraged the fast food giant to customize product variety without hampering the efficacy of its supply chain. Around the world (including India), approximately 85% of McDonald's restaurants were owned and operated by independent franchisees. Yet, McDonald's was able to run the show seamlessly by outsourcing nine different ingredients used in making a burger from over 35 suppliers spread all over India through a massive value chain. Between 1992 and 1996, when McDonald's opened its first outlet in India, it worked frenetically to put the perfect supply chain in place. It trained the local farmers to produce lettuces or potatoes to specifications and worked with a vendor to get the perfect cold chain in place. And explained to the suppliers precisely why only one particular size of peas was acceptable (if they were too large, they would pop out of the patty and get burnt). These efforts paid off in the form of joint ventures between McDonald's India (a 100% wholly-owned subsidiary of McDonald's USA) and Hardcastle Restaurants Pvt. Ltd, (Mumbai) and Connaught Plaza Restaurant (New Delhi). Few companies appreciate the value of supply chain management and logistics as much as McDonald's does. From its experience in other countries (Refer Exhibit II & III), McDonald's was aware that supply chain management was undoubtedly the most important factor for running its restaurants successfully. Amit Jatia, Managing Director, Hardcastle Restaurants Private Limited said, "A McDonald's restaurant is just the window of a much larger system comprising an extensive food-chain, running right up to the farms". McDonald's worked on the supply chain management well ahead of its formal entry to India. "We spent seven years to develop the supply chain. The first McDonald's team came to India way back in 1989," said S. D. Saravanan (Saravanan), Product Manager, National Supply Chain, McDonald's India.
1

Background Note
McDonald's was started as a drive-in restaurant by two brothers, Richard and Maurice McDonald in California, US in the year 1937. The business, which was generating $200,000 per annum in the 1940s, got a further boost with the emergence of a revolutionary concept called 'self-service.' The brothers used assembly line procedures in their kitchen for mass production. Prices were kept low. Speed, service and cleanliness became the critical success factors of the business. By mid-1950s, the restaurant's revenues had reached $350,000. As word of their success spread, franchisees started showing interest. However, the franchising system failed because the McDonald brothers observed very transparent business practices. As a consequence, imitators copied their business practices and emerged as competitors. The franchisees also did not maintain the same standards of cleanliness, customer service and product uniformity. At this point, Ray Kroc (Kroc), distributor for milkshake machines expressed interest in the business, and he finalized a deal with the McDonald brothers in 1954.

A cold chain refers to the warehousing, transportation and retailing of products under controlled temperatures. Such a chain is necessary for ice creams, frozen vegetables, processed meats, dairy and bakery products. While frozen foods need sub-zero temperatures up to -20C, products like butter, which require chilling, need about 04C.

He established a franchising company, the McDonald System Inc. and appointed franchisees. In 1961, he bought out the McDonald brothers' share for $2.7 million and changed the name of the company to McDonald's Corporation. In 1965, McDonald's went public. By the end of the 1960s, Kroc had established over 400 franchising outlets. McDonald's began leasing/buying potential store sites and then subleased them to franchisees initially at a 20% markup and later at a 40% markup. Kroc set up the Franchise Realty Corporation for this. The real estate operations improved McDonald's profitability. By the end of the 1970s, McDonald's had over 5000 restaurants with sales exceeding $3 billion. However, in the early 1990s, McDonald's was in trouble due to changing customer preferences and increasing competition. Customers were becoming increasingly health-conscious and wanted to avoid red meat and fried food. They also preferred to eat at other fast food joints that offered discounts. There was also intense competition from supermarkets, convenience stores, mom and dad delicacies, gas stations and other outlets selling reheatable packaged food. In 1993, McDonald's finalized an arrangement for setting up restaurants inside Wal-Mart retail stores. The company also opened restaurants in gas stations owned by Amoco and Chevron. In 1996, McDonald's entered into a $1 billion 10-year agreement with Disney. McDonald's agreed to promote Disney through its restaurants and opened restaurants in Disney's theme parks. In 1998, McDonald's took a minority stake in Chipotle Mexican Grill - an 18-restaurant chain in the US. In October 1996, McDonald's opened its first restaurant in India. By 1998, McDonald's had 25,000 restaurants in 116 countries, serving more than 15 billion customers annually. During the same year, the company recorded sales of $36 billion, and net income of $1.5 billion. McDonald's overseas restaurants accounted for nearly 60% of its total sales. Franchisees owned and operated 85% of McDonald's restaurants across the globe. However, much to the company's chagrin, in 1998, a survey in the US revealed that customers rated McDonald's menu as one of the worst-tasting ever. Undeterred by this the company continued with its expansion plans and by 2001, it had 30,093 restaurants all over the world with sales of $ 24 billion (Refer Exhibit I for key statistics of McDonalds). By mid 2001, the company had 28 outlets in India.

In Search of Perfect Logistics - The Story of the Cold Chain

In 1996, when McDonald's entered India, it was looking for a distribution agent who would act as a hub for all its vendors. Mumbai-based Radhakrishna Foodland Private Limited (RFPL) was chosen for the job as it was already a distributor for its sister concern, Radhakrishna Hospitality Services, a catering unit supplying to offshore institutions. The iceberg lettuce from Ooty, mutton patties from Hyderabad and sesame seed buns from Punjab were all delivered to RFPL's distribution centre (cold storage) in its refrigerated vans.

FIGURE I: JOURNEY THROUGH THE COLD CHAIN; Source: Business India, October 4, 1999.
RFPL stored the products in controlled conditions in Mumbai and New Delhi and supplied them to McDonald's outlets on a daily basis. By transporting the semifinished products at a particular temperature, the cold chain ensured freshness and adequate moisture content of the food. The specially designed trucks maintained the temperature in the storage chamber throughout the journey. Drivers were instructed specifically not to switch off the chilling system to save electricity, even in the event of traffic jam.

"This centralized distribution system is unique to McDonald's. We have to ensure that the integrity of the product is maintained throughout the cold chain," said H. Shriram (Shriram), General Manager, Distribution Centre, RFPL. FJ Walker of Australia, a McDonald's partner, helped RFPL build a cold storage in Thane. Another cold storage with equipment worth about Rs.75 lakh was built in Delhi in 1998. RFPL also handled McDonald's inventory management. It had to anticipate future requirements and contingencies and plan for optimum utilization of the refrigerated vehicles. Meeting McDonald's "cold, clean, on-time" delivery standards was no easy task considering that there were 30 suppliers situated all over the country. AFL Logistics Ltd (ALL), a joint venture between and Coughlin of the US, and RFPL was responsible for ensuring these standards. Coughlin's task was to make sure that McDonald's had the proper amount of supplies and materials at each restaurant. The challenge was the physical movement of material and inventory control in a country with bad roads and basic infrastructure bottlenecks. To meet McDonald's high standards, Coughlin ensured that quality, temperature and packaging requirements were met. At the same time, unused capacity in the vehicles was used to transport goods from other vendors. This helped Coughlin deliver the lowest cost with the highest quality. RFPL also handled in-city distribution to restaurants. "We make a projection of demand from each of the restaurants based on historical data and ask the suppliers to meet the demand. This information is also sent to the logistics company. The suppliers, in turn, give us feedback on their ability to meet the demand," Shriram said.

FIGURE II: VITAL LINKS IN THE COLD CHAIN; Source: Business India, October 4, 1999.
According to Vinay Adhye (Adhye), director, RFPL, "Managing logistics for McDonald's is as complicated and demanding as rocket science." To begin with, while the restaurants were not supposed to stock more than three days of inventory, the time limit for distribution centres or warehouses was a stringent 14 days to minimize costs and optimize quality control. This required roundthe-clock monitoring of pick-ups and truck movements. Since most of the items were perishable, McDonald's standards covered the entire delivery schedules. For in-city delivery, the truck was monitored from the time it left the distribution centre till the time it reached the restaurant. Not just that, the time taken in offloading was noted too. Adhye further added, "The restaurant gives us a strict 30-minute window in which time we have to complete the delivery. And in the last two and a half years we have missed the window only once." The products were transported from the suppliers' end to the distribution centre in refrigerated and insulated vehicles through a system of consolidation to ensure better utilization of vehicle capacity. While the temperature in the reefers ranged from -18 to -22, that in chilled trucks ranged from 1 to 4. "At no point is the cold chain disturbed, so much so that if any of the McDonald's restaurants face a power breakdown, reefer trucks are arranged to ensure that temperature is maintained", said Shriram. He further added, "We have a contingency plan and a back-up at every point, in the event of a failure". RFPL was also responsible for cleanliness (including the personal hygiene of the drivers), and the packing and temperature control of the food (digital probes were inserted into items selected at random) it transported. There were also data logs to track the movement of each batch. This meant that in the case of a complaint from a restaurant, the batch could be identified, isolated, and dumped. To perfect the system, the RFPL team travelled to a number of countries, including Turkey, the Philippines, Australia, and the US. AFLL also followed similarly detailed procedures.

McDonald's insisted on standardization by its suppliers. Vista Processed Foods & Kitran Foods (Vista & Kitran Foods), which supplied the pies, nuggets, vegetable, and chicken patties, commissioned a new facility for the purpose in 1996, complete with insulated panels, temperature control, and chill rooms. McDonald's also assisted its suppliers with improvements. For instance, it helped Trikaya Agriculture develop a variety of iceberg lettuces (which is a winter crop) that would grow all year round. And for quality control, Trikaya's post-harvest facilities included a cold chain consisting of a pre-cooling room to remove field heat, a large cold room, and a refrigerated van with humidity controls.

Outsourcing at its Best

McDonald's sourced ingredients from all parts of India. (Refer Table I). The iceberg lettuce was specially developed for India using a new culture farming technique. This variety of lettuce was similar to the lettuce McDonald's used elsewhere in the world. To meet the demand consistently, McDonald's helped Trikaya Agriculture grow the lettuce throughout the year and even in rain-shadow areas. The crop was harvested between 45 days, depending on the climate. The crop was harvested early in the morning and immediately stored in vacuum pre-coolers installed at the farm. The pre-cooler brought down the temperature of the lettuce from 26 to 3. McDonald's was able to bring technology to its suppliers too. Vista and Kitran Foods was formed through a joint venture between Vista and OSI Industries, US, for chicken products; and between Kitran and Kitchen Range Foods, UK, for vegetable patties. Vista and Kitran's Taloja plant was commissioned in December 1996. "We have developed a supplier chain to get fresh vegetables and chicken. We test everything that comes into our plant," said Jose Azavedo, CEO, Vista & Kitran. The plant had a Hazard Analysis Critical Control Point (HACCP) system to ensure quality. The ready-to-cook patties, manufactured at the plant, were stored in rooms at -26 c. McDonald's had also applied supply chain technology when setting up Dynamix Dairy Industries Limited. The Dynamix Dairy plant, with technological collaboration from various international firms, including Schreiber International Inc, US, went in for backward integration, by tying up with cooperative organizations at the district level. The joint venture with Baramati Cooperative Milk Marketing Federation resulted in facilities across Baramati to collect milk. "We did a survey of Baramati and set up 35 bulk cooling stations with 50 tanks where milk can be collected, checked and stored at 3", said A. R. Sumant, General Manager, Milk Procurement, Dynamix Dairy Industries Limited. "Our aim was to ensure that the milk producer does not travel more than 2.5 km to deliver his product. That ensures longer life for milk," he added. Once collected, the milk was transferred to Dynamix's plant in insulated tankers. Dynamix procured 3.5 lakh litres of milk every day, which was used to make processed cheese exclusively for McDonald's. The product was made according to the multinational's specifications.

TABLE I: OUTSOURCING THE INGREDIENTS

Cheese Dynamix Dairy Industries Ltd., Pune Dehydrated onions Jain Foods, Jalgaon Iceberg lettuce Trikaya Agriculture, Pune Chicken patty Vista Foods, Taloja Veg. Patty, Veg. nuggets, Pineapple/Apple pie Kitran Foods, Taloja Chicken (dressed) Riverdale, Talegaon Buns Cremica Industries, Phillaur Eggless mayonnaise Quaker Cremica Pvt. Ltd., Phillaur Sesame seeds Ghaziabad Iceberg lettuce Meena Agritech, Delhi Fish fillet patties Amalgam Foods Ltd., Kochi. Iceberg lettuce Ooty Farms & Orchards, Ooty Vegetables for the patties Finns Frozen Foods & Jain Foods (Nasik, Jalgaon) Mutton and mutton patties Al Kabeer, Hyderabad Source: Business India, October 4, 1999. McDonald's convinced its suppliers to set up two separate production lines for chicken and vegetable patties, keeping in the mind the link between food and religion in India. This was in sharp contrast with its global practice, where McDonald's suppliers produced all types of patties from the same line. These two production lines were housed in two different rooms and the only way a worker could cross over from one line to the other was by

passing through the shower room. This eliminated all chances of contamination. However, from a supplier's point of view, more lines meant a reduction in capacity utilisation and high cost of production. To minimise costs, McDonald's helped Vista & Kitran Foods produce derivatives of chicken and vegetable nuggets (not based on McDonald's recipe) for Indian hotels and restaurants and thereby reach new markets. Vista & Kitran's higher margin and higher capacity utilization for non-McDonald's products helped it remain cost competitive. McDonald's philosophy had been 'one world, one burger' i.e. the McDonald's burger should be consistent in terms of cost and quality throughout the world. To ensure this, all of McDonald's suppliers followed the internationally acclaimed HACCP systems wherein both inputs and finished goods were subjected to chemical and microbiological tests. This kept food fresh and free from contamination. Apart from this, the entire production line was automated using sophisticated technology, barring only the final compilation of the bun, cheese and patty - which was done by hand.

Questions for Discussion

What is a 'Cold Chain'? Explain how McDonalds managed the components of the cold chain. Critically comment on the role played by the unique centralized distribution system in McDonald's supply chain. 'McDonald's is one of the few companies that has placed substantial emphasis on effective and efficient supply chain management system as a means to leverage for competitive advantage.' In the light of this statement, analyse the steps taken by McDonalds to standardize its supply chain in India.

EXHIBIT I: McDonald's - FINANCIAL PERFORMANCE SUMMARY

Dollars in Millions Franchised Sales Company-operated Sales Affiliated Sales Total System Wide Sales Total Revenues Operating Income Income before Taxes Net Income Cash provided by operations Capital Expenditures Free Cash Flow Treasury Stock Purchases Financial Position at year end Total assets Total debt Total shareholders'equity Shares outstanding (in millions) Per Common Share Net Income Net-Income Diluted Dividend Declared Market price at year end Franchised Restaurants Company-operated Restaurants Affiliated Restaurants Total Systemwide Restaurants 2001 $24,838 $11,040 $4,752 $40,630 $14,870 $2,697 $2,230 $1,637 $2,688 $1,906 $782 $1,090 $22,535 $8,918 $9,488 1,280.70 $1.27 $1.25 $0.23 $26.47 17,395 8,378 4,320 30,093 2000 24,463 10,467 5,251 40,181 14,243 3,330 2,882 1,977 2,751 1,945 806 2,002 21,684 8,474 9,204 1,304.90 1.49 1.46 0.22 34 16,795 7,652 4,260 28,707 1999 23,830 9,512 5,149 38,491 13,259 3,320 2,884 1,948 3,009 1,868 1,141 933 20,983 7,252 9,609 1,350.80 1998 22,330 8,895 4,754 35,979 12,421 2,762 2,307 1,550 2,766 1,879 887 1,162 19,784 7,043 9,465 1,356.20 1997 20,863 8,136 4,639 33,638 11,409 2,808 2,407 1,642 2,442 2,111 331 765 18,242 6,463 8,852 1,371.40 1996 19,969 7,571 4,272 31,812 10,687 2,633 2,251 1,573 2,461 2,375 86 605 17,386 5,523 8,718 1,389.20 1995 19,123 6,863 3,928 29,914 9,795 2,601 2,169 1,427 2,296 2,064 232 321 15,415 4,836 7,861 1,399.50 0.99 0.97 0.13 22.56 12,186 3,783 2,230 18,299 1994 17,146 5,793 3,048 25,987 8,321 2,241 1,887 1,223 1,926 1,539 387 500 13,592 4,351 6,885 1,387.40 0.84 0.82 0.12 14.63 10,944 3,216 1,739 15,899 1993 15,756 5,157 2,674 23,587 7,408 1,984 1,676 1,083 1,680 1,317 363 628 12,035 3,713 6,274 1,414.70 0.73 0.71 0.11 14.25 9,918 2,733 1,476 14,127 1992 14,474 5,103 2,308 21,885 7,133 1,862 1,448 959 1,426 1,087 339 92 11,681 3,857 5,892 1,454.10 0.65 0.63 0.1 12.19 9,237 2,551 1,305 13,093 1991 12,959 4,908 2,061 19,928 6,695 1,679 1,299 860 1,423 1,129 294 117 11,349 4,615 4,835 1,434.50 0.59 0.57 0.19 9.5 8,735 2,547 1,136 12,418

1.44 1.14 1.17 1.11 1.39 1.1 1.15 1.08 0.2 0.18 0.16 0.15 40.31 38.41 23.88 22.69 15,949 15,086 14,197 13,374 6,059 5,433 4,887 4,294 4,301 3,994 3,844 3,216 26,309 24,513 22,928 20,884 Source: www.mcdonalds.com

Includes $378 million of pretax special operating charges primarily related to business reorganization in the US and other global change initiatives, and the closing of 163 under performing restaurants in international markets. Includes the $378 million of pretax special operating charges noted above and $125 million of net pretax special nonoperating income items primarily related to a gain on the initial public offering of McDonald's Japan, for a net pretax expense of $253 million ($143 million after tax or $0.11 per share). Net income also reflects an effective tax rate of 29.8 percent, primarily due to the one-time benefit of tax law changes in certain international markets ($147 million). Includes $162 million of Made For You costs and the $160 million special charge related to the home office productivity initiative for a pretax total of $322 million ($219 million after tax or $0.16 per share).

EXHIBIT II: McDonald's IN MEXICO

Problems: Mexico could not grow potatoes that met McDonald's high standards. The country had few distribution centers, which were located at different parts. Haulage from the distribution center to the restaurant exceeded 1000 miles. There were uncontrolled highway robberies. Contract carriers (transporters) did not have standard size vehicles and were unreliable.

A study conducted by McDonald's Mexican subsidiary, Sistemas de Mexico, revealed that Mexico could not grow potatoes that met McDonald's high standards. Thus, frozen potatoes for McDonald's famous fries in Mexico came from the Western United States and Canada. This created the need for logistics services, or what might be called a Golden Arches supply chain. Once the products crossed over to Mexico, they were sent to one of the two distribution centers in Mexico City or all the way to the other end of the country in Cancun. From the two locations, McDonald's consolidated loads from the United States and Canada as well as from Mexico, and sent trucks to more than 170 restaurants in 30 cities across Mexico. Distribution was handled with threesection trailers: one section for frozen food, one for refrigerated goods and one for dry goods. While a typical haul from a distribution center to the restaurant was about 100 miles in the United States, the trip could exceed 1,000 miles in Mexico. This was because there was not enough restaurant density in Mexico to maintain more distribution centers. The distribution centers, which were set up on the basis of the demand, were operated by Martin-Brower de Mexico, a subsidiary of McDonald's largest distribution centre operator in the United States. Mexico City accounted for about 40% of McDonald's total demand. Cancun was chosen because of the large number of US tourists in the resort city. Because of Mexico's problems with highway robberies, the new trailers were left undecorated for security purposes. McDonald's operated with Martin-Brower under a handshake agreement and a strategic alliance, although McDonald's did not have any ownership of the center. The distribution center managed its own fleet of trucks instead of relying on contract carriers. In Mexico, such carriers were unreliable and often did not have standard-sized equipment, which was a key component of the quality offered by McDonald's. Nevertheless, during special promotions at restaurants, the centers often turned to outsourced carriers. Outside carriers had to comply with refrigeration standards, which were generally not fully developed. Some carriers handled frozen goods, but there were only a handful of them. Source: Complied from various sources.

EXHIBIT III: McDonald's IN MOSCOW

The Challenge Taste must be the same in all the outlets, yet all the products used must be secured locally.

One of the most unique McDonald's outlets was the 700-seat McDonald's in Moscow. McDonald's wanted the Big Mac to taste the same in Moscow as it did in New York, Paris, or Sydney, yet it wanted all food products to be secured locally. McDonald's prepared for this challenge by planning the supply chain for the Moscow restaurant six years in advance, when its experts began to work with Russians to upgrade their production standards to supply the desired quality of meat, wheat, potatoes, milk, and other basic ingredients. Supplier location was an important part of the supply chain at McDonald's, and past experience had shown that what worked best was a combination of a number of independently owned-food-processing plants dedicated solely to supplying McDonald's restaurants. This type of centralized system, called a food town, reduced both transportation and material handling costs. A $60 million food town was established in Russia that combined a bakery, meat plant, chicken plant, lettuce plant, fish plant, and distribution center. Each of these processing facilities was independently managed, but all shared cooling and freezing facilities with the distribution center. To maintain the standards of quality & customer service; McDonald's located dedicated processing facilities. The system also reduced capital set-up costs, inventory and material handling costs, and distribution costs. Source: Compiled from various sources.

ADDITIONAL READINGS & REFERENCES:

1. 2. 3. 4. 5. 6. 7. Ritchie P, McDonald's: A winner through logistics, International Journal of Physical Distribution and Logistics Management 20, no.3 (1990) pp:21-24. Shah Minari, Distribution; cold comfort, Business India, June 6, 1998. Bhardwaj Neera, Distribution: The making of McQuality, Business India, June 29, 1998. Kalloor Roshni, McDonalds buys its stuff, Hindu Businessline, July 15, 1998. Venkatraman Latha, The McDonald's - AFL Logistics tie-up-keeping that lettuse crisp!, Business Line, July 5, 1999. Bamzai Sandeep, Big Mac takes centrestage, Business India, October 4, 1999. Tracking the McDonalds food chain, www.strategicnewspaper.com, May 6, 2000.