McDonalds Restaurant Case Study

McDonalds is a global brand-oriented restaurant that is operated in

in over 119 countries serving around 50 million customers daily. The major
challenge faced by it is in terms of managing stock by accurately
forecasting the demands of the product and controlling stock of the raw
materials. This process of stock management is pretty tough and need an
appropriate and logical analysis as follows:

Management Information system MANUGISTICS

at McDonalds:
The present information system managed at McDonalds is known
as Manugistics. According to a research director, Lora Cecere:
It is one of the most accessible web-based architecture that was
implemented by the companys management after due diligence and
proper testing (2).
It is a new planning and forecasting software system that predicts
following aspects:

Likely demand of finished menu items e.g. Big Macs etc.

Accurate forecasting of demands for minimizing waste.
Controlling stock of the raw materials to meet with customers
demands and reducing waste.

The goals of this Manugistics system are (3):

Forecasting customer demand across thousands of European

fast-food establishments.

Improving management of food and materials stock levels.

Doing daily reads of sales at each restaurant and converting

the information into theoretical inventory.
Analysing and forecasting the quantity of inventory needed by
a restaurant.

This system has proved quite beneficial for the company. Its major
advantages include (1):

It
It
It
It

has
has
has
has

reduced foods costs by minimizing the waste.

made the existing supply chain system more efficient.
offered high-leveled forecasting with accuracy.
provided complete supply chain visibility.

It supported a lot in decision making.

It has been reported that after the implementation of this
system in United States, the percentage of participating
restaurants in stock during a 28-day special promotion
increased from 45% to 90%.
According to Rob Bauer, the IT director for supply chain at
McDonalds:

In France and Germany, participating restaurants used the system

to reduce raw-item waste by 30%, and cut inventories by 30%. In
addition, the number of times a manager had to bring store product from
one restaurant to another due to shortages was reduced from eight to
four (3).

There is never shortage of stock. This results in customers

satisfaction in getting everything that they ordered.
The orders are made accurate based on current stocks.
The time required in preparing an order is calculated
accurately and efficiently.
The amount of stock ordered for promotions is more accurate,
based on past performance.
There is a reduction in the need for emergency deliveries. This
ultimately saves money.
Stock levels are always at optimum level. It thus helps to
ensure sales and the freshest product.
Stock can be reduced automatically at the end of a promotion,
thus avoiding too much stock.

Suggestions for information processing tools for

managing stock activities operationally, tactically
and strategically at McDonalds:
In order to enhance the efficiency and accuracy of present stock
control system, the company needs to implement some new
information processing tools and methods to enhance the stock
management activities. The methods are as follows:
1. Just-In-Time (JIT):
This approach is best applicable for providing fresh
food i.e. the raw materials are received just in time; they
are processed and produces meals that are served to
consumers just in time too. It means that fresh meals are
completed and served on the spot to the guests (4).

This approach has many positive factors as follows:

It reduces cost by consuming lesser budget.

Food storage areas provide more room for
other materials.
Fresh food products result in more customer
satisfaction and less wastage of food.

2. Re-Order point (ROP):

This approach involves calculating the number of raw
materials and units required to carry out the production
that is demanded averagely on daily basis. This prevents
the risk of reduced stock which might result in customer
dissatisfaction (4).
The re-order point is calculated by considering
following two factors:

Average normal consumption.

Time consumed in processing orders.

3. Consumption along with Saving of Stock system (4):

This method involves writing down the requisitions
for maintaining record of proper documentation. This
provides better control on stock system. When the products
are transferred daily, whether from one place to another,
the properly written requisitions helps along as follows:

It presents the accurate usage rates and

maintains them.
It maintains accuracy in the re-order points.

Inventory control system employed at McDonalds:

The inventory control systems employed here are Just-In-Time
(JIT) and First In, First Out (FIFO). They are explained here
under:
1. Just-In-Time (JIT):
This approach, as explained above, provides fresh product in
lesser time i.e. as soon as the order is placed, the food is prepared
by employing freshly received raw materials and hence served just
in time without any delay (5).

This method provides controlled inventory, reduced wastage

and enhanced customer satisfaction. Some of its other highlighted
advantages are (5):

The quality of served food is improved by having freshly

made product.
There is better customer service since the delay
between the ordered-time and serving time is made
as minimal as possible.
The food is sold as soon as it is prepared. This results in
minimal storage in inventory which ultimately reduces
the holding costs and thus food is sold at less higher
prices.
Raw materials are handled better in a way that they are
not ordered in bulk before-hand. They are received
according to calculated units. This prevents wastage of
old and stocked raw materials.

2. First In, First Out (FIFO):

This method handles the raw materials, work-in-progress and
finished products in such a way that food served is always fresh (1).
It is carried own in following steps:
I. Raw materials are used in the same order as they are
received. This keeps the product fresh.
II.
The production of food in based on freshly received raw
materials.
III.
Products are sold in the order they are made. This keeps
the stock fresh always.

Economic Order Quantity and Material Requirement

Planning calculations for production of Happy Meal
boxes for a period of 8 weeks:
I.

Economic Order Quantity (EOQ):

EOQ is defined as the order size that minimizes both
total stock holding and ordering costs. Its general formula
mainly comprises of stock holding cost, ordering cost per
item and demand (7).
According to given data and requirements, the basic
steps in calculating EOQ are as follows:

 Given data:
Total demand = D = 150+70+175+90+60 = 545 happy
meals boxes
Here, demand is aggregated as a total demand since
EOP method considers the annual demand as an independent
entity.

Now,
Average weekly demand =

= 150 happy meals in

week 1; 70 happy meals in week 3; 175 happy meals in week

5; 90 happy meals in week 7; 60 happy meals in week 8.
Ordering cost = S = 2000 per order
Holding cost = H = 1500 per week
Lead time = L = 2 weeks

Manual Calculations:
EOQ =

The reorder point = R =

2DS
H

25452000
1500

38

* L = 150 * 2 = 300 happy meal

boxes for week 1.

=
=
=
=

70 * 2 = 140 happy meal boxes for week 3.

175 * 2 = 350 happy meal boxes for week 5.
90 * 2 = 180 happy meal boxes for week 7.
60 * 2 = 120 happy meal boxes for week 8.

Above calculations shows that when the inventory

position drop to 300 happy meals in week 1, 140 happy meals
in week 3, 350 happy meals in week 5, 180 happy meals in
week 7 and 120 happy meals in week 8, then the an order of
38 more happy meals boxes must be placed.

EOQ Calculation in Excel spreadsheet:

In excel, following formulas were used for calculations:

o EOQ = SQRT ((2*C3*C4)/C5)

o Total cost at this point = $B$18/2 * $C$5 +
$C$3/B18 * $C$4
o For drawing graph:
Ordering costs = $C$3/$A$11 * $C$4
Holding costs = $A$11/2 * $C$5
Total costs = C11 + D11
Below is the spreadsheet of calculations for EOQ and its respective graph:

EOQ model chart

150,000.00
100,000.00
cost

total Costs
ordering Costs

50,000.00

holding Costs

150 70 175 90
no of happy meals

60

(The complete excel calculations in spreadsheet are attached also in a

separate excel file.)

II.

Material Requirement Planning (MRP):

MRP is an integrated cross-functional process that

considers demand as a dependent variable and performs
calculations accordingly (6). For the above provided scenario,
the basic MRP calculations are shown here under:

Step 1:
First of all, the demand for happy meals boxes per week
of an eight week period is given below:

The demand in each of the eight weeks is shown above.

The company initially has 260 happy meals boxes available so
if these are used to meet the demand of 150 in week 1, we
get:
260-150 = 110 left on-hand (i.e. in stock) at the end of
the week.
I.e. it is needed to order some more happy meal boxes
in order to meet all of the forecast future demand over the 8
week planning period.

For the moment suppose nothing is ordered in week 1,

nothing in week 2, etc. The situation by the end of week 5 will
be as below:

In order to avoid a stock out in week 5, it is needed to

order at least 135 happy meal boxes. Now, the given lead time
between ordering a happy meal box and receiving it is 2

weeks. Therefore, for avoiding a stock out in week 5, 135

happy meal boxes must be ordered either in week 3, or in any
week before week 3 i.e.

135 chairs in week 1, or

135 chairs in week 2, or

135 chairs in week 3,

would each ensure that sufficient happy meal boxes are

available to meet forecast demand in week 5.
If 135 happy meal boxes are ordered earlier than week
3, then the company will be carrying extra inventory (stock)
for a number of periods, thus carrying stock costs money. It
would seem appropriate therefore to order 135 chairs in week
3. This will give:

Continuing on in the same manner we get:

Now, requiring an order of 90 chairs in week 5 and giving:

Continuing again:

It shows the requirement of an order of 60 chairs in week 6

and giving:

It is to be noted that no data is given here on for basing

order decisions in weeks 7 and 8. As it is the end of the
planning period, thus these are usually taken as zero.
(The complete excel calculations in spreadsheet are attached also in a
separate excel file.)

Network Diagram and Calculation of critical path for

new project:
1. Network Diagram:

A network diagram basically illustrates the given project data

related to a particular tasks to be completed and tells how long
would each task take and tells the constraints on the order in which
the tasks are to be completed (8).
For given data of the new project, the network diagram is
drawn here under:

In above network diagram, each activity is represented by a

vertex. The vertexes are joined with each other in the manner each
task is to be completed before or after one another. The number
marked on each arrow head i.e. arc is shows the duration (in days)
of each respective task.
2. Critical path:
Critical path is basically the Longest sequence of activities in
a project plan which must be completed on time for the project
to complete on due date. An activity on the critical path cannot be
started until its predecessor activity is complete. It is calculated by
first computing the earliest possible start for each activity by going
forward through the network. Then the latest possible start time is
found by moving backward. Activities which have equal earliest and
latest start time makes up the critical path (9).
Below are the computed start times at each node.

The numbers in the numerators of each node are the earliest

starting times. In case of A and B, they are zero, since they are the initial
nodes. C is to be started after completion of A and B; hence the earliest
starting time chosen for it is 5. The earliest time at D is 5. Similarly, since
E is to be started once both C and D are finished, thus its earliest time is
9. It then gives the earliest completion time of 10.
Since, 10 is the earliest possible completion time, it is also
considered as the latest possible start time.
Now, by moving backward, the latest possible start times are
calculated as:
E = 10 1 = 9
C=94=5
D=93=6
A=54=1
B = minimum of 5 5 = 0 and 6 5 = 1
These values are shown in the denominators of the nodes
values. The vertices with equal earliest and latest starting times make up
the critical path and they are:
Critical path = B C E

 Calculation of financial viability for the launch of

increased burger production:
The financial viability of this new project can be calculated by
estimating the values for Internal Rate of Return (IRR) and Net
Present Value (NPV). Both values are calculated separately for 10%
and 20% and then compared and correct one will be selected.
For 10%

Internal Rate of Return (IRR):

It is generally calculated using following
formula:
NPV = 0 = initial investment + {cash flow/
(1+IRR)} + {cash flow/(1+IRR)^2} + +
{cash flow/(1+IRR)^n}
Where, n = number of time duration.
Since, it is a hit and trial method and requires
lot of time, the value of IRR is calculated using
a financial calculator and it comes up to be:
IRR = 13.95%

Net Present Value (NPV):

It can be calculated by the following formula:
NPV = - initial investment + present values (for
inflows)
= - 224,000 + 261,300 = 37,300
For 20%

Internal Rate of Return (IRR):

In this case, the value of IRR calculated using a
financial calculator comes up to be:
IRR = 14.7%

Net Present Value (NPV):

NPV = - initial investment + present values (for inflows)

= - 224,000 + 199,600 = - 24,400

Conclusions:
In order to decide the values of IRR and NPV among the two
from 10% and 20% annum calculations, following results are
deduced:

Based on the IRR rule, an investment is

acceptable if the IRR exceeds the required return
(i.e. present cash inflows). It should be rejected
otherwise. In this case, however both values
13.95% and 14.7% are above 10% and 20%
respectively.

In case of NPV, the investment is acceptable only

when the net present value is positive and
rejected if it is negative. Since, in above
calculations, NPV is positive in case of 10% i.e.
37,300, hence it is selected for launching this
new burger production.

Since, NPV is positive in case of 10%, hence, IRR

should also be chosen of this i.e. 13.95%

Therefore, the project works best and have more

financial liability in case of 37,300 NPV value and
13.95% IRR value.

Work cited
1- http://businesscasestudies.co.uk/mcdonalds-restaurants/managingstock-to-meet-customer-needs/types-of-stock.html#axzz2GceyjHtq
2- http://www.computerweekly.com/news/2240058399/McDonaldsgets-a-taste-of-future-demand-with-Manugistics-roll-out
3- http://supermarketnews.com/archive/mcdonalds-controls-inventoryworldwide-system
4- http://www.suic.org/wpcontent/uploads/research3/mba_research/25Thanchanok_Prasarnsuk
lab.pdf
5- http://www.inventorymanagementreview.org/2005/11/mcdonalds_a_
gui.html
6- http://www.slideshare.net/simplyshreya99/demand-forecastinginventory-management#btnNext
7- http://www.scribd.com/doc/22765513/Strategic-OperationsManagement#outer_page_6
8- http://www.cargalmathbooks.com/The%20EOQ%20Formula.pdf

9- http://www.cimt.plymouth.ac.uk/projects/mepres/alevel/discrete_ch1
2.pdf
10http://www.businessdictionary.com/definition/critical-path.html