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Operation and Logistics Management of McDonald’s

by Suleman
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McDonald’s operates through the franchisee networks’ business model, affiliates or manages the restaurants. Its basic revenues come from the franchisees and affiliates’ leases, fees and royalties. Apart from these, it also earns from its own outlets by direct sales. A very well-known example of lean operations is McDonald’s.

In all its logistical activities in the supply chain, the firm utilises the Lean theory. Let us begin to understand the lean logistics operating at the level of the restaurant. A traditional McDonald’s restaurant’s kitchen is built to generate uniform outputs in an assembly line configuration. The layout of the kitchen is made in such a way that the material in the assembly line is moved with minimal loss of time. The diagram below shows the design (Abdullah et.al).

Operation and Logistics Management of McDonald's

To allow fast response, the kitchen follows visual signs to take orders from the customer service desk that is located right in front of the kitchen. The moment an order is issued by the customer service executive sitting at the​​ front desk, he moves the details shown on the video screen to the kitchen. In the latest system toasts, the fresh bun is prepared within 11 seconds. This unique toast that has the ability to easily cook buns removes the need to carry buns beforehand and then heat them when an order is placed by the client. This causes the bun's freshness to decrease at two sites. First, when the bun is placed in storage waiting for the customer's order for long periods and second when it is cooked. Though McDonald's has defined strict quality parameters to ensure freshness of its products which includes discarding of the material if it has been kept in the storage for longer than a particular pre-defined amount of time, the new technology of preparing the bun only when customer requires is based on the pull production system. This eliminates wastage, which was happening earlier, and also saves time. This can be seen from the diagram where it says that the earlier process took 20 to 30 seconds while now it only takes 11 seconds. Thus, by introducing pull production system and JIT (prepare the bun just in time to deliver the order to the customer) manufacturing, the company has eliminated waste. Not only this, by introducing visual display of the order, the staff in the kitchen​​ can be ready for the job before hand, which will further reduce wastage of time. The bun then moves into the assembly line where one person fills in the ingredients and sends to the next stage of the line. Here the second person wraps up and delivers it to​​ the counter for the frontline executive to deliver to the customer. In the assembly line, the time of heating in the microwave before delivering to the customer has been completely eliminated by introducing the new toast as the bun will be hot by the time​​ it comes for wrapping. With the activities of the assembly line standardized, one person is performing the same task which helps the person get accustomed to the activity and helps in increasing his efficiency as he needs to concentrate on one activity and not keep changing his skills as per a new activity. This brings in standardized output as the people performing the activities assigned to them with maximum efficiency and accuracy. Another important feature of this assembly line is the availability of extra space to be used at the time of peak periods. This space can be utilized by assigning extra personnel to the area who will work on the assembly line to help increase production.

Each restaurant has its own individual but standardized system of order​​ forecasting and replenishment forecasting. For example, each outlet uses linear programming model to prepare manpower scheduling systems. These computerized scheduling programs help in saving the time spent on scheduling by an outlet by around 80% to 90%.​​ Such systems are so mature that they can compute manpower requirement with up to 100,000 variables and 3,000 constraints. A typical restaurant has 150 employees working in 30 different shifts (Abdullah et.al). Thus technology has been successfully used by​​ McDonald's to provide lean operational logistics within the restaurant. In fact, some of the outlets even have systems to monitor the number of customers driving into the parking lot (called "Hyperactive Bob) and then inform the operations team inside the​​ restaurant about the expected number of orders that they can received in the next couple of hours or minutes (Abdullah et.al). This helps the operations team to consolidate their internal activities much before the customer has actually walked in.

McDonald's maintains operational and logistical excellence through standardized process flow charts. It has well defined activities which are assigned to relevant departments and have a pre-defined process flow. For example, there is complete list of how the process of taking the order will start and finally end with the cleaning of the table. The following table shows the process flow chart which is used in the various restaurants. Each process has been divided as per the activities i.e. operations (OPR), transportation (TPR), inspection (INSP), delay and storage.

Each activity is denoted symbolically thus leading to visual management of operations. This break down of process into sub-processes helps in eliminating the delay at each stage and reducing the TAKT​​ time. Thus inspection is an integral part of the process flow which helps in eliminating waste by reducing defects at the time of the production rather than at the end of the production cycle.

The company maintains quality at the restaurant level by measuring the various metrics it has set as performance measures for the outlets. These are – cleanliness, quality of the product, delivery/speed, customer satisfaction and delay time. These parameters are continuously monitored and measures are taken to improve them. Thus by defining quantifiable parameters, McDonalds ensures a rigor around service and logistics throughout all the restaurants world-wide.​​ 

The external logistics are equally well defined as the internal ones. The company works on a supply chain​​ that is modeled around a 3 pillar stool. The three pillars of the stool are – corporation, suppliers and owner/operator (franchisee). McDonald's ensures adequate communication among these three pillars to ensure that the right products are delivered within​​ the minimum time and requires minimum cost inputs. Handshake agreements and trust are the two ways in which the relationship with the suppliers and franchisees work. The supply chain is further strengthened by ensuring long term relationships with the key​​ stake holders. The franchisees work with exclusive certified facilities. For example, the interior and exterior architecture of the facility, the kitchen layout, the location of the customer service counter, etc. This helps in standardization as well as allows the best possible use of facilities. The risks are shared with the suppliers and the franchisees ensuring that they do the best and do not hesitate to take risks by being innovative. The following diagram shows the supply chain of the company (Schachner 2006).

​​ The supplier structure is decentralized and transparent. That means the suppliers have access to the real time demand from the Distribution Center (DC). They also have the visibility into the supplier exchange which helps them understand the​​ capacity of the suppliers and the actual demand of the DC. The suppliers are independent in taking their decisions regarding production and replenishments but they work on integrated plans. With online coordination with the restaurant, there is complete traceability of demand and supply. The item administration department of the restaurant / franchisee keeps track of the supply and demand and works as an integrator with the supplier. The integrator provides forecasts based on the data received from the restaurant. It provides relevant information to the suppliers and DC and also takes adequate inputs regarding the stock situation. The DC and the supplier are connected to form a centralized procurement system. Thus, the DC in turn, uses the information provided by the integrator to send out demand to the supplier who can provide requisite material. As the supplier replenishment and procurement system is based on an integrated plan, there are least chances of inaccurate supply of products. The distribution centers then send the relevant supplies through the cold storage trucks to the restaurant. The transportation routing is also very dynamic. The routes are decided based on the shortest distance and one requiring minimum time. For example, the shortest distance​​ from the DC to the restaurant may not be the one that takes least time. There might be lot of traffic jams in that route at a particular time of the day. So, in that case the DC should be able to foresee all these eventualities before routing a consignment on to a particular route. McDonald's uses logistics software to design and maintain routes to ensure delivery within the shortest time and minimum cost. Similar cold storage trucks transport material from the suppliers to the DC. A similar dynamic routing system is used by the suppliers to ensure timely delivery. Thus the supply chain of the company is based on the network design model whereas the internal logistics of the restaurant is based on the rough-cut system (Thornton). Supply chain optimization is achieved through complete cost transparency. The trade function is integrated with the support of the purchase department. The following figure shows the process of information and goods flows to obtain optimization of the supply chain (Schachner):

Network1

The​​ logistics involved are limited to keeping up to 100 sales items in the restaurant and then ordering for replenishments as per demand. This ensures minimum wastage. Within the warehouses, not more than 400 Stock-Keeping-Units (SKU's) are kept. This ensures​​ low inventory carrying costs. The warehouses are categorized into hubs which is a collection on warehouses in a region. Thus, a hub doesn't carry more than 1,500 SKUs at a time. Another distinguishing feature of its supply chain logistics is the fact that​​ one DC caters to no more than 200 restaurants. The company currently holds around 180 DCs globally (Schachner). This ensures that the DCs are not overburdened and economies are reached with regards to transportation. The delivery frequency is around 3 per​​ week which is a bit higher in the urban areas (Schachner). The company has exclusive third party logistics distributors. Because of this exclusive relationship, the 3PL providers understand the standards required by McDonald's and invest in technology to​​ provide the requisite quality standards. Freight consolidation is done through freight forwarders who are specialists in the area of business and hence provide the best possible services.

​​ The company has strict policies regarding their quality and hence they have standardized all logistical operations by defining measurable parameters for each activity. For example it has a Distributor Quality Management Process (DQMP) in which it defines parameters on which the quality of service provided by the distributor is tracked. This system helps in monitoring their performance and also lets McDonald's provide them feedback on how to improve if they are found to be falling below the expected levels. Besides this, the company has specified logistics standards in the​​ following areas (Schachner):

  • Operations and Customer Relations (Operations Manual)​​ – The company provides this manual to all the franchisees and partners to ensure that the operations and customer services standards are maintained.

  • Quality Control​​ (HACCP / QIP)​​ -​​ Threat Analysis and Critical Control Point (HACCP) is a method of process control for the detection and prevention of microbial and other food production hazards. It involves steps designed to eliminate problems before they arise and as soon as they are observed, to correct deviations. Such a reported and validated preventive control system is generally accepted by scientific authorities and international organisations as the most productive solution available to healthy food production (bis.org.in).

  • Cold Chain Standards​​ – the company has specified high cold chain standards which start at the warehouse and follow into the trucks which are required to provide adequate refrigeration for delivery of the material without deteriorating the quality​​ of the products. For example, the reefers maintain a temperature of​​ -18º to -22º while the chilled trucks maintain a temperature of 1 to 4º. There need to be adequate backups to ensure that this cold chain is not disturbed at any point in time. These trucks are also insulated so that the temperatures are maintained (icmrindia.org).

  • Hygiene Regulations​​ – The company has formulated stringent hygiene regulations which covers storage of input material, the outlet cleanliness etc. These are monitored on a regular basis.

  • Product Handling Standards​​ – This includes timelines for keeping a product (for example the salad) in storage. The company specifies time line up to which products can be kept in waiting for customer order. All products which do not get utilized​​ within that time are discarded. Another important characteristic of product handling is the way the material is transferred within the various supply chains. The company has strict guidelines on cold storage parameters to be used while transporting material. The temperature control norms are specified beforehand and cannot be changed. In the case of contingency plans, there must be there are power problems in the restaurant and freezer trucks are arranged to ensure products are kept at specified temperatures.

  • Emergency and contingency plans

  • Risk & Crisis management​​ 

  • Continuous unannounced internal and 3rd​​ party audits for DCs result in superior quality scores regularly. The audits happen for processes involving transportation as well as production.​​ Quality inspections happen at 20 different points in the supply chain.

  • Supplier production is matched with delivery using ERP

  • The delivery schedules laid down by the company are very stringent to ensure quality of products is not deteriorated. For example, after a​​ truck reaches the point of delivery it is given only thirty minutes to delivery (icmrindia.org). Even the movement of the truck from the time it leaves the DC to the time it reaches the delivery point is tracked. Besides this, there are data logs to track​​ the movement of batches. This helps in easy identification of any defective batch in case of a complaint. This entire batch can then be discarded to ensure quality standards.

So far, we have seen the advantages of the various techniques and systems used by​​ the company to manage its logistics and also how the company ensures quality standards within its various supply chains. However, there is a flip side also to these methods. The JIT system used for inventory management requires a lot of forecasting and planning. Even though very high level forecasting systems are used and the communication between the restaurant, suppliers and the DC is standardized and robust, it is still not fool proof. Any errors in judgment can lead to drastic losses in terms of customer turning away due to non-availability of the product. The JIT system exposes the firm to the risk of dependence on specialised suppliers and hence increases their bargaining power. Another risk is that of internal issues. These could be eventualities like labor strikes etc. which can prevent the suppliers from providing the requisite material. Thus, by facilitating the interconnectedness between businesses, JIT inventory systems increase the risk that problems or failures on one end of the production chain might be felt on another end (Koletic 2005). However, there are ways of overcoming these risks. For example, the firm can develop backup resources to be able to deal with this contingency or develop in-house capabilities to produce in emergency situations. There can be other ways also of insulating oneself from such contingencies. These could be diversifying the supplier network so as to reduce dependence on one or making short-term contracts which can be renewed on the bases of performance. However, the​​ value additions that McDonalds have achieved through Lean systems are quite immense as compared to the drawback. The following are some of them (Huthwait 2004):

Performability: The ability to provide the same product irrespective of the place.

Affordability: Provide value at low price (by saving from reduced inventory and specialized supply chain).

Feature ability: Provide variety but around the core competency.

Deliverability: Reduce the waiting time of the customer by defining deliverability in terms of seconds and not minutes. McDonalds today can deliver an order within 45 seconds.

Useability: Use disposable packages. Eliminate the cost of carrying heavy reusable crockery.

Maintainability: Drive for perfection in ease of maintenance, food delivery and storage by developing standardized stores.

Durability: Use standardized equipments. The one piece flow manufacturing helps in eliminating wastage and reduces the overall production time (Epply). On the whole the company's supply chain methods have​​ been useful in upgrading the systems of its suppliers both direct and indirect. This has been demonstrated by one of its suppliers Esca who have used lean to upgrade their own supply chains to ensure adequate quality requirements for McDonlad's (foodchaincentre).

References:
  • Abdullah A, Aymon, H, Justin, J and Nitin, S,​​ McDonalds, viewed on May 14, 2010. http://www.slideshare.net/dredmonds/mcdonalds-3754675 bis.org.in,​​ Hazard Analysis Critical​​ Control Point ​​ (HACCP), Viewed on May 14, 2010. http://www.bis.org.in/forms/haccp.htm

  • Thornton, S,​​ System Models Used in Supply Chain Management,​​ viewed on May 14, 2010. nhttp://www.ehow.com/about_5519915_system-used supply-chain-management.html

  • Epply, T,​​ The Lean Manufacturing Handbook. Viewed on May 14, 2010. http://www.continental-design.com/lean manufacturing/handbook-2.html

  • Foodchaincentre.com.​​ McDonald's Restaurants, viewed on May 15, 2010. http://www.foodchaincentre.com/FoodChainFiles/red%20meat/1 %20Case%20Studies%20-%20McDonalds%20Restaurants.pdf

  • Huthwait, B,​​ 2004,​​ The lean design solution: a practical guide to streamlining product design and development,​​ Inst. for Lean Innovation.

  • Icmrindia.org,​​ In Search of Perfect Logistics – The Story of the Cold Chain, viewed on May 15, 2010.​​ http://www.icmrindia.org/free%20resources/casestudies/McDonald%20food%20chain-3.htm

  • Koletic, N, 2005,​​ The risks of being Just-in-time, viewed on May 14, 2010. http://www.inventorymanagementreview.org/justintime/

  • Schachner, T, 2006,​​ Synchronizing the perishable supply chain at​​ McDonald's, National retail federation.

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