Analysis of McDonalds' Operations Management

In today’s business environment, operations management is used by companies not only to be competitive, but also to ensure that their objectives are met at a cheapest cost. This will consist of a set of planned activities that would convert various inputs into goods and services.

This report provides an analysis of McDonalds and organisation’s Operations Management, Operational Strategy, process and product design, Supply Chain Management, inventory control, JIT and Total Quality Management which include all the different processes and techniques to enhance the value of products and services that McDonalds provide to its customers at the acceptable cost.

McDonald’s is the global fast-food service retailer. The company have more than 32,000 restaurants and serve more than 60 million people in more than 100 countries every day. More than 80% of McDonald’s restaurants worldwide are franchised and operated by local people.

When Richard and Maurice McDonald opened their first restaurant they developed the idea of an ‘assembly line’ where a reduced menu could be cooked cheaper and quicker, which would lead to a higher turnover of customers.

The history of McDonald’s began with founder, Ray Kroc. He managed the franchising of the McDonalds’ restaurant concept. By 1961 Ray Kroc was running the whole plan. The only thing the McDonald brothers did was run their one restaurant, and receive 0.5% from the larger company. The expansion of the McDonald’s brand was not something they were really interested in. Ray Kroc, on the other hand, was. He wanted to put a McDonald’s restaurant in every state in America – which he eventually did. Kroc took over McDonald’s company, at a cost of 2.7 million dollars.

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Anyone who wanted to open a McDonald’s restaurant had to pay Kroc around a thousand dollars and then 1.9% from the annual takings of the restaurant. He then passed 0.5% of the takings onto the McDonald brothers and kept the other 1.4%. It is estimated that if the McDonald’s had continued to receive their 0.5% it would have been worth around two hundred million dollars by the year 2000.

The McDonald’s chain has not been without its problems. There was the famous McLibel case – the longest running libel case in British legal history.

Also the discovery that some beef products were used in the preparation of their french fries, which resulted in the company paying compensation of 10 million dollars to Hindus, Sikhs, and vegetarians.

There have been various criticisms of the McDonald’s Corporation, ranging from the source of their meat, to the treatment of workers in the restaurants (BBC, 2005).

McDonald’s Restaurants UK Limited is owned subsidiary of the U.S. parent company and opened its first UK restaurant in Woolwich in 1974. There are now 1,200 restaurants operating in the UK which, despite representing only 4% of the total number of McDonald’s restaurants worldwide, contribute 7% of global profits, making the UK a very important financial market for McDonald’s shareholders. (McDonald’s Corporation, 2008)

This report will present the operational strategy of McDonald’s and also how the processes and products are designed in the company.

Furthermore the report explains the flow of materials and information between the operations within the McDonald’s supply chain and also what type of inventory management is used in the Company, moreover report underlines importance of lean management, just-in-time and other systems that are incorporated in the Company. In addition report introduces Total Quality Management and its importance within McDonald’s operational process.

Operational Strategy

“Operations strategy concerns the pattern of strategic decisions and actions which set the role, objectives and activities of the operation”.

(Slack et al, 2004. p.67)

The main objective of company in the operational area is that the production process was as effective as possible. In other words, when using the same assets the company produce the maximum amount of high quality product which satisfies customers.

Companies can achieve these results through the use of tools such as: reducing costs, improving product quality, punctual delivery, speed of response, product flexibility in adapting to individual customer requirements, resistance to fluctuations in demand, advanced technology and excellent customer service. The listed tools relate to the operational strategies, which by focusing on the production process on certain key elements can give a measurable competitive advantage.

To achieve these objectives McDonald’s create a balance between customer’s needs and minimising waste. Demand is forecasted and stock is controlled so that products do not have to be thrown repeatedly.

McDonald’s is a global company, but they operate locally. Currently, McDonald’s wants to be perceived as a modern company that cares about customers and ecology. They offer fast-serve meals, such as: breakfast, salads, vegetables and dairy products.

In their restaurants people can buy regional products, including Rice burgers served in Taiwan, Japan shrimp, coconut milk in Brazil.

Three dimensions of operational strategy process

Value:

McDonald’s sells nearly millions of burgers every day. Jobs are systematic and repetitive in everyday processes. In order to produce so many burgers every employee have assigned particular job in which they have to ensure that the quality and taste of the products is the same all the time.

Varieties:

McDonald’s offer a wide choice of menu items such as: breakfasts, salads, fruits and vegetables and also kids meals to satisfy customer’s demands. McDonald’s menu concentrates on five main ingredients: beef, chicken, bread, potatoes and milk. The main menu items are: the Big Mac and French fries which is one of the main sellers along with local offers and new products that consumers want. Whether it’s McWraps in Europe, Angus Burgers in Australia, or McCafé specialty coffees and smoothies in the U.S., company is strategically enhancing menu to attract new customers.

Variations

McDonald’s process is so well organized that it can meet the changing capacity, anticipation for what the customer might demand, ensuring flexibility.

Demand for products are calculated using store-specific historic product mix data from the last two years, store-specific and national causal factors for example dates of events such as national promotions and school holidays, information from store managers about factors that might affect demand, e.g. road closures or local events and promotions.

Performance objectives

Performance objectives are related to operational processes and their basic function of fulfilling customer’s needs. There are five performance objectives:

Quality

Most customers are looking for high quality. Every organisation wants to provide error free products for their customers and gain competitive advantage. Quality objective leads to certain actions and policies in operations to provide a service that the customer wants.

McDonald’s serves a variety of nutritious, high-quality food products including salads, fruits, and vegetables.

At McDonald’s the employees are trained to prepare and present meals according to very specific procedures that are strictly enforced, especially in the preparation and handling of raw and cooked products. For example, the ten-minute ‘holding time’ for sandwiches ensures maximum quality and freshness to each customer. This means that if the products are not sold within ten minutes from the time of their preparation, they are discarded. McDonalds meets all the hygiene specifications, including hand-washing procedures. McDonald’s succeed on the feedback from the customers to continuously improve the quality & service.

Speed:

Speed is all about how long customers wait before receiving their service organisation increasing the availability of their products or services if the waiting time is minimised.

The Operations process is so well designed at McDonald’s that every customer who comes is served quickly. The company have preparation time set for burger and other menu items so that the order is delivered within 3-4 minutes. Even during the busy hours the staff members ensure that the order is delivered on time to the customer.

Dependability:

An organisation’s processes have to consistently meet a promised delivery time for a product or service.

McDonald’s has a more dependable process for the customers by offering the meals on time. They have qualified workers to deliver products on time every one of them have assigned particular job. McDonald’s has predictable opening hours during the weekdays and weekends, the products on the menu are available constantly during any time of the day.

Flexibility:

Refers to elasticity of the processes and change in the variety of products or services making operations more flexible to changes in customer requirements.

As customer tastes change, McDonald’s needs to increase the range of new products it offers. McDonalds offers a lot of flexibility to meet customer preferences. It offers a balanced collection of culturally relevant menu items in the markets, for both adults and kids and is maximizing the choices. McDonalds has a multiple trained staff in order to be flexible. It maintains shift based system of work among the crew members allowing them to be flexible enough in the work they do.

Cost:

Refers to minimizing the cost of the process, leading to a cheaper service. The best way of lowering cost is to focus on the customer requirements i.e. fulfilling the quality objective in both product design and operation, as a way of eliminating rework and waste. Operations should focus on getting the supplied service right. It should be also co-ordinated with processes like information systems which help reduce errors.

McDonalds have a well planned cost control strategy. The restaurant has a well established low cost supply chain. They adopted Just-In-time strategy that reduces the cost of unnecessary storage and waste. Food can be sold at a lower price because the price does not absorb the costs of unsold food. Ultimately this means lower costs for McDonald’s.

They ensure efficiency and speed in distribution and very good food processing technology system. McDonalds has employed the value meal strategy which allows customers to buy a sandwich, French fries, and drink at a discount when purchased together.

“Thus, it is observed that all operations objectives are connected. If quality is improved, cost is also reduced, thus time is also improved and which in turn leads to more flexibility. Thus by starting with quality, along with time reduction the other objectives are directly attacked by taking unique actions for that objective, as needed. Hence, a series of such actions will then result in continuous improvement of all four operations objectives at the same time.” (Schroder, 2007 p. 24-25)

McDonald's PEST Analysis:

The success of any organisation depends upon the various external and internal factors which are beyond the control of an organisation. These factors are called Environmental factors. These environmental factors basically include four areas namely Political, Economical, Social and Technological and the analysis of these factors is called PEST analysis. To overcome the problems created by these factors the businesses come up with various strategies.

Political Factors:

Politics play very important roles in the functioning of the business. It is very important for a firm to know the existing political factor within it is operating. What sort of laws and legislation exist in the country and what are the future prospects. This is quite important to know because these factors will determine the strategy required to sustain and work without problems.

Government policy can have a major impact on the operation of a business. The political and public debate on obesity and other health issues negatively affected fast food sales.

In recent years, McDonald’s has been facing legal trials of possibility in breaking the health legislation by providing unhealthy foods to customers. This had made some damage to McDonalds’ image. However, McDonald’s has already been trying to introduce healthier foods on its menu such as salads, fruits and milk for the kids.

Economic Factors:

Similarly it is important for a firm to know the economy of the country it is operating within. The factors like unemployment, minimum wages, exchange rate, interest rate, economic growth inflation rate etc are quite important for a firm to know. Economic factors might affect it. If the economy of the country is not good then the number of McDonald’s customers can decrease.

Economic factor can influence the potential profit of a business. One of the economical forces which may influence McDonald’s is the change in interest rate. Most of McDonald’s restaurants are franchises, therefore, franchisees would suffer on their borrowing if interest rate increases.

Social Factors:

Social factors include the demographic and cultural aspects of the environment. Social factors play important role in a business. The business has got to respect the culture it is operating in. For example it cannot sell beef products in a hindu community and pork products in a Muslim community. Apart from that the business has got to know the taste and preference of its customers.

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The fast food industry has been hit by negative publicity in recent years due to the increasing amount of diabetes, unhealthy food and childhood obesity. In order to overcome the problems, McDonald’s has been introducing healthier foods and educational programmes to bring a healthier environment. McDonald’s also has been heavily contributed in the charity events in order to make contribution to the society.

Technological Factors

Every organisation must monitor developments in technology. These can affect the production methods employed by the organisation. Due to the increasing importance of internet, regional planners work with restaurants and by communicating with them on a regular basis via email and telephone.

McDonald’s also have a friendly use website with more details and information available

Process design

Process design is the process by which some functional requirements of people are satisfied through the shaping or configuration of the resources and/or activities that comprise a product, or a service, or the transformation process that produces them (Slack et al 2004, p.94).

The process should be designed to deliver the products in the best possible way. Before design the process every manager should ask some questions, e.g. what process should give to customers? How much flexibility do customers want? How much will they pay for the products? (Waters 1999, p. 65).

Each restaurant is headed by a Restaurant manager who is responsible for the daily operation and customer interaction. The crew members carry out the basic operation at the restaurant and ensure the customer satisfaction.

The Process at McDonalds starts with the customer order and then after receiving the order, the design must be completed and delivered. With this operations process, McDonald’s aims to be able to deliver a reasonable product within reasonable time. The nature of the work is to provide customers ordered products within few minutes.

The order placed by the customer is taken by one of the crew members operating at the tills, as the order is entered into till, a message is passed on to the appropriate crew member in the kitchen for the preparation of the order.

In food preparation McDonalds have their own strategy and standards; the Crew members cook burgers on a grill that heat both sides of the burger in a little less than four minute where the Patties are “batch cooked” in advance. The hamburger buns toaster time is slightly less than one minute to give it a brown texture and slightly crusty, the assembling of hamburger is done by laying out the toasted bottom, spread mayonnaise, add grilled beef, on top lettuce and onions close it with the toasted top and is wrapped and placed into the Universal cabinet ready to be sold to customers. Finally the customer is asked for the mode of payment to complete the transaction.

The process flow in McDonald’s:

1. Customer order
2. Toast bread product
3. Cook frozen products
4. Place product in packaging
5. Add ingredients
6. Holding Cabinet (Wrapped burgers are kept max 10min)
7. Delivery to the Customer

Having a well planned process design, McDonalds is able to produce and service including customer’s specification maintaining their quality, reduce the customer waiting time at the counters. They have dependable crew members and resource for on-time delivery of products and service. The flexibility is achieved by processing a wide variety of products and changing the cost of the items and lowers their processing costs by eliminating waste in terms of preparing the burgers in bulk.

5. Product design

The objective of designing products and services is to satisfy customers by meeting their needs and expectations. This enhances the competitive advantage of company (Slack et al, 2004 p.129)

McDonald’s product design concentrates on maintaining consistency in how products are prepared as well as what raw-food components are used. They serve a variety of products, sandwiches with beef, fish, and chicken products, menu also include salads, fruits and dairy products. The quality is ensured through standardized and careful employee training efforts.

The Company frequently introduce new products and a reason for this is that customers are demanding more choice. McDonald’s menu concentrates on five main ingredients: beef, chicken, bread, potatoes and milk. The company’s main menu lists is offering: the Big Mac and French fries, which still exists as a major seller. A Big Mac consists of a bun, two beef patties, lettuce, cheese, pickles, onions, sauce and a small amount of seasoning. The restaurant will only combine these items just before the customer orders. Other standard product names come from the McDonald’s convention of adding a ‘Mc’ to a particular item.

Although McDonald’s is a global company, they operate locally. In restaurants people may buy regional products, including Rice burgers served in Taiwan, Japan shrimp and coconut milk in Brazil.

Ethical considerations about product design could be that in order to minimise the negative comments about unhealthy food, increased amount of diabetes and obesity among children the Company introduced healthier foods in their menu. They purchase from suppliers that ensure the health and safety of their employees and the humane treatment of animals. The company is also trying to minimise the impact on environment.

Supply chain management

Supply chain management is the management of the interconnection of organisations that relate to each other through upstream and downstream linkages between the different processes that produce value in the form of products and services to the final consumer (Slack et al, 2004, p. 445).

SUPPLY CHAIN PLANNING AND CONTROL

• Coordinated delivery of products and services from the supply chain
• Demand
• The market
• Customer requirements
• Supply
• The operation
• Operations resources
• Required time, quantity and quality of products an services

Supply chain management is concerned with managing the flow of materials and information between the operations, which form the strands ‘chains’ of a supply network. (Slack et al,2004, p. 444).

McDonalds ensures its suppliers follow the exact standards of quality, value and cleanliness set by them. When it comes to tracing the products ingredients, great emphasis is placed, so McDonalds are able to control every link in the supply chain.

Wherever possible, McDonalds tries to use suppliers who are based in the UK, as they prefer them, but saying this, they still have to meet McDonald’s exact product and hygiene standards.

All of their European sold beef is supplied from Europe and the great majority of their British sold beef is sourced from Britain. McDonald’s has developed a ‘supplier quality index’ (SQI) by which all suppliers are measured. It allows the company to monitor performance of suppliers across the many agricultural and non-agricultural products and services purchased (Food Chain Centre, 2003).

In 2004, McDonald’s introduced a specialist central stock management function known as the Restaurant Supply Planning Department. This team communicates with restaurant managers on a regular basis to find out about local events. The team builds these factors into the new planning and forecasting system – called Manugistics – to forecast likely demand of finished menu items, for example Big Macs.

Raw materials include the buns, beef patties, paper cups, salad ingredients and packaging are delivered to the restaurants between 3 and 5 times a week. At any time, a restaurant will have a range of products ready for sale, for example Big Macs, fish and side salads.

At McDonald’s, all raw materials, work-in-progress and finished products are handled on a First In, First Out (FIFO) basis. This means raw materials are used in the order they are received. Therefore stock is always fresh because products are sold in the order they are made.

Ongoing communication between the central Restaurant Supply Planning team and individual restaurants helps to manage the stock more effectively. This team of regional planners works with around 80 restaurants each and communicates with them on a regular basis via email and telephone. Any factors that could affect the number of customers visiting an individual restaurant need to be logged with the team. These are taken into account in calculating the forecasts. Supply Planners work with the stock control system, to ensure enough raw materials leave the McDonald’s distribution centres. This ensures that restaurants can produce the meals required for the level of demand forecasted.

Supply Planners working for McDonald’s include range of causal factors in the calculation of their forecasts, so that based on past performance they can predict future demand for each restaurant. McDonald’s Restaurant Managers need to ensure that the data they enter into the system is as accurate as possible. For example, each day Restaurant Managers record opening and closing stocks of key food items. They record all other items weekly (McDonald’s Corporation, 2008).

Vertical integration the degree to which an operation chooses to own the network of processes that produce a product or service. The strategy of expanding on the supply side of the network is called backward (upstream) vertical integration, and expanding on the demand side is called forward (downstream) vertical integration (Slack et al, 2004 p. 169, 779).

McDonald’s has practiced a backward (upstream) vertical integration, by replacing most of its suppliers. It has done so for two reasons, 1) To reduce costs, and 2) To ensure that they make top quality products. One of the coffee suppliers of the Company is Distant Lands which have its own coffee farm. In this example vertical integration reduces the risk of delayed delivery (dependability).

Inventory management & Controls

Inventory planning and control compensates for the differences in timing between the supply of an operation’s products and services and the demand for them (Slack et al 2004, p. 405).

There are 5 types of inventory:

1. BUFFER INVENTORY compensates rapid variations in supply and demand.
2. ANTICIPATION INVENTORY is used when changes in demand are big but relatively predictable. It is also used when supply changes are large.
3. DE-COUPLING INVENTORY creates the chance for independent scheduling and processing speeds between process stages.
4. PIPE LINE INVENTORY exists because material cannot be transported right away between the point of supply and the point of demand.
5. CYCLE INVENTORY occurs when one or more stages in the process cannot supply all the items it produces at the same time (Slack et al 2004 p.411-412).

McDonald’s method of keeping burger lanes full during peak periods is a recognizable example of a pull system in a service application.

McDonalds has made billions of hamburgers using elements of just-in-time, from the time of order from the customers to the payment from them; the burgers or the meals are ready to be consumed. If they are later than the time ordered, customers will be dissatisfied. So it is important for McDonalds to use the JIT process in order to keep quality and satisfied customers.

Just-in-time means producing goods and services exactly when they are needed.

Lean production system is the western term for Toyota Production System. Lean operations and just-in-time planning and control aim to meet demand right away, with perfect quality and no waste. Lean operation means waste elimination in order to create operation that is faster, more dependable and that produces high quality products and also operates at low costs (Slack et al 2004 p. 518, 519).

There are two major pillars of lean production system. One is Just-in-Time system and other is Kaizen.

Kaizen is a Japanese term for continuous improvement involving everyone – managers and workers alike.

Kanban is a Japanese term for card or signal, it controls the transfer of materials between the stages of operation. (Slack et al, 2004 p. 533, 653)

McDonald’s use lean production system and minimise waste by accurate stock management and by developing correct demand forecasts so that products do not have to be discarded.

McDonald’s is an example of a JIT system, they doesn’t begin to cook its orders until a customer has placed an order. McDonald’s is able to make their products fast enough thanks to technology they use, eg. bun toaster. The Company provide fast service and at the same time the finished products are not placed in inventory for long time.

The major benefit of using just-in-time system for McDonald’s are good quality food at a lower cost and also better quality customer service. This higher quality customer service is the ability to actually produce faster. Without this ability, McDonald’s ordering costs would be higher because the costs associated with ordering would be the loss of customers tired of ordering fast food that really isn’t fast (Atkinson 2005).

Total Quality Management (TQM):

Total Quality Management is a philosophy of how to approach the organization of quality improvement. This approach puts quality at the heart of everything that is done by an operation and including all the activities within the operation (Slack et al, 2004, p. 722).

Feigenbaum defined TQM as; “An effective system for integrating the quality development, quality maintenance and quality improvement efforts of the various groups in an organisation, so as to enable production and service at the most economical levels which allow for full customer satisfaction”(Cited in Slack et al, 2004, p.720).

McDonald’s goal is simple: to give customers high quality products anywhere in the world and maintain high standards of service. Every member of the organisation must be involved from the highest executive to the crewmembers of McDonalds. The commitment to quality must be instilled into everyone from the moment they join McDonalds in every dimension of the organisation, e.g. Operation, Finance, Marketing, Human Resources, Health and Safety and Food Safety

The basic principles of McDonalds are:

1. Putting the customer first by making sure all customers are fully satisfied with McDonalds, predicting and fulfilling their needs, exceeding their expectations, by using market research to find out what they want, they aim to surprise you with their quality, choice and service and making sure that all service standards are met.

2. Making continuous improvements by reducing costs, maintain good ordering procedures in all restaurants.

3. Aim for zero defects – do it right first time, it can be very expensive putting it right afterwards. Prevention is better than cure. This requires rigorous quality testing and control so that defective products are spotted immediately.

The advantages of using TQM:

• Every individual in McDonalds is responsible for quality
• Quality becomes the focus for all activities
• Everything McDonalds does is designed to satisfy their customers. This can lead to a greater market share and also increased profit

The disadvantages for using this system are:

• Requires well-trained, responsible staff, this could cost more money for training each employee.
• Some of the employees can be resistant to change
• Gives visible effects in the long run

Conclusion.

Operation management function exists in every organisation. It is concentrating on achieving the processes of transformation of raw materials into a finished product. Moreover effective operation management enhances performance in the process.

McDonald’s Corporation is one of the most known companies in the world. In their operational strategy company decided to reduce costs, improve product quality, punctual delivery of their product to customers and continuous performance of all operational aspects of company. All departments of organisation and every employee have to work together to ensure that the strategy reaches its objectives. All the processes in McDonald’s reflect the needs of the customers and products are designed taking into account high quality, speed of service and cost.

McDonald’s working together with suppliers that fulfil all the standards of quality set by the company. To satisfy customers needs of fast served quality products their strategy incorporated just-in-time system. As a result the restaurant is serving fresh food in a short time.