“McDonald’s Restaurant Case Study”

McDonald’s 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 McDonald’s 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
company’s 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 customer’s 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 has reduced food’s costs by minimizing the waste.

 It has made the existing supply chain system more efficient.
 It has offered high-leveled forecasting with accuracy.
 It has 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 McDonald’s:

“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 customer’s 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 McDonald’s:

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 McDonald’s:

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 = 𝒅̅ = 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:

2∗𝐷∗𝑆 2∗545∗2000
EOQ = √ =√ = 38
𝐻 1500

The reorder point = R = 𝑑̅ * 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:
 £160,000.00
EOQ model chart
£140,000.00
£120,000.00
£100,000.00
cost £80,000.00 total Costs
£60,000.00 ordering Costs
£40,000.00 holding Costs
£20,000.00
£-
150 70 175 90 60
no of happy meals

(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=9–4=5

D=9–3=6

A=5–4=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/managing-stock-to-meet-
customer-needs/types-of-stock.html#axzz2GceyjHtq
2- http://www.computerweekly.com/news/2240058399/McDonalds-gets-a-taste-of-
future-demand-with-Manugistics-roll-out
3- http://supermarketnews.com/archive/mcdonalds-controls-inventory-worldwide-
system
4- http://www.suic.org/wp-
content/uploads/research3/mba_research/25Thanchanok_Prasarnsuklab.pdf
5- http://www.inventorymanagementreview.org/2005/11/mcdonalds_a_gui.html
6- http://www.slideshare.net/simplyshreya99/demand-forecasting-inventory-
management#btnNext
7- http://www.scribd.com/doc/22765513/Strategic-Operations-
Management#outer_page_6
8- http://www.cargalmathbooks.com/The%20EOQ%20Formula.pdf
9- http://www.cimt.plymouth.ac.uk/projects/mepres/alevel/discrete_ch12.pdf
10- http://www.businessdictionary.com/definition/critical-path.html