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 1 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.

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.

1 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 -20°C, products like butter, which require chilling, need about 0-
4°C.
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 McDonald’s). 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 semi-
finished 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 round-
the-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 -18º to -22º, that in chilled trucks ranged from 1 to 4º. "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 26º to 3º.

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 -26º 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 3º", 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

2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991
Dollars in Millions

Franchised Sales $24,838 24,463 23,830 22,330 20,863 19,969 19,123 17,146 15,756 14,474 12,959

Company-operated Sales $11,040 10,467 9,512 8,895 8,136 7,571 6,863 5,793 5,157 5,103 4,908

Affiliated Sales $4,752 5,251 5,149 4,754 4,639 4,272 3,928 3,048 2,674 2,308 2,061

Total System Wide Sales $40,630 40,181 38,491 35,979 33,638 31,812 29,914 25,987 23,587 21,885 19,928

Total Revenues $14,870 14,243 13,259 12,421 11,409 10,687 9,795 8,321 7,408 7,133 6,695

Operating Income $2,697 3,330 3,320 2,762 2,808 2,633 2,601 2,241 1,984 1,862 1,679

Income before Taxes $2,230 2,882 2,884 2,307 2,407 2,251 2,169 1,887 1,676 1,448 1,299

Net Income $1,637 1,977 1,948 1,550 1,642 1,573 1,427 1,223 1,083 959 860

Cash provided by operations $2,688 2,751 3,009 2,766 2,442 2,461 2,296 1,926 1,680 1,426 1,423
Capital Expenditures $1,906 1,945 1,868 1,879 2,111 2,375 2,064 1,539 1,317 1,087 1,129

Free Cash Flow $782 806 1,141 887 331 86 232 387 363 339 294

Treasury Stock Purchases $1,090 2,002 933 1,162 765 605 321 500 628 92 117

Financial Position at year end

Total assets $22,535 21,684 20,983 19,784 18,242 17,386 15,415 13,592 12,035 11,681 11,349

Total debt $8,918 8,474 7,252 7,043 6,463 5,523 4,836 4,351 3,713 3,857 4,615

Total shareholders'equity $9,488 9,204 9,609 9,465 8,852 8,718 7,861 6,885 6,274 5,892 4,835

Shares outstanding (in millions) 1,280.70 1,304.90 1,350.80 1,356.20 1,371.40 1,389.20 1,399.50 1,387.40 1,414.70 1,454.10 1,434.50

Per Common Share

Net Income $1.27 1.49 1.44 1.14 1.17 1.11 0.99 0.84 0.73 0.65 0.59

Net-Income Diluted $1.25 1.46 1.39 1.1 1.15 1.08 0.97 0.82 0.71 0.63 0.57

Dividend Declared $0.23 0.22 0.2 0.18 0.16 0.15 0.13 0.12 0.11 0.1 0.19
 Market price at year end $26.47 34 40.31 38.41 23.88 22.69 22.56 14.63 14.25 12.19 9.5

Franchised Restaurants 17,395 16,795 15,949 15,086 14,197 13,374 12,186 10,944 9,918 9,237 8,735

Company-operated Restaurants 8,378 7,652 6,059 5,433 4,887 4,294 3,783 3,216 2,733 2,551 2,547

Affiliated Restaurants 4,320 4,260 4,301 3,994 3,844 3,216 2,230 1,739 1,476 1,305 1,136

Total Systemwide Restaurants 30,093 28,707 26,309 24,513 22,928 20,884 18,299 15,899 14,127 13,093 12,418

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 three-
section 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. Ritchie P, McDonald's: A winner through logistics, International Journal of Physical Distribution and Logistics Management
20, no.3 (1990) pp:21-24.

2. Shah Minari, Distribution; cold comfort, Business India, June 6, 1998.

3. Bhardwaj Neera, Distribution: The making of McQuality, Business India, June 29, 1998.

4. Kalloor Roshni, McDonalds buys its stuff, Hindu Businessline, July 15, 1998.

5. Venkatraman Latha, The McDonald's - AFL Logistics tie-up-keeping that lettuse crisp!, Business Line, July 5, 1999.

6. Bamzai Sandeep, Big Mac takes centrestage, Business India, October 4, 1999.

7. Tracking the McDonalds food chain, www.strategicnewspaper.com, May 6, 2000.