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It is impossible to take a bite from a Big Mac at any McDonald’s franchise and not be blown away by this giants’ incredible success. McDonald’s supply chain is largely responsible for its amazing success and continued growth. The amount of strategy and planning that goes into McDonald’s logistics must be simply staggering. The McDonald’s system has been duplicated many times over by other franchises, but no one has been able to knock the “double arches” out of its top spot. As a matter of fact, McDonalds and Unilever were the supply chain giants that is until of course Amazon came a long and took the helm.
Some Quick Facts
McDonalds began its franchise operations in the 1950’s and has grown exponentially every year since. Today there are McDonalds fast food restaurants in over 100 countries! Just about everywhere you travel there will be a McDonalds serving up their burgers and other fare. This company has over 69 million customers around the world. Here are some facts:
- Over 14000 McDonalds in the US
- Over 37,000 McDonalds globally
- They buy over 2 billion eggs annually just in the US.
- They sell 75 hamburgers every minute of everyday around the world
- There are 550 million Big Macs sold each year
- 9 million pounds of French fries are sold everyday
- 60 million people have downloaded the McDonalds App
The numbers are simply staggering! All this activity requires an amazingly efficient supply chain that is cost effective and dependable. The real staggering fact is that McDonalds outsources 100% of their supply needs.
McDonalds the King of Vertical Integration
McDonalds is a fine example of how vertical integration can keep costs down and profits up. They grow their own beef through contracted producers, process their own meat, create their own spices and mixes in factories that they contract, grow their own potatoes and other vegetable through contracted producers, transport their goods on their own. McDonalds owns the land that their restaurants are situated on, so they do not have to deal with leases and landlords. They have taken control of their supply chain nicely.
Everything that makes McDonalds, McDonalds, is done through a vertical integration supply chain, and evidently it really works for them. Of course, they are a large volume buyer (that may be one of the biggest understatements) which makes the vertical integrated supply chain the best option, but there are plenty of companies using the system and not experiencing the growth that they do.
One of the clear advantages to their supply chain system is that they have control, although according to the people in charge, McDonalds does not want to control their suppliers. However, this system does give them a lot of control over supplies.
Why is McDonalds Successful?
They make a decent burger and they sell them on the cheap but is that enough to drive a business to become the corporate giant that they are? McDonalds hires 1 million workers annually. They have a workforce that is 1.5 million strong and a net worth of about $105 Billion Dollars. The stock is strong and stays strong, the question is how did they do it?
Theirs is one of the most powerful supply chain success stories! If you ask reps at McDonalds about the McDonald’s system you get vague quotes back about “establishing a supply chain where everyone wins” but you do not get a lot of “do this than do that” type instruction. Recently when asked about the success of their supply chain the chief supply officer for McDonalds answered “Our unique supply chain model is based on an exceptional set of operating principles that create long-term wealth and competitive advantage for everyone involved by mitigating costs, preventing safety issues, and producing quality and innovative products that delight customers in a uniquely McDonald’s way. The result is increased customer value, better brand health and stronger business performance.”
They have mastered the vertical integrated supply chain but there is something else that has really proven to be the deciding factor in this company’s exceptional success.
In 2016 They Held the Number Two Spot for Best Supply Chain
In 2016 McDonalds supply chain system was ranked number 2 in the Top Supply Chains by Gartners. One of the key reasons for McDonalds successful supply chain is their vested interest model. It is a model where suppliers receive larger pieces of the proverbial pie by doing business with McDonalds.
In traditional models, suppliers and business receive value from each other but in McDonalds approach suppliers and business create value together. Their model promotes growth not only of the restaurants but for the suppliers as well.
McDonalds philosophy is based on The Three-Legged Stool approach designed by McDonalds founder Ray Kroc. He established trust with his suppliers by developing a winning strategy where each “leg” of the franchise was heavily dependent on the other to succeed.
The First Leg of the stool is McDonalds employees, the second leg is the franchise owners and the third leg are the trusted suppliers. Each “leg” is a partner in success and equally important. If one leg fails, the stool collapses. For one member of this trinity to prosper they all must prosper.
The What’s in It for Me System?
This all sounds just too simple. McDonalds did not reinvent the wheel to develop this dynamic supply system? The fact is they did not, what they did reinvent was getting suppliers interested in seeing a company succeed.
The WIIFWe approach (identified by the University of Tennessee during a study of the success of McDonalds supply chain) is a big part of why this company has been able to enjoy the great success it has. WIIFWe (what’s in it for we) is the backbone of the entire “system” at McDonalds. Bringing value to everyone involved in the process is a must to achieve the smooth operations that Ray Kroc envisioned.
By approaching suppliers with a plan that helps them to enjoy more profits and steady growth McDonalds can secure the supplies that they need and keep costs down, while enjoying their own profits. For example, suppliers do not have to worry about asking for increases for products, that is already built into the contract. As the restaurants do well, so do the suppliers. Instead of viewing producers as simple suppliers, they are viewed as business partners and collaborators.
The entire supply chain is a “we”. Everyone works together toward one common goal, success! This we approach is defined by 5 simple rules.
Ray Kroc set up 5 simple rules to manage their supply chain that are still very much in practice today:
- Focus on outcomes not on transactions-instead of focusing on RFP’s and searching for better prices, McDonalds focuses on building long term business partnerships that will further the goals of the business.
- Focus on the what, not the how-this is a simple rule that in its simplest terms means trust the suppliers to deliver the QSC&V (Quality, Service, Cleanliness & Value) standards that McDonalds have set and do not worry about how they will do it. In other words, if you empower suppliers to meet your demands they will. McDonalds does not micromanage suppliers.
- Set clearly defined outcomes that are measurable-everyone must be on the same page. You cannot set vague guidelines and expect to get the outcomes that you desire.
- Pricing model/incentives for cost/service trade-offs-this is one of the most important rules to McDonalds model, everyone must be making money. Pricing so that every supplier can make a profit and enjoy the rewards of doing business with McDonalds is a key tenet to this successful supply chain.
- Govern for insight not oversight- establish peer-to-peer relationships that are there to provide insight and not micromanage.
What’s Best for the System
Before a supply decision is made at McDonalds, it is reviewed to determine if it is best for the system! While Ray Kroc is long gone his legacy of system first has stood the test of time and survived through different leadership and generations of suppliers. The system works, and no one wants to change that. Of course, changes are made but never without determining if it is best for the system first.
There are a few take a ways from an examination of McDonald’s supply chain.
1. You must have a lot of volume to take full advantage of this model.
2. If you treat people well, many times they will remember and treat you well back even in business.
3. Ray Kroc may have only been a traveling salesman, but he understood intimately what it took to get people to work hard for you and believe in your vision.
McDonalds has developed a supply system that is efficient, effective and the backbone to their organization it is based less on business smarts and more on people smarts and core values that depend on treating people fairly. It is a model that is worthy of close study.