Production and Operations Management Project

Inventory Control Procedures of McDonalds

Submitted By:Ankit Mohan (P301111FMG003)

Hrysshikesh Dihingia (P301111FMG002)
Pratik Gupta (P301111FMG005)
Sanchita Kapoor (P301111FMG006)

INTRODUCTION
BREIF BACKGROUND
McDonalds 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 restaurants 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. 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 McDonalds Corporation. In 1965, McDonalds went
public.By the end of the 1960s, Kroc had established over 400 franchising outlets.
McDonalds began leasing/buying potential store sites and then subleased them to franchisees
initially at a 20% mark up and later at a 40% mark up. Kroc set up the Franchise Realty
Corporation for this. The real estate operations improved McDonalds profitability. By the end
of the 1970s, McDonalds had over 5000 restaurants with sales exceeding $3 billion.However,
in the early 1990s, McDonalds 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 re-heatable packaged
food. In 1993, McDonalds finalized an arrangement for setting up restaurants inside WalMart retail stores.
McDonalds is the worlds leading food service retailer with more than 31,000 restaurants in
119 countries serving 50 million customers each day. Celebrating 11 years of leadership in
food service retailing in India, McDonalds today has a network of 155 restaurants across the

country, with its first restaurant launch way back in 1996. Prior to its launch, the company
invested four years to develop its unique cold chain, which has brought about a veritable
revolution in food handling, immensely benefiting the farmers at one end and enabling
customers to get the highest quality food products, absolutely fresh and at a great value. In
line with its respect for local culture, India is the first country in the world where McDonalds
does not offer any beef or pork items. McDonalds has also re-engineered its operations to
address the special requirements of vegetarians. Vegetable products are kept separate
throughout the various stages of procurement, cooking and serving. The mayonnaise and the
soft serves are also 100% vegetarian. McDonalds has retained the No. 1 position for 3rd
consecutive year in the latest Business World Most Respected Companies of India, survey
in thefood retailing industry. The company was also awarded the CNBC Awaaz Consumer
Award in the Most Preferred Fast Food Company category. The company has also been
honoured with the Images Retail Award in the Catering Services Category for the current
year. A leading food service retailer with 155 restaurants in India, McDonalds India caters to
3 lakh customers every single day.

AIM: To study Inventory Control in McDonalds India.

SCOPE OF STUDY
1) Inventory control procedure practiced

Before:Earlier McDonalds used to pre-cook a batch of burgers and sit under heat
lamps. It used to keep them under the lamps for as long as possible and eventually
discard whatever they couldnt sell. Hencecustomers couldnt enjoy freshly made
food. The only way it could happen was by the customer giving a special order.
After:
McDonalds now follows a Just in Time (JIT) system of inventory management. JIT,
as the name suggests, is the system of supplying products to customers as soon as they
have ordered it, with minimal delay between placing the order and getting it in
hand.This shift was possible because of the new burger making technology that
enabled them to make burgers faster and keep the time between placing an order and
receiving it as miniscule as possible. This results in the finished product sitting in the
inventory for as little as possible. This enables proper inventory management and
reduces wastage while giving maximum satisfaction to the customer.

Benefits of following JIT now:

a)Improved quality of food: The burgers are made fresh for the customer and
thus provide maximum satisfaction. There is no chance of offering stale food to
thecustomer. Higher customer satisfaction leads to customer retention and increased
sales. The customer resists the impulse to try out rival brands till he is
derivingmaximum satisfaction from the brand in question.
b)Better customer service: McDonalds earlier used to make special orders for
customerswhile dishing out precooked burgers from the inventory to most customers.
Hencesuch special orders were dreaded by the staff and used to freak them out. The
staff,now after introduction of the JIT system, is more calm and composed and
offers better service to the customers. This higher customer service is subject to the
abilityto produce faster burgers. McDonalds are able to handle the demand a lot
better. They dont have to waste time in calculating the estimated sales hour by
hour and maintain inventory.

c)Better costs: The holding costs for the raw material like bread, beef, cheese,
chickenis fairly high because of their spoilage costs. Under the old system,
McDonalds usedto maintain a high inventory leading to faster orders but this resulted
in a lot of unsoldfood because of the low shelf life of beef etc. after being cooked. The
food was thenforced to be sold at a higher price to cover up for the losses in scrapping
unsold food.This resulted in lower costs to McDonalds

d)Better Raw Material handling: With the new system, McDonalds does not need
to procure the raw materials in bulk advances. This reduces daily expenses
considerablyand ensures fresh and high quality raw material all the time.

a) Feasibility of employing JIT:a. Economic Order Quantity (EOQ) The benefit of applying JIT is that it
reduces the total cost of ordering and holding inventory.
b. Safety Stock Reductions The aspect of JIT is the drastic reduction in safety
stock as it reduces the variability in demand and lead time from suppliers as
suppliers are considered to be the internal production process in McDonalds.

There are two major parts of JIT inventory operationslowering the ratio between
ordering cost and holding cost and shortening lead times. This results in high holding
costs for McDonalds, thus, ordering very small batches very frequently is the most
feasible solution. This leads to eliminating average inventory above safety stock level.
If lead times and lead time variability can be decreased safety stock can be decreased
resulting in inventory coming in as it needs to come-in.

Current Ordering Policy of McDonalds

Supply Chain is one of the critical factors for the smooth functioning of any business. And
when we are talking about fast food business with McDonalds as the subject of the study it
can expected a Supply Chain model of one of the highest precisions. It is this unmatched
Supply Chain Structure, which not just ensures on time delivery of raw materials and supplies
to McDonalds but also enables it to cut down on its cost and maximize profitability along
with maintaining highest quality standards of its products. The level of commitment of
McDonalds can be gauged from the fact that even before it set up its first restaurant in the
country it infused Rs 400 Crore to set up its delivery mechanism. McDonalds initiative to set
up an efficient supply chain and deploy state-of-art technology changed the entire Indian fast
food industry and raised the standards of performance to international levels.
As already mentioned, McDonalds had been working on its supply chain even before it
opened its first joint in the country. McDonalds, an international brand which was trying to
make inroads into the country, developed its Indian partners in such a manner that they stayed
with the company from the beginning. The success of McDonalds India was achieved by
sourcing all its required products from within the country. To ensure this, McDonalds
developed local businesses, which can supply it highest quality products. Today, McDonalds
India works with 38 different suppliers on a long term basis and several other stand alone
restaurants for its various other requirements. McDonalds distribution centres in India came
in the following order: Noida and Kalamboli (Mumbai) in 1996, Bangalore in 2004, and the
latest one in Kolkata (2007). McDonalds entered its first distribution partnership agreement
with Radha Krishna Foodland, a part of the Radha Krishna Group engaged in food-related
service businesses. The association goes back to July 1993, when it studied the nuances of
McDonalds operations and requirements for the Indian market. As distribution centres, the
company was responsible for procurement, the quality inspection programme, storage,
inventory management, deliveries to the restaurants and data collection, recording and

reporting. Value-added services like shredding of lettuce, re-packing of promotional items

continued since then at the centres playing a vital role in maintaining the integrity of the
products throughout the entire cold chain.
Cold Chain was one of the unique concepts of McDonalds supply chain in India, on which it
had spent more than six years to get the system into place. This system brought about a
veritable revolution, immensely benefiting the farmers at one end and enabling customers at
retail counters get the highest quality food products, absolutely fresh and at great value.
Through its unique cold chain, McDonalds has been able to both cut down on its operational
wastage, as well as maintain the freshness and nutritional value of raw and processed food
products. This has involved procurement, warehousing, transportation and retailing of
perishable food products, all under controlled temperatures. The following list of suppliers,
who build up the major supply chain of McDonalds, reveal how this Cold Chain works and
contributes towards the efficiency of McDonalds.
1. Dynamix Diary Industries (Supplier of Cheese)
Dynamix has brought immense benefits to farmers in Baramati, Maharashtra by setting up a
network of milk collection centres equipped with bulk coolers. Easy accessibility has enabled
farmers augment their income by finding a new market for surplus milk. The factory has:
Fully automatic international standard processing facility. Capability to convert milk into
cheese, butter/ghee, skimmed milk powder, lactose, casein & whey protein and humanized
baby food. Stringent quality control measures and continuous Research & Development.
From farm two degrees Celsius in 90 minutes is the first step to quality. For example, the Rs
262-crore Dynamix Dairy Industries, located in Baramati in Pune district of Maharashtra,
manufactures cheese slices for McDonalds at 10 metric tonnes per month. Dynamix has
helped set up 15 bulk cooling centres throughout the district from which it purchases milk.
Each cooling centre, which is equipped with modern measuring and testing equipment and a
large cooling tank, is not more than a few kilometers away from local dairy farms. A farmer
can deliver milk even twice a day on his bicycle and get a printed receipt on the spot, which
also lists the quality of the milk supplied by him as per fat content, colour and solids content.
If the milk is sub-standard or adulterated, it is rejected on the spot. A batch of milk can vary
from one litre to 10 litres, or more. Each batch is mixed in one large stainless steel cooler and
chilled immediately to two degrees Celsius to stop bacterial growth and preserve freshness.

From this point onwards, until just before the burger is actually served in a McDonalds
restaurant hundreds of kilometers away, the temperature is never allowed to increase. When
the refrigerated milk arrives at the Dynamix plant at Baramati, the milk in every single tanker
is thoroughly tested and rejected if found sub-standard, adulterated or contaminated. The
sophisticated testing lab can check fat content with an accuracy of 0.1 per cent. It can even
detect minute traces of pesticides or antibiotics administered to cows. This instant feedback
and the rejection of the entire tanker-load forces farmers to follow the best practices in terms
of animal husbandry, use proper feeds, cut down on the indiscriminate use of pesticides and
animal medicines and completely stop even the slightest attempts at adulteration.
2. Trikaya Agriculture (Supplier of Iceberg Lettuce)
Implementation of advanced agricultural practices has enabled Trikaya to successfully grow
specialty crops like iceberg lettuce, special herbs and many oriental vegetables. Farm
infrastructure features:

A specialized nursery with a team of agricultural experts.

Drip and sprinkler irrigation in raised farm beds with fertilizer mixing plant.

Pre-cooling room and a large cold room for post harvest handling.

Refrigerated truck for transportation.

Trikaya Agriculture, a major supplier of iceberg lettuce to McDonalds India, is one such
enterprise that is an intrinsic part of the cold chain. Exposure to better agricultural
management practices and sharing of advanced agricultural technology by McDonalds has
made Trikaya Agriculture extremely conscious of delivering its products with utmost care
and quality. Initially lettuce could only be grown during the winter months but with
McDonalds expertise in the area of agriculture, Trikaya Farms in Talegaon, Maharashtra, is
now able to grow this crop all the year round. McDonalds has provided assistance in the
selection of high quality seeds, exposed the farms to advanced drip-irrigation technology, and
helped develop a refrigerated transportation system allowing a small agri-business in
Maharashtra to provide fresh, high-quality lettuce to McDonalds urban restaurant locations
thousands of kilometers away. Post harvest facilities at Trikaya include a cold chain
consisting of a pre-cooling room to remove field heat, a large cold room and a refrigerated
van for transportation where the temperature and the relative humidity of the crop is

maintained between 1 C and 4 C and 95% respectively. Vegetables are moved into the precooling room within half an hour of harvesting. The pre-cooling room ensures rapid vacuum
cooling to 2 C within 90 minutes. The pack house, pre-cooling and cold room are located at
the farms itself, ensuring no delay between harvesting, pre-cooling, packaging and cold
storage. With this cold chain infrastructure in place, Trikaya Agriculture has also a plan to
export this high value product to other international markets, especially to McDonalds
Middle East and Asia Pacific operations. McDonalds expertise in packaging, handling and
long-distance transportation has helped Trikaya to do trial shipments to the Gulf successfully.
In addition to export, McDonalds assistance has enabled Trikaya Agriculture to supply this
crop to a number of star-rated hotels, clubs, flight kitchens and offshore catering companies
all over India.
3. Vista Processed Foods Pvt. Ltd. (Supplier of Chicken and Vegetable range of
products including Fruit Pies)
A joint venture with OSI Industries Inc., USA, McDonalds India Pvt. Ltd. and Vista
Processed Foods Pvt. Ltd., produces a range of frozen chicken and vegetable foods. A world
class infrastructure at their plant at Taloja, Maharashtra, has:

Separate processing lines for chicken and vegetable foods.

Capability to produce frozen foods at temperature as low as -35 Degree Cel. to retain
total freshness.

International standards, procedures and support services.

Vista Processed Foods Pvt. Ltd., McDonalds suppliers for the chicken and vegetable range
of products, is another important player in this cold chain. Technical and financial support
extended by OSI Industries Inc., USA and McDonalds India Private Limited have enabled
Vista to set up world-class infrastructure and support services. This includes hi-tech
refrigeration plants for manufacture of frozen food at temperatures as low as 35 C. This is
vital to ensure that the frozen food retains it freshness for a long time and the cold chain is
maintained. The frozen product is immediately moved to cold storage rooms. With continued
assistance from its international partners, Vista has installed hi-tech equipment for both the
chicken and vegetable processing lines, which reflect the latest food processing technology
(de-boning, blending, forming, coating, frying and freezing). For the vegetable range, the
latest vegetable mixers and blenders are in operation. Also, keeping cultural sensitivities in

mind, both processing lines are absolutely segregated and utmost care is taken to ensure that
the vegetable products do not mix with the non-vegetarian products. Now, at Vista, a very
wide range of frozen and nutritious chicken and vegetable products is available. Ongoing
R&D, both locally and in the parent companies, work towards innovation in taste, nutritional
value and convenience. These products, besides being supplied to McDonalds, are also
offered to institutions like star-rated hotels, hospitals, project sites, caterers, corporate
canteens, schools and colleges, restaurants, food service establishments and coffee shops.
Today, production of better quality frozen foods that are both nutritious and fresh has made
Vista Processed Foods Pvt. Ltd. a name to reckon within the industry.
4. Radhakrishna Foodland (Distribution Centres for Delhi and Mumbai)
An integral part of the Radhakrishna Group, Foodland specializes in handling large volumes,
providing the entire range of services including procurement, quality inspection, storage,
inventory management, deliveries, data collection, recording and reporting. Salient strengths
are :

A one-stop shop for all distribution management services.

Dry and cold storage facility to store and transport perishable products at temperatures
upto -22 Degree Cel.

Effective process control for minimum distribution cost.

McDonalds local supply networks through Radhakrishna Foodland, which operates

distribution centres (DCs) for McDonalds restaurants in Mumbai and Delhi. The DCs have
focused all their resources to meet McDonalds expectation of Cold, Clean, and On-Time
Delivery and plays a very vital role in maintaining the integrity of the products throughout
the entire cold chain. Ranging from liquid products coming from Punjab to lettuce from
Pune, the DC receives items from different parts of the country. These items are stored in
rooms with different temperature zones and are finally dispatched to the McDonalds
restaurants on the basis of their requirements. The company has both cold and dry storage
facilities with capability to store products up to -22 C as well as delivery trucks to transport
products at temperatures ranging from room temperature to frozen state.
5. Amrit Food (Supplier of long life UHT Milk and Milk Products for Frozen Desserts)
Amrit Food, an ISO 9000 company, manufactures widely popular brands

Gagan Milk and Nandan Ghee at its factory at Ghaziabad, Uttar Pradesh.
The factory has:

State-of-the-art fully automatic machinery requiring no human contact with product,

for total hygiene.

Installed capacity of 6000 ltrs/hr for producing homogenized UHT (Ultra High
Temperature) processed milk and milk products.

Strict quality control supported by a fully equipped quality control laboratory.

All suppliers adhere to Indian government regulations on food, health and hygiene while
continuously maintaining McDonalds recognized standards. As the ingredients move from
farms to processing plants to the restaurant, McDonalds Quality Inspection Programme
(QIP) carries out quality checks at over 20 different points in the Cold Chain system. Setting
up of the Cold Chain has also enabled it to cut down on operational wastage
Hazard Analysis Critical Control Point (HACCP) is a systematic approach to food safety that
emphasizes prevention within its suppliers facility and restaurants rather than detection
through inspection of illness or presence of microbiological data. Based on HACCP
guidelines, control points and critical control points for all McDonalds major food
processing plants and restaurants in India have been identified. The limits have been
established for those followed by monitoring, recording and correcting any deviations. The
HACCP verification is done at least twice in a year and certified.
The relationship between McDonalds and its Indian suppliers is mutually beneficial. As
McDonalds expands in India, the supplier gets the opportunity to expand his business, have
access to the latest in food technology, exposure to advanced agricultural practices and the
ability to grow or to export. There are many cases of local suppliers operating out of small
towns who have benefited from their association with McDonalds India.

Shortcomings of applying JIT

Employee commitment Employees must commit to JIT, to enhance the quality as

their ultimate goal, and to see JIT as a way to compete rather than method used by
managers to increase their workload.

Production level JIT works best for medium to high range of production volume.

Recognition of process.

Familiarity with problem solving.

Formal agreement of over value and waste.

Other relevant aspects of study

US based food giants success in India is based on four pillars: limited menu, fresh food, fast
service and affordable price. Intense competition and demands for a wider menu as well as
drive-through and sit-down means encourage fast food giants to customize product variety
without hindering the efficacy of its supply chain between 1992 and 1996 McDonalds
worked frantically to put the perfect supply chain in place and train local farmers to produce
potatoes or lettuces of specific sizes and worked with vendors to get the perfect cold chain.
These efforts paid off when McDonalds India, wholly owned subsidiary of McDonalds USA,
entered into Joint Ventures with Hardcastle Restaurants Pvt. Ltd. (Mumbai) and Connaught
Plaza Restaurant (New Delhi).
As McDonalds knew that supply chain management was undoubtedly the most important
factor for running its restaurants successfully it worked on the supply chain management well
ahead of its formal entry to India.
a) Product Planning:
In McDonalds Restaurants, product planning is a key operation. It has to keep on
adding new products to its menu so as to meet the needs of the customers as their
needs and preferences are constantly changing. For instance, the increasing preference
of consumers towards healthy food made the restaurant add healthier food items to its
menu. Similarly it has to add new products for different seasons, for examples hot
coffee in winter and milkshakes in summer.
b) Capacity Planning:
In McDonalds Restaurant, the managers have to set its capacity of making food items
in such a way that it responds quickly to the demands of those items in peak hours
which is very important for a fast food restaurant like McDonalds. It also have to
make sure that it has enough stock of ingredients to prepare food items which is very
important because if one ingredients fall short then the whole process of making food
may halt. For instance if the buns required for making burgers falls short then the

restaurant may not be able to sell any burgers even if it has enough quantities of other
ingredients.
c) Location Planning:
McDonalds Restaurants also have to plan their location in such a way so that
maximum customers visit their restaurants. Therefore McDonalds prefer locations
such that it can have large customer base, transport access and availability of parking
space. Moreover it also prefers locations that are suitable for raw material delivery,
which is availability of ample space for deliveries of raw material.
d) Process Planning:
In McDonalds restaurant also, the manager develop and establishes the process of
cooking food items so that food is prepared using that method which helps them to
maintain the speed and the quality of the food. Moreover it also designs processes so
that the health, safety and hygiene issues are taken into consideration. Also the
managers keep on introducing latest equipments with the advancement of technology
so as to bring pace, perfection and quality in the product.
e) Supply Chain Management:
In McDonalds Corporation , the restaurants also have certain suppliers who supply
them the with the raw materials like buns, beef, patties, ketchup, sauce, mayonnaise,
disposable cups, food packaging materials etc. Therefore it has to manage its
relationship in a effective manner so as to get the raw materials at the right time, in
proper quantity, and at acceptable cost.
f) Quality Management:
Quality in McDonald restaurant is very important because of two reasons. Firstly
because of the legal requirements of the quality of food served. Secondly ,to keep up
the good reputation which McDonalds restaurants have earned over the years. Quality
of food can be very difficult to maintain and therefore McDonalds restaurant carry on
a number of practices to make sure that quality food is served. Some of these practices
are the visits by the food inspector from the head office, supervisor checks etc.
g) Maintenance
In McDonalds, there are several equipments that are used for the preparation of food.
Therefore it is very important to maintain and service those equipments so as to
maintain the quality of the product, safety of the employees and to avoid further costs
of repairing machines. Another important things that needs maintenance are hygiene,
costs, quality etc.

b) Conclusion Thus to conclude McDonalds local supply networks through

Radhakrishna Foodland, which operate distribution centres (DCs) for McDonalds
restaurants across India have all focus their resources to meet McDonalds expectation
of cold, clean and on time delivery thus playing a vital role in maintaining the
integrity of products throughout the entire cold chain. Ranging from liquid products
brought in from Punjab to lettuces from Pune, DCs receive items from different parts
of the country which are stored in rooms with different temperature zones and are
finally distributed to the McDonalds restaurants as per their requirements.