Peter Kandra

EDEXCEL

BTEC Higher National Diploma

QCF level 4: BTEC Higher National Diploma Unit code:
R/505/8181

Operations Management in Business

PETER KANDRA

Operations management and strategic planning

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CONTENTS
INTRODUCTION.....................................................................................................................................3
2.1 IMPORTANCE OF THREE Es TO THE MCDONALD.......................................................................4
2.2 TRADE-OFF: time, cost, quality..................................................................................................5
2.3 THE FIVE PERFORMANCE CRITERIA............................................................................................6
2.3.1 THE SIGNIFICANCE OF 5 CRITERIA TO MCDONALD............................................................6
2.3.2 COMAPRISON TO THE OTHER FAST-FOODS........................................................................7
RESOURCES............................................................................................................................................8

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INTRODUCTION

Organisations cannot predict their future and plan in detail every action. However, every organisation
need some strategic plan in order to be aware where they heading and how they can get there. An
operational plan is the comprehensive way in which department will use its resources to achieve
company goals. Once the operations management and its functions have been understood and all
performance objectives has been clarified, companies needs to create a set of general principles and
basics which will help in decision making. Strategic planning involves defining companys direction
and describing how budgets and resources will be allocated [Tara D., 2015].

The importance of linkage between operations functions and strategic planning is necessary to
understand in order to achieve goals that have been set in the most effective way. The main strategic
plan of McDonald is to be the biggest and best selling fast food in the world. Strategic and
operational plans allowed this business to grow into the one of the leading fast food brands in the
world. This report will explain the linkage between operations management and strategic planning
with reference to McDonald.

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2.1 IMPORTANCE OF THREE ES TO THE

MCDONALD

The business world today is very competitive. One of the essential elements that drives businesses
are concepts of Economy, Efficiency and Effectiveness. Business should focus on a long term
strategies in order to improve their overall performance and stay competitive. Therefore they should
create and deliver value at all levels of their activities.

Value for money is about finding the right balance between the economy, efficiency and
effectiveness [Jackson P., 2012]. McDonald is creating value to its stakeholders, however not clear
value to all of them. It is obvious that McDonalds stakeholders such as suppliers, franchises and
shareholders have benefits from business with this company. Despite this fact, customers did not get
the best value in the recent years. Next lines will explain the Three Es with relevance to McDonald.

Economy

Economy is about overall costs and revenues of the company and how these are managed. It also
consider the way a change in one cost or benefit can have impact on the others. It is fundamental to
find balance between resources for set goals at reasonable costs (Efficiency looks more at volume
and the way resources are used but economy looks more at cost of resources). For example an
improvement in efficiency in one area can lead to higher cost in different area.

McDonald economy is effective as they operate their own restaurants in US and they use franchise
business model too. The total revenue was in 2014 was $27 Billion from which $9 billion are from
franchised shops and the rest from company operated restaurants. From $19 billion operating costs
$15 billion is from company owned restaurants. Because of huge operating costs, McDonald net
profit is 4.7 billion after tax. [McDonald Annual report, 2014]. This indicates that McDonald is
spending a lot of resources for their own US restaurants. Wages, occupancy, and goods costs are the
main expenses. However McDonald is investing hugely in to the marketing too. In general
McDonalds economy is at the good level however, if they would be able to cut the operating cost of
their own restaurants, the profit could be significantly increased.

Efficiency

On the other hand, Efficiency states the right use of resources to accomplish an objective. Efficiency
means that the company is reducing wastes and resources to deliver the same amount of value.
Because McDonald is trying to be very standardised, its efficiency is quiet high. They can get very
good deals and promotions from their suppliers. They are efficient because they are low variety
business. Because of standardisation, advertisement is also efficient as they can make one
advertisement for entire country. The labour in restaurants is paid minimum wage and people still
work there. All the restaurants has modern machines and even a coffee making is automated which
increases speed. Therefore McDonald is very efficient in terms of costs and speed, however only at
operational-restaurant level. McDonald is not the most efficient business in strategic level as their
operational costs are very high. They pay over 1.5 Billion on the energy (electricity, gas etc). This
should be however reduced as each store should be able to set start and so times for its equipment
so they can save energy.

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Effectiveness

In other words doing things right. It refers to the degree to which the goals and objectives are
achieved. It also involves if targeted problems are solved. McDonalds ability to achieve strategic
goals is one of the main reasons why they grow so big. They are effective in many areas. One of them
is costs. Their suppliers must be happy for having business with McDonald and McDonald is able to
use its buying power to get the convenient deal. McDonald is also effective in using franchise
business model. Individuals which decides to run a McDonald franchise needs to have a good
amount of money prepared up front. This makes 1/3 of McDonalds revenue. Operational level is also
effective as restaurants have fast serving and they are highly standardised.

2.2 TRADE-OFF: TIME, COST, QUALITY

Trade-offs are the extent to which improvements in one performance objective can be achieved by
scarifying performance in others [Slack N., 2013]. Simply said, if company decide to increase quality,
it would surely increase cost. It is a case of finding either the most benefit or the least harm for the
least cost. For most organisations, a lower price of products will reflect on more sold units and
higher revenue but margins would be smaller and total profit may be lower. However, there is an
optimum price that will generate the most profit.

In case of McDonald, it is well-known fact that their food is not the best quality however they claim
their goal is to provide the best quality food. McDonald is very low cost and this is how they do it.
They supply everything very cheap and in huge bulks. That is why there is an issue of quality. If
McDonald wants to be low cost it is impossible to be very high quality. If they would increase quality
and start supply their beef from some UK based farm that offers higher quality meat, they would also
have to increase price of their products in order to keep profitable margins.

Every business would like have an appropriate level of inventory. Low inventory means a greater risk
of shortages and lost sales. McDonalds inventory is managed very well by few systems. This is a
tension between time and costs as McDonalds restaurant needs sufficient stock levels however not
they cannot overstock. This would increase wastage and therefore decrease efficiency. McDonald is
using Manugistics/JDS based forecasting system for forecasting of products inbound and outbound to
restaurants. This system evaluates relevancy and accuracy of orders comparing two years history of
orders [Mcdonalds.co.uk, 2015]. Because of this and also Manhattan warehouse management
systems that helps with quality of picking and delivering, McDonald can manage supplies on time,
accurately and efficiently.

Another example of McDonalds direct trade-off is between staff utilization (costs) and customer
waiting time (time). If too many tills are opened then a quality of service is high and people do not
have to wait long time. However, there are times when restaurant is not busy and employees are idle
which is inefficient. On the other hand, if too few tills are active, McDonald can save costs for labour
but customers would have to wait longer time and therefore quality of service will be decreased. This
works on basis of manager experience as he roughly knows when he can expect busy times and
when quiet times. Effective staff allocation allows McDonald to save costs on labour and keep the
customer service fast. Corn Market Street McDonalds average waiting time is around 4 minutes
when it is busy and under 1 min waiting time when it is quiet. They do not use full capacity of their
tills even when the restaurant is very busy. This indicates that manager is trying be effective and save
some costs on labour.

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2.3 THE FIVE PERFORMANCE CRITERIA

Operations and also businesses are evaluated by the results they have such as profits. Company
should defines its strategy and then identify the operational performance objectives in order to
achieve this strategy. Next step is to define measures that will help in judging if performance
objectives are met. Operating environment have to be adjusted accordingly to this performance
objectives. These objectives are quality, speed, dependability, flexibility and costs.

It is highly important to keep eye on the operating expenses here. Even if the profits of the company
increase, significant rise in operating expenses suggest problems. This problem can be solved by
evaluating mentioned performance objectives. [Billie N., 2014]

2.3.1 THE SIGNIFICANCE OF 5 CRITERIA TO

MCDONALD

The main reasons why these five criteria are so significant to the McDonald are because they are
helping the company with:

Measuring the operational performance

Ensuring the customer is satisfied
Increasing competitive advantage

Next table will evaluate significance of these performance criteria to Mc Donald:

CRITERION SIGNIFICANCE TO MCDONALD

QUALITY McDonald should try to not have defects in the products and service too. If McDonald wants to
satisfy customers, quality is necessary as customers are expecting quality food. If this criterion is
not taken seriously, McDonald may lose customers as it happened last year due to food scandals
in Asia. Low quality was one of the major contributor of 15% drop in sales of this business
[Hayley P., 2015].
SPEED Minimising the time between a customer asking for food and receiving it is crucial advantage
against competitors. The process of making hamburger is at high level and that is where
McDonald is competing very well.
DEPENDABILITY Product and service ability to be the same quality as it was either last time or in different branch
is important fact. McDonald would not have so many customers if their burgers would be
inconsistent and would not have expected taste. Wherever people go McDonald has same taste
hamburgers or cheeseburgers.
FLEXIBILITY Meeting customers requirements by flexibility is not the strong side of McDonald. If someone
would ask for extra gherkin he would not get it. This is weakness of McDonald. McDonald is not
flexible with the owners of franchises too. The layout of restaurants is strictly set and rules are
clear. McDonald is not flexible due to their standardised business model. Therefore flexibility
does not play a big role for them.
COSTS This is one of the main advantage of McDonald. Restaurant is buying goods in huge bulks and
they get significant discounts and promotions as they are an important customer for all suppliers.
It is main reason why McDonald could earn so much money as they keep the cost of one
hamburger at the lowest level possible. According to the elepathjurnal.com, the average price of

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one hamburger is around $0.30 which is 0.20. Because the McDonald has low variety and high
volume of their products, they are able to keep their cost down.
Table 1: Importance of 5 performance criteria to the McDonald

As shown on the table 1, these criteria helps McDonald in meeting their strategic plans. These
performance elements are highly important if McDonald wants to compete with other fast foods.
Because they are focusing on speed and costs, they are able to sell more food for less costs. It also
helps to increase differentiation. People may be happier to go to McDonald because of their fast
service and cheap prices instead of waiting longer in a queue in Burger King even if the food is higher
quality. People also like repeatability. More people are likely to eat McDonald as they know the taste
rather than try something new.

2.3.2 COMAPRISON TO THE OTHER FAST-FOODS

Following graph evaluate the five performance criteria for McDonald, Burger King and Taylors. The
first two fast foods are huge competitors, however, Taylors is added just to compare different values
and business model.

Figure 1: Comparison of 5 performance criteria of three different businesses

As shown on the figure 1, performance criteria of McDonald are reaching high values at costs, speed
and dependability. On the other hand flexibility and quality is significantly lower. Comparing to the
big competitor Burger King, McDonald is obviously better however, the flexibility of Burger King is
higher as they offer over 50 options of burgers and food items and a lot of sweet treats and
beverages [burgerking.com, 2015]. Taylors is more focused on flexibility and quality of food provided.
Each of these businesses excel in few of these criteria but not in all of them. McDonald can do well in

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all of these criteria however, flexibility would be the problem as they are focusing more on speed and
costs. Trade-offs are obvious and each of these restaurants manage them slightly different

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RESOURCES

1. Tara D. (2015), Strategic planning & Managing Portfolios, [Online], Available:

http://smallbusiness.chron.com/strategic-planning-managing-portfolios-16885.html [2nd
December 2015]
2. Billie N. (2014), Objectives of operational performance, [Online], Available:
http://smallbusiness.chron.com/objectives-operational-performance-77937.html [2nd
December 2015]
3. Burgerking.com (2015), Burger king nutrition menu, [Online], Available: http://bk-emea-
prd.s3.amazonaws.com/sites/burgerking.co.uk/files/documents/Nutrition_Feb.pdf [2nd
December 2015]
4. Jackson P. (2012), Value for money and international development, [Online], Available:
http://www.oecd.org/development/effectiveness/49652541.pdf [4th December 2015]
5. McDonald Corporate (2014), McDonald Annual Report 2014, [Online], Available:
http://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/Investors/McDonald's
%202014%20Annual%20Report.PDF [4th December 2015]
6. Slack N. (2013), Operations Management, Seventh Edition, Pearson Education Limited, 2013

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