Copyright 2004, Traffic World, Inc.
When McDonald''s a few years ago offered to slap an extra strip of bacon on its burgers for 35 cents, it misjudged customer appetites. The promotion proved so popular the fast-food giant had to rush order a few more rashers, triggering a bit of a ripple impact across part of the economy.
"We closed the spot market for pork bellies and increased our costs greatly," said Robert Bauer, information technology director for McDonald''s global supply chain. It also McDonald''s to rethink the way it manages purchasing, inventory and replenishment.
Now the company wants its franchisees and corporate managers to use an online ordering system that will help it plan exactly what to purchase, pack and ship - and how many trucks it will need to do it.
McDonald''s already has seen dramatic improvements in its European operations using this technology. The company has reduced raw waste by 30 percent, inventory by 30 percent and store transfers from 8 to 4, said Bauer. Order times were halved, saving 60 minutes per week, he said.
Annual savings per store are approximately $5,585, which sounds like little to a big corporation except that it adds up to at least $11.5 million in savings at just the 2,072 McDonald''s restaurants in France and Germany.
McDonald''s wouldn''t reveal the total savings it expects from the system in Europe and the United States but they certainly will be much higher. For 2003, McDonald''s had a return on investment of 23.2 percent. "We feel we can go much higher than that," said Bauer.
McDonald''s online ordering program reflects the shift toward "demand chain planning" under way across many industries. Product life cycles are getting shorter, competition more intense and even global giants need to be nimble. Waste has to be cut out of supply chains, whether it''s too many plastic spoons or too many shipments using too many trucks, trains, planes and ships.
Although a fast-food restaurant chain can hadly match Dell Computers, which doesn''t put its products together until it received an order, better demand planning can help a restaurant reduce or even eliminate spot shortages and the waste associated with overstocking.
That''s a tall order for any company, but it''s especially challenging for companies built on franchises models and so do not own their supply chain.
Yet, McDonald''s is setting logistics trends for restaurants with its online ordering system. Last year, only 12 percent of restaurants ordered food supplies electronically - 10 percent for nonfood supplies, said the National Restaurant Association. Some two-thirds purchased perishable foods and nonfood supplies primarily through a distributor.
McDonald''s, however, is one of a handful of companies with the clout to get thousands of franchisees - its business partners and customers - to sign up for such a system. The company serves more people by Tuesday than Wal-Mart serves each week. More than 31,000 McDonald''s restaurants serve 46 million customers each day in 119 countries. In the United States, thousands of trucks are on the road each day delivering food and supplies to McDonald''s franchises.
Those trucks are hauling more than just all-beef patties and sesame seed buns. Mc-Donald''s is one of the largest toy distributors in the United States. USA Today named McDonald''s McFlurry Maker one of the top 10 new toys at Toy Fair 2003.
Under its new McKids licensing initiative, the company will sell toys, clothing, footwear, accessories, books, DVDs and videos - and you still can get fries with that.
The company''s massive purchasing and shipping operations demand careful planning and timing. Order too few Happy Meal toys, for example, and the fat hits the fire. Would you want to be next to a six-year-old when a restaurant runs out of "Haunted Mansion" Happy Meal toys?
Yet at the time of the bacon promotion, orders and inventories were managed manually. "No one was really looking at supply-chain integration," Bauer said.
Not only are the majority of its restaurants not owned by the company but its entire supply chain is outsourced - that includes all its warehousing and transportation needs, he said.
McDonald''s began to revamp its supply chain in 1996 with software and technology purchased from Manugistics, Oracle and Sun. At first, "We spent the majority of time collecting data," said Bauer. "We had to have standardized data. Then we had to put the infrastructure in place to run the data." McDonald''s wanted common business processes across its network, he said.
Working with its software partners and Martin-Brower and Perseco, its transportation and distribution contractors, the company has made significant progress, but the global scope of its organization demands more. "We still have a long way to go," Bauer told shippers at a recent conference sponsored by Manugistics in Washington, D.C.
McDonald''s announced a "revitalization" program last April focused on building sales at existing restaurants while cutting capital expenditures by $800 million to $1.2 billion in 2004. The company, which has seen its annual growth rate slow in recent years, expects to add only 360 restaurants this year compared with 1,000 in 2003. And it plans annual sales growth of 3 to 5 percent for 2005 and beyond, while growing operating income 6 to 7 percent a year.
"Together with our franchisees and suppliers, we will pursue opportunities to improve productivity and identify cost savings," Chairman and CEO Jim Cantalupo said when announcing the plan earlier this year. Monitoring and measuring operations will contribute to that, and web-based demand planning and tracking is one item on McDonald''s strategic menu. The company is using software from SAS and Manugistics to roll out the online system in the United States and Europe.
In the United States, the technology initiative is geared for limited supply items such as Happy Meal toys. Such promotions run for 28 days and "we want to hit the 28-day mark as close as possible for promotions," said Bauer.
The trick: Happy Meal toys are produced 12 months in advance. "There is no additional production we can do. It''s a set inventory," said Bauer.
In the United States, where McDonald''s has about 13,000 restaurants, nearly 12,100 are online, said Bauer. It''s unlikely it ever will hit 100 percent, said Bauer. Getting franchisees - who own 70 percent of the restaurants - to use the system is a challenge. "They don''t have to sign up if they don''t want to," he said.
"It''s difficult to get the restaurants to give us information," said Bauer. "They look at us as a big brother: ''You are going to do bad things to me.'' Even today, we need to be careful about how we use the information.
"We had to put incredible incentives in place," he said. For instance, McDonald''s will buy back cases of Happy Meal toys if too many are shipped to a restaurant. To encourage restaurant owners to order supplies electronically, McDonald''s designed the system so restaurants can compare their performance with other, similar restaurants, said Bauer.
Bakkri Mohammed manages a busy McDonald''s restaurant in downtown Washington, D.C., a couple of blocks away from where Bauer addressed the Manugistics conference. At the heart of the capitol''s tourist and business district, the franchise fills up early in the morning as workers buy McMuffins, McGriddle sandwiches and coffee and it stays busy well into the night.
Being able to order supplies electronically has "helped a lot," Mohammed said. He uses the system to order supplies through McDonald''s contractor Martin-Brower.
Planning the right amount to ship to restaurants like Mohammed''s each week is critical because McDonald''s wants its inventory to be "invisible." It wants deliveries to its stores at night so that workers aren''t tied up dodging hand carts and tractor-trailers aren''t parked in front of restaurants. Martin-Brower users a type of conveyor belt to quickly move packages from the truck directly into the restaurant - a process that''s easier when customers are absent.
McDonald''s delivers supplies between one to three times per week per store, sometimes more often in urban areas, said Bauer. Each truck makes two to three stops per route.
For 2004, McDonald''s plans to complete implementation of online ordering in Germany and France, where it is using the system for all food and supplies. McDonald''s has 1,100 restaurants in Germany and 972 in France, where the company says it has generated positive comparable sales and profit increases each of the past six years, despite much publicized protests by French farmers and activists.
McDonald''s is one-third of the way through the project in Germany and half-way through the project in France, said Bauer. McDonald''s plans to expand the system to the United Kingdom, Hungary, Austria, Spain, the Czech Republic and The Netherlands. It hasn''t decided which software will be used to bring the project to other markets, such as Latin America, Bauer said.