McDonald’s Organization: Operation Management

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Introduction

McDonald’s restaurant is currently the biggest and most successful chain of restaurants that serves fast food to around fifty-eight million customers worldwide daily. This can is proven by the company’s share price which has been stable at around $ 50 per share and trading nearly 10 million shares per day on average on the New York Stock Exchange. This can be compared to those of its competitors such as Burger King whose share price trades at around $ 21 and trades around 1.5 million shares per day on average in the same stock market (Blake, 2009). It bases its operation on the sales of products such as French fries, cheeseburgers, hamburgers, hotdogs, chicken and chicken products, salads, fruits, wraps, desserts, milkshakes, and soft drinks. Their long chain of restaurants comes with playgrounds, advertising, luxury lounges, and fireplaces (in selected branches) to increase comfort which comes with this excellent food menu.

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Being in operation since 1940 this chain of restaurants boasts a record expansion into international markets becoming a significant symbol of business globalization. McDonald’s restaurant branches are operated through franchising, affiliates, and some directly by the corporation. According to information from McDonald’s Corporation’s official website around 75% of McDonald’s branches are run as franchises while the rest is run by the company. A large portion of their revenues is raised through franchising, which pays the rent and divides a percentage of their profits. These collections add to money earned through the sales of their appetizing products.

This business was founded on the principles of Speedy Service (Speedee Service) which was the basis of modern fast-food restaurants. Currently, McDonald’s operates some 31,000 and counting restaurants worldwide, this translates roughly to 1.5 million jobs. Diversification has lead to the acquisition of other brands such as Pret (formally -Pret a Manger) and Piles Café. (Lisa, 2007)

This report will try to analyze McDonald’s Operations to come up with the concepts of operations management that are applied by this large corporation. This report will basically focus on the following concepts of operations management;

  • Human Resource and Job Design
  • Supply chain management
  • JIT practices and Inventory management
  • Quality management
  • Maintenance
  • Capacity Management and Planning
  • Location

In Operation management terms, Mcdonald’s has a highly qualified operating system, its kitchen, and its management, to serve high volume customers. As time goes by and market needs diversify, Consumers have become more mobile and selective the dynamism is such that people have changed their schedules and anytime is time to eat. They want a broader choice of food to choose from. Speed is one of the main focuses of these restaurants since its inception. An article in Fortune magazine (Fortune, 2002), featured a memo that accused the McDonald’s franchisees of an alarming rate of poor service delivery. This included unprofessionalism, poor customer care, and slow service. Admittedly, when asked for comments one of the CEO’s Jack Greenberg said that they were experiencing quality problems in service delivery and customer satisfaction. This fact was a wake-up call, McDonald’s afterward came up with a plan to constantly review their operations management standards which have been constantly reviewed in 2003, 2005 and 2006 respectively.

Since the publication of the report on obesity back in 2004 by the House of Commons, there have been some changes in food contents that are usually served by fast-food restaurants and other food products that are regarded as junk. As a result of the escalation of obesity, McDonald’s has gone further to include the amount of nutrition to their foodstuffs in branches especially in Europe and the US. This has been a result of requirements by some local governments and governing bodies especially health-related. This is meant to protect the unaware populations from not knowing how many calories they are taking per the amount of food they eat (Neumark et al, 2008).

Human Resource and Job Design

The quality of the products a business produces ends up making or breaking its reputation. According to Blake (2009), McDonald’s beef supplies have 100% USDA-inspected beef which does not contain fillers, additives, or extenders. This review also shows the progress from as far back 1987 when McDonald’s launched the fresh tossed salads, the white chicken used for preparing the chicken MCnuggetts followed in 2003, then the much-publicized food nutrition information which is also a requirement in the UK and US branches due to government regulations and healthy eating issues. These foods are supplied by regularly inspected and audited suppliers who are certified to produce these raw materials. These suppliers include Nestlé, Newman’s Own, and Golden State Foods among others.

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It’s according to McDonald’s CRS report in 2008; it’s working with stakeholders and partners towards ethical environmental and social campaigns. With this, it launched a campaign aimed at delivering responsible food to its customers. This means the delivery of safe foods in an ethical in all their branches worldwide. In addition, they are using this as a way of improving their services including incorporating new laws as they are made by the countries they operate in.

But products of high quality require equally high-quality employees to produce and distribute. Each McDonald’s restaurant is structured as an independent business, with restaurant management responsible for accounting, operations, inventory control, community relations, training, and human resources (Shafer, 1990). Therefore if a business intends to maintain a good reputation for the long term then it needs to do its best to hire and maintain a high-quality workforce. Then it is of the highest priority for a business such as McDonald’s that offers a wide array of personal services, the ability to recruit, train and retain high-quality staff.

McDonald’s uses recruitment and training policies with procedures that are usually customized to bring onboard recognize, build-up and keep the high competence of workers which its business strongly requires. A McDonald’s branch restaurant usually has up to 60 employees (Peter, 2009). The majority of these employees referred to as ‘crew members’ are paid by an hourly rate. They are primary charged with the responsibility of preparing the food, serving the customers and carrying out tasks to ensure the efficient running of the restaurants. The outstanding restaurant workers are, managers who are on the payslip. It is their sheer duty to ensure quality management of the restaurant’s business, business and crew performance.

At McDonald’s customer satisfaction begins with the abilities, obligation and approaches used by the employees, therefore effective workers are the key to success. Therefore, the staff professionalism is the most crucial assets of the organization. As a matter of this realization the organization strives to give world class services to its customers and tries to employ, train and retain world class employees. To achieve this objective, it has identified the basic required skills and conducts that applicants should demonstrate. For each of the positions available, there is a stated description of the duties that shows the responsibilities of each worker as per the competence and skills.

For recruiting hourly-paid employees McDonald’s advertises the positions vacant in the restaurant. The Company also uses the local job centres, career fairs and other local facilities. The Company’s future managers are pulled out of two main sources; majority of all the salaried management positions by promoting the hourly-paid employees, the remainder are graduates , (Lisa, 2007) a worker hiring activity usually is characterized by many work vacancy applications other than the positions existing. The manager will select the probable fit candidates to undergo an interview. It is of high importance that effective hiring material with a clear message targeting the right pool of job seekers.

McDonald’s prepares an interview guide that helps the company’s interviewing team to predict how an applicant’s behavioural pattern that will influence his/her future performance. It uses a decision-making process which is a fact-based in nature. The questions are set to base on actual events and situations unlike those that allow applicants to provide theoretical information. The panel of interviewers look out for some behavioural evidence that can be exhibited by the applicant’s life history and those traits that fit in well with the requirements of the job. The panel rates the potential employees basing on their responses after which they will offer the jobs the most promising candidates who have earn the highest ratings.

After getting the right people who pass the interview they are taken through a training session. The Management has developed a curriculum which is basically divided into four key programmes; Shift Management, Systems Management, Restaurant Leadership, and Business Leadership (Lisa, 2007). McDonald’s recruitment and employee retainment process is based on the belief that its success lies in hands of those whom they have given the various duties to run within their company as indicated in their The aim of this rigorous recruitment process is to hire the best people in the job market, work hard to retain them by offering ongoing training relevant to their position and to promote them when they are ready. The company’s worker hiring procedures, practices and policies are customized by the pursuit of the company to achieving its goals.

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Supply Chain Management

Supply chain includes all the facilities, the functions, and the operations that is included in the manufacturing processes and the dispatch of the finished products or services, from the suppliers (and those who supply them) to customers (and those they sell to). It also covers the planning and managing of supply, demand, acquiring raw materials, production activities and scheduling and rescheduling the product or service; it also includes warehousing activities, inventory control and management, and distribution to consumers; and delivery and customer service. The greatest difficulty to overcome in supply management is learning to handle uncertainty. The purpose of supply chain management is to coordinate supply activities, while reducing uncertainty. (Joseph 2001)

McDonald’s is one of the companies which epitomize excellent supply chain management. McDonald’s has successfully developed a string of suppliers in areas which seem inaccessible by most companies. To achieve this McDonald’s developed a very exacting specifications for its food products and requires that all finished goods maintain a very high rate of consistency to an extent that a hamburger in Eastern-Europe tastes the same as a hamburger in North America. Furthermore, they have a policy of acquiring supplies from local organizations. It took them 9 years for McDonald’s to build a network of suppliers in Russia, but today the restaurant in Moscow is one of the largest and most successful. The following figures from the McDonald’s press release show the success of their international business venture. McDonald’s January comparable sales as per the press release were as follows increases by segment were as follows:

  • U.S. up 5.4%
  • Europe up 7.1%
  • Asia/Pacific, Middle East and Africa up 10.2%

In general the report showed that their global comparable sales went up by a 7.1% margin in January. This information was released was released to both media and published on their website on February 9th of 2009 by Jim Skinner their chief executive officer.

In addition, McDonald’s suppliers play a pivotal role in their success, providing quality products at competitive prices. Ray Kroc’s philosophy is usually illustrated in a three legged model. The first leg symbolizes McDonald’s, a second leg their franchisee partners and the third leg their suppliers and partners (Beatrice, 2001). The stool being strong on its three legs shows the value McDonald’s attaches to it supplier who are treated as part of their team.

Just-In-Time Practices and Inventory Management

JIT is a philosophy used in operations management especially by the manufacturing sector to reduce wastes of materials and to help them generally improve their production both in efficiency and effectiveness. It is meant to cut down on the waste materials from any production process that may push the costs up and not doing the same to the value of outputs. These processes may include transportation of raw materials, the holding of unwanted inventory, and the use of production equipment and methods which are not efficient and effective leading to high costs. This philosophy in at times called lean production (which generally accelerates a production process while minimizing wastes, utilizing the plant maximally.) or stockless production (ordering stocks only when you need them hence no stocks are held). (Beatrice, 2001)

These two approaches combined should help to raise the profit margins and return on investment through cutting down inventory. Meanwhile, increasing a firms inventory turnover rate, in the process reducing variability, improving product quality, while cutting down on production cycles periods and dispatch leads times to lower other costs tied up in maintenance and stock holding costs. Furthermore, JIT utilizes a hedging technique which makes sure that the excess capacity is made use of other than building up inventories for the future which would cause problems later. (Beatrice, 2001)

JIT applies to repetitive process such as a manufacturing processes or cycle in which the usual products and components are repetitively. McDonald’s have shown excellent performance in practicing JIT. Their JIT system is done in such a way that McDonald’s doesn’t begin to cook or reheat or assembling the foodstuffs before placement of an order by a customer (Atkinson, 2005). McDonald’s traditionally used to cook hamburgers before placement of orders and left them under heat retainers for a long time, eventually this led to discarding of whatever wasn’t sold.

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Nowadays, as a result of technological advancement McDonald’s have invested burger-cooking ovens which have a high-tech bun toaster. With this technology they are able to cook and reheat foods in record speed for customer’s orders to be processed as they wait. The main concept behind this is providing a client with their order faster while the finished product sits in their inventory for as short as possible.

McDonald’s is now able to offer better food for its customers at a much lower cost. Better food is produced in terms of quality of food served, while costs are reduced as a result of reduced food spoilage rates, cutting down on the overall cost of ordering and having keeping inventories in the stores while having a reasonable reduction in safety stock. What McDonald’s is commonly known for is their very high holding costs coupled with their ordering costs (Lisa, 2007). Eventually, this, combined with the ability to pull down safety stock margins, is where JIT becomes effective.

This is evident through the test of the new menu which was done at some 600 outlets in California. Some of the new products included the Angus deluxe, Swiss and Angus bacon Angus mushroom and cheese. This was after rivals such as burger king had introduced nearly the same two years earlier. The products were meant to attract the teenage customers at a very low price of $3.99 compared to its rivals $6.00 dollar a piece. But this did not mean that they did away with their traditional menus (Bird, 2006). The safety stock hence exists because of these fluctuations. Hence, what JIT tries to do is reduce both lead times and the changes in the lead times so as to enable the reduction of the safety stock to the lowest levels possible;

In conclusion the two parts to JIT inventory operations are, reducing the proportion between ordering and holding costs while shortening lead times. The resultant effect is that a firm with this kind of holding costs (high) that they order very small collections with a high frequency is the best and most profitable method. It does away with the average inventory above the safety stock level.

Inventory Management

The main issue is that investors require the least of their money or as little as possible held in the firm’s inventory. It might be okay to hold a huge inventory on the balance sheet if the rate of release of that stock is quick enough to elude the risk of obsolescence or breakages. Big companies such as Dell have better methods and systems for handling inventory; as a result they only order what they need when they are needed due to their investment in a Delphi inventory management system. They do not under any circumstance buy an excess or suffer a stock out because they have an idea of the numbers they should be holding. Businesses with too much stock both on their shelves and in a warehouse are being less productive and operating below their potential. When the management is wiser, that stock is liquidated to have it as cash ready to be used whenever something more productive comes up.

Inventory control and management should be customized in a way which is in line which the needs of the market and adhere to the strategic plan of the company. The many changes in the needs of the people, opportunities coming into existence because of world marketing, out sourcing of technology and material aimed at making better the daily practices reveals that McDonald has just to change its approach and practices of management and change the process for Inventory Control.

McDonald’s maintains a shorter inventory turn which is approximately four days. (McDonald’s.com) This difference in efficiency translates into a bigger change as compared to companies with longer stock turn over rates. According to case studies carried out by times magazine, Compaq USA had to close some of their production lines as a result of poor inventory management practices which lead to longer inventory turn rates. By having fewer inventories and more money, McDonalds can comfortable use their cash on hand in more investments such as opening more restaurants, doing more advertisement, and even buying back some of the company’s shares. This reduces the strain on cash flow by a big margin enabling management to increase flexibility in long-term planning.

Quality Management

Quality Management comprises of the activities performed by a firm with the aim of getting the required level of quality. The method of making sure that the development, design and implementation of a service reach the required standards is referred to as Quality control. But Quality management can be said to be divided into three categories; quality improvement, quality assurance and quality control. Quality management is mainly geared not only towards product quality, but also the means to achieve it. Therefore, Quality management utilizes use of quality assurance and Quality control of both processes and products in order to get more consistent and better quality (Aquilano, 1991).

To ensure quality control the McDonald’s chain already goes under a lot of professional scrutiny which would be in form of quality inspections. In addition, they improve on their training processes and taking better care of employees. McDonald’s does this by including online e-learning material for its restaurant staff to make it easily accessible and easy to update procedures. In addition, it ensures that employee job satisfaction is achieved and they frequently are given recognition for their good performance. This ensures better service to their customers who go away happier and satisfied to come back another day.

According to Todd Bacon the Supply Chain Management head, quality is in the top agenda for McDonald’s. it puts in place strict rules which suppliers should abide with and if any of these rules are broken their contracts are terminated. Observers suggest that McDonald’s should be congratulated for being the role model in any market it enters. For example when in opened its Hong Kong branch it was the first restaurant to offer clean facilities for their clients (McDonald’s, 1990). This aspect made McDonald’s demand to go high driving other restaurants such as Burger king into working hard to provide the same facilities. This has also made that Asian population to envy the western culture because of what they view McDonald’s to be.

Maintenance

McDonald’s Corporation has more than thirty thousands branches in the world, and they are located in one hundred and nineteen nations (Bird, 2006). This has made venturing into a McDonald’s franchise a more profitable venture, which has a high chance of turning out to be a successful endeavour. They serve forty six million clients each day. The McDonald’s brand is famous, valuable and has one of the leading share prices in both American and international stock markets. This can is proven by the company’s share price which has been stable at around $ 50 per share and trading nearly 10 million shares per day on average on the New York Stock Exchange. This can be compared to those of its competitors such as Burger King whose share price trades at around $ 21 and trades around 1.5 million shares per day on average in the same stock market (Reuters, 2008), in the global market, because of its quick service restaurant reputation not forgetting the position it occupies as the leading informal eating-out market in every region of the world.

These franchised branches make-up 70% of McDonald’s restaurant empire. Each franchised restaurant and Corporation owned branches manage themselves. This means that each takes care of its expenses while paying rent, royalties, or profit shares to the main company. Therefore franchising to a great extent minimises the operational cost for the Company as most costs are met by the branches, while the main company focuses on growth and planning for the long-term.

Capacity management and planning

Capacity planning refers to the process whereby determination of the production capacity required by an organization in order to cope with its production needs comfortably even with fluctuating demands for its products. In that perspective capacity planning has the term “capacity” used to mean the maximum amount of production work that an organization is capable of handling within a cycle or given period of time (Adam, 1982).

At McDonald’s, for example, the oven capacity for their various foods can be a major constraint. Oven capacity cannot be changed regularly, and consideration while this is being constructed is put on the long-term. This is to ensure that the design will serve with the least wastes and losses. Manufacturing companies work hard to get equilibrium between capabilities of the different sections in the organization and so does McDonald’s. While coming up with a decision on whether to increase or reduce the capacity, both service firms and manufacturing organizations must nearly the make similar decisions. They have to take into consideration the time limit they have, the amount they want to produce, and with this in mind calculate the capacity extensions they require.

Location

Locations of businesses have a dramatic effect on the level of productivity a business has by being well situated for both consumers and suppliers. Most busy city streets and malls are the best locations for setting up business firms; this is because the large population acts as potential customers. Just by their walking past increases the chances of someone being interested in your products or services and coming in for a buy. Similarly, Businesses without this exposure will have less potential customers and that will reflect on their sales which will be lower than that of the exposed businesses.

To increase competitiveness of McDonald’s restaurants their location is chosen carefully. This is to enable the easy reach by customers at any time day or night and also to remain in the reach of their suppliers. In addition to this the drive-in branches increase accessibility of these restaurants eliminating the need to provide huge parking bays for customers reducing construction costs.

Conclusion

McDonalds needs to get creative ideas such as adding new product lines, better service delivery, and may be include styled furniture in restaurants to improve their business even further. In addition, it needs to research into alternative energy sources to cut down on the total amount of energy used to run their processes and by their ovens and lighting their premises. This factor is meant to cut down operational costs significantly. Furthermore it needs to add investments into training and retraining its staff, to keep up with the dynamic business trends while improving customer service at the same time.

Some years ago, strategy for commercial growth for McDonald was relatively simple. They used the strategy of just opening more restaurants and the sales would also grow at the same rate. In 2002, the company’s share price began to tumble dramatically; the business required a way to turn-around its policies such as that of opening more shops and sales would just increase. That’s when the company turned to business intelligence (BI) policy to see if things would change for the better. This change in the system of operation ha enabled them become the world’s leading Chain of restaurants. Therefore, a good recommendation would be to investment more in such a plan of changing with times in order to improve competitiveness.

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