Nothing left to chance

52 million people a day validate McDonald’s logistics model, says Jack Bunker

Only a handful of iconic brands can begin to approach the familiarity of McDonald’s famed ‘Golden Arches’. According to the company’s website, over 52 million people pass through the restaurants’ doors each day at more than 30,000 locations worldwide. McDonald’s annual 10-K filing with the US Securities Exchange Commission lists global revenues exceeding US$23.5 billion in 2008. That’s a lot of Big Macs.

Notwithstanding a universally bleak world financial picture, the McDonald’s machine hums along, not only boosting revenue, but squeezing inefficiency out at every seam. Untold trillions have evaporated from the world economy in recent months, yet McDonald’s has shown staggering sales growth. Global comparable sales for 2008, fourth quarter, 2008 and January 2009, increased by 6.9 per cent, 7.2 per cent, and 7.1 per cent respectively. Dynamic operations in the Asia Pacific Middle East and Africa (APMEA) region drove much of this growth, with respective sales increases of nine per cent, ten per cent and 10.2 per cent for the same periods.

Murat Üngün, Purchasing Director for McDonald’s Middle East and Africa Group

So what has driven the APMEA region’s exemplary growth? According to a recent official release, “operations excellence and a sharp focus on breakfast, convenience and everyday affordability.” After speaking with Murat Üngün, Purchasing Director for McDonald’s Middle East and Africa Group, one understands that the first of these components, “operations excellence,” is the cornerstone of the success model. In short, not just savings, but sales increases depend upon the McDonald’s supply chain concept.

Üngün, a food engineer by training, began his career in Turkey with Unilever, followed by a stint with the Coca Cola Company, before joining McDonald’s in 1994. He has been posted in Dubai since 2007.

To understand the company’s success in the region, explains Üngün, one must first appreciate the McDonald’s formula, reduced to an algebraic equation:

“Quality (Q) plus service (S), over cost (C), results in value (V) for our customers. As long as we increase value, that’s how we make profit at the end of the day,” says Üngün. McDonald’s is doing something right – operating income for 2008 increased a breathtaking 33 per cent (28 per cent adjusted for constant currencies) for the APMEA region. The value to the McDonald’s customer is thus a product of not only the food’s cost, which must be competitive, but also the food’s quality, which cannot be compromised.

Üngün’s geographic region of responsibility, the Middle East and Africa, oversees some 650 locations or ‘stores’. These stores are completely franchisee-owned as “developmental licensing markets” – the McDonald’s corporation itself owns no outlets in the region. With the exception of Saudi Arabia (which is divided into East and West regions), each of the 15 countries in the group is considered a single market, each with one license holder. In addition to Saudi Arabia, the MEA Group has stores in Oman, the UAE, Bahrain, Qatar, Kuwait, Sri Lanka, Pakistan, Lebanon, Jordan, Egypt, Cyprus, Turkey, Mauritius and Reunion Island.

What makes the logistical operation so impressive is that, according to Üngün, “about 70 per cent of purchases in the region are locally sourced.”

Üngün calls this “a good mix” of local and import sourcing, with very little coming from the US. Turkey, for example, is completely self-sufficient, and Egypt nearly so. Bigger markets have more mature infrastructures, while smaller markets such as Mauritius, Reunion and Jordan may need more logistical support from Dubai.

Where infrastructure does permit, the preference for local supply results from more than just convenience. Customs duties, for example, may be extraordinary, as in the case of Turkey, a country that Üngün says imposes a 245 per cent duty on imported beef. Price, however, never trumps quality. “If the local supplier is not up to McDonald’s standards, no matter what the cost, we must import,” says Üngün. Maintaining that consistent quality around the world cannot be faked. “A Big Mac has to taste the same, whether from New Zealand, or wherever,” he emphasises.

To ensure this bottom line result, McDonald’s treats supply chain not as a quixotic endeavour to pinch a few pennies at the margins, but as an indispensable component of the success formula. To illustrate, Üngün draws up a diagram of a three legged stool. One leg represents the suppliers, another the franchisees (or license holders) and the third the company itself. A collapse of any one leg shatters the entire operation. “Our successes are team successes,” explains Üngün. “Our failures as well.”

The role of the local supplier in the process its hand-in-glove with that of the market’s distribution centre. McDonald’s uses approximately 400 SKUs, sourced by scores of suppliers within the Africa and Middle East group. The SKUs break down into three categories.

Local suppliers provide the majority of ambient products, for example, such as cups, napkins and sugar packets. Likewise, chilled products – those stored at between one degree Celsius and four degrees Celsius (lettuce, tomatoes, cheese) usually come from local sources. Some frozen products kept at between minus 18 degrees Celsius and minus 22 degrees Celsius (beef, chicken and fries) may be imported; but here as well, the company prefers to source locally wherever possible.

With so much riding on the critical relationship with the local supplier, not surprisingly, McDonald’s undertakes a stringent vetting and auditing process.

McDonald’s standards incorporate all local law requirements in the various markets, explains Üngün. “But McDonald’s has its own high level of quality,” he says. “This is usually more stringent than the local laws themselves.”

“We identify potential suppliers and we use third party companies to check on them. We’re looking into not only food quality, but their history, financials, how they’re doing business, processing capability, sustainability, promoting social responsibility, product quality, food safety, traceability.”

The vetting process is comprehensive.

“Nothing is left to chance.”

This scheme places tremendous responsibility upon the local distribution centre. These centres “collect weekly orders from restaurants, place orders with the suppliers, receive the products and store them and then prepare mixed pallets to send to the stores. The distribution centre then collects the money from the store and pays the suppliers,” says Üngün.

“They also apply quality control and food safety checks.” “All this is being done by independent distribution centres,” he says. “The whole process is very much transparent and controlled.”

Indeed, McDonald’s takes transparency a step further with its “invisible delivery.” “In some countries the distribution centres deliver products to the stores with their own keys to the restaurants.” The distributor enters in the wee hours of the morning, stocks the shelves and leaves. “There is a huge level of trust between the distribution centre and the franchisee,” says Üngün. “It is a big family – supplier, franchisees and the company – all working to increase value to the customer.” Invisible delivery is more than just a convenience, it underscores the McDonald’s rationale – allow personnel to focus on the customer, rather than back room distractions. “This is how we differentiate,” says Üngün.

The transparency of McDonald’s distribution is remarkable as well in that the distributors, themselves sometimes competing for business outside the McDonald’s organisation, maintain regular councils. “There is a logistics council. Some distribution centres hold quarterly meetings, exchange information and best practices. The meetings are organised in a different country every time.”

According to Üngün, distribution centre candidates are sent to other distribution centres to visit and get a feel for the McDonald’s way of operating. “For example, a distribution centre in Malaysia has sent an expert to train in the UAE.”

Returning to the family concept, Üngün adds, “If you’re in the family of suppliers in McDonald’s, all doors are open for you.”

The supply chain is not only transparent, but as one would expect, sophisticated. Using GPS technology, the company and the distribution centres can monitor not merely the location of every truck on the road, but the temperature inside the vehicle as well.

Like any organisation, the entire operation must respond to special peaks and valleys in demand. “We have a very good inventory management system,” says Üngün. “All distribution centres are using sophisticated IT systems.” Distributors and license holders also employ historical data to meet unique phenomena such as demand during Ramadan, for example.

McDonald’s has built its success not by paying lip service to logistics, but by a detailed commitment to ensuring quality control at each link of the supply chain.

The company knows what others may only surmise – that active participation in supply chain management drives their competitive advantage.