Worldclass

Why would a company spend eight years to grow potatoes, and six years to get its lettuce right?Because it knows it is worth the effort. Praveen Kurup provides insights into the intense supply chain and logistics activities at McDonald’s India

McDonald’s India does not own any part of its supply chain. It has only a handful of suppliers and partners. About 40-odd suppliers, atleast ten of whom are today pioneers in their respective areas of operation, be it Vista Processed Foods in food processing, RK Foodland in cold storage and perishables distribution, Dynamix Dairy in processed milk products, or Trikaya Agriculture in worldclass lettuce cultivation.

And McDonald’s India does not have a written contractual system with any of them. Everything runs on trust and commitment. The entire supply chain works on what the company calls ‘a handshake relationship’ with all its suppliers. It does not have a written protocol of any nature with its suppliers. “We don’t give any guarantee to our suppliers, nor do they give us any guarantee,” says Abhijit Upadhye, Director – National Supply Chain, Menu Management and New Business Channels. “The whole system runs on trust. We don’t have a written protocol that makes it binding on our part to give any specific volumes to a supplier for any timeframe just because the supplier is putting in so much investment.”

Abhijit Upadhye, Director – National Supply Chain, Menu Management and New Business Channels

At any given point in time, any supplier can walk out of the relationship, and McDonald’s could be in a big soup.

Similarly, the company could also walk out on any of its suppliers and almost certainly bring their volumes down to a trickle. But this never happens because the trust among them is very strong.

This system could have been mistaken for one based on non-committal, short term relationships had it not been for the fact that McDonald’s has done it in every single market it has entered. The company does not wash its hands of a commitment. It has built itself on the simple belief that if its suppliers show the dedication to invest in a supply chain that will deliver its products, it should also be willing to trust them on the deliverables. And as long as these are met, both ends of the supply chain are amply rewarded. This is how the whole McDonald’s system started. Even before he set out to build the McDonald’s chain, the legendary Ray Kroc already knew that to grow quickly he had to rely on his partners. Over the course of selling milkshake machines he had very clearly realised that the restaurant chain business was not scalable because of the parasitic relationship between the proprietors and their franchisees. The owners preferred to milk their franchisees no matter how short term the benefits would be.

Ray decided that he could expand rapidly by doing the exact opposite. And how he revolutionised the franchisee business model is a legend that every management school teaches scores of students who hope to make it big in the business world.

But Ray Kroc knew equally well that to deliver what was needed to run a restaurant chain, a strong supply chain was a prerequisite. And he ensured that this was done without owning a single bit of the supply chain. He built an exacting system that was based on standard operating procedures. He brought discipline into a business that was hardly an industry back in the fifties. He brought the concept of standard specifications into a business that had a reputation for being non-standard.

And he did that without owning a single bit of the supply chain that today delivers all that it takes to run the very epitome of globalisation – nearly 32,000 local restaurants in more than 100 countries.

Startup blues

Even a McDonald’s with all its legendary experience had a tough time setting foot in India. The abysmal state of the required elements in the supply chain left them with no choice but to set up most of it on their own. Their guiding light has been long term planning because of the way infrastructure has been developing especially on the food side. It took them over six years to build the required supply chain, after which they finally opened the first store in 1996.

There was practically nothing to rely upon. Even the largest of companies in the food processing sector were not into products that McDonald’s required.

Finding a reasonably good cold chain was out of question. The only refrigerated trucks available were the ones used by the ice-cream manufacturers. But again, the quality of the trucks were not good enough to deliver its products.

And most of the truckers were not reliable as well. “They would switch off the refrigeration unit to save on costs,” says Upadhye. “Knowing these challenges we decided that the best way out was to set up the whole value chain on our own. We simply could not have gone ahead with all the quality issues present in the supply chain back then.”

There was tremendous pressure from the parent group to deliver according to international standards. This presented unique problems beyond the obvious in India. Deciding upon the right menu, for instance, became a huge challenge especially during those early days. India is the only country where the menu is drastically different from the standard McDonald’s menu. This had to be done to ensure that religious sentiments are not hurt.

“We couldn’t get beef and pork into our menu here, which are main items internationally. Without them we had to do a lot of work on developing products for India,” explains Upadhye.

Chicken was possibly the only ingredient that could be readily introduced. But then the challenge of developing a vegetarian section cropped up.

The vegetarian population was too large to be ignored. But McDonald’s does not have a vegetarian section in any other country.

“So we had a dual challenge of not only meeting international quality standards, but also catering to local tastes that very unheard of in other countries. Some of the non-vegetarian products like a McChicken burger would be exactly the same, but the sauce in the McChicken burger presented a challenge because it uses egg as an ingredient. Because the same sauce is being used in a McVeggie burger, we decided to develop an eggless version of the sauce,” says Upadhye.

This ensured that there would be no discomfort for the vegetarian customers. But it presented its own problems.

McDonald’s has a central quality lab in Singapore that evaluates products from all countries to check if they meet international product specifications. Even the taste, feel and smell of the product matters. “We had to score a minimum percentage to qualify as going to a restaurant. So the eggless mayonnaise had to qualify as a normal mayonnaise sauce because that was the only reference available at the international labs. Such instances presented a very big challenge on the development side, but the company managed to overcome these by developing the required expertise among its local suppliers.”

Small is enough

For all the challenges conquered in India, the company has a very small supply chain team. McDonad’s India has two franchisees – Connaught Plaza Restaurants takes care of north and east, while Hardcastle Restaurants manages the western and southern regions. Between the two, there are about 155 stores. Most of the departments are functionally different and operate as separate entities within the two companies. Supply chain, quality assurance and new product development (Menu Management) are the only three functions that are common to both.

Both supply chain and quality assurance have a single head, while Menu Management has a separate head. Both of them report into Upadhye. The supply chain team has close to six people, new product development around two people, and quality has three employees. So, overall, a team of about ten people are all that the company has to handle these crucial functions.

Upadhye explains that this is possible only because the company ensures that its suppliers handle their roles responsibly and are very serious about the stringent deliverables. The team from McDonald’s only has to ensure that the rules are laid down properly, and there are enough controls in place to keep track of things. The rest is taken care of by its partners and suppliers.

A Helping Hand

Placing such heavy demands obviously has the potential to leave its suppliers gasping for breath. McDonald’s knows this and tries to help them in two simple ways. First it encourages its specialised international partners to come in and set up a technical joint venture or an equity joint venture with some of the better suppliers in India. For instance,Vista Processed Foods got both technological help and funding from OSI International. Similarly, its local distribution centre received technological assistance from the main international distributor based out of Australia. Such help has gone a long way in ensuring that its supply chain is miles ahead of others in India.

The second approach is even more innovative, and involves less interference from Mcdonald’s. “We have a lot of councils in the McDonald’s system. There is a lettuce council, a chicken council, etc. In the chicken council, all chicken suppliers from across the world come together and understand the current developments in their field,” explains Upadhye. “They discuss challenges, process changes and share useful information among themselves.

If a supplier in any specific country is facing a challenge on developing a specific product, or is looking at new product development as an initiative, he can readily discuss it in the council and take help from experienced chicken suppliers from any part of the globe.”

There could be competing suppliers from the same country, although this typically happens only for large countries like the US. Each council holds conference calls on a monthly or a bi-monthly basis. “Once in a year, all members of the council get together and it is very surprising that in that entire council meeting there is just one McDonald’s executive; all others are supplier representatives. And all they discuss is McDonald’s!” exclaims Abhijit.

Apart from these ongoing measures, the company regularly conducts a lot of training sessions with its partners.

He informs that these are not ordinary softskills training, but hardcore functional training sessions based on years of operational experience.

Trust meter

Trust and commitment with suppliers ensure a good long term relationship. But to keep day-to-day operations under control, McDonald’s collects a large amount of data at every point in its supply chain.

Every supplier in the supply chain has a separate scorecard – McDonald’s calls it the supplier performance index.

It covers all aspects starting with various managerial measurements in terms of their values and expectations, and goes all the way down to how precise quality requirements are being met on the field. How many complaints are there against each supplier? What kind of scores are they getting in the lab? How are they matching up on the cost parameters? How are they meeting assured supply requirements? Everything is measured. A direct result of such extensive measurements is that the company can easily verify if its suppliers are indeed meeting quality and quantity requirements. Because of such clarity, McDonald’s India does not place any restrictions on its suppliers sharing their assets with other customers.

“Our critical requirement is that we need complete assured supply. Our restaurants should never run out. As long as our quality norms are met and we are the most competitive priced customer for the supplier, he is free to do anything with his assets. That is the minimum expectation we have. In the end, the asset is owned by him and not us,” is how Upadhye puts it.

McDonald’s regularly benchmarks this data against current and historical data from other countries. When comparing the data, the company uses specific variables to identify similar countries and then groups them together to compare all other collected data. This is done because for most products there might be no point in comparing data from India with that from the US, it might be more useful to compare it with, let’s say the Philippines, or some other country that has similar volumes. In some product categories, like deboned chicken, the volume might not be that significant because the pricing can be similar. Such intense calculations help the company maintain a clear view of how its business is faring across the spectrum.

Demanding quality

Over the past 18 years, McDonald’s India has built a supply chain that few might think of even now. International exposure might have gone a long way in understanding the intricacies of the supply chain, but implementing it must have only made it all the more difficult. Knowing what is missing can get frustrating if you cannot fix it. How did the company manage to fix it and continue to improve it?

“The challenges are many, but they all seem to be fairly basic, it’s just that not many seem to be thinking about fixing it,” says Upadhye, who believes that the shippers are to be blamed. “Shippers have to demand quality. If my team does not look at measurements during our business reviews, we will suddenly find that partners have started compromising down the line. If we are firm on what we want, it builds pressure in the system, and they will deliver according to standards.”

According to Upadhye, if the food processing giants in India had the technology and expertise to meet some of the company’s requirements it would have helped McDonald’s quicken its supply chain implementation. Shippers need to be quality conscious and sternly demand more from their partners to make them deliver.