McDonalds' Restaurants is a worldwide company servicing an unspeakable amount of customers each day.

There are a variety of technological trends and innovations which have an impact on the use of technology in logistics, which may be grouped into three themes:

1. Integration and flexibility
2. EDI
3. Hardware

The following figure proposes the total logistics information system:

(Min, et. al., 1994)

4.1.1 Integration & Flexibility

The successful integration of information within an organisation is a powerful enabler for:

• Reduced costs
• Increased productivity
• Improved customer service

Advance transaction processing systems which address the needs of an entire organisation are now common place.  These systems enable management to monitor inventory at all locations throughout the organisation, which may include multiple warehouses in multiple countries.  Integrated systems are now available which provide real time visibility of demand forecast information, inventory levels and production schedules.  Once these systems have been linked successfully to sophisticated decision support systems, then the supply managers will have the ability to manage the traditional supply chain tradeoffs in a dynamic way (Kobbacy, et. al., 1999).

Currently, McDonald’s have access only to 60% of their stores production schedules and usage patterns.  Data of stock distributed to each store is only available after distribution has taken place.  Senior management do not have access to a majority of individual store’s POS systems, a necessity to ensure supply chain management process is as efficient as possible.

4.1.2 Electronic Data Interchange

“EDI is the computer-to-computer exchange of inter – and intra-company business and technical data, based upon the use of agreed standards.”(Verwijmeren, et. al., 1996).

Despite the fact that EDI has been around for a long time, McDonald’s have only recently implemented this standard. Their current EDI transactions include:

1. Interactive, query-response transactions – performed to determine order status checks
2. Trade Data interchange – cover transactions such as purchase orders, delivery notifications and invoices.  Unfortunately, McDonald’s are yet to centralize, their system to a global network.  Currently, they interact with suppliers within different industries who utilise their own standards, and may not compatible with a further range of standards that McDonald’s uses worldwide.
3. Electronic Funds Transfer – encompasses payment against invoices, EFTPOS and clearing systems transactions.  McDonald’s does not use this practice worldwide.  Many stores are still operating without EFTPOS facilities, and using manual, paper invoicing systems when interacting with suppliers (Closs, et. al., 1997).

With all these links with EDI in place between suppliers, manufacturers, retailers, customers and the banks a totally paperless supply chain is now possible.  This is the key strategic benefit of EDI – as an enabler for closer supply chain relationships.  By employing the use of one range of standards (one EDI system), McDonald’s can effectively communicate with suppliers and partners, as well as enabling near stores to consolidate any transactions such as purchase orders to reduce costs further.

4.1.3 Hardware

One of the key benefits of recent hardware trends is that commuting power can now be implemented in parts of the supply chain that previously were never considered, either because of cost constraints, or space constraints, or both. An example is the use of hand held scanners.  These have contributed to the growth in the use of labeling and automatic identification of products and locations.  Although the distribution centres throughout U.S. implemented barcode scanners, Europe and Australia are not using this equipment as standard practice.  This is a fundamental enabler for the success of logistics information systems as requirements for greater traceability demand improves means of identification (Kobbacy, et. al., 1999).

Another trend is the growth in open systems.  An advancing technology creates new computer network capabilities, it is vital that companies have the flexibility to transform those capabilities into competitive advantage.  McDonald’s are yet to implement an open network system, where subsidiaries from around the world   can compare practices in order to determine where competitive advantage lies.

5.0 Logistics & Time Reduction

A recent definition recently proposed by the Institute of Logistics U.K. states that: “Logistics is the time-related positioning of resources.”  It follows that effective logistics management is the process required to affect the positioning of resources in the right position in the supply chain at the right time.  Logistics focuses on the total system design, integration of one process with another, system efficiency, deployment of resources and above all the effective management of time (Wilding, et. al., 1996).

The search for speed has become the latest initiative in the pursuit of competitive advantage.  Customers are taking low cost for granted, moving their attention to the availability of product as soon as the need arises.  This effect flows on from the store end of the value chain through the supply chain and into the arena of new product development.  The increased change in the external environment is forcing businesses to become much more agile in changing their products and processes to extend their capabilities (Wilding, et. al., 1996).

McDonald’s ability to provide rapid service has resulting in companies importing the “McDonald’s concept”.  McDonald’s carries the speed not only in customer service, but also throughout its activities; for example, the development of new premises where the target time for erecting a new drive through take-away of just ten days.

5.1 Total Cycle Time & Time-Based Competition

Boston Consulting Group originated the concept of time-based competition.  Time-based competition is the just-in-time (JIT) philosophy extended throughout the entire volume delivery cycle, from research and development through marketing and distribution.  When one firm dominates, the nature of competition changes and cost becomes secondary Larson, et. al., 1999).

Time-based competition is a concept that establishes time as a primary competitive variable, supplanting other dimensions of competition.  When firms recognise that consumers put a premium on time, and may even be willing to pay more to save time, they may respond by focusing competitive strategies on cycle time.  Adherence to the TBC concept requires firms to realign their competitive focus to concentrate on time (Mason-Jones, et. al., 1998).  

The total cycle time (TCT) concept is based on the recognition, throughout the entire value chain, that time is an important strategic weapon.  Firms are realigning their competitive priorities from quality to improved customer response time by focusing on delivery speed and reliability.   TCT management is a philosophy and strategy based on time, not cost, productivity, or quality.  However, this dramatic strategic shift from traditional costing approaches to TBC is based on applying innovative management techniques to some core functions.  TBC requires the examination of every aspect of the firm’s operations. Meticulously eliminating all redundant or non-value-added, but time consuming, activities from the process (Mason-Jones, et. al., 1998).  

The conceptualization of total cycle time can be seen below:

                 

(Ng, et.al., 1997)

McDonald’s have epitomized time reduction strategies, making time saving a core activity. Currently, the ‘McDonald concept’ serves as a benchmark for firms within different industries, when adopting time-reduction strategies.  McDonald’s ability to deliver its products faster and at a higher efficiency rate, provide a more strategic edge, in comparison to direct competitors (Ng, et.al., 1997).

However, as mentioned in the above discussion, McDonald’s can achieve further time-reductions within all logistics operations by deploying greater use of resources, such as technology.  The introduction of more resources may not result in shorter design times, unless however, the resource deployment is backed by top management commitment to innovation.  Greater automation may not contribute significantly to reduced design time, but improved relationships with suppliers and increased manufacturing flexibility does contribute to reduced design time.

5.2 Purchasing Cycle Time

Purchasing is a significant aspect of total cycle time management for three reasons:

1. Through supplier qualification and selection, purchasing management directly impacts on the time capabilities of the suppliers with which the firm does business.
2. The characteristics of the procurement transaction process directly affects the firm’s total cycle time.
3. Purchasing management establishes the nature of the firm’s relationships with its suppliers.

Recently, suppliers have become a major competitive resource in reducing cycle time, supporting the notion that supplier relationships and purchasing strategy are critical aspects of total cycle time management (Vonderembse, et.al., 1995).

5.2.1 Supplier Relationships

Fung (1999) discusses three components of effective supplier alliances: trust, free flow of information, and mutual benefit for both parties.  Fung concluded that top management, quality, logistics, production and engineering must all co-operate to make supplier alliances effective.

Currently, just within the U.S., McDonald’s, maintains relationships with over 30,000 suppliers, and their statistical data shows nearly 12,000 of those businesses will cease operations next year.  When instigating relationships with suppliers, McDonald’s needs to make sure the selection process involves long-term commitments from both sides, otherwise effective supplier relationships cannot exist.

Harland (1999) states that to the consumer, ‘quick response’ and ‘JIT’ strategies have become the watchword of a new era of time-based competition.  These strategies stress the importance of capturing relevant information at the point-of-sale and passing it on immediately to suppliers to generate replenishment orders.  By expediting point-of-sale information to suppliers electronically, stores can reduce order processing and restocking times.

As mentioned before, not all McDonald’s stores have the ability to electronically transmit data.  Furthermore, as  McDonald’s does not foresee a future with nearly half of its suppliers, a large percentage also do not depend on technology to receive orders. McDonald’s should look to develop and manage effective long-term relationships with suppliers, therefore, possibly enabling a reduction in the number of suppliers used.  Updating supplier relationships involves supplier education programmes, ongoing consulting and implementation support, sharing of information (volumes, new technology, benchmark data, reliability, yields and affordability targets, etc.), long-term commitments, and joint development of projects.  Sharing information with suppliers can provide higher levels of customer service as stores can evaluate inventory, automatically reorder, adjust billing errors and locate goods in transit without leaving the store.  Analytically, McDonald’s can look to decrease costs further, and redesign its value chains into seamless supply chain management (Fawcett, 1995).

5.2.2 Purchasing Strategy

A firm’s purchasing strategy is an important element in total cycle time reduction. The nature of the firm’s supplier relationships will depend on the purchasing strategy employed (Herbig, et.al., 1996).

Humphreys (1998) detailed five critical disciplines – quality improvement, velocity, all-in-cost, technology and risk reduction – requiring formal attention in the development of a procurement strategy in order to evolve purchasing strategy to a status of a strategic partner.

5.2.3 Transportation Cycle Time

Transportation carriers are suppliers to their customers in very much the same way that any supplier of an actual product is a supplier to its customer.  Therefore, the same kinds of supplier relationship management initiatives discussed above are relevant for transportation carriers as well.  However, most firms, including McDonald’s have been slow to recognise this.  Nonetheless, establishing alliance relationships with carriers, and the subsequent sharing of information may help in reducing the transit time aspects of total cycle time.  Extensive use of EDI could cut the time involved in import documentation (for McDonald’s international shipments), receipt orders by suppliers, carrier specification and receipt booking, and receipt of back up request by carrier, all in all simplify point-to-point shipment tracking (Collins, et.al.. 2001).

McDonald’s can look to unify its transportation needs by outsourcing them to a handful of carriers, enabling the company to establish long-term relationships.  Furthermore, by uniting a communication strategy amongst stores and suppliers, McDonald’s can decrease costs further, if shipments are delivered in batches to geographically nearing stores.  Such relationships, combined with McDonald’s economies of scale can reduce transportation costs even more as load quantities designated to a single supplier would increase,  shrinking transportation rates.

Firms may opt for higher-priced freight transportation services from a reliable carrier that can meet the performance standards for time reduction. McDonald’s need to move to performance-oriented transportation selection which includes consistent and shorter transit times, the ability to provide customized services and in turn allow McDonald’s to decrease safety stock held.

6.0 International Logistics

The competitive environment for firms such McDonald’s has changed dramatically in the past 15 years.  Customers in geographically dispersed, emerging and established global markets now demand higher quality products at lower cost in a shorter time.  As a result, firms have been forced to reorganize their logistics activities and realign their global strategies.  Organisations have moved from a centralized, vertically integrated, single-site facilities to geographically dispersed networks of resources.  In order to acquire technological know-how and assets quickly, or to acquire a local presence in new and distant markets, strategic partners are increasingly part of the network structure.  Global networks are designed to provide the speed and flexibility necessary to respond to windows of market opportunity.  The trends toward volatility and uncertainty in the economic and competitive playing fields that have given the rise to these new structures can be expected to continue at least into the near future (Dupuis, et.al., 1996)

Liberalisation of economies and the lowering of trade barriers are ushering international operations into an era of unprecedented growth.  Consequently, there has been a dramatic increase in the cross-border inter- and intra-company transfer of goods.  As global transactions increase, international purchasing, inventory management, and logistics, all take on added significance.  Further, increased operations in international markets bring additional issues such as variations in government policies, quality of infrastructure and nature of supply base, etc., to the forefront.  To compete more effectively in a global marketplace, it is important that firms understand these issues and align their purchasing, management of inventories, and distribution systems to the diverse environments in which they operate.  Proper management of these systems can help strategically transform firms into world-class competitors( Pope, et.al., 1998).  

As McDonald’s recognises its capabilities as a global retailer, it needs to re-examine, at the strategic level, the ways in which it seeks to add value and reduce costs throughout the entire company.  Organisational  “down sizing”, cost reduction drives, quality improvement initiatives and inventory reduction programmes are possibilities that can be looked at as resultant changes.  The introduction of superior efficiency of so-called “lean production”, the implementation of JIT, needs to be continuously re-examined in order to remain strategically viable.

Within operations managers need to constantly seek new methods of adding value, either through improved performance of the product or throughout the development of the “service package” and service delivery system that surrounds it.  At the same time, McDonald’s have to find ways of reducing costs without impacting on their product or service package (Collins, et.al.. 2001).

6.1 International Purchasing

The remarkable move towards international purchasing has been precipitated in part by the internalization of the marketplace, global competition and changes within the business environment (Sum, et.al., 2001).

The linkage between the function of purchasing and the other requisite functions carried out by the company has assumed a heightened degree of importance.  Managers are starting to realise that purchasing decisions have a dynamic impact on such factors as capacity requirements, equipment needs, product costs and quality performance.

One factor which has prompted a considerable amount of international purchasing concerns the fact that domestic suppliers alone may not be able to meet the needs of the firm.  International buying has, therefore, become a necessary competitive weapon in the battle of survival and prosperity. In this regard, the move to international buying is an attempt to lower overall costs, increase product quality, increase flexibility and improve product design (Humphreys, et.al., 1998).

Intense competition from abroad, pressures stemming from the need to reduce trade deficits through exports, and the interdependence of global economies have all served to internationalise the marketplace.  Surviving and thriving in today’s global markets requires that companies be truly “world class”.  The U.S., for example, has lost its competitive edge to other countries which have taken a more proactive marketing strategy to maintain their position within the changing world of business (Humphreys, et.al., 1998).

As a result, McDonald’s as well as other firms need to realise that in order to compete, one must strive to be lost-cost, high-quality producer.  For many companies, this emphasis on cost reduction is critical as operating within mature markets implies little or no product differentiation exists.  Cost, in addition to quality, and customer satisfaction have become the foundation on which a successful competitive strategy is built.  In recognition that U.S., as well as Australian and Western European, labour rates are significantly higher, McDonald’s can look to purchase necessary products in cheaper labour markets.  Another approach to cost cutting may be to pursue extensive automation as mentioned earlier.

With respect to quality, the Japanese have played a major role in this area.  Historically, firms have believed that was a tradeoff between ‘quality’ and ’cost’.  That is to say, the pursuit of higher quality meant a corresponding increase in costs.  However, an understanding of Japanese methodologies has instilled a different point of view among managers.  Through diligent planning, careful design, and efficient and effective processes, Western firms are also now able to add a new dimension to quality, without incurring additional costs.  McDonald’s implementation of JIT is just an example of firms implementing Japanese approaches.  Yet, the company can further increase its efficiencies and economies of scale by undergoing further integration of cost cutting processes (Wilding, et.al., 1996).

Below, is a conceptual framework for JIT implementation

(Wilding, et.al., 1996)

For purchasing the implication is clear: outsourcing for supplies is a predominant strategy to be employed in achieving this technological edge.  This is reflected in the tremendous amount of money being spent by U.S. firms for overseas purchases.  More fundamentally, however, is the adaptation of Japanese philosophy of quality has provided further impetus towards the development of internationally based relationships (Herbig, et.al., 1996).

Not surprisingly, corporations are relying increasingly on suppliers to be equipped with necessary equipment.  This necessitates a certain degree of flexibility, which in turn should help to introduce new products on the market quicker.  As part of this strategy to ensure flexibility, companies are directing more purchasing activity to offshore suppliers with demonstrated engineering, technological and process capabilities.  Outsourcing and offshore buying are increasingly being given attention as corporate strategies to enhance flexibility (Herbig, et.al., 1996).

6.2 International Inventory Management

In today’s business environment it has become imperative that firms develop overseas production and distribution networks in order to compete globally.  Companies are no longer restricted to using local suppliers for inputs and can seek out opportunities internationally to reduce costs, improve quality and innovate.  Firms can expand their horizons by sourcing externally and globally (Kobbacy, et.al., 1990).

A number of underlying environmental factors will affect a company’s propensity to source globally and externally, and correspondingly its inventory system.  Inventory systems allow a firm to control its goods from the time they enter the organisation as raw materials until the finished products are made available to the customers.  A suitable inventory system can help an organisation achieve a competitive advantage by reducing costs and lead times (Kobbacy, et.al., 1990).

The management of inventory is significantly more complicated in an international environment, compared to domestic operation.  Managers need to study the environmental conditions and the corresponding complexity of inventory systems, in order to effectively audit their inventory systems and gain an understanding of the global environment.

The constructs developed for international operations of inventory management, are universal and designed to be applicable for a diverse range of international operations.

 The following eight constructs are defined:

1. Government policy
2. Quality of infrastructure
3. Product characteristics
4. Uncertainty
5. Information
6. Production environment
7. Supply base
8. Effectiveness.

• Governmental policy – The impact of government policy is significant on inventory management.  For example, export controls can have a major impact on the flow of products among subsidiaries in different countries.  Furthermore, management should take into account tax structures and agreements, tariffs and duties.
• Quality of Infrastructure – This construct refers to the availability of the required level of infrastructure for a firm to operate efficiently, as these levels vary from country to country.  The quality of infrastructure has a direct bearing on the facility location decisions and correspondingly on the inventory system.  The term infrastructure refers to the adequacy of railroads and roads, communications, wage rates, availability of transport as well as availability of labour.
• Product characteristics – this refers to the profile of the product in stock, as product characteristics can have a major impact on the inventory system.  McDonald’s faced this problem when opening stores in India, as consumption of beef is considered sacrilegious. McDonald’s should further evaluate the extent to which demand for the products are determined by the prevailing market conditions, as well as the ‘shelf life’ of the product.
• Uncertainty – This construct measures the combined effect of the variation and shocks caused to the system by shifts in governmental policy, infrastructure and product characteristics.  The level of uncertainty can significantly affect the type and size of inventory system in place.  For instance the greater the degree of uncertainty, he greater the need to maintain safety stock.  McDonald’s needs to carefully evaluate levels of uncertainty within each region it operates in order not to damage operations, through loss of stock, or unavailability of labour.
• Information – The level of information can have a profound effect on the type of supply chain and production system.  Possible items, such as replenishment systems in place and time horizon for analysis for the forecasted demand, may need to be considered by McDonald’s when evaluating regions in terms of information availability.
• Production environment – This construct assesses the environment in which the inventories are being consumed and in turn, recreated.  The interaction between the inventory system, production system and production policies can be measured by McDonald’s by the importance of items such as out of stock policy, number of stocking points, push vs. pull systems and repair systems in place.
• Supply base – The supply base construct refers to the movement of material from a company’s suppliers to its customers, as previously discussed.
• Effectiveness – Refers to the ability of a firm to meet the needs of its customers in a timely manner.  The type of environmental condition, coupled with the production and supply system, will affect the effectiveness of the inventory system.  As mentioned in previous discussions, McDonald’s can look to the following items to determine effectiveness – annual inventory turnover, % of delivery promises met, % of orders not split due to materials shortage, the average lead time in days from when the order is placed, to when it is delivered (Pope, et.al., 1998).

The relationship between the constructs can be viewed below:

   

   

                       

(Pope, et.al., 1998).

7.0 Logistics & the Environment

Businesses succeed because they respond to external and internal changes and adjust in an effective manner.  With regard to the environmental movement, businesses can be motivated to embrace change brought about by consumers, government, competition and ethical responsibility.  To achieve business goals and objectives, McDonald’s must respond to increasing consumer demand for “green” products, comply with ever tightening environmental regulations, and implement environmentally responsible plans as a good corporate citizen.  The impact on decision-making is both short and long term.  Short-term responses may involve reaction to accidents or compliance with regulations or liability triage; long-term response involves a recognition that the environment is a major factor in decision making, with company wide implications (Svoboda, 1995).

        

Being environmentally responsible means improving operational efficiency by conserving resources and reusing them as much as possible. McDonald’s can cut costs by conserving energy, reducing resources used, and reusing and recycling useable materials.  Currently, McDonald’s only uses recyclable packaging within countries, where this practice is mandatory, however, the company should look at implementing a company wide approach in order to comply with environmental concerns that exist around the world (Svoboda, 1995).

Since logistics is an integral part of the firm’s efforts to become environmentally friendly, logistics managers must understand the impact of their daily activities on the firm’s image.  With growing demand for ‘green’ products, logistics systems that deliver these products to consumers’ hands should themselves be ‘green’ if for no other reason than to maintain a good environmental image. The relationship between logistics and the environment is shown below.

Logistics decisions intimately interact with other business functions.  Inventory management, for example, is an important part of logistics from purchasing all the way to service management.  Decisions made in other functional areas may have an impact on logistics and, ultimately, the environment.  New environmentally responsible practices may be more expensive, but the expanded market share may bring more profits to offset the added costs.  Naturally, at times environmentally responsible practices, such as installing vehicle emission control devices, simply add costs to the operation and hurt productivity.  Logistics managers need to weigh all the options and select the best alternative that helps to achieve the firm’s cost, profit and environmental goals (Wu, et.al., 1995).

McDonald’s will need to assess every logistics element in order to establish where non-environmentally friendly practices are used.  Raw material acquisition, in-bound as well as outbound logistics, production, transportation, as well as other elements can be reshaped to become ‘green’. The difficulty will be in justifying the potential contribution of environmental elements such as emissions reduction, in terms of their benefit to the firm as opposed to their benefit to society (Svoboda, 1995).

8.0 Recommendations

1. Implementation of a standardized technological approach throughout the organisation 

General :

• McDonald’s needs to implement a company wide POS system that is accessible by senior management in all parts of the world.  This strategy will enable the company to track sales and forecast demand.  In turn, management at all levels will be able to establish stock needed.

Specific :

An implementation of a company-wide POS system will realise each store savings of $240,000 p.a ()

General :

• A systematic use of a generic EDI system will allow McDonald’s to interact with suppliers, as well as enable instantaneous order placement, to ensure little expense is spared, in line with JIT practices in place.

Specific:

• Abolishment of manual invoicing will net the company a saving of $4 per invoice, saving approx $400,000 just within the U.S.  Furthermore, this initiative will increase shareholder ROI by 7% p.a., during implementation, growing to 11% when upon the projects completion ().

2. Establish and cement supplier relationships 

General:

• McDonald’s needs to reduce the number of suppliers it currently uses.  The company should look at establishing relationships with suppliers that can enhance its competitive edge.  If the company continues to deal with suppliers that are operating in a dynamic financial environment, they will not be able to operate at its “leanest” due to expenses involved in the recruitment of new suppliers.

Specific:

• McDonald’s should reduce the number of suppliers currently used:

Food – the number of suppliers used within the U.S. should be reduced to 8 from a current 23.  Research indicated F J Walker Foods should be utilised in association with the American Food Corporation to supply meat & poultry, Simplot Pty. Ltd. is the most viable supplier of French fries, Hash Browns and Fillet-O-Fish, Kraft Foods to supply cheese and condiments, and Parle Foods to supply pickles.

Services – McDonald’s should employ a single recruitment agency to take care of recruitment, cleaning and other non-managerial duties to ensure the McDonald’s standards is upheld in every store.  Furthermore, outsourcement of this group of functions will allow management to attend to its core competencies.

These companies will be able to service the needed economies of scale, reducing the possibility of risk due to any imminent closures of business ().

3. Re-evaluate JIT effectiveness 

• Although McDonald’s has implemented JIT reasonably well, the company has still many changed to introduce in order for this system to operate at maximum efficiency.  This particular alteration will only need to be fine-tuned if the above recommendations are implemented correctly, as it will systematically self-adjust if the proper moderating variables are correctly employed ()

4. Implement a global environmental campaign to improve brand image

General:

• McDonald’s needs to ensure that its ‘green’ strategy is implemented throughout the entire company.  Customers who live in countries where environmental awareness is high, are prone to visiting the stores elsewhere, where the environment is not part of the company’s business strategy.  In turn, this occurrence may create a negative reaction, impacting on consumption even at home.  Furthermore, word-of-mouth communication may further decrease brand image, if customers feel strongly enough about the issue ().

Specific:

• McDonald’s needs to look at packaging practices currently in place.  A separate plan should be actioned to deduce the full costs involved in its implementation.  The plan should be implemented within a relative period of time ~ 5 years and may involve costs of up to $5 billion ().

9.0 References

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