Week 7 Assignment Case Study

Case Study: Online Purchasing at McDonalds

I n 2002, when McDonald’s offered to put an extra strip of bacon on any hamburger for

35 cents, it

encountered drastic forecasting problems. The promotion turned out to be so popular that the company

had to increase its order for pork bellies, which sent a bullwhip effect across the economy, resulting in

shortages and increased costs. The

source of the problem? Thousands of franchisees, each of them

operating somewhat independently, using largely manual ordering systems that did not feed

information to corporate headquarters on a timely basis. The company responded by developing an

online o

rdering system to help it plan its purchases and shipments. The system was first implemented in

European stores in 2003, leading to a 30 percent reduction in raw waste, a 30 percent reduction in store

inventory, and a decrease in store transfers (i.e., shi

pments of bacon between stores because of

shortages) from 8 percent to 4 percent. In addition, order times for each store were cut in half, saving 60

minutes per week. Annual savings per store were $5,585, which equates to $11.5 million for the 2,072

resta

urants in France and Germany. McDonald’s is leading a shift to “demand chain planning” by fast

-

food restaurants. In 2003, the National Restaurant Association estimated that only 12 percent of

restaurants ordered food supplies electronically, and only 10 pe

rcent ordered nonfood supplies

electronically. With more than 31,000 restaurants serving more than 46 million customers per day in

119 countries, McDonald’s has thousands of trucks on the road delivering food and supplies to its

franchisees. With its Happy

Meals promotions, McDonald’s is one of the largest toy distributors in the

world. Each store receives supplies one to three times per week.

McDonald’s has several major challenges in integrating its supply chain. First, the majority of its

restaurants are owned by franchisees, limiting the company’s ability to control the adoption and

implementat

ion of new technologies. According to Robert Bauer, information technology director for

McDonald’s global supply chain, “It’s difficult to get the restaurants

to give us information. They look at

us as a big brother: ‘you are going to do bad things to me.’” The franchisees do not have to agree to use

the software. Thus, while there are about 13,00

0 restaurants in the United States, only 12,100 use the

online system. Second, the entire supply chain is outsourced, from hamburger and French fry

production to warehousing and transportation. The company began revamping its supply chain in 1996

with soft

ware and technology from Manugistics, Oracle, and Sun. Several years were spent primarily

collecting and organizing data. McDonald’s worked closely with its two major distribution contractors,

Martin

-

Brower and Perseco. The technology works well for everyd

ay projects but hits snags with

limited

-

supply items like Happy Meal toys, where the promotions run for 28 days, yet the toys must be

produced 12 months in advance. There is no chance to correct for poor forecasts once the promotion

has started.

QUESTIONS

1. Getting franchisees to adopt the online ordering system is a major challenge. What techniq

ues would

you use to encourage adoption?

2. Draw a supply chain map showing the various parties in McDonald’s supply chain: food growers,

manufacturers, distributors, corporate headquarters, and restaurants. Describe the type of information

that needs to b

e exchanged between the partners in each pair of partners. What is each organization

looking for in its information systems?

Case Study: Online Purchasing at McDonalds

I n 2002, when McDonald’s offered to put an extra strip of bacon on any hamburger for 35 cents, it

encountered drastic forecasting problems. The promotion turned out to be so popular that the company

had to increase its order for pork bellies, which sent a bullwhip effect across the economy, resulting in

shortages and increased costs. The source of the problem? Thousands of franchisees, each of them

operating somewhat independently, using largely manual ordering systems that did not feed

information to corporate headquarters on a timely basis. The company responded by developing an

online ordering system to help it plan its purchases and shipments. The system was first implemented in

European stores in 2003, leading to a 30 percent reduction in raw waste, a 30 percent reduction in store

inventory, and a decrease in store transfers (i.e., shipments of bacon between stores because of

shortages) from 8 percent to 4 percent. In addition, order times for each store were cut in half, saving 60

minutes per week. Annual savings per store were $5,585, which equates to $11.5 million for the 2,072

restaurants in France and Germany. McDonald’s is leading a shift to “demand chain planning” by fast-

food restaurants. In 2003, the National Restaurant Association estimated that only 12 percent of

restaurants ordered food supplies electronically, and only 10 percent ordered nonfood supplies

electronically. With more than 31,000 restaurants serving more than 46 million customers per day in

119 countries, McDonald’s has thousands of trucks on the road delivering food and supplies to its

franchisees. With its Happy Meals promotions, McDonald’s is one of the largest toy distributors in the

world. Each store receives supplies one to three times per week.

McDonald’s has several major challenges in integrating its supply chain. First, the majority of its

restaurants are owned by franchisees, limiting the company’s ability to control the adoption and

implementation of new technologies. According to Robert Bauer, information technology director for

McDonald’s global supply chain, “It’s difficult to get the restaurants to give us information. They look at

us as a big brother: ‘you are going to do bad things to me.’” The franchisees do not have to agree to use

the software. Thus, while there are about 13,000 restaurants in the United States, only 12,100 use the

online system. Second, the entire supply chain is outsourced, from hamburger and French fry

production to warehousing and transportation. The company began revamping its supply chain in 1996

with software and technology from Manugistics, Oracle, and Sun. Several years were spent primarily

collecting and organizing data. McDonald’s worked closely with its two major distribution contractors,

Martin-Brower and Perseco. The technology works well for everyday projects but hits snags with

limited-supply items like Happy Meal toys, where the promotions run for 28 days, yet the toys must be

produced 12 months in advance. There is no chance to correct for poor forecasts once the promotion

has started.

QUESTIONS

1. Getting franchisees to adopt the online ordering system is a major challenge. What techniques would

you use to encourage adoption?

2. Draw a supply chain map showing the various parties in McDonald’s supply chain: food growers,

manufacturers, distributors, corporate headquarters, and restaurants. Describe the type of information

that needs to be exchanged between the partners in each pair of partners. What is each organization

looking for in its information systems?