McDonalds: Inventory Management Practice and Its Advantages

By: Piyush Dewan (MBA Core-Div A: I Trimester)

McDonalds is one of the most popular fast food chains with a worldwide presence. It can be

found in 119 countries and has about 31,000 restaurants. It employs about 1.5 million people and

is one of the largest fast food chains, serving 47 million customers daily (2). Most restaurants

offer both counter service and drive through service with indoor seating (and sometimes outdoor

seating too!). McDonalds has become a emblem of globalization. It’s main line of business is

hamburgers. It primarily sells cheeseburgers, hamburgers, French fries, chicken products, ice-

creams and soft drinks.

Inventory management in McDonalds: McDonalds follows a Just in Time (JIT) system of

inventory management.

JIT, as the name suggests, is the system of supplying products to customers as soon as they have

ordered for it, with minimal delay between placing the order and getting it in hand. McDonalds

doesn’t begin to cook or assemble or preheat their stuff until they receive a customer order (1).

This was not the case earlier. They had a different approach to inventory management wherein

they used to pre-cook a batch of hamburgers and sit under heat lamps. It used to keep them under

the lamps for as long as possible and eventually discard whatever they couldn’t sell. Hence

customers couldn’t enjoy freshly made food. The only way it could happen was by the customer

giving a special order.

Hence McDonalds moved to the JIT system of inventory management. This shift was possible

because of the new burger making technology that enabled them to make burgers faster and keep
the time between placing an order and receiving it as miniscule as possible. This results in the

finished product sitting in the inventory for as little as possible. This enables proper inventory

management and reduces wastage while giving maximum satisfaction to the customer. The

customer is made to wait for a very short period and this is a huge factor while going for such a

system of inventory management. Thus, the customer is happy. But it has also lead to a huge

decrease in costs for McDonalds and this is what has made JIT system such a success. The

following have been the apparent advantages the JIT mechanism has brought to the McDonalds

Operations:

a) Improved quality of food: The burgers are made fresh for the customer and thus

provide maximum satisfaction. There is no chance of offering stale food to the

customer. Higher customer satisfaction leads to customer retention and increased

sales. The customer resists the impulse to try out rival brands till he is deriving

maximum satisfaction from the brand in question.

b) Better customer service: McDonalds earlier used to make special orders for customers

while dishing out precooked burgers from the inventory to most customers. Hence

such special orders were dreaded by the staff and used to freak them out. The staff,

now after introduction of the JIT system, is more calm and composed and offers

better service to the customers. This higher customer service is subject to the ability

to produce faster burgers. McDonalds are able to handle the demand a lot better. They

don’t have to waste time in calculating the estimated sales hour by hour and maintain

an inventory.

c) Better costs: The holding costs for the raw material like bread, beef, cheese, chicken

is fairly high because of their spoilage costs. Under the old system, McDonalds used
 to maintain a high inventory leading to faster orders but this resulted in a lot of unsold

food because of the low shelf life of beef etc. after being cooked. The food was then

forced to be sold at a higher price to cover up for the losses in scrapping unsold food.

This resulted in lower costs to McDonalds.

d) Better Raw Material handling: With the new system, McDonalds does not need to

procure the raw materials in bulk advances. This reduces daily expenses considerably

and ensures fresh and high quality raw material all the time.

High holding costs and low ordering costs were the factors that drove the Just in Time system to

the market. The ability to lower the operating costs makes JIT a highly feasible solution. It has

also led them to reduce drastically the safety costs. Safety time exists due to variability in

demand and variability in lead times from suppliers (3). JIT helps reducing the lead times and

hence safety stock. JIT provides for an attractive and cost cutting mechanism but it is very

important to weigh the risks and analyze the associated consequences that might happen. A very

fast burger making technology makes JIT a viable option for McDonalds but this might not be

the case in other organizations and they might face problems in handling bulk orders through JIT

system.

Sources:

1. http://www.inventorymanagementreview.org/justintime/

2. http://www.breitbart.com/article.php?

id=CNG.aec4920fe8094fdd0baaeab2ed126bf1.741&show_article=1

3. Inventory management explained, David J Piasecki