McDonald’s Fries Supply Chain

Issues in McDonald’s India French Fries

Supply Chain
• Supply side constraints
Issues in McDonald’s India French Fries
Supply Chain
• Supply side constraints
– Stable supply for growing demand with quality
and cost pressure
– Import restrictions, and not sustainable
– Efforts only on distribution, not on input
• Collaboration and relationships with suppliers
• Risk management approach
• Vertical integration – core competency?
Issues in McDonald’s India French Fries
Supply Chain
• Long stable contracts with fixed prices
• Reduced lead time and lower inventory
• Risk
– Over reliance on one supplier
– Hold-up problem
– Farmers/McCain can divert to competitors
– Less control over the supply side
Hindu Business Line,
2002
 Design of Supply Chains

Source: What is the Right Supply Chain for your product, HBR
 Comparison of Efficient and Responsive
Supply Chains
Efficient Responsive
Primary goal Lowest cost Quick response

Product design strategy Min product cost Modularity to allow

postponement
Pricing strategy Lower margins Higher margins

Mfg strategy High utilization Capacity flexibility

Inventory strategy Minimize inventory Buffer inventory

Lead time strategy Reduce but not at expense Aggressively reduce even if
of greater cost costs are significant
Supplier selection strategy Cost and low quality Speed, flexibility, quality

Transportation strategy Greater reliance on low cost Greater reliance on

modes responsive (fast) modes
Supply Chain Integration
 Solectron’s Value Addition (Integration)
Capacity Provider
Economies of Scale
Cost Competitiveness
Process Improvement
SMT
Growth in size
Production efficiency
Still Manufacturing
Purchasing – negotiating
with suppliers
Low cost producer as
compared to OEMs
Acquisition of Customers
facilities
•20 % à 80% of
production
•Better than customers
•Quality, JIT, etc
•Still contract manufacturer
with Purchasing
Multiple locations of Plants
•Minimize overall
transportation cost
•Logistics activities
Spares, IT, Services
Second level design
services (after concept &
prototype)
New partnerships/alliances in
supply chains
Demand distortion
Supply Chain Integration

• Demand variability increases as you move up the supply chain from customers towards
supply

Equipment Tier 1 Supplier Factory Distributor Retailer Customer

22
Bullwhip Effect in the US PC supply chain

Changes in
demand
80%

60%

Semiconductor
40% Equipment

20% PC

0%

-20% Semiconductor

-40%

1995 1996 1997 1998 1999 2000 2001

Annual percentage changes in demand (in $s) at three levels of the semiconductor
supply chain: personal computers, semiconductors and semiconductor manufacturing
equipment.
Source: Matching Supply with Demand, Cachon and Terwiesch, McGraw-Hill, 2012

23
 Increasing Variability of Orders
Up the Supply Chain

Lee, H, P. Padmanabhan and S. Wang (1997), Sloan Management Review

 Causes of the Bullwhip Effect

Supplier Practices Buyer Practices

§Forecasting of future trends in demand
§Incentives offered to buy-in-bulk •Updating of future demand based on
• Price Promotions recent demand
• Sales force incentive •Safety stock adjustments
§Supplier behaviour uncertainty Order •Promotion plans Order
• Shortage Handling § Order Batching considering economies of
• Price Fluctuations scale of production
§ Supplier Inefficiency •Large production runs
• Buying in large batches

Source: Supply Chain Management: Text and Cases Janat Shah, Pearson Education India, 2009

26
 Impact of Bullwhip Effect

§ Increase in manufacturing cost and significant rise in inventories.

§ Increase in replenishment lead times.
§ Increase in transportation costs.
§ Increase in stock outs.
§ Increase in Labour costs.

Ways to combat the Bullwhip Effect

§ Information sharing:
• Collaborative Planning, Forecasting and Replenishment (CPFR)

• Vendor Managed Inventory (VMI): delegation of stocking decisions

– Used by P&G/Wal-Mart.

• Continuous Replenishment

• Efficient Promotions

§ Alignment of Incentives – Contracts benefitting supply chain partners

Source: Supply Chain Management, Sunil Chopra, Pearson Education India, 3rd Ed., 2008
27
Source: Lee, Padmanabhan, Wang. 2004. Reflections on the Bullwhip Effect.
Management Science
Green Supply Chains