Lean and JIT Mcdonalds

Summary: The purpose of this assignment is to analyze critical elements of an effective and efficient stock control system for a continuous flow production line and how these elements can contribute to the profitability of McDonald’s business. Introduction Business activities involves purchasing raw materials, semi-finished goods and components, changing them into finished goods or combined with services, and selling them to the customers. Before customers purchasing these finished goods and services, they are all hold by companies and are regarded as stocks. Companies are always trying to control their stock according to the market demand and the holding opportunity costs in order to generate highest profit for them.

McDonald’s is one of the most popular chain restaurant businesses. By continuously serving customers, it can almost be regarded as a flow production factory. It builds its customer royalty by offering fast, fresh, quality food. Moreover, because it starts offering more food selections, its stock level has raised to a higher level. Therefore, to maintain their service efficiency, stock management has become one of the major challenges for McDonald’s. This analysis evaluates stock management concepts that McDonald’s has applied and discusses how they benefit McDonald’s. Stock management: The level of stock should be maintained is a major challenge for most businesses / companies based on inventories. For instance, maintaining a low stock level may cause business activities to come to an abrupt halt. Businesses might not be able to cope with unexpected demand from

market since there will not be enough finished goods to be sold. Production process may be delayed because there since low inventory will result in revenue lost and numerous resources being wasted such as human resources and time. By owning a low stock level, companies always need to re-order small quantity from supplier and therefore the relationship and ability of supplier is essential. (Womack, James P. and Jones, Daniel T., 2003). On the contrary, holding a high volume of stock might also causes problems. Before company sells stocks to costumers, its capital is tied with stocks and therefore will lower the liquidity of company. Excessive stock also uses other resources such as warehousing which may be utilized for more productive purposes. Holding large amount of stock might also require more attention on deterioration and product life cycle since customers will no longer purchase goods which are damaged or in McDonald’s case perished. Materials such as frozen food needs special storage facilities in order to keep them fresh, therefore companies need to invest more capital on its equipment. Stock management is regarded important as it can control companies’ wastage, improving space functionality and company’s liquidation. Moreover, by implementing stock management, companies can identify many other problems within the company’s production process such as flow production path and the efficiency of using human resources. Therefore it has the potential improve the overall productivity. Lean Inventory / Just in Time inventory: Lean production was designed to improve flow production system created by Henry Ford, who first built the car flow production line. Because after The World War two, customers started requiring different products and this changed flow production focusing on variety of smaller

quantity products. However, during the adaptation phase, it highlighted significant problems such as overproduction and the difficulty of changing the production process. Therefore lean production was designed to re-engineer the production process and overcome these shortcoming. Lean Production is a management concept that not only focusses on controlling the stock, but also focuses on changing whole company’s environment and culture. Its primary objective is to reduce all wastage and error, establish good teamwork and efficient information flow within whole company system to improve the overall productivity and product quality. Just in time (JIT) can be regarded as a part of lean production. It is a production strategy that aims to minimize stock quantity and associated carrying cost. (Liker, Jeffrey, 2003). By improving the information and product transferring system, JIT was designed to achieve the placement of proper amount of materials in the right place just in time, and produce higher quality products for next step just in time. The following are lean production and just in times’ core

concepts

and

its

challenges:

Zero Stock: Both the concepts try to improve the company’s profit by eliminating the waste entirely. They try to achieve zero stock, or reducing their stock level to the lowest point. Because the Just in Time approach is demand oriented, if there is no demand, production will not occur. To successfully implement the JIT concept, precise demand prediction and efficient information flow system is necessary. Without precise demand prediction, retailers might increase the buffer stock in order to minimize errors. However, if there is overproduction, it will be regarded as waste.

Compared to mass production, lean production exposes the wastage from overproduction and other aspects. If there is overproduction, the company will need to adjust surplus resources and restructure producing processes. Especially, stock is regarded as a problem in JIT system (Ohno, Taiichi., 1988). Since there are many production problems such as unstable machineries, high percentage of flow production and inefficient concurrent production line, stocks are usually considered as buffers to cope with these problems. However, lean production aims to improve total quality of the production system, therefore these stocks are deemed as an unnecessary cost and hiding production problems. In other words, by reducing the stocks, the company can expose conflicts and defects between processing steps, and helps the company to improve their overall productivity. Team Work: Lean production aims at improving total quality control, therefore the elements related to production process are all considered as important (Flinchbaugh, Jamie. and Carlino, Andy. 2006). Human resources can be considered as one of the most important assets within the company. Lean production suggests that company should encourage staff to take job training; this not only motivates employees, but also can enhance company’s total productivity. Employees are encouraged to participate in decision making to improve the production process, since they are the first who notice the problems when they occur. By empowering the staff to provide advice and suggestions, companies can identify problem in early stages and therefore reduce the cost of solving the problems. Moreover, Lean Production suggests that companies should train employees to be able to take after other employees’ job within his/her own team. It provides employees with an extended

knowledge-base to discuss problems when they within their working team. This also strengthens their ability to replace their colleagues in case of any eventuality. Although lean production will lose more value when it loses its employees compared to traditional mass production concept, this system is more capable to motivate people to do their job and correct mistakes within the company, which indeed can save a lot of capital. It also can continuously improve the production process and finally enhance the quality of products or services. How McDonald’s applies Lean production and JIT and its benefits: 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. Most restaurants offer both counter service and drive through service with indoor seating and sometimes outdoor seating as well. McDonalds has become an emblem of globalization. It’s main line of business is hamburgers. It primarily sells cheeseburgers, hamburgers, French fries, chicken products, icecreams and soft drinks. Because of the enormous amount of sales, stock control is always considered as an important factor in its success.

Inventory management in McDonalds: McDonalds follows a Just in Time (JIT) system of inventory management. McDonalds doesn’t begin to cook or assemble or preheat food items until they receive a customer order. However, they had a very different approach to inventory management wherein they used to precook a batch of hamburgers and sit under heat lamps. They would keep them under the lamps for as long as possible and eventually discard whatever they couldn’t sell causing wastage. Hence

customers couldn’t enjoy freshly made food. Managers would also pre-order a bulk of raw material depending on their own past experience once a week, which would often leave many items perished along with the inefficiency of space using. 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. It also enables proper inventory management and reduces wastage while providing maximum satisfaction to the customer. The customer is made to wait for a very short period and this is a very important factor while going for such a system of inventory management. Thus, not only is the customer is happy but also it has led to a massive decrease in costs for McDonalds hereby highlighting the success of the JIT system. 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 higher 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: 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) Reduced costs: High holding cost and low ordering cost are the factors drive just in time management. Business always hope to control stock level at lowest point. The holding costs for the raw material like bread, beef, cheese, chicken is fairly high because of their perishable nature. 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. Compared to old strategy, now McDonald’s is using a computer system called ‘Weblog’, which can be regarded as an electronic version of the JIT system. It creates a proposal every day for managers to analyze and adjust. All managers need to do is calculate the opening and closing stock, key in the details and the central planner will discuss stock amount if there is a promotion or a special campaign with managers. With this JIT system, McDonald’s has been able to reduce the delivery times from once a week to four to five times a week. Because there is much less stock in store, McDonald’s can open their branches in a smaller space. Managers can put more emphasis on service and store cleanliness hereby enhancing the total quality of their brand. 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. 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. 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. e) Increased Efficiency: Lean production aims to cut all the waste which can be defined as unnecessary cost. Goods transferring path is one of the key factors that causes considerable wastage in terms of time and space. To minimize delay in transfer path, McDonald’s designed a work place in a manner that most of the employees do not need to move to deliver finished goods. It simply creates a food path between the kitchen and the front serving desk, therefore it not only cut down the time to deliver the food to customers, but also minimize the space to operate

its

tasks.

Maximizing employee efficiency is also one of the lean management objective. (John Seddon, Brendan O’Donovan and Keivan Zokaei, 2009). To achieve this, McDonald’s offers frequent job training to its staff. Not only does the staff at McDonald’s need to know their own job but the employees also need to understand others employees’ job process in case they need to take control of it (Bonnie Conrad and Demand Media, 2008). Employees are also welcome to give their opinions if that is helpful for improving company quality. McDonald’s efforts towards their employees to inculcate higher standards of service is the reason it is successful in more than one hundred countries. Conclusion: Efficient stock management is crucial for any business. In case of McDonald’s, customers can always enjoy a meal without worrying it might be out of stock. With the Lean / JIT system,

McDonald’s can reduce a huge cost of un-sold food and also increase delivery times that ensure that l its food items are fresh and high quality. The reduced wastage also helps McDonald’s sustainability efforts to be more eco-friendly, which helps to promote its brand. All in all, just in time and lean production not only emphasizes on stock control, but on total quality control. They are concepts that help a company to focus on what should be improved within the company rather than just increase the size of the company to benefit from economies of scale. By applying these two concepts, it offers company a good chance to re-examine their business structure and efficiency, which may be overlooked by managers.

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