(Operations Management) - McDonald's Analysis

McDonald’s Restaurant STAT 2800 Survey of Operations Management Project II Dr. Rotimi Aderohunmu

November 15, 2004 By: Stephanie Earley Matt Kellond Heather Kraich Eddie Phillips Rabab Sadeq Thuy Van

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EXECUTIVE SUMMARY

To sustain its viability in a competitive market, the McDonald’s Corporation sets its overall goal of “making its customers happy.” To reach this broad goal, McDonald’s mainly focuses on competitive bases of speed, cost, and nutrition. The corporation also recently created dramatic strategy changes to its stores internal processes by introducing the Made for You System, and McDonald’s also created a Revitalization Plan which encompasses all areas of the business to make its customers happy. Quality management at McDonalds is one of the major factors that make the corporation one of the most successful fast food restaurants in the world. The corporation uses computerized information systems and strict corporate quality standards to maintain quality at their restaurants. To enforce the standards, the corporation undertakes exhaustive inspections on each restaurant two times per year. Also, thorough training processes ensure that all McDonald’s employees have the proper knowledge to meet the corporation’s standards, which will in turn make their customers happy. Many suppliers aid McDonald’s success by supplying their raw materials efficiently and on time. McDonalds reassures that their product is fresh by choosing suppliers near the restaurants, to minimize transport time. To ensure quality of products and reduce cost between the restaurants and their suppliers, the McDonalds Corporation publishes specific guidelines to ensure that the restaurants receive the best quality materials. McDonald’s ensures consistent products by enforcing strict standards and frequently inspecting its suppliers. The corporation participates in a very efficient supply chain network. The corporation also takes advantage of long-term relationships with suppliers to ensure consistent products. McDonald’s also takes active steps to avoid bad products and reduce overall costs. Forecasting is in large part down by the corporation as their responsibility to the franchisees and share holders. McDonald’s uses qualitative forecasting methods by gathering information from customers, employees, and experts, via written surveys and other correspondence. Forecasting has given the corporation opportunity to excel in creating new innovations, creating localized meal selections, and generally making the customer happy. In summary, the entire McDonald’s corporation revolves around its goal to make its customers happy. McDonald’s works toward this broad goal with strong competitive bases, quality management, an efficient supply chain with quality products, and continuous forecasting.

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TABLE OF CONTENTS Introduction........................................................................................................................4 Operations Competitive Strategy Main Competitive Bases ..........................................................................................4 Strongest Priority .....................................................................................................7 Strategy Changes .....................................................................................................8 Quality Management Speed......................................................................................................................11 Quality Inspections ................................................................................................12 The 5 P’s ................................................................................................................14 Training..................................................................................................................15 Raw Materials Arrival and Maintenance........................................................................................16 Grade “A” Beef and Other Meats ..........................................................................16 Produce ..................................................................................................................18 Supply Chain Examination of Supply Chain................................................................................18 Supply Chain Efficiency ........................................................................................19 Quality Along Supply Chain..................................................................................20 Share Costs.............................................................................................................21 Forecasting Aspects of Forecasting...........................................................................................21 Listening to Customers ..........................................................................................22 Forecasting Success and Failure ............................................................................23 Conclusion ........................................................................................................................24 Appendices Appendix 1, TTL Control Chart ............................................................................25 Appendix 2, KVS Control Chart............................................................................26 Appendix 3, Data for Control Charts.....................................................................27 Appendix 4, McDonald’s Hierarchy......................................................................28 Appendix 5, Process Chart for Preparing a Hamburger ........................................29 Appendix 6, Illustration of a McDonald’s Supply Chain ......................................31 Appendix 7, Interview with Ronald Lessnau.........................................................32 Bibliography .....................................................................................................................36

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INTRODUCTION McDonald’s, founded by Ray Kroc, is now one of the most popular fast food restaurants across the world. They’ve proudly served more than 46 million customers in 59 different countries and currently have more than 30,000 different locations worldwide (“Food Service”). The fast food industry is booming at a rapid rate, especially the health conscious food options. With this in mind, McDonald’s has a strategic plan to stay on top of their competitors by providing consumers with affordable prices, great service, and more healthy meal options. McDonald’s is competitive in many categories, including price, quality, management and employee training. Consumers trust McDonald’s products because they use many of the same trusted brands that families buy at local grocery stores. The only difference is that their shopping cart is a whole lot bigger. This report details McDonalds’ competitive strategy, quality management, raw materials, forecasting, and supply chain.

OPERATIONS COMPETITIVE STRATEGY Main Competitive Bases McDonald’s Corporation competes in a challenging market segment by providing need-satisfying products to customers. In this segment, ineffective competitors often fail without proper strategies (Kerin). To sustain its viability, the McDonald’s Corporation employs an effective competitive strategy to make it stand out against competitors such as other fast food restaurants.

Although McDonald’s competes on several bases,

including speed, cost, and nutrition, their strongest priority is “making customers happy” (“McDonald’s Worldwide” 3).

The company recently made drastic changes to its

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process by introducing the Made for You system (Chase). Speed McDonald’s competes on several bases mainly to make their customers happy by providing speedy, affordable, and nutritious foods. Through extensive market research and survey, the organization discovered that its customers desire speed as one of the restaurants’ top priorities. Therefore, McDonald’s vision aims to “provide fast, friendly and accurate service” (“McDonald’s Worldwide” 5). McDonald’s realizes that specific targets are necessary to measure the performance of speed, and continuously takes relevant measurements to compare actual performance with desired targets Specific measurements are detailed later in this report in the “Quality Management” section. To achieve efficient service times, the company utilizes proven, standardized training processes for its employees and new drive-thru layouts to reduce service times. Along with speed, McDonald’s also competes by offering prices at a low cost. Cost To offer high quality products at low cost requires efficient processes throughout the entire McDonald’s organization. Once again, this goal is built into their vision statement when they claim that “We will be the most efficient provider so that we can be the best value to the most people” (“McDonald’s Worldwide” 5).

McDonald’s

incorporates several avenues to provide great value to its customers: ƒ

One strategy that the company has employed for many years is the value meal. The value meal allows customers to buy a sandwich, french fries, and beverage at a discount when purchased together.

McDonald’s restaurants offer seven to

twelve value meals, both for their lunch menu and breakfast menu.

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ƒ

More recently, McDonald’s began offering a dollar menu, consisting of many individual items costing only $1.00 each. First tested in southern California, the dollar menu has proved to be very successful and has been since incorporated to many individual stores (Zuber 2).

ƒ

Some individual franchise owners choose to offer daily specials of special menu items, such as “$0.39 hamburger Wednesdays,” or other similar specials. Big Mac Mondays are a popular regional promotion.

Nutrition McDonald’s third main competitive base is nutrition. The organization understands that health trend is an increasingly popular trend therefore; the organization has recently focused extraordinary efforts to promote their new nutritious choices. Although not specifically built into the organization’s vision, McDonald’s has already introduced many options to achieve this goal: ƒ

In the United States, “Go-Active” meals have been offered within the last few years. These meals include a salad, bottled water, and a “step-o-meter” to help customers keep track of how many steps they take a day.

ƒ

Other countries have seen similar healthy options. The United Kingdom saw fresh fruit bags, containing apples and grapes, as an alternative to french fries (“McDonald’s Worldwide” 12).

ƒ

Not only does McDonald’s care about its customers, but it is also considerate of its employees’ health.

In Europe, the organization worked with external

nutritionists to develop an “Employee Guidebook” which contains tips and nutrition information for healthy lifestyles (“McDonald’s Worldwide” 13).

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ƒ

McDonald’s has assembled their Global Advisory Council on Balanced Lifestyles.

This council consists of exercise & obesity specialists,

environmentalists, and other professionals to ensure that McDonald’s takes appropriate steps in helping its customers achieve optimal health. ƒ

The company is also utilizing technology to their advantage.

The current

McDonald’s website lets a user select any combination of menu items, place the items in the online bag, and conduct a nutritional analysis on their selections. The user can break down the analysis even further than a menu item, down to individual condiments, including ketchup, pickles, etc. (“Bag a McMeal”).

Not only has the company introduced many steps to ensure nutrition, but it will strive to continue the trend toward nutrition. McDonald’s plans to: add additional healthy menu options (fruits and vegetables); increase nutrition awareness among McDonald’s employees; and conceive new ways to deliver nutrition information to its customers, as well as other actions (“McDonald’s Worldwide” 13). Strongest Priority “At McDonald’s, making customers happy is what our business is all about. And we know it takes a lot to make that happen. We work hard to provide every customer with a choice of meals and an experience that exceeds their expectations.” U

U

The preceding statement is the quote which introduces McDonald’s Worldwide Corporate Social Responsibility Report (2004).

Although the company strives to

compete on several bases, their ambient goal is making customers happy. They reach this goal through a variety of efforts. McDonald’s visionary goal is to continually improve their organization.

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To

achieve this goal, McDonald’s in-store managers conduct frequent inspections of their store, and the corporation also conducts thorough inspections several times per year. For long term improvement, the McDonald’s Corporation introduces new ways to measure performance and food safety.

Continuous improvement is detailed in the “Quality

Management” section. In summary, McDonald’s strives to reach its goal of making customers happy through their normal competitive bases of speed, price, and nutrition, and they also ensure customer satisfaction through continual improvement of their operations. Strategy Changes Made for You McDonald’s organization recently underwent drastic strategy changes to better serve their customers. Under their previous system, the company would make several sandwiches at once, and hold the sandwiches in a warming bin until purchased by a customer. Under this system, management had to precisely predict how much food had to be put on hold. Precise prediction had to be used because if there were not enough food placed on hold, this would create the problem of increase waiting times for customers, and too much food would cause waste of expired items. McDonald’s dramatically changed their strategy in order to stay competitive with other fast food organizations. In 1999, McDonald’s spent $181 million to introduce their Made for You system (Chase). Under this new system, standard food items are not held in a bin until they are sold.

In the Made for You system, modern technology greatly assists McDonald’s

operations. When a customer places an order, the sandwich items are immediately

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displayed on a computer monitor in the kitchen and a tone sounds to alert the kitchen staff. Upon a new order, an employee in the kitchen will toast the bun, and assemble the sandwich accordingly. Standard items simply list the name of the sandwich, while customized orders list the sandwich name and the desired condiments.

Once the

sandwich is assembled, it is presented to the food loading area, where a different staff person retrieves the sandwich and completes the order by adding french fries, desserts, etc. The system works the same for front counter orders as well as drive-thru orders (Phillips, Kenny). Unfortunately, the introduction of the Made for You system did not transition smoothly. McDonald’s watched its customer satisfaction drop for the three consecutive years beginning in 1999 (Chase). After further research, they realized that although the new system provided fresher food, it was not as quick as the previous system. Instead of reverting back to the old system, McDonald’s continues to fine tune Made for You and add new options to help the system work faster. Revitalization Plan In order to cope with the first ever quarterly loss that resulted from inefficient use of the Made for You system (Chase), McDonald’s has devised a new plan to increase profits. Previously, the corporation emphasized adding more restaurants to increase sales, but the new plan places emphasis on increasing sales at existing restaurants. The new plan will reduce spending, to enable more cash to shareholders through dividends and share repurchases (Cantalupo 1). Specific goals of the revitalization plan are to: ƒ

Attract new customers

ƒ

Encourage existing customers to visit more often

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ƒ

Build brand loyalty

ƒ

Create enduring profitable growth

The main goal is to increase sales by creating an exceptional customer experience. McDonald’s plans to achieve this goal by focusing on its people, products, places, prices, and promotions. Menu Along with changes in their process strategies, McDonald’s has flirted with menu changes as well. Last year, they created a “new taste menu,” where they offered a new sandwich which was offered for one week. The purpose was to offer customers a variety of options to satisfy peoples’ desire for variety. However, the new taste menu proved to be ineffective. Some customers would fall in love with an item, but it would only last one week, and they would be frustrated that they couldn’t purchase their new beloved favorite sandwich. More recent changes to the menu have proved effective. McDonald’s realized that many of today’s customers seek healthy food options, and the corporation has offered items accordingly. As mentioned under “Competition Bases,” McDonald’s now offers a wider variety of nutritious items and provides information to help its customers as well as employees make informed healthy choices.

QUALITY MANAGEMENT Speed One of the major quality management control factors includes minimizing the time that processes are done; this ensures an effective and efficient operations. Many of

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these processes are done through the use of advanced information technology, through calculating the time of the processes or even making a database to observe procedures and make improvement to their processes. One specific measurement is called Total Time in Line (TTL) which calculates the total time customers spend in the McDonald’s line, from the time the customer begins ordering until the time they get their food. TTL measurements are calculated the same way whether the customer is eating inside or ordering through drive through. The target TTL is 90 seconds. See “Appendix 1” for our group’s construction of a TTL Control Chart for a McDonald’s store. (Phillips, Eddie). Along with measuring TTLs, other programs are utilized to make the speed of the service more efficient. The Made for You system uses the Kitchen-Video-System (KVS) to support fulfilling speedy orders. The Made for You system allows the order taker to enter or delete the orders on a touch screen that lists sandwiches, as well as individual condiments, in a way that eases the data entry process for the worker. As soon as any food is ordered, from any register, the necessary food items are displayed on a computer monitor in the kitchen. The kitchen staff immediately begins to prepare the food, and then erases the orders from the screen as the food is finished. Similar to TTLs, the time is measured between when an item is first displayed on the monitor, to the time when it is served. McDonald’s continuously monitors these kitchen times in order to ensure that the Made for You system is working as efficiently as planned. See “Appendix 2” for our group’s construction of a KVS Control Chart, and “Appendix 3” for the data we were provided to construct the charts. (Phillips, Eddie). Technology not only measures performance values within the organization, but it also assists in the drive through area. When a drive through worker is taking an order, it

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is displayed automatically on a screen available to the customer outside, called the Customer Order Display (COD). The customer can review the COD and correct any mistakes, thus making the ordering process more precise. More precise orders eliminate time wasted from correcting mistakes (Phillips, Kenny). Maintaining the speed and accuracy of the processes in McDonald’s is also done through less technological techniques. McDonald’s uses different colored packages to help the employee recognize the different types of food; colored wrapped sandwiches makes it easier to distinguish what is wrapped beneath. For example, a cheese burger is wrapped in yellow colored paper and a fish fillet is wrapped in blue, while a hamburger is wrapped in white paper. Special ordered sandwiches without standard condiments come in red and white paper, with a paper receipt attached which details the items on the sandwich (Phillips, Eddie). Quality Inspections Food safety is one of McDonald’s top priorities. Every restaurant is required to check food temperatures, expiration dates, and other food safety hazards several times throughout each day of operation. The corporation sends a standardized Food Safety book to every store which includes a comprehensive list of every item that needs to be measured. Cooked food temperatures are measured to ensure that all food is cooked properly before served. Refrigerated and frozen foods are also checked to make certain that they do not get too warm and are not spoiled. Expiration dates are checked on foods frequently, if the item is expired than it is discarded. Equipment is also measured to ensure that it is functioning properly. Also included in the safety checks is the water temperature in the restroom sinks, workers must be caution because water that is too hot

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can burn customers. Food safety checks are performed several times throughout the day (Phillips, Eddie). Periodic corporate inspections, both announced and unannounced, are one of the major quality management controls at McDonald’s. The McDonald’s Corporation applies two major inspections on each restaurant per year. One is called Field Operations Review (FOR), and the second is called System Observation Review (SOR). Restaurants have two opportunities to pass the tests. If the store fails to pass the inspections on a second attempt, the corporation takes over the store and brings in better employees to ensure that the proper processes and equipment are being used properly. Both inspections are extraordinarily thorough and they are based on a point system, and points can be taken off for many different reasons. For example, points can be reduced if the credit card system is too slow, if the store’s walls have cracks, or even if the restaurant performs processes that slow the serving time (such as accepting personal checks for payment). Points will also be lost if employees are not dressed according to regulations, including wearing name tags (Phillips, Kenny). During a corporate inspection, the restaurant must also provide a food safety log of recorded entries to ensure that proper food testing is completed frequently and properly (Phillips, Eddie). Along with exhaustive corporation inspections, in-store managers also personally inspect their restaurants on a frequent basis. One example is the manager on duty’s task of completing a “travel path” every thirty minutes of his shift. During a travel path, the manager personally checks every aspect of the restaurant, including: the lobby area where customers eat; the restrooms; the grill area behind the counter; the walk-in refrigerators and freezers; the stock area; as well as the entire perimeter outside the restaurant

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(Phillips, Eddie). During the travel path, the manager also confirms that the Food Safety checklist has been completed and that all measurements fall within the specified range. Through completing travel paths, management continuously checks every aspect of the restaurant throughout the day. The Five P’s Even though many of the quality management processes in McDonald’s are done through the use of information technology, other quality management factors such as maintaining the five P’s forces (People, Product, Price, Place, and Promotion) are essential in any business. Consequently, McDonald’s Corporation uses these related forces in the sense that each P creates a chain affect on each other. The following is a list of methods using the P forces. The first force is the people working in the McDonald’s chains, which are represented by service, hospitality, and pride. The staff employed in McDonald’s are continuously trained and kept in the company to reduce the cost of training short-term inexperienced workers. Moreover, the training process has been improved to include online e-learning tools for the restaurant staff. Maintaining the workers in the company is very important to McDonald’s and the corporation rewards workers who do outstanding services. This form of incentive is motivational to the workers (Cantalupo 4). The second force is the products which include the quality, taste, and price of the goods sold. McDonald’s is trying to establish flexibility with the changing tastes and preferences in the market, Moreover, they are also seeing growing interest in premium product and wholesome food choices. The quality and safety of the food is a main entity in maintaining the quality of the food at McDonald’s (Cantalupo 4).

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The third force is place which is represented by the clean, relevant, and modern store environments. Whether it was in the main restaurant area, the kitchen, or even the restrooms, the company ensures the safety and comfort for the consumers and staff workers. The company intends on having the gold standards for cleanliness (Cantalupo 5). The fourth factor is price, which is presented in the productivity and value. The value of the product is increased when consumers gets high quality products for lower costs. Therefore, McDonald’s Corporation ensures that its customers receive the highest value of food for the price they pay (Cantalupo 5). The fifth factor is promotion which is presented in marketing, leadership, and trust. The company has already earned its reputation for good quality food so they just focus on customers cares. They do this through community involvement and their social responsible towards the environment. This process will gain the trust of loyal customers and keep them for life (Cantalupo 5). Training As the people aspect of the 5 P’s shows, McDonald’s realizes that its employees must understand their duties in order to fulfill the organization’s goals. To ensure that all employees properly perform their assigned duties, McDonald’s invests greatly in their training program. The company continues to receive prestigious awards for their leadingedge training, including the “Employer of Choice Award” from the Restaurant Business Magazine (“Restaurant Management”). New crew members go through a thorough orientation process consisting of several videos, followed by several days of direct oneon-one training by a trainer. After employees feel comfortable with the operations, they

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may be promoted to Crew Trainers.

Crew Trainers undergo further training for

specialized processes such as the grill area, front counter, drive-thru, and other areas. Shift supervisors are the next step in the organization, followed by Second Assistant Managers, followed by First Assistant Manager, and the top manager at each McDonald’s restaurant is the Restaurant Manager (Phillips, Eddie). For a graphical representation of a typical McDonald’s in-store hierarchy, see “Appendix 4.”

Training never stops at

McDonald’s, no matter which position an employee holds. Some current employees describe McDonald’s as the “best training company in the world” (Phillips, Kenny). To improve the Made for You system, McDonald’s recently introduced a strategy called “Shift into Overdrive,’ and this strategy focuses on helping shift managers work more efficiently. All McDonald’s restaurants are required to send at least one manager to participate in the new training program (Phillips, Kenny). This training mainly focuses on the human aspects of Made for You, ensuring that the system is being used as design. Since the new system requires seamless work from several people, the entire team must work together for the system to work quickly to provide food to customers. Finally, to ensure the quality of the operations, McDonald’s conducts surveys periodically to get feedbacks from customers (Phillips, Eddie). As shown throughout this section, the McDonald’s Corporation has been doing a very good job at keeping the quality of its products and services, whether it was through using computerized equipment or to train their human resources.

RAW MATERIALS The Arrival & Maintenance Our group conducted an extensive interview with Ronald Lessnau, an owner of Operation Management Project 2 Page 16 of 36

several McDonald’s restaurants located in Denver.

See “Appendix 6” for the full

interview. Through the intense process of choosing and manufacturing raw materials, McDonald’s customers can be assured of a quality product. Whether arriving via truck or train, raw materials are delivered fresh and ready to use everyday. To ensure that this freshness is passed onto the customer, each arriving package is personally inspected for damage during its travel. In addition, the condition of delivery trucks are also taken into account to make sure that meat was untainted due to a filthy meat cooler. The meat cooler should always be set at 10 degrees below zero and the meat should remain at a constant temperature of 34 to 38 degrees. While some inspections are known, others are random to ensure that quality is consistent from one delivery to the next. Grade “A” Beef and Other Meats All beef cooked at McDonald’s is of Grade “A” quality and 80%-82% lean. McDonald’s not only supports humane slaughtering of animals but also refuses to purchase dairy cows over 5 year old due to the toughness of their meat. Upon the arrival of meat, received from Otto & Sons, Inc. in Chicago, a two hour supply is taken directly to the grill side freezers which stand at a constant temperature of 0 degrees. Once placed on the grill, the meat is cooked at a specific temperature to assure the meat holds the proper internal temperature to meet the requirements of food safety and yet hot enough to hold its natural juices. Cooked hamburger patties and other meat products are stored in a humidity controlled cabinet until usage to ensure that patties remain hot and moist.

The

preparation time of a hamburger should not take longer than 90 seconds and only 35 seconds after the hamburger bun itself has been toasted. This allows each customer to

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receive his/her meal in the timeliest fashion. Produce McDonald’s hires agronomists which can spend up to two years assisting farmers grow perfect russet potatoes, 6-inches long, that produce a finished french fry which is appealing both in looks and taste. In addition, many produce items, including lettuce, have specifications that are two pages long.

With this many guidelines in place,

McDonald’s can guarantee that they are delivering to their customer the best ingredients possible. The produce delivered from Condie’s in Salt Lake City to the Evans and Colorado McDonald’s restaurant arrives via railroad to ensure that freshness is maintained.

Upon inspection, should any produce not meet the correct internal

temperature, the refrigerator is either immediately altered or the items are discarded.

SUPPLY CHAIN Examination of Supply Chain Food quality is a very important aspect at McDonald's restaurant.

Further

explaining the “Raw Materials” section, the corporation seeks fresh lettuce and tomatoes, quality buns and potatoes, pure ground beef, select poultry and fish and wholesome dairy products. McDonald’s ensures that their products are guaranteed to be the best quality before serving to their customers. McDonald’s has many suppliers who play a vital role in providing quality products to McDonald’s customers. Many Midwestern McDonald’s restaurants utilize the same supplier for products, including: meat, produce, dairy, and other products. Many McDonald’s receive their raw meat from Otto & Sons Corporation, located

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in Chicago and Oklahoma (Lessnau). McDonald’s take time and responsibility to conduct extensive research on their meat. For example, the corporation announced plans that call for its suppliers worldwide to phase-out of animal growth promotion antibiotics that are used in human medicine. They reassure consumers that they are providing beef that hasn’t been injected with steroids. For produce, many Midwestern McDonald’s locations receive their produce from Condie’s, located in Salt Lake City, Utah. They receive produce shipments as often as three to four times a week to ensure freshness. McDonald's shakes, McFlurry Desserts and reduced-fat ice cream are made from fresh quality cream, whole milk, skim milk and condensed skim milk, all of which are supplied from Robinson Dairy. Robinson Dairy is located in Colorado Springs.

Due to the

proximity of the Robinson Dairy to the city of Denver, many Denver McDonald’s receive dairy shipments quite often. McDonald’s gets it supply of tea and Danish pastries from Sara Lee, and they receive their catsup from Hunts and Heinz. McCormick provides its spices and some of their sauces, and they receive their blend of Arabica coffee beans from South America. Although many restaurants share the same supplier, McDonald’s also has many independent suppliers which were unnamed due to confidential data. See “Appendix 7” for an illustration of a McDonald’s supply chain. Supply Chain Efficiency McDonald’s enjoys a very efficient supply chain because they incorporated an electronic Foodservice Network (eFS Network). In an eFS Network, a company which operates an independent Business to Business (B2B) marketplace facilitates sales and purchases to the foodservice industry. The main eFS Network, based in Chicago, is open

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to all segments of the industry - from foodservice suppliers and distributors to multi-unit operators. It helps to maximize Internet based efficiencies and saves its participants money across the entire supply chain. The eFS Network's neutral web-based marketplace has helped to streamline information flow between participants as well as promote industry-wide technology standards. It features both a public exchange that will promote connections between participants in the foodservice industry and private exchanges that enable confidential customer-supplier interactions. The exchange focuses on U.S and Canadian foodservice distribution, which is a $150 billion industry.

In summary,

McDonald’s takes utilizes all advantages offered by the eFS network. Quality along the Supply Chain Recognizing the importance of the supply chain in maintaining quality is one of McDonald’s strengths, and therefore McDonald's aims to create long-term relationships with a limited number of supplies. Suppliers are usually monitored to ensure that they can meet McDonald's required standards. Repeat orders mean that suppliers can be confident of survival and growth, while McDonald’s consistently enjoys standardized, high quality products. McDonald's stresses its strict standards based on quality, value and cleanliness. McDonald’s also keeps track of the origin of each product, which enables the company to control every link in its supply chain. As mentioned throughout this report, food safety is very important to the company.

To ensure that the restaurants serve safe food, McDonald’s undertakes

extensive animal welfare audits to ensure that each of their suppliers adhere to their rigged standards for animal treatment and care. They do this by conducting unannounced audits, up to 100 per year, at various farms and supplier facilities. Overall, McDonald’s

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creates advantageous long-term relationships with suppliers, and ensures safe food, to fulfill its goal of making customers happy. Share Costs McDonald’s share cost between their suppliers and the corporation is much lower than other fast food restaurants. This is due to the fact that they have specifications and specialist who assists the suppliers in planting or producing the raw materials before it is shipped to the restaurants. By enforcing strict standards for food quality, McDonald’s lowers the cost between suppliers and themselves by preventing any food being shipped which does not conform to standards. By giving attention to the suppliers and presenting the standards ahead of time, McDonald’s will reduce the share costs between them. This planned reduction in costs helps achieve McDonald’s competitive strategy of providing low cost to the customers.

FORECASTING Aspects of Forecasting McDonald’s continually receives information from customers, employees, and the industry that effects short, medium, and long term decision making. Different kinds of information are received from all levels of the corporation and are used to learn more about the market movement and advertisement structure, including basic everyday processes in production and packaging of goods for the targeted markets. Forecasting is done in large by the corporation, as part of their responsibility to the franchisees and McDonald’s shareholders. Through our interview with Mr. Lessnau, we learned details concerning the basics

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of McDonald’s business and hierarchy. However, we were not able to obtain in-depth information that is used for their budgeting, marketing, advertising, detailed forecasting, and innovations of new products because it contains confidential contents. This is due to the scrutiny from people looking for flaws, bad business conduct, and other degrading allegations concerning of McDonald’s.

Everything we received was cleared at the

corporate level. Forecasts are vital to McDonald’s organization and significant management decisions. Forecasts provide the basis for budgetary planning, cost control, planning new products, process selection, capacity planning, and facility layout. McDonald’s uses a qualitative type of forecasting.

Typically,

The main information used in

forecasting the stability and future growth of the corporation is by the number of customers going in and out the door and all voiced opinions. Listening to Customers A major component of forecasting is listening to customers. Different medians of communication exist for customers to relay there ideas, opinions, concerns, and problems to the McDonald’s Corporation. At a particular location, a customer has access to employees, managers, and owners to voice their opinions and concerning their likes and dislikes about the particular restaurant. Often, McDonald’s managers and owners use open ended questions to allow customers to expand on what they want to discuss. McDonald’s offers a nationwide, toll free 800 number for customers to use when the corporation has fallen short of their expectations or when a restaurant makes a mistake with their order. Internationally, McDonald’s has a website that is not only interactive and informative throughout the 59 nations they supply to, but is a place for customers to

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voice their opinions and complaints. As Ronald Lessnau exclaimed, “We listen!” At the corporate level, qualitative forecasting can be seen even with the limited information we received. The McDonald’s market research department records data by talking with customers to find out how they like or feel about a particular ad campaign or a specific commercial. The product development department uses input on developing a new product or changing how the new product is prepared, priced, or packaged. Forecasting Success and Failure McDonald’s has been extremely accurate in forecasting trends or needs the customers want and request. Mr. Lessnau states, “McDonald’s, in the past has helped customers deal with their changing lifestyles.” An example of this is when the Egg McMuffin, the first hand held breakfast sandwich by Herb Peterson, was introduced for the first time. “It took 10 years for breakfast to be successful at McDonald’s and now McDonald’s cracks more farm fresh, grade “A” eggs daily than the largest institution in the United States, the US Military.”

Although the corporation is usually accurate,

consumers know that McDonald’s sometimes has shortcomings and is not always correct in projections. Even with using a qualitative forecast, the future is not always clear so see. Twelve years ago, due to the favoring focus group survey responses for healthier products, McDonalds developed and marketed the McLean Burger. It contained only 7% fat and was the most tasteful low fat burger on the market, costing 53 cents a pound more then the normal beef.

Unfortunately, it did not sell.

After the McLean burger’s

introduction, customers decided that the product was too expensive and did not taste as good as other sandwiches. Perhaps the failure of the McLean burger explains

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McDonald’s slow reaction to the current low carbohydrate diets. Ronald Lessnau also gave examples of when qualitative forecasting influences how he fixes errors of past business decisions at his establishment. Decisions have been made on information gained from surveys, interviews, history of products, and questionnaires. One particular McDonald’s restaurant has extended their hours as a result of many comments. Also, years ago one region reduced some of the seasoning in the chicken products, and based on interviews and focus groups that region returned back to the original product and did not take the change national. Mr. Lessnau also described that some Denver, Colorado locations went back to 99-cent double cheeseburgers years ago because of feedback they received in focus groups that were conducted as part of their normal market research. As Lessnau explained, “Sometimes you can prevent a good idea from going bad by talking to those closest to the customer, your sales people.” The data collected for these long terms and every day business decisions were from employees as well as customers.

CONCLUSION In conclusion, the McDonald’s Corporation has successfully maintained their reputation of being one of the most trustworthy fast food chains worldwide. As a result of their competitive strategy, strict quality management, efficient raw materials supply chain, and forecasting, they created an efficient operations management system. The company continues to utilize an effective operations management processes, which in turn helps them make their customers happy.

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Appendix 1 – Total Time in Line (TTL) Control Chart

Total Time in Line (TTL) Control Chart

180 160 140

Seconds

120

Average Order Time per Hour Average Daily Time

100

Upper Control Limit

80

Lower Control Limit 60 40 20

PM 7: 0

0

PM 6: 0

0

PM 5: 0

0

PM 4: 0

0

PM 3: 0

0

PM 0 2: 0

1: 0

0

PM

PM

M A 00

12 :0 0

M 11 :

10 :

00

A

A M 0 9: 0

0 8: 0

7: 0

0

A M

A M

0

Hour

Although the McDonald’s restaurant providing this data is open until midnight, we were only given data from 7:00 AM to 7:00 PM. According to this chart, the TTL’s before 9:00 AM were above the upper control limit (120 seconds). Perhaps the store was understaffed during this early morning time period, which could explain the high TTL’s. Operation Management Project 2 Page 25 of 36

Appendix 2 – Kitchen Video System (KVS) Time Control Chart

Kitchen Video System (KVS) Control Chart 65 60 55 50 Average KVS Time per Hour Average Daily Time LCL

Seconds

45 40 35

UCL

30 25 20

PM 7: 00

PM 6: 00

PM 5: 00

PM 4: 00

PM 3: 00

2: 00

PM

PM 1: 00

00 12 :

00

A

PM

M

M A 11 :

00 10 :

9: 0

0

A M

A M 0 8: 0

0 7: 0

6: 0

0

A M

A M

15

Time

Similarly to the TTL control chart, the KVS times were above the upper control limit (50 seconds) during the early morning hours. This could also be explained by a shortage of employees. For this chart, we were only provided data from 6:00 AM until 7:00 PM.

Operation Management Project 2 Page 26 of 36

Appendix 3 – TTL and KVS Data Used to Construct the Control Charts

Due to protection of confidential data, we were not given more specific data than the times. We asked for customer count data and sales data but our requests were declined due to confidentiality reasons. Operation Management Project 2 Page 27 of 36

Appendix 4 – Typical McDonald’s in-store Hierarchy

Franchise Owner

Store M anager

1st Assistant M anager

2nd Assistant M anager

Shift M anager

Crew

2nd Assistant M anager

Shift M anager

Shift M anager

Crew Trainer

Crew Trainer

Crew Trainer

Crew Trainer

Crew Trainer

Crew

Crew

Crew

Crew

Crew

Source: Phillips, Eddie

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Crew

Appendix 5 – Process Chart

McDonalds Process Chart The Preparation of a Hamburger

Employee enters the kitchen area

Employee assists the supply trucker bring all supplies into the restaurant's kitchen

Employee inspects the raw material inventory for the follow ing day

Is there enough beef in storage?

A

Does any supplies delivered today need refrigeration?

Call Otto and Sons Company in Chicago and have them send more beef

No

No Yes

Is there enough produce in storage?

Call Condie's in Salt Lake City and ask them to send more lettuce, tomatoes and onions

No

Employee cleans the preparation counter and prepare for customer's orders

Employee w aits to fill a customer's order

Yes

Is there enough condiments on the service counter?

No

Call Hunt's Ketchup for additional ketchup packets to be sent Customer enters McDonalds and approaches the register

Yes

Is there enough milk cartons available for purchase?

No

Call Robinson Dairy in Colorado Springs for a new supply delivered

Employee w aits to still fill the customer's order

Yes Employee goes outside and greets the truck carrying today's supplies from the railroad station.

A 2

A

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Yes

Place beef in freezer w hile putting the milk and produce in the refrigerator

A

B

2

Does the customer w ant lettuce and tomato on his/her Big Mac?

Customer places order

Yes Place tomato and lettuce atop the hamburger patty

No

Review orders via computer screens. T here is an order for a Big Mac.

Place top half on bun on top of hamburger ingredients. Toast hamburger bun and place it on the preparation counter.

Place the hamburger into a cardboard box designed for a Big Mac

Review the computer screen displaying orders w aiting to be filled.

Retrieve meat from holding tray.

Place the hamburger patty on the bottom half of the bun.

Yes Place Big Mac box onto a restaurant tray

Review the computer screen displaying orders w aiting to be filled.

Does the customer w ant to dine in the restaurant?

Take order to the front service counter

B Hand Big Mac order to the w aiting customer

Operation Management Project 2 Page 30 of 36

No Place Big Mac into a take out bag

Appendix 6 – Illustration of a McDonald’s Supply Chain

SERVICES

SUPPLIERS Inputs

McCormick (Spices)

Otto & Sons (Re d Me at)

SERVICE SUPPORT OPERATIONS Transformation

Sara Lee (Pastries)

Chicago, IL

Robinson Dairy (Dairy Products)

Colorado Springs, CO

Supply Network

MANUFACTURING

SUPPLIERS

Output

Chicago, IL

Bethesda, MD

Condie's

Localization

CUSTOMERS

Baltimore, MD

Tyson (Poultry)

(Produce )

LOCAL SERVICE PROVIDER

McDonalds Restaurant 6355 E. Evans Ave Denver, CO 80222

Salt Lake City, UT

MANUFACTURING

Operation Management Project 2 Page 31 of 36

DISTRIBUTION

CUSTOMERS

Appendix 7 – Interview with Ronald Lessnau “What: McDonald’s Interview Where: 3996 E Evans Ave When: Thursday, October 28, 2004

at 1:15 p.m.

Manager

Owner

Ronald Lessnau

Process Can you take us through the process of manufacturing a McDonald’s hamburger? (This consists of every step from obtaining the raw materials from various companies to create the hamburger itself to hand to the awaiting customer.) McDonald’s has a complex purchasing and quality assurance department. They have specialist in each area, beef, Poultry, Nutritionist, Chefs, Agronomists and so on. Our specs for raw quality are where the purchasing and manufacturing process begins. The specifications for lettuce are two pages long single spaced type. When McDonald’s opens a new country, they spend in excess of two years developing the supply chain. This includes everything that is used in the restaurant from milk to potatoes. Agronomists can spend two years to help the farmers grow a russet potato that is six inches long and has the solid contents that are required to produce a finished fry that looks, taste and has the mouth feel that french fries do in Colorado, Chicago or Tokyo. I can’t share the ingredients or recipes, but I can tell you that our beef is 100% Grade A and McDonald’s has higher specs than the USDA. McDonald’s inspectors work daily at all the beef plants that we purchase beef from inspecting the manufacturing processes and assuring quality control is in place. McDonald’s has set the industry standard in Quality control and assurance. McDonald’s has worked with the CDC to set standards for the humane slaughter of cows and no dairy cow over 5 years old will be used for beef supply in the McDonald’s food chain supply. The hamburgers are 80 to 82% lean beef. When the hamburger patty is formed at the plant, it is cryogenically frozen and stored at a minimum of 10 degrees below zero. It is ship via rail car or truck at the same temperature to different distribution systems around the country. Each of these centers are privately owned by independent business people who must comply with McDonald’s quality specs for handling, storage, ordering, product rotation, (first in first out) and inventory turn. To assure high standards are maintained during the delivery to the restaurants and proper handling of products during that process as well the driver and McDonald’s mangers check the product, as it is unloaded. They are looking for condition of the cases as they come off the truck, condition of the truck itself. Is it clean and in good repair inside and outside? Has it been cleaned before it left the yard to deliver to the restaurants? They check the internal temperature of the frozen meet to assure it arrives at the proper temperature. It must be kept at minus 10 degrees at all times. They check the temperature and condition of the refrigerated product as well. It has to meet the dame rigorous standards. It must be delivered between 34 to 38 degrees. McDonald’s has quality assurance personnel who inspect the distribution systems and spot check deliveries as well. Some inspections are announced and some are random with no notice. At the restaurant, once the product is received the same standards apply for product rotation, temperature and storage as the distribution centers. We check the temperature of our freezers and refrigerators twice a day and record those temperatures in a book that becomes a permanent Operation Management Project 2 Page 32 of 36

record of quality control and safety for our restaurant. The restaurants are required to keep those books on premise for 6o days before they can be taken to record storage. Once the product reaches our back door we take two hour supply of frozen meat to our grill side freezers where the temperature is zero and the meat is grilled on our grill at a specific temperature and time to assure a properly cooked patty that has good visual characteristics, has the proper internal temperature for food safety and quality, is hot and maintains its natural juices. The cooked patties are held in a temperature can humidity controlled cabinet that keeps the patty hot and moist. From there the patty is placed on the properly finished bun with the ingredients or toppings the customer requested. The sandwich is prepared and served to the customer as fast as possible. From the time the bun is toasted the sandwich is finished with 35 seconds. Our standard for the time the customer finishes placing their order, they should have their sandwich in 90 seconds or less. We check the temperature of the toasted buns daily to assure the toaster is properly calibrated and the finished product meets the desired quality specs McDonald’s set. We check the internal temperature of all finished products, meat, chicken, filet, beverages etc twice a day to assure quality and food safety. These temperatures are recorded in the book mentioned earlier and recorded. Any product that does not meet the internal temperature must be corrected immediately. We check the procedures of the employees as they prepare the products to assure they are following the correct procedures. To maintain quality control on the restaurants my organization does inspections both announced and unannounced to review procedures and inspect the whole process described above. McDonald’s does inspections on the restaurants three times a year to review all procedures. Each restaurant is graded on these visits and the grades are used to determine eligibility for growth to new franchised locations and the ability to be rewritten at the end of your franchise term. Failure to meet these requirements could result in default of your franchise agreement. Raw Materials What companies do you receive your raw materials from? What can you tell us about the companies that supply your raw materials? What form of transportation is taken to ensure that the food arrives at your store fresh and not perished? Do you receive your raw materials from the company directly or from the McDonald’s headquarters? McDonald’s receives its raw materials from different vendors depending what part of the country you’re from. All vendors work off the same specifications. The meat we use in Denver is from Otto & Sons Inc. They have meat plants in Chicago and Oklahoma that supply meat to our distribution center. We receive our produce from Condie’s in Salt Lake City, Milk from Robinson Dairy in Colorado Springs. Sara Lee provides our tea and Danish. Hunts and Heinz provides our catsup. McCormick’s provides our spices and some of our sauces. McDonald’s has many suppliers of raw products. Those are just a few. McDonald’s Corporation does not provide raw materials or products to the Licensee. Ray Kroc had a basic belief that McDonald’s have the highest quality specifications and hold suppliers to those specs versus providing products to the Licensee’s and having a conflict between quality and profit margins. He wanted the Company to be successful and provide the framework and procedures for the system. He wanted the best products used at the best price and knew that independent business people who had their time, money and passion in something would be better for the system, the customer and the owner.

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Customer Service/Surveys Do you use customer feedback to improve your service? If so, how? Having you ever directly contacted a customer based on their feedback information to get a better understanding of their comment? Who directly uses and implements customer’s comments? McDonald’s listens to customers in many different ways. We talk to some of our customers in the lobby and find out what’s on their mind and how they like what’s going on in the restaurant. Sometimes asking an open ended question allows the customer to expand on what they want to talk about. We listen! We have an 800 number that customers use to call when we fall short of their expectations or when we make a mistake with their order. McDonald’s has a web site that can be visited by customers and their they can voice their opinion, voice complaints or learn more about what McDonald’s is doing as a company in many different areas. McDonald’s has nutrition, public relations, charity work and donations, education and scholarships to mention a few. When a customer calls about a service issue or any comment, my procedure is they will receive two phone calls, one from the restaurant manager and the other from one of our supervisors or myself. We want to hear comments from our customer. It is important to the lifeblood of any business. We have extended our hours as a result of many comments. We have gone back to different products because of customer feedback. Years ago we reduced some of the seasoning in our chicken products in a test market. Based on the interviews and focus groups that were conducted we went back and didn’t roll it out nationally. We went to all white meat nuggets because of focus group studies. In Denver we went to the 99-cent double cheese years ago because of feedback we received in focus groups that were conducted as part of our normal market research. We talk to customers all the time. This may sound simple but our family and crew are customers too, and we ask how they feel about new products or procedures. Sometimes you can prevent a good idea from going bad by talking to those closest to the customer, your sales people. Anytime a customer calls, writes or sends an e-mail, it’s an opportunity to fix a problem and be responsive to their needs and learn more about how they feel about your business. They talk to many people and can be an ambassador for your business or can present you in a bad light. Customer comments are used by different departments at the corporate level, market research will talk to customers and find out how they like or feel about an Ad Campaign or a specific commercial. Product development may use input on developing a new product or changing how a new product is prepared, priced or even how it’s packaged. Forecasting What are your goals for this particular store? What do you forecast your store will be doing in the future? Introducing new products? What methods will be used to carry out these store forecasts and why? IDEAS: Better customer attention, better products? Are the forecasting products a reflection of the individual customers’ desires and needs? In the past, how accurate have you been at forecasting changes in your store? Hoe do you deal with forecasting errors? Forecasting in the sense you’re describing is done in large part by the corporation, as part of their responsibility to the franchisee’s and McDonald’s shareholders. Each local restaurant forecast or project the impact of the new product that is being marketed and / or introduced.

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The goal for my particular restaurants is to exceed the projections of new product launches. I strive to implement all products better because of the initial capital investment required or the investment in training, procedures and marketing that I have to spend. Increasing the unit movement of any product can result in increased sales and profits. I can’t share what new products McDonald’s will be rolling out in the upcoming months or next year, so that is a tough question to answer. I can say that I am always working on ways to improve everything we do that affects the customer. Some improvements are slow and others are subtle. Nonetheless, the grade we receive is from the customer’s pocket book. If we do things right and improve, customers let us know. When we launch a new product, such as Chicken Selects, we increase the advertising budget and focus the marketing on specific demographics. We target the audience then the media they will most likely use, radio early a.m. or drive time. Television is another media, now what program and what time slot? Print media is used as well, will it be outdoor billboards, newspaper or magazines. Next we sample the product with our employees so they know what it is and how it tastes. After soft launch, we start the full marketing campaign and product test or give samples to our customers on a specific day across the TV market. We use radio remotes and bring product to local radio stations for them to eat so they can talk about the product while they are reading the script for our live commercials. After the first wave of marketing McDonald’s sometimes do more focus group surveys to determine how well the launch went. Sometimes customers tell us during these introduction periods that the creative didn’t get them interested in the product or it wasn’t believable, in those cases McDonald’s may modify the creative or the commercial. Case in point was the McLean Burger we sold 12 years ago. It had 7% fat. Was the best low fat burger on the market, cost 53 cents a pound more for the meat than our normal beef? Customers told us they wanted a lean burger that was healthier. McDonald’s gave them the best lean beef burger available. It didn’t sell! Customers voted with their pocket books and said, “We want food that taste good.” Fat adds flavor and eaten in moderation with a balanced diet is good for you. This is a case where McDonald’s listened to a few customers and then listened again. I believe this best describes how we listen, forecast and move with the trends in the market place. It best describes how we react to mistakes and how we try our best to be successful. McDonald’s owes it to its customers, licensee’s suppliers and its shareholders to listen, react and be a responsible leader. In summary, McDonald’s has been extremely accurate in forecasting trends or needs the customers want and request. Not trying to be arrogant, but McDonald’s in the past has help customers deal with their changing lifestyles. The Egg McMuffin developed by Herb Peterson, an owner operator in California introduced hand held breakfast sandwiches for the first time. It took 10 years for breakfast to be successful at McDonald’s and now McDonald’s cracks more farm fresh, grade “A” eggs daily than the largest institution in the United States, the US Military.”

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Bibliography “Bag a McMeal.” Accessed online on October 26, 2004 at: http://www.findarticles.com/ p/articles/mi_m3190/is_50_35/ai_80748686. Cantalupo, Jim. “McDonald’s Revitalization Plan.” October 29, 2003. Accessed online on October 26, 2004 at < http://www.mcdonalds.com/corp/invest/pub/ revitalization.RowPar.0001.ContentPar.0001.ColumnPar.0004.File.tmp/mcd_revit alization_plan.pdf>. Chase, R., Jacobs, F., Aquilano, N. Operations Management for Competitive Advantage (10th Edition). McGraw-Hill Irwin; Boston; 2004. Howard, Lisa. “Suppliers.” June 19, 2003. Accessed online on November 8, 2004 at: . Kerin, R., Berkowitz, E., Hartley, S., Rudelius, W. Marketing (7th Edition). McGrawHill Irwin; Boston; 2003. Lessnau, Ronald, Current McDonald’s Owner. Personal Interview, October 28, 2004. “McDonald’s Worldwide Corporate Responsibility Report 2004.” Accessed online on October 26, 2004 at: . Phillips, Eddie, Prior McDonald’s Manager (1998 – 2003). Personal Interview, October 27, 2004. Phillips, Kenny, Current McDonald’s Manager. Personal Interview, October 27, 2004. “Restaurant Management.” McDonald’s Restaurant Management Careers. Accessed online on October 27, 2004 at: http://www.mcdonalds.com/usa/work/ manage.html. Zuber, Amy. “Big Mac, Big Value: McD to Lower Prices;” December 10, 2001. Accessed online on October 26, 2004 at http://www.findarticles.com/p/articles /mi_m3190/is_50_35/ai_80748686.

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