mcdonalds case study operations management

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Thursday, 18 november 2010, operations management (mcdonalds case study).

INTRODUCTION - OPERATIONS MANAGEMENT:

Operations management can be defined as the planning, scheduling , and control of the activities that transform inputs into finished goods and services. In other words, it is ‘a field of study that focuses on the effective planning , scheduling, use, and control of a manufacturing or service organisation through the study of concepts from design engineering, industrial engineering, and management information systems, quality management, production management, accounting, and other functions as the affect the operation.’ ( APICS Dictionary , 1995)

Operations management concerns making the most efficient use of whatever resources an organisation has so as to provide the finished goods or services that its customer need in a timely and cost effective manner. (Barnett ,1996).

Operations management is related with the strategy of the organisation. In this coursework, we will demonstrate the relationship between the operations management and the strategy of the organisation with the help of a corporate entity.

The corporate entity chosen is McDonald's Corporation .

COMPANY BACKGROUND

McDonald's Corporation is the world's largest chain of fast-food restaurants . The business began in 1940 , with a restaurant opened by siblings Dick and Mac McDonald in San Bernardino , California . Their introduction of the "Speedee Service System" in 1948 established the principles of the modern fast-food restaurant . Today McDonald's restaurants are found in 120 countries and territories around the world and serve nearly 54 million customers each day.

( Source: http://en.wikipedia.org/wiki/McDonald's )

In all its restaurants around the globe, there are a number of operations that has a relationship with the overall strategy of the organisation. Let us know discuss the key operations decisions and its relationship with the strategy.

Operations Management: An Active Learning Approach By John Bicheno

PRODUCT PLANNING

Organisations exists to provide products and services which can be purchased by other organisations or an individual. Therefore planning of products and services is one of the most important operation of any organisation. It involves designing products with both economy and quality in mind, which a customer will find attractive, be able to understand and quickly able to use with minimum risk and which delights him or her by its performance or flavour or durability etc. ( Bicheno , 2002; p51)

In McDonald’s Restaurants, product planning is a key operation. It has to keep on adding new products to its menu so as to meet the needs of the customers as their needs and preferences are constantly changing. For instance, the increasing preference of consumers towards healthy food made the restaurant add healthier food items to its menu. Similarly it has to add new products for different seasons, for examples hot coffee in winter and milkshakes in summer.

CAPACITY PLANNING

The second operation decision important for organisations is capacity planning. Capacity planning and control is the task of setting the effective capacity of the operation so that it can respond to the demands placed upon it. This normally means determining how the operation should respond to fluctuations in demand. Operations managers usually distinguish between short, medium and long-term capacity decisions. For short- and medium-term capacity planning, the capacity level of the operation is adjusted within the fixed physical limits that are set by long-term capacity decisions. This is also referred to as aggregate planning and control because it is necessary to aggregate the various types of output from an operation into one figure. (source: http://www.mas.dti.gov.uk/content/resources/categories/fact/FACT_Capacity_planning.html )

In McDonalds Restaurant, the operations managers have to set its capacity of making food items in such a way that it responds quickly to the demands of those items in peak hours which is very important for a fast food restaurant like McDonalds. It also have to make sure that it has enough stock of ingredients to prepare food items which is very important because if one ingredients fall short then the whole process of making food may halt. For instance if the buns required for making hamburgers falls short then the restaurant may not be able to sell any hamburgers even if it has enough quantities of other ingredients.

LOCATION PLANNING

Location planning is one of the important operations that every organisation carries out and it is essentially one of the critical success factors for any organisation. Success or failure of any organisation may well depend on the location where it is situated. Therefore it is very important for businesses to choose an ideal location. Businesses may choose location on the basis of various factors such as proximity to the source of raw material, cost-effectiveness, proximity to customers or suppliers, competition in the area, transportation availability and cost, availability of resources, and availability of right labour.

McDonalds Restaurants also have to plan their location in such a way so that maximum customers visit their restaurants. Therefore McDonalds prefer locations such that it can have large customer base, transport access and availability of parking space. Moreover it also prefers location that are suitable for raw material delivery, that is availability of ample space for deliveries of raw material.

PROCESS PLANNING:

After developing the product the businesses have to develop processes for making and supporting the product. Organisations have to identify appropriate processes which will be needed to achieve required level of output of the planned goods and services at right quality standards. Organisation considers both the traditional methods in which the organisation has handled and processed its products and services and the possible alternatives which currently present themselves. That is, it considers the advancement of technology, computing power, and evolving managerial expertise. (Bicheno, 2002; p99)

In McDonalds restaurant also, the operations manager develop and establishes the process of cooking food items so that food is prepared using that method which helps them to maintain the speed and the quality of the food. Moreover it also designs processes so that the health, safety and hygiene issues are taken into consideration. Also the managers keep on introducing latest equipments with the advancement of technology so as to bring pace, perfection and quality in the product.

LAYOUT DESIGN:

Layout is the arrangement of facility to provide working, service and reception, storage and administrative areas. The layout is designed by traditional techniques using templates, scale plans, string diagrams, and travel charting as they have been proved as low-cost methods of achieving either optimal or near optimal layout plans. Poor layouts can greatly reduce the overall capacity and overall productivity. Therefore care must be taken by organisation when designing layout. (Bicheno, 2002; p121)

In McDonalds Restaurant also layout designing is a very important operation. A proper layout of the equipments in the kitchen is very essential to ensure preparation of quality food in less time. It also designs its layout keeping in mind the health and safety issues. It also designs layout in such a way that needs of supervision is minimised. Another factor that is considered is the cost of production which also depends on the layout.

Job design consists of formal specifications and informal expectations of an employee’s work related activities. The job design should try to meet the needs of both the job holder and the organisation. Thus each job must be reasonable compromise of technical, economic, and behavioural feasibility.

Technical feasibility : The person holding the job must be capable of performing the required tasks with the resources available to them.

Economic feasibility: The cost of providing a salary to the employees, providing equipment and maintaining the organisational environment must remain within the organisation’s capabilities.

Behavioural feasibility: The feeling that people derive from a job affects their motivation to perform it.

(Greasley, 1999; p75)

Job designing is also an important operation in McDonalds restaurant. Each employee is designed a particular set of jobs. For example, some crew members cook food items in kitchen, some crew member work on the counter, while others look after the customers in the lobby. Also there are employees who manage all the crew member and look after overall wellbeing of the restaurant. While designing these jobs the technical, economical and behavioural feasibility is taken into consideration.

SUPPLY CHAIN MANAGEMENT

In the simplest terms, supply chain management (SCM) lets an organization get the right goods and services to the place they're needed at the right time, in the proper quantity and at an acceptable cost. Efficiently managing this process involves overseeing relationships with suppliers and customers, controlling inventory, forecasting demand and getting constant feedback on what's happening at every link in the chain. (Kay, 2001; p1)

In McDonalds Corporation , the restaurants also have certain suppliers who supply them the with the raw materials like buns, beef, patties, ketchup, sauce, mayonnaise, disposable cups, food packaging materials etc. Therefore it has to manage its relationship in a effective manner so as to get the raw materials at the right time, in proper quantity, and at acceptable cost.

INVENTORY MANAGEMENT

Inventory management is another important operation of any organisation. It involves choosing the best method of inventory control. While choosing the method of inventory control, the organisations must keep in mind the expected demands of the products. The basis on which the organisations choose their methods of inventory control may differ but the common idea is to ensure that the mix of inventory types is able to satisfy customer needs and deliver the required profitability and cash flows.

In McDonalds the inventory is managed on the basis of First-In-First-Out basis. This is because most of the inventory consists of perishable items. Therefore delivery of inventory happens thrice or more times a week depending on the business of the restaurant. Moreover inventory is stored in freezer with proper packaging so as to ensure freshness of the food items. All this activities comes under inventory management of the organisation.

QUALITY MANAGEMENT

Quality management consists of maintaining the quality of the goods and services so as to meet the minimum requirements laid by the industry. Moreover it is important so as to keep up the reputation of the organisation. To manage and maintain the quality of the products and services the organisation may adopt a number of practices like quality checks procedure etc.

Quality in McDonald restaurant is very important because of two reasons. Firstly because of the legal requirements of the quality of food served. Secondly ,to keep up the good reputation which McDonalds restaurants have earned over the years. Quality of food can be very difficult to maintain and therefore McDonalds restaurant carry on a number of practices to make sure that quality food is served. Some of these practices are the visits by the food inspector from the head office, supervisor checks etc.

MAINTENANCE

Maintenance means preservation of the things in the organisation. In simple words, maintenance is way of protecting your production workers, office workers, drivers, and all the other users of your organization’s assets. (http://www.maintenanceresources.com/ReferenceLibrary/MaintenanceManagement/The_Battle_of_Maintenance.htm)

In McDonalds, there are several equipments that are used for the preparation of food. Therefore it is very important to maintain and service those equipments so as to maintain the quality of the product, safety of the employees and to avoid further costs of repairing machines. Another important things that needs maintenance are hygiene, costs, quality etc.

CONCLUSION:

Therefore we conclude that operations management is very important for any organisations as they have a relationship with the overall strategy of the organisation. Operations management contributes to the strategy and therefore helps the organisation to gain competitive advantage. For instance, process planning can help the organisation reduce cost and gain cost advantages and therefore gain competitive advantage. Therefore the organisations must effectively manage the operations of the business as it has a massive effect on the strategy of the organisation.

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Mcdonalds case study

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role of operations management

● strategic role of operations management - cost leadership, good/service differentiation

Operations → business processes that involve transformation/production - Production = conversion of inputs into outputs

Customer focus → minimising waste, fair value for labour, low cost, reflect changes in consumerism

Profit centres → aspects of the business that derive revenue and profits Cost centres → areas which cost is attributed Cost Leadership → aiming to have the lowest cost & be most price-competitive

CASE STUDY: McDonald’s → Mcdonald9s invested in a global training program (Hamburger University) to ensure efficiency and reduce overall costs

● goods and/or services in different industries

Goods/Services Differentiation Standardisation → making products that are all the same

Product Differentiation → distinguishing products

Differentiating Goods Differentiating Services

Product features

Product quality

Augmented features (add-ons or benefits)

Time spent on a service

Level of expertise

Qualifications and expertise of the service provider

Quality of the materials/technology used in service delivery

Goods Differentiation Perishable goods → short lead times, distributed fast

Non-perishable goods → operations similar in all industries, more durable goods Self-service → encouraging customers to take initiative

● interdependence with other key business functions Interdependence → mutual dependency on one another

Interdependence with...

Marketing → producing goods based on market needs, marketing based on cost, product design affects transformation

Finance → cost of production, labour costs

Human Resources → staff needed for production, technology changing operations, outsourcing specialists

influences ● globalisation, technology, quality expectations, cost-based competition, government policies, legal regulation, environmental sustainability

Globalisation → removal of trade barriers between nations, operating on an international scale & develop

international influence

CASE STUDY: McDonald’s → McDonalds has 37,000 restaurants in 120 countries → in 2018, McDonald9s ranked 11th on Forbes list of most valuable brands

→ 2017 report showed US$91billion in sales, showing success in maintaining competitive advantage by adapting to global conditions

Supply chain management → managing the flows of goods and services, including transformation. - Businesses need a reliable supply chain that is responsive to changes

Technology → the design, construction and application of innovation devices, methods and machinery in the

operations process. - Administrative level → organisation, planning, decision making - Processing level → manufacturing, logistics, quality management, inventory management

CASE STUDY: McDonald’s → digital menu boards, automatic drink dispensers, online ordering apps

Quality → how well designed, made and functionable goods are. - Expectations that people have of business determines the way products are designed, created and delivered.

CASE STUDY: McDonald’s → after complaints of coffee quality, McDonalds made a promise in 2011 that coffee would be barista made. → in 2018, Mcdonalds started using fresh (not frozen) beef patties, despite taking longer to cook, quality was improved

Cost-based Competition → derived from the breakeven point Fixed costs = costs that do not change regardless of business activity

Variable costs = costs that vary in relation to business activity/level of production

CASE STUDY: McDonald’s → in 2015, Mcdonalds dominated western Europe, other businesses attempted to compete by lowering their prices → close focus on cost, helps them to maximise profits

Government policies & Legal Regulation → Work Health and Safety Act 2011, Fair Work Act 2009,

Superannuation Guarantee Act 1992, Racial Discrimination Act 1975, Taxation Act 1953 → influence business operations

CASE STUDY: McDonald’s → McDonalds is bound by obligations in relation to marketing, advertising, product safety and quality guarantees (Australian Consumer Law 2010) → they must ensure conscionable conduct at a local, state and federal level

Environmental Sustainability → business operations shaped around sustainable practices

CASE STUDY: McDonald’s → in 2012, McDonalds opened the Australia's first Green star accredited restaurant in VIC

● corporate social responsibility CSR → doing more than just complying with the law, but having higher respect for people, community and

environment

Triple Bottom Line → financial profitability, social impact and environmental impact of a business.

Transformation = the conversion of inputs into outputs

the influence of volume, variety, variation in demand and visibility (customer contact)

→ volume = how much product is made, volume flexibility is essential to responding to changes → variety = the mix of products made & services delivered → variation in demand = businesses aim to forecast demand to that adjustments can be made accordingly

→ visibility (customer contact) = contact through surveys, interviews, warranty claims and letters (customer feedback shape what the businesses produce)

CASE STUDY: McDonald’s → volume = changing volume of seasonal products (eg. frozen drinks and ice cream) to maintain short lead times → variety = having breakfast, beef and chicken burgers, 16 drinks, 7 wraps and salads, 50 mccafe items → variation in demand = having contact to fast produce when fluctuations occur → visibility = customers can give online feedback using an online form or customer service line

sequencing and scheduling → help to structure the transformation process → sequencing = the order in which activities i the operations process occur

→ scheduling = the length of time activities in the operations process take

CASE STUDY: McDonald’s → McDonald9s sequences its process so that assembly of a burger can be managed in a way that is efficiency and consistent → Manages timing of making friends, beef patties, nuggets, dispensing drinks

gantt charts
critical path analysis → gantt charts and CPA are scheduling tools.

Gantt charts = outlines activities that need to be performed, the order in which they need to be performed and their duration

Used for processes that have several steps
Advantages: forces managers to take appropriate steps, makes it easier to monitor progress

Critical path analysis = scheduling method that shows what takes need to be done, duration and what is required

to do the tasks

The critical path is the shortest length of time it takes to complete all tasks necessary

technology, task design and process layout Technology = application of science or knowledge that enables people to do new things

Office technologies → mobile phones, computers, personal digital assistants, EFTPOS machines

Manufacturing technology → robotics, computer-aided design & computer-aided manufacturing

Task Design = planning the flow of activities

Define what needs to be done, identify who needs to do it, breakdown takes int specific skills, allocated time and difficulty elements

Skills audit → formal process used to determine the present level or skill or skill shortfalls

Workplace layout → the way in which machinery and technology is orientated in the operations plant

Process Layout = arrangement of machinery so that they are grouped together by the function they perform

CASE STUDY: McDonald’s → technology - online ordering on the 8mymaccas9 app → task design - greet the customer, take their order, repeat order back, state the total → process layout - kitchen layout is based on appliances used to make a specific product

monitoring, control and improvement

Monitoring → measuring actual performance against planned performance (typically measuring KPIs) Control → when KPI9s are assessed and corrective action is taken if required (comparing what was intended to what actually happened)

Improvement → systematic reduction of inefficiency, wastage, poor work processes and bottle necks

Bottlenecks is a process which slows down the overall processing speed

● outputs → the end result of business efforts - the good/service provided or delivered to the customer

→ must be responsive to customer demands

customer service

→ how well the business meets and exceeds the expectations of the customer → if not satisfied, processes need to be reviewed

CASE STUDY: McDonald’s → seeks customer feedback thorough in-store questionnaire → recruiting staff that are customer-centred and friendly

→ a promise made by the business that they will correct any defects in the goods/services

● operations strategies

quality, speed, dependability, customisation, cost

Quality → the quality of a good or service determined by customer expectations - Quality design (high grade materials, functionable), quality of conformance (meeting standard of prescribed design), quality of service (reliability of service, time efficiency)

Speed → the speed of response (time between product request and getting it) - Aiming to satisfy customer demands as fast as possible - Goals = reduced wait times, shorter lead times, faster processing

Dependability → how reliable products are - How long they can be used before they fail - Eg. warranty claims Flexibility → how quickly operations processes adjust to changes in the market

Customisation → creating individualised products Cost → the minimisation of expenses so operations is cheap as possible

Eg. through new technology

CASE STUDY: McDonald’s → quality - fresh meat and vegetables → speed - 11 seconds to toast a bun, 20 seconds to assemble burger, 14 seconds to wrap burger → customisation - create your taste menu → cost - changes in minimum wage in the US caused Big Mac9s to go from $3 to $4 (17% increase)

● new product or service design and development Design → new products, innovations and ideas

Development → implementing and testing ideas

● technology

leading edge, established

Technology → helps gain competitive advantage by gaining efficiencies to improve operations

Leading edge = the most advanced technology (helps faster products, reduce waste, efficiency)
Established = technology that is developed and widespread (eg. barcodes, computers)

CASE STUDY: McDonald’s → drink-dispensing machines to improve HR costs and efficiency

● inventory management

advantages and disadvantages of holding stock, LIFO, FIFO, JIT

→ monitoring and controlling all the stock and when it comes in and when it goes out

Holding stock = just in case stock, held as reserve in case of interruptions or unexpected increase in demand - Advantages : reduce lead time, shown as an asset on the balance sheet - Disadvantages : costs of storage, cost if stock never sells

LIFO = last in first out, stock purchased most recently and used first

Advantages : matching revenue to costs, simple to operate, suitable for when prices are rising
Disadvantages : inventory valuation does not reflect current prices

FIFO = first stock purchased, the oldest and will be used first - Advantages : the freshest stock is being sold - Disadvantages : never shown as an asset

JIT = ensures that the exact amount of inputs will arrive as they are needed

Advantages : saves money, shrinkage costs
Disadvantages : allows responsiveness to changes in demand

CASE STUDY: McDonald’s → throw out unsold chips after 7 minutes and burgers after 20 minutes → using stock control system called manugistics

● quality management

control, assurance, improvement

→ the degree of excellence of a product/service Management = processes undertaken to ensure consistency, reliability, safety and fitness Control = refuses problems and defects in the product by using inspections Assurance = use of a system to ensure that standards are achieved Improvement = focus on continuous improvement and total quality management

Total quality management (TQM): managing the entire business to deliver quality to customers

Commitment and responsibility from employees
Achieved through benchmarking, employee empowerment, customer focus

CASE STUDY: McDonald’s → control: testing sample of outputs to predetermined standards → assurance: McDonald9s Supplier Quality Management (SQMS)

● overcoming resistance to change

financial costs, purchasing new equipment, redundancy payments, retraining, reorganizing plant layout, inertia

→ changes in the external environment (legislative, regulatory, economic conditions, technological) → internal environment = staff & technology

Financial cost → organising change impacting profits, dividends, share profits Purchasing new equipment → necessary to keep up with technological advancements. Helps to imptorb

flexibility, speed, consistency, quality and reduce waste - financial cost

Redundancy payments → paying workers who are no longer required after a change is made - financial cost Retraining → on or off the job, gaining new skills (eg. software operation) - is time and cost inefficient

Reorganizing plant layout → is a resistance factor because of the cost or transporting, powering and placing Inertia → psychological resistance to change (fear of uncertainty)

Kurt Lewin’s freeze/change/unfreeze model 1. Freeze - breaking down the forces supporting existing technology, preparing for change 2. Change - new prodoceedsures communicated and implemented 3. Refreeze - managers offer positive view on changes

John Kotter’s eight-step model

Establish sense of necessity 5. Empower people to fulfill vision

Form a guiding group 6. Recognise and reward achievements

Create a vision 7. Consolidate improvements

Communicate vision 8. Institutionalise the changes

● global factors

global sourcing, economies of scale, scanning and learning, research and development

→ broad reference to coursing business supplies or services without being constrained by location

→ advantages : cost advantage, access to new technologies, access to other resource → challenges : possible relocation of aspects of operations, storage and distribution

Economies of scale → cost advantages that can be gained by producing on a larger scale

Scanning and learning → scanning the global environment and learning from the best practices of businesses

around the world

Research and development → helps create leading edge technologies and create innovative product and solutions

CASE STUDY: McDonald’s → R&D for McDonalds is a constant process focusing on the external environment → they engage with suppliers, customers & franchisees to ensure product satisfy stakeholders

CASE STUDY: McDonald’s → a growing 8foodie9 mentality has forced McDonalds to offer more healthier options (salads, wraps) → legal regulations mean the publishing of calories on foods

● consumer laws → in 2011, a single national consumer law was introduced (Australian Consumer Law → ACL) → covers: product safety, labelling, market prices, price monitoring, industry codes, mergers & acquisitions → breaches of the act result in the ACCC issuing on the spot fines of thousands of dollars

deceptive and misleading advertising Bait & switch advertising → advertising a product cheap to entice customers, and when they run out customers have to buy a more expensive product. Dishonest advertising → using deceptive words saying that a product has a quality that it does not

price discrimination → setting of different prices in separate markets (eg. different geographical location)

implied conditions → unspoken and unwritten words of a contract → eg. the product must be of acceptable quality, match the description, care in delivering service

warranties → designed to offer a degree of protection to the customer if the good is faulty or the service is not carried out with care.

● ethical – truth, accuracy and good taste in advertising, products that may damage health, engaging in fair competition, sugging → conduct that goes above legal requirements

Truth & accuracy in advertising → advertising - a paid, non-personal message communicated through a mass medium → advertising should be as truthful as they are held morally responsible → shouldn't have: untruths in concealed facts, exaggerated claims (puffery), vague statements

Good taste in advertising → what is acceptable and not offensive to people → being aware of a younger audience

Products that may damage health → federal codes restrict the advertising of junk foods on channels for kids

Engaging in fair competition → Competition & Consumer ACt 2010 (prohibits: cartel conduct, misuse of power, exclusive dealing, resale)

Sugging → selling under the disguise of a survey (market research)

CASE STUDY: McDonald’s → in 2012, McDonalds was found to have breached Spam Act 2003 by sending text messages regarding happy meal deals, with no opt out option → in 2015, they were accused of not good taste in advertising by focusing on the toy in the happy meal rather than the food itself

marketing process ● situational analysis – SWOT, product life cycle SWOT - The identification and analysis of the internal strengths and weaknesses of the business and the opportunities and threats from the external environment. - A business must constantly monitor changes, looking for opportunities to exploit and threats to avoid

Product Life Cycle - Stages that a product passes through: introduction, growth, maturity and decline

CASE STUDY: McDonald’s → strengths = goodwill, global brand, market share → weaknesses = poor operating performance, protecting intellectual property → opportunities = expansion into countries, reinvesting in restaurant, SMA → threats = negative publicity, commodity price increase, interruptions to supply chain

● market research

The process of systematically collecting, recording and analysing information concerning marketing problems
3 step process → 1. Determining information needed, 2. collecting data from primary(eg. surveys) and secondary (eg. industry reports) sources, 3. Data analysis & interpretation

CASE STUDY: McDonald’s → in 2005, asked 2602 people in Australia what they hope to see in McDonalds products → found more people wanted healthier options → as a result they improved use of vegetable oil, salt reduction, seared chicken

● establishing market objectives

Increasing market share → gaining share in the total industry sales for a particular product
Expanding the product mix → expanding product range to better understand customers9 needs
Can be done through asking customers what they want, anticipating market trends, R&D.

CASE STUDY: McDonald’s → 3 pillar approach = 1. Retaining existing customers, 2. Regaining lost customers, 3. Converting casual customers

● identifying target markets Target market → a group of present and potential customer to which a business intends to sell its products to

Customers in target market share certain characteristics Mass marketing → seeking a large range of customers, developing a single marketing mix, one distribution channel to reach all customers Market segmentation → total market is subdivided into groups (demographic, geographic, psychographic) Nicha market → narrowly selected, needs often neglected by large businesses

CASE STUDY: McDonald’s → UK target market = families and busy workers

CASE STUDY: McDonald’s → demographic = happy meals having toys → psychographic = having healthier options → geographic = options based on location (eg. Japan has teriyaki mcburger, shrimp fried and chocolate fries)

● products – goods and/or services - branding - packaging Products → goods and services that can be offered in exchange for the purpose satisfying a need or want

A combination of tangible and intangible components
Total product concept: the tangible and intangible benefits that a product possesses Branding → a name, term, symbol or logo that identifies a specific product and distinguishes it from its competitors.
Brand name is that part of the product that can spoken
Powerful marketing tool
Helps to identify specific product, evaluate product value, gain repeat sales, encourage customer loyalty Packaging → involves the development of a container and the graphic design for a product
Preserves the product, protects the product, attracts consumers attention Labelling → presentation of information on a product or its packaging
name , description, date mark, country of origin, warnings

CASE STUDY: McDonald’s → people are able to recognise the golden arches → using package to make claims (8beef: great taste9 , 8100% beef9)

● price including pricing methods - cost, market, competition-based - pricing strategies – skimming, penetration, loss leaders, price points - price and quality interaction Price refers to the amount of money a customer is prepared to pay in exchange for a product.

Price too high can mean loss of sales, price to low gives a bad quality impression
Pricing methods are influenced by internal and external factors Cost-based → derived from the cost of producing or purchasing a product then adding a mark-up Market-based → setting prices according to the interaction between levels of supply and demand Competition-based → the price covers costs and is comparable to the competitors price.
Either below, equal to or above the competitors Pricing strategies: Price skimming → charging the highest possible price, during the introduction stage
Used to recover costs of R&D Price penetration → charging the lowest possible price
Used to achieve large market share Loss leaders → a product sold at or below cost price
Used to gain customers willing to buy other products as well Price points → selling products at predetermined prices Price bundling → buying several products for a comprehensive package Price & quality interaction → 8you get what you pay for9 → products of high quality are sold for more due to higher manufacturing prices

CASE STUDY: McDonald’s → 8loose change menu9 (loss leader) - enticing customers to buy a cheap option as well as a more expensive → price bundling with family boxes, value meals → price points, higher quality burgers are more expensive

● promotion - elements of the promotion mix – advertising, personal selling and relationship marketing, sales promotions, publicity and public relations - the communication process - opinion leaders, word of mouth Promotion is methods used to inform, persuade and remind the target market about its products

Used to attract new customers, increase brand loyalty, encourage existing customer to return Advertising: paid, non-personal message through a mass medium
Mass, direct, telemarketing, e-marketing, social media, billboards Personal selling: sales representatives directed to a customer in attempt to make a sale
Can be modified, individualised, after-sales customer service Relationship marketing: development of long-term and cost-effective relationships with customers
Aim to create loyalty programs to encourage repeat sales Sales promotions: the use of activities or materials as direct inducements to customers
To entice new customers, encourage trial purchases (eg, coupons, refuneds, premiums) Publicity: free news story about business9s new products Public Relations: aimed at creating and maintaining favourable relations between business and its customers
Promoting positive image, effective communication, issues monitoring, crisis management Communication process
Used to communicate clearly, efficiently and succinctly to their target markets
A channel is any method used for carrying a message Opinion leaders → a person who influences others Word of mouth → people influencing each other during conversations

CASE STUDY: McDonald’s → TV commercials, radio ads, catch phrases → relationship marketing - exclusive offers, free wifi, online offer wallet, newsletter with offers and deals → publicity by sponsoring sporting event (including the olympics, FIFA, v8 supercars)

● place/distribution - distribution channels - channel choice - intensive, selective, exclusive - physical distribution issues - transport, warehousing, inventory Distribution channels → roots taken to get the product from the factory to the customer, involving intermediaries.

Procedure to customer
Producer to retailer to customer
Producer to wholesaler to retailer to customer (most common)
Producer to agent to wholesaler to retailer to customer Channel choice:
Businesses channel of distribution best suited to the product Intensive distribution → saturating the market with its products Selective distribution → using a moderate proportion of all possible outlets Exclusive distribution → only one retail outlet for a products in a large, geographic location

Physical distribution → activities concerned with the efficient movement of the products from the producer to the consumer. - Transport → an intricate network of transportation required to deliver the vast array of products - Warehousing → a set of activities involved in receiving, storing and dispatching goods - Inventory → a system that maintains qualities and varieties or products appropriate for the target market

CASE STUDY: McDonald’s → using a selective distribution channel → partnership with uber eats in 2017

role of financial management

● strategic role of financial management

→ planning and monitoring the business9s financial resources to enable the business to achieve its financial objectives

→ setting financial objectives, sourcing finance, preparing budgets, financial statements, maintaining cash flow, distributing funds

● objectives of financial management - profitability, growth, efficiency, liquidity, solvency

Profitability → the excess of revenue over expenses Growth → the ability of the business to increase its size in the longer term Efficiency → the ability of a business to minimise its costs to manage assets and maximise profits

Liquidity → ability to meet financial commitments in the short-term

Solvency → ability to meet financial obligations in the long-term

CASE STUDY: McDonald’s Profitability - aims to grow operating margin between 20-40% annually Growth - aims for 3-5% sales growth annually Efficiency - aims to reduce administrative expenses by 1% Liquidity - aims to increase on-hand cash from $12B to $2 (USD) from 2016- Solvency - continue returning cash to shareholders

Short term financial objective are the tactical (one or two year) operational plans of the business Long term financial objective are the strategic plans for the business set for over 5 years

short-term and long-term interdependence with other key business functions → Operations department require funds to purchase inputs and carry out transformation

→ Marketing department requires funds to undertale various forms of promotion

→ HR department requires funds in order to pay staff

influences on financial management → business needs funds in order to establish itself and thrive

● internal sources of finance – retained profits

→ funds generated from inside the business → retained profits - international finance retained from earnings/profits when not all profits are distributed but kept

in the business as a cheap and accessible source of finance.

CASE STUDY: McDonald’s → 2017 annual report shows that the company has $48 (USD) in retained profits

● external sources of finance → funds provided by sources outside of the business

● – debt – short-term borrowing (overdraft, commercial bills, factoring), long-term borrowing (mortgage, debentures, unsecured notes, leasing)

→ short-term borrowing and long-term borrowing from external sources by a business. Short term

Overdraft: one of the most common types, a bank allows a business to overdraw on their account with minimal costs

Commercial bills: short-term loans issued by financial institutions, for larger amounts over $100,000 for 30-180 days. They are usually secured against the business9 assets

Factoring: raising funds by selling accounts receivable

CASE STUDY: McDonald’s → McDonalds has available $25Billion (USD) in overdraft

Mortgage: secured by the property of the borrower, repaid with interest
Raising funds from investors rather than institutions
Unsecured notes: loans from investors for a set period of time, not secured against assets with a higher interest rate
Operation leases = short periods
Financial leases = for the life of the asset

CASE STUDY: McDonald’s → McDonalds leases 12,262 stores worldwide, paying around $16Billion (USD) annually

● – equity – ordinary shares (new issues, rights issues, placements, share purchase plans), private equity

→ the finance raised by a company through inviting new owners - Done through the Australian Securities Exchange (ASX)

Ordinary shares - Most commonly traded shares in Australia - Individuals become part-owners of a publicly listed company - Dividend: distribution of company9s profits to shareholders and is calculated as cents per share New issue = a security that has been issued and sold for the first time to the public market

Rights issue = the privilege granted to shareholder to buy new shares in the same company Placements = allotment of shares made directly from the company to investors

Share purchase plans = an offer to existing shareholder in a listed company to buy more shares with no brokerage

fee Private Equity → money invested in a private company, not listed on the ASX

Used to raise capital to finance future expansion

CASE STUDY: McDonald’s → McDonalds has issued 1,660 million shares

● financial institutions – banks, investment banks, finance companies, superannuation funds, life insurance companies, unit trusts and the Australian Securities Exchange Financial institutions collect funds and invest them in financial assets.

→ banks - major operators in financial markets, most important source of funds for businesses

→ investment banks - provides services in both borrowing and lending to the business sector

Eg. trade in money, provide working capital, arrange project finance, advice on mergers and takeovers → finance companies - non-bank financial intermediaries that specialise in commercial finance
Eg. short term loans, raise money through debentures

→ superannuation - requires all employers to make financial contribution to a fund which provides benefits when employee retires (federal government scheme)

→ unit trust - mutual funds - funds from smaller investors, invested in financial assets

Australian Securities Exchange (ASX) - Created by a merger in 2006 - Australian stock exchange & sydney futures exchange - Offers... shares, futures, warrants, contracts, real estate investment - Primary & secondary market

CASE STUDY: McDonald’s → McDonalds lease most of the land and buildings in which they use, they use a 25 year lease contract matching the 25 year franchisee lease from the company

● monitoring and controlling – cash flow statement, income statement, balance sheet

Cash flow statement → financial statement which indicates the movement of cash receipts and cash payments resulting from transactions

Shows ability to pay debts on time
Potential shareholders check a business has positive cash flow
Shows: operating activities, investing activities and financing activities (borrowing activities)

Income statement → summary of the income earned and the expenses incurred over a period of trading - Record income, record COGS, work out gross profit, calculate net profit

Balance sheet → represents a business9s assets and liabilities at a particular time, expressed in money terms

Assets = items of value owned by the business
Liabilities = claims by people other than wonders against assets, what is owed by the business
Owner9s equity = funds contributed by the owner - represents net worth of the business

CASE STUDY: McDonald’s → McDonalds compares its ratios with Yum1 Brands Inc (KFC, taco bell) → current ratio - Mcdonalds = 1:1, Yum! = 1:1 (2017) → debt to equity ratio - both Mcdonalds and Yum! Have negative equity in 2017 due to buying back stock from shareholders → gross profit ratio - McDonalds = 68%, Yum! = 69%

● financial ratios - liquidity – current ratio (current assets ÷ current liabilities)

Goals is to be over 1:1 (eg. 2:1)

gearing – debt to equity ratio (total liabilities ÷ total equity)

Goal is to be below 1, meaning they have more equity than debt

Increase equity (retain more profits, sell shares), decrease debt (sell non-essential assets

profitability – gross profit ratio (gross profit ÷ sales); net profit ratio (net profit ÷ sales); return on equity ratio (net profit ÷ total equity)

Difference between sales and cost

Goal is to have the highest ratio possible

Higher the ratio = higher return to owners/shareholders

efficiency – expense ratio (total expenses ÷ sales), accounts receivable turnover ratio (sales ÷ accounts receivable)

Goal is to have the lowest percentage

Should be less than 30 days

Shows how long it takes the firm to pay its debts

comparative ratio analysis – over different time periods, against standards, with similar businesses Analysis → working the financial information into significant and acceptable forms, making it meaningful

Vertical = within one financial year

Horizontal = different financial years

Trend = 3-5 year period

● limitations of financial reports – normalised earnings, capitalising expenses, valuing assets, timing issues, debt repayments, notes to the financial statements → normalised earnings - earnings that have been adjusted to take into account changes in economic conditions.

Gives a more accurate depiction of the true earnings, making it easy to compare years.

→ capitalising expenses → a business records as expense as an asset on the balance sheet rather than income

Understates and overstates the profit of the business → valuing assets - estimating the value of assets when recording them on the balance sheet, some assets are also difficult to value

→ timing issues - expenses incurred by the business on the income statement of the period in which revenue related is earned (eg. real estate agent earns 2% commission in June but paid in July, cost of commission is in June)

→ debt repayments - financial reports do not show how long the business has to pay debts, methods of recovering

debt, when debts are due Notes to the financial statement

Reports the details and additional information that are left out of the main reporting documents
Information for stakeholders, explain financial statements, accounting methodologies

CASE STUDY: McDonald’s → McDonalds have intangible assets such as goodwill which cannot be recorded on financial reports → McDonalds uses straight-line depreciation which can impact the statement of assets

● ethical issues related to financial reports Audited accounts → check of the accuracy of the financial records and accounting procedures

Used by financial institutions, owners, shareholders and potential investors
Internal, management or external orders
Multiple Choice

Subject : Business Studies- Unit 2

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mcdonalds case study operations management

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McDonald’s Business Studies Case Study

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Resource Description

role of operations management ● strategic role of operations management – cost leadership, good/service differentiation

Operations → business processes that involve transformation/production – Production = conversion of inputs into outputs

Customer focus → minimising waste, fair value for labour, low cost, reflect changes in consumerism Profit centres → aspects of the business that derive revenue and profits Cost centres → areas which cost is attributed

Cost Leadership → aiming to have the lowest cost & be most price-competitive

CASE STUDY: McDonald’s → Mcdonald’s invested in a global training program (Hamburger University) to ensure efficiency and reduce overall costs

goods and/or services in different industries

Goods/Services Differentiation

Standardisation → making products that are all the same

Product Differentiation → distinguishing products

Differentiating Goods Differentiating Services

– Product features – Product quality – Augmented features (add-ons or benefits) – Time spent on a service – Level of expertise – Qualifications and expertise of the service provider – Quality of the materials/technology used in service delivery

Goods Differentiation Perishable goods → short lead times, distributed fast

Non-perishable goods → operations similar in all industries, more durable goods

Self-service → encouraging customers to take initiative

● interdependence with other key business functions

Interdependence → mutual dependency on one another

Interdependence with… Marketing → producing goods based on market needs, marketing based on cost, product design affects transformation

Finance → cost of production, labour costs

Human Resources → staff needed for production, technology changing operations, outsourcing specialists influences

● globalisation, technology, quality expectations, cost-based competition, government policies, legal regulation, environmental sustainability

Globalisation → removal of trade barriers between nations, operating on an international scale & develop international influence

CASE STUDY: McDonald’s → McDonalds has 37,000 restaurants in 120 countries → in 2018, McDonald’s ranked 11th on Forbes list of most valuable brands → 2017 report showed US$91billion in sales, showing success in maintaining competitive advantage by adapting to global conditions

Supply chain management → managing the flows of goods and services, including transformation. – Businesses need a reliable supply chain that is responsive to changes

Technology → the design, construction and application of innovation devices, methods and machinery in the operations process.

– Administrative level → organisation, planning, decision making – Processing level → manufacturing, logistics, quality management, inventory management

CASE STUDY: McDonald’s → digital menu boards, automatic drink dispensers, online ordering apps

Quality → how well designed, made and functionable goods are. – Expectations that people have of business determines the way products are designed, created and delivered.

Cost-based Competition → derived from the breakeven point Fixed costs = costs that do not change regardless of business activity Variable costs = costs that vary in relation to business activity/level of production

CASE STUDY: McDonald’s → in 2015, Mcdonalds dominated western Europe, other businesses attempted to compete by lowering their prices → close focus on cost, helps them to maximise profits Government policies & Legal Regulation → Work Health and Safety Act 2011, Fair Work Act 2009, Superannuation Guarantee Act 1992, Racial Discrimination Act 1975, Taxation Act 1953 → influence business operations

CASE STUDY: McDonald’s → in 2012, McDonalds opened the Australia’s first Green star accredited restaurant in VIC

● corporate social responsibility CSR → doing more than just complying with the law, but having higher respect for people, community and environment Triple Bottom Line → financial profitability, social impact and environmental impact of a business.

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