Introduction To Logistics And Supply Chain Management

Mcdonald’s French Fries Supply Chain

Before opening its first store in India in 1996, McDonald’s spent six years building its supply chain. During those six years, the company worked to source as many ingredients as possible from India, and their efforts were successful. However, MacFries, as McDonald’s french fries were popularly known, were a particularly tough product to source locally—and importing fries was undesirable for both cost and availability reasons.

Not All Potatoes Are Created Equal

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While India was the third-largest producer of potatoes in the world, less than 1 percent were process grade. To qualify for french fry production, a potato must have high solids, low sugars, large, oblong shape, disease resistance and a long dormancy. Ideally, a french fry potato needs a growing season of 120 to 150 days, long daylight when photosynthesis takes place, and cool nights, when potato bulking takes place. Sandy-loam soil is ideal, and the potatoes grow better with controlled.

In India, ideal potato growing, and storage conditions simply do not exist. The Indian climate allows growth only in the winter versus the long summers in parts of the U.S. and Europe. This limited the number of days those potatoes could be harvested. Outdated farming and irrigation practices limited yields as well. Typical Indian potatoes have high sugars, low solids, and are small not a good fit for long french fries. When a normal Indian table potato is sliced into a french fry and put into oil, due to high moisture levels, the result is an oily, soggy mass of potatoes rather than crispy golden fries.

McDonald’s India Demand and Supply

India had the second-largest overall population in the world next to China and a fast-growing middle class which now had more discretionary spending power. To cater to the Indian consumer, McDonald’s worked on developing a completely new menu geared to local tastes. It developed a vegetarian menu and focused on fish and chicken products since beef is not eaten by most Hindus, who represented around 50 percent of the population, and pork is not commonly eaten.

In 1990, when McDonald’s began investigating entry into India, the company observed very outdated farming and irrigation practices in the country. Water and electricity were wasted in the farming process, and there were no facilities at the finish level to store post-harvest produce. Most raw materials such as wheat flour, milk and potatoes did not meet McDonald’s target specifications. Logistics and distribution were real challenges as well. Roads were extremely poor, and a cold chain barely existed. There were only 200 refrigerated trucks in the entire country. Temperature controlled warehouses for products like potatoes were not available. The quality of food processing was quite low. McDonald’s could not buy processed chickens, as India had mostly a live bird market. There was no deboning facility available. Vegetable processing was very rare, as most Indians used fresh vegetables purchased at the local market. It was clear that the company had a lot of work to do to develop the supply chain it needed to deliver food to customers that met McDonald’s specifications.

The Building Blocks of a Local Approach

McDonald’s local approach to doing business shaped its entry into India. The company wanted to have partners that understood Indian operating conditions and Indian consumers. The company also wanted to build a local supply chain to drive agricultural growth, generate employment and show the Indian government the company’s commitment to development.

With the India supply chain, the company used a mix of international suppliers, local supplies, and joint ventures. This was critical since all the elements, from the menu, cost structure and overall economics  were very different from their counterparts m the U S. The joint venture model, where McDonald’s corporate partnered with local entities, was typical of how McDonald’s operated in many international markets. Many items, from sandwich sauces, chicken and vegetable patties to distribution center services were developed through joint ventures between local suppliers and an international McDonald’s supplier. In some cases, McDonald’s could rely on 100 percent domestic sources, such as with fish patties, dairy mixes, and buns. If 100% were local sources or partnerships could not satisfy McDonald’ s needs, the company resorted to imports.

McDonald’s opened itsrestaurants in Delhi and Mumbai in 1996, only after years of developing the supply chain and knowledge of the Indian market. The company focused on four key principles: quality, service, cleanliness, and value. In the Indian market, the quality of ingredients was the big challenge. Most agricultural products were grown for home consumption, so they did not conform to standards required for processing. After years of setting up the foundation, McDonald’s fumed its focus to building food, safety and quality standards, meeting service standards, and clearing bottlenecks in the supply chain. Growth accelerated compounded annual growth was around 31 to 35 percent from 2003 to 2011. McDonald’s began to focus more attention on filling capacity needs, adjusting supply and service models, and localizing its products.

Potato Farmer Matters

French fries were way popular with Indian customers, and the supply of MacFries was critical to the company’s success in India. Fry are something that Indian consumers absolutely love at McDonald’s, and they expect for affordable price.

In the early 1990s McDonald’s helped create a joint venture between international french fries supplier Lamb Weston and India-based Tami Foods. The joint venture invested 10 million dollars to set up the first french fries line in the country. This money was invested in land, plant and machinery. Given the challenges around raw material quality and storage conditions, the joint venture focused on identifying and growing a suitable variety of potato for making MacFries. New storage facilities were created to help store potatoes in the right conditions. However, the huge investment of time and money to produce MacFries had failed because the company could not grow the right variety of potato. McDonald’s could not open its first store without MacFries on the menu.

At this point, the company realized that importing frozen fries was the best option to get fries quickly. Lamb Weston petitioned the Indian government to allow imports of fries into India. The process for obtaining an import license approval took almost six months to add frozen french fries into the customs classification, so that Lamb Weston could Import fries. The Indian government imposed restricted import quantity up to 800 metric tons only, additional import duties were 56 percent. The lead time for importing fries from the U. S. to India was around 60 days.

Given McDonald’s aggressive growth plans and limitations on import quantities under one license, McDonald’s invited another one internationalsuppliers, McCain, to double the importsupply. McCain was also allowed to import 800 metric tons of frozen french fries, which it sourced from its plants in the U.S., New Zealand and Europe. Both Lamb Weston and McCain were then helping Import french fries to serve the growing demand for McDonald’ s in India. By 1999, the quantity restriction was removed by the government. However, the steep import duties and unfavorable exchange rate meant that fries would continue to be an expensive item unless localized. Relying on imports was not a tenable strategy

Making a Structural Change

Though the initial attempt to localize french fries had failed, McDonald’s decided to fry again in 1998 with McCain. In India, the raw potatoes were not allowed to be imported. So, McCain had to bring in only the suitable potato genetic resources. The local supply strategy was an exercise in risk management. If Indian licensing requirements changed in the future, McDonald’s may not have a license to import fries. Given import duties levied on foreign agricultural products in many countries, having a local strategy was often an advantage.

The first big focus would have to be cultivating the appropriate variety of potato where other suppliers had failed. McCain learned that cultivating potato seeds in high elevations was ideal because seeds grown at high altitude had high vigor, enabling a commercial crop planted with those seeds to have higher yield and larger-sized potatoes. Second, farmers would need to grow the potatoes in a suitable, more accessible location than the Himalayas. At the same tune, McCain had to test its production capabilities in India. Vista Foods, which supplied McDonald’ s with patties, puffs and pies, had some excess capacity in India, McDonald’s helped McCain get access to this excess capacity without a huge investment for McCain had to bring in equipment to produce potato wedges and patties, while the rest of the infrastructure was provided by Vista Foods. This gave McCain enough potato product volume to build up some business with local farmers. With the patty supplier Vista’s excess capacity was utilized, McCain was able to test the Indian market with small-scale production, and McDonald’s had found a route to developing a local supply of french fries. Knowing that they would have McDonald’s commitment to buy fries, McCain then decided to build a $25 million (Canadian) manufacturing facility dedicated to processing french fries. The plant had the capacity to process 40,000 potatoes. Once they were processed, fries were frozen and sent to thirdparty logistics storage facilities or to McDonald’s distribution centers. From there, they were shipped to restaurants.

Partnering with Farmers to Improve Quality and Build Quantity: a Win-Win

McCain conducted regional trials to locate the ideal growing area and experimented with 13 types of potatoes to pinpoint the right variety. They also conducted management trials to identify the best combination of growing practices, and storage trials to figure out the best protocol for storing potatoes. The new drip irrigation techniques used 33 percent less water than traditional flood irrigation. By 2011, around 100,000 acres were under drip or sprinkler irrigation compared with just 67 acres in 2002. The company transformed storage practices by applying a potato sprout suppressant in combination with using controlled temperature storage. This helped to avoid deterioration in potato quality during storage. Local government also subsidy farmer to buy drip irrigation system.

Key agricultural breakthroughs were demonstrated to farmers growing potatoes for McCain. These Included shifting from traditional row planting to mechanical field preparation, shifting from hand picking of potatoes to mechanical and planting in double rows to utilize space better and reduce water consumption.

In 2007, McCain was finally able to produce fries that met McDonald’s specifications. McCain doing what everyone said was not possible. Most potato-growing experts McDonald’ s had consulted in the past said that India could never grow the one of potato needed to make a MacFries. But against all odds, and after years of effort, McCain made this happen. By 2008, 30 percent of McDonald’s India’s supply was being manufactured locally and grown to 75% by 2010. McDonald’s benefited from using local fries with 30 percent lower cost structure and no exposure to the fluctuating exchange rate.

McDonald’s India and McCain India had come a long way and had discovered that close collaboration with farmers was essential to their collective success. Given the pressure of food inflation, reducing reliance on imports was becoming even more critical. The company’s close collaboration with farmers over many years would help them address the current challenge of cost control. But the question remained: Could McDonald’s ever achieve 100 percent local supply and stay there amidst growing demand?

The case study is adopted and adapted from Pontifical Xavierian University (2015). Student can watch youtube to understand about Mcdonald’s French Fries Supply Chain.

This Is How McDonald’s Perfect French Fries Are Actually Made

1. Elaborate the challenges and opportunities that McDonald’s and its suppliers face in India market to develop the French Fries Supply Chain. [ 40 marks]

2. Describe the options that McDonald’s and its suppliers can pursue to overcome the challenges of French Fries Supply Chain. [ 30 marks]

3. Recommend the supply chain strategies or technologies that McDonald’s and its suppliers could adopt to grow in India market. [ 30 marks]