Strategy Project: McDonald’s and Beef

The Category Strategy Project McDonalds and Beef Introduction Commodities are necessities for the success of numerous businesses throughout the world. Preparation and research concerning a commodity must be completed in order for a company to source that commodity successfully. The purpose of this study is to provide purchasing management and top management with specific information that can be used to construct an advantageous procurement strategy. If a company does not have reliable useful about a commodity, that commodity’s market, and that commodity’s suppliers it will be very hard for them to be able to source that commodity efficiently and effectively which will greatly diminish their ability to succeed in the market place. We chose McDonald’s because of its tremendous success in the global market place. We wanted to choose a company who everyone is familiar with and has been successful at what they do. Another reason why we choose this company is because we believed that, given its huge popularity, it would not be too hard to find information about it. We chose beef because we believed that beef was the company’s most critical commodity.

Company Description The McDonald’s Corporation is one of the world’s largest chains of hamburger fast food restaurants; it serves nearly 47 million customers daily. The first McDonald’s restaurant was opened in San Bernardino, CA in 1940; it now serves customers at over 31,000 locations in over 120 countries. The McDonald’s restaurant serves a wide variety of items on their menu including a large number of beef items. The most popular of these beef items include: the Big Mac, the Quarter Pounder, the Hamburger, the Cheeseburger, and the Big N’ Tasty. Our report will focus on the sourcing of the beef for these beef items. “McDonald’s beef procurement is operated through its four global geographic divisions; North America, Latin America, Europe and Asia/Pacific/Middle East/Africa” (Murphy, 2009). “They form what is termed the ‘McDonald’s Global Beef Board’” (Murphy, 2009). “All four procurement functions are involved in any significant changes in procurement in any of the other divisions” (Murphy, 2009). “McDonald’s is currently looking to leverage its global scale in order to improve its long term beef sourcing capabilities” (Murphy, 2009). Their new Worldwide Beef Supply Chain director Jose-Luis Bretones is “planning on working towards creating a more integrated global supply network, more open global beef trading options and a procurement system with greater flexibility overall” (Murphy, 2009). However, since McDonald’s is a global corporation with an extremely complex worldwide supply chain, our report will focus predominantly on the procurement of beef by McDonald’s to their locations in the United States. In the past McDonalds has bought mostly American beef for use in their U. S. estaurants and much of their beef still comes from within the country. However, according to McDonalds, “due to a well-documented shortage of lean beef in the U. S. , and to meet the needs of (their) customers, (they have started to)… purchase a relatively small percentage of high quality imported lean beef from New Zealand and Australia. (They) do this to supplement (their) domestic beef purchases” (McDonald’s Customer Response Center, personal communication, November 7, 2009). Description of the Commodity Beef is the name of meat that comes from cattle and other bovines (Travisl, 2009). It is typically served to consumers in the form of steak, burger patties and other ground beef products, hot dogs, beef jerky, roast beef as well as other dishes (Travisl, 2009). The United States, Japan, Brazil and China are world’s largest consumers of beef products (Travisl, 2009). It is a staple of the diet of a very large number of Americans (Travisl, 2009). The largest exporters of beef are Australia, Brazil, Argentina and Canada (Travisl, 2009). It is also heavily sourced from of Uruguay, Nicaragua, Russia and Mexico (Travisl, 2009). McDonalds’ hamburger patties are made of 100% pure beef, the beef is hand-seasoned on the grill with salt and pepper (McDonalds). The hamburger patties are grilled to a temperature of at least 155°F which is in accordance with the Food & Drug Administration (FDA) Food Code (McDonalds). Two substitutes for beef that are served at McDonald’s are chicken and fish.

However, many of McDonald’s customers would not be satisfied if they were forced to settle for fish or chicken due to beef being unavailable. Therefore, McDonald’s must make sure that they are able to consistently meet their customers beef demand. Part of this effort entails having an efficient and effective purchasing strategy.

Some companies may use beef to feed animals but McDonald’s has no use for it other than serving it to their customers to be consumed. Most of McDonald’s beef comes from USDA-inspected United States suppliers (McDonalds). In order to maintain demands, they import a small percentage of USDA-inspected quality beef from Australian and New Zealand suppliers (McDonalds). Angus burgers such as the Angus Bacon & Cheese, Angus Deluxe, and Angus Mushroom & Swiss are also menu items (McDonalds). The patties for these burgers are made of Angus beef “come from two Scottish breed of cattle (Black and Red Angus), which are naturally polled; that is, they do not have horns” (Drakew, 2009). McDonalds started to test hamburgers made with Angus beef at some of their restaurants in the United States of America. According to McDonald’s customer’s response to the burgers was positive and so they began selling the burger at all of their US locations in July 2009. Angus burgers are generally more expensive due to their beef being of higher quality than what goes into typical hamburgers. A portion of McDonald’s Angus beef currently comes from New Zealand. Since Angus is a specific type of beef, whose supply may differ from that of regular beef, McDonald’s should monitor its domestic production and supply and to determine if they might need to increase their foreign importation of the product or perhaps find a way to increase its domestic supply.

Depending on to what degree market forces for Angus beef differ from that of regular beef McDonald’s might have to pursue a different sourcing strategy for it. Industry Analysis McDonald’s Industry Although McDonald’s is a fast chain superpower and the largest buyer of domestic beef, they must still concern themselves with the competitive forces within their market to maintain their position as a market leader. Porter’s five forces model best outlines these forces, taking into account: market internal competition, threats of new entrants, pressure from substitutes, supplier bargaining power, and buyer bargaining power (Monczka, 207, SCM355). First it is necessary to define McDonald’s industry as the fast food industry, specifically the burger fast food industry, in which it is the industry leader. It’s key competitors, or market internal competition, are Jack in the Box, Carl’s Junior, Burger King, and Wendy’s/Arby’s (Northrop, 3). The high cost of entry into the fast food industry makes it unlikely that McDonald’s will face increased competition from new entrants in the near future. A new entrant would need to be able to achieve similar economies of scale to McDonald’s in order to be a real threat and that is unlikely to happen. However, the threat from substitutes is one that McDonald’s should be concerned over. Subway has nearly as many locations and differentiates its products from McDonald’s as the healthy alternative. With an increasingly health conscious consumer base and a menu that consist of primarily red-meat, high calorie items, McDonald’s is at a disadvantage when it comes to offering a healthy eating experience. In addition, YUM! Brands (Taco Bell, Pizza Hut, A&W, Long John Silver’s, KFC) has just as many locations collectively and competes with McDonald’s by offering fast food alternatives to burgers. Their menu items are similarly priced and served up just as quickly and conveniently as in McDonald’s. The buyer is the consumer in McDonald’s industry and in the food industry it is the consumer who has the last say. As previously stated, U. S. consumers are more health conscious than ever and there is increased pressure on McDonald’s to provide an overall healthier menu.

Lastly, there is the force of supplier power. There is no real substitute for beef from their perspective; McDonald’s cannot continue to do business if they do not procure the beef they need. McDonald’s has to be concerned over the cyclical shortages of U. S. lean beef because if their suppliers’ capacity is fully utilized they need to know where they are in the pecking order for their suppliers (Conagra, SCM455). Fortunately, as stated previously, McDonald’s is the largest buyer of U. S. beef and that allows them mitigate this risk. Supplier Industry Australia, the U. S. , and Canada are the dominant participants in world beef production, with McDonald’s sourcing the large majority of beef from the U. S. (Brocklebank, 7). There is internal competition between suppliers of beef for large, condensed farmland suitable for grazing. However, the strongest force for the supplier beef industry is the threat of substitutes.

The poultry industry is blessed with both multiple offspring and a short generation interval – an ideal situation for rapid genetic improvement” (Brocklebank, 5). U. S. fast food restaurants including McDonald’s continue to diversify menu offerings in an effort to decrease their dependence on beef. Economies of scale are greater for poultry and pork, and therefore so are their costs. Poultry and pork production has moved to large scale proportions and standardization levels that beef is likely never to meet. The beef industry faces the buying power of McDonald’s as well. McDonald’s buy is so great that they do not have to pay wholesale for beef. Although there is no data on exactly what McDonald’s pays for beef, it is reasonable to assume that they pay significantly less than the market wholesale price. It is possible that McDonald’s buys all of many of its suppliers supply, forcing the suppliers to meet most of McDonald’s demands, leaving them no other option but bankruptcy if they don’t oblige.

Although we have no idea if this is actually the case. Demand Analysis The total amount of beef that was consumed by the United States in 2008 was 27. 3 billion pounds (Mathews, 2009). McDonald’s U. S. purchases about 1 billion pounds of beef per year (Ishmael, 2003). Approximately 1/27 of all beef consumed by the United States is consumed by McDonald’s U. S. This should afford McDonald’s a huge economies of scale benefit. McDonald’s U. K. states that their current sourcing strategy includes: not searching on the commodity market for the lowest cost suppliers and sourcing only from dedicated suppliers who do not compromise on safety or quality, and not squeezing suppliers too hard on price but instead paying more for high performance (Food Chain Centre). Since McDonald’s U. S. alleges to have “the highest standards for food quality and food safety (including feed certification) in the fast food industry” (McDonald’s Customer Response Center, personal communication, November 7, 2009) it is reasonable to assume that their sourcing strategy is similar to that of their British counterpart’s. The immense amount of product that McDonald’s demands, puts them in a very powerful position. A beneficial course of action for McDonald’s would be to pursue a strategy of supply base rationalization and optimization, as opposed to sourcing from many different suppliers. This would put them in a good position to take advantage of economies of scale from those suppliers as well as insist on certain quality requirements (Monczka, 318 SCM355). If McDonald’s were to rationalize its supply base down to its best most dedicated suppliers and offer very large contracts to those chosen few, the use of economies of scale could help them achieve a price closer to, if not at the price offered by the lowest cost suppliers.

This way the company can stay within the confines of their current philosophy of only sourcing from the most dedicated suppliers while simultaneously minimizing costs. Additionally, with the size of the orders which McDonald’s would be able to place with a supplier it should not be too hard to get that supplier to comply with whatever reasonable quality requirements McDonalds might desire. One supply base improvement that McDonald’s might be able to achieve through supplier rationalization and optimization could be obtaining more American grass-fed beef. Although McDonalds currently sources most of the beef used at their U. S. establishments from within the country, a portion of it is sourced from Australia and New Zealand (McDonald’s Customer Response Center, personal communication, November 7, 2009). This is because, according to McDonald’s, “it cannot satisfy its need for lean beef by buying solely from American sources and has to turn to beef exporters outside the USA to make up the shortfall” (Mikkelson, 2009). “American beef cattle are primarily grain-fed and produce fattier meat, while grass-fed cattle (raised in Australia and New Zealand) produce leaner beef” (Mikkelson, 2009). Clearly, the company must incur significant logistics costs from having to transport the beef to America from the other side of the Earth. American ranchers claim that McDonald’s leanness standards are too high, and that if McDonald’s lowered its standards they would be able to supply the company with the lean beef that they need (Mikkelson, 2009). Or perhaps McDonalds could take advantage of their huge demand by giving contracts to American farmers that are large enough for the farmers to justify changing their cattle feeding practices. This would be a win-win supplier optimization solution (Monczka, 695 SCM355 and SCM455). The farmers would be able to increase their revenue and McDonald’s would be able to save money on distribution costs by sourcing the beef from within the country in which it will actually be consumed as opposed to having to source it from all the way across the world.

Additionally, buying beef for American restaurants from only American farmers would be better for McDonald’s from a public relations perspective. Supply Analysis The beef supply chain is not a cooperative one; there is little trust between those who engage in transactions up and down the supply chain. This puts it at a competitive disadvantage when compared to the supply chain of poultry and pork which has achieved much greater levels of coordination through vertical integration and complex contracts (Brocklebank, 6). Such a lack of integration across the beef supply chain makes it difficult for them to respond to changing consumer demands quickly. In 2008, the production of meat animals comprised over $66 billion of added value to the American economy (AssociationNational, 2008). In 2008, 34. million cattle were slaughtered and 26. 6 billion pounds of beef was produced (AssociationNational, 2008). More than 660,000 cattle are harvested in the U. S. on a weekly basis (AssociationNational, 2008). McDonald’s has to be concerned that it is highest in the pecking order for fulfilled orders by its suppliers. This is due to the fact that a “…large portion of beef production in the U. S. is boxed and sent to retailers for further processing…” (Brocklebank, 8). Suppliers of beef are at a production crossroads however. Although artificial insemination has increased the rate of breeding of beef cows, “…a beef cow only typically produces one offspring and there is a long lag between when a heifer is born and when it can be bred” (Brocklebank, 5). The point is the process of beef cow breeding is close to being optimized and that makes it difficult for farmers to keep the rate of increase of production even with the increasing rate of demand for beef. Cargill, Tyson Foods, OSI, Keystone and Lopez Foods are five of the American suppliers of beef to McDonald’s (McDonald’s, 2006: Gigeman76, 2009). Silver Fern Farms and Anzco are the two suppliers of beef to McDonalds from New Zealand (Morgan, 2009). FJ Walker Foods and Australian Food Corporation are the two suppliers of beef to McDonald’s Australia and are likely the Australian suppliers of beef to McDonald’s in the U. S. (Austrade, 2007). Due to shortages in the U. S. lean beef supply, McDonald’s was forced to look to foreign suppliers. A trend that is likely to increase as McDonald’s grows its business and increases market share as well as the world demand for beef increases. However, McDonald’s has to consider its brand image when deciding how much of its beef it sources outside of the U. S. When McDonald’s first began sourcing some of its beef from outside the U. S. there was an up rise by its U. S. suppliers. There were also concerns over the quality and production standards of beef sourced from other countries.

For example, beef sourced from South America was thought to have traces of dangerous pesticides because grazing areas were sprayed with them. However, all beef used by McDonald’s is USDA approved even if it is not necessarily raised in the U. S. Price Analysis Market Structure McDonald’s accounts for 19% of market share in the fast food industry. However, they dominate the Fast Food Hamburger Restaurant (FFHR) industry with 90% of the market share in 2008. Because each fast food hamburger restaurant offers similar menus and prices, the purchasing of beef is highly competitive (McDonald’s). Because of McDonald’s large market share in the fast food industry, especially in United States, the company has significant advantages when it comes to lowering production costs, lowering input costs and bargaining power over suppliers. However, they like every other company are susceptible to conditions of supply and demand when it comes to products they source. Also, external factors such as natural disasters and mad cow disease can cause changes in beef price. McDonald’s pricing strategy needs to account for these aforementioned factors.

The U. S. Cattle Supply and Trends Weather has significant control over the cattle supply because the availability of grass and wheat that is used to feed cattle in the summer and fall is dependent on weather conditions (McDonald’s). In order to make sure farmers have enough hay for the winter, they send surplus cattle to market, increasing supply in the short term, but reducing breeding stock and decreasing supply in the long run” (McDonald’s). Considering this fact, it might be beneficial for McDonald’s to purchase excess beef before the winter and stockpile it for when prices inevitably increase later on. Strong Demand for Beef and Forces Consumer spending on beef has grown $26. 9 billion over the past ten years, last year it was $76 billion (Association National, 2008). Per capita spending for beef in retail and foodservice was about $249 last year, an increase of approximately $50 from 2001 (Association National, 2008). “In 2008, per capita consumption of beef was 59. 9 pounds, compared to 59. 2 pounds for chicken” (AssociationNational, 2008). McDonald’s needs to take overall beef into account in their procurement strategy because it has an effect on price. The United States has historically banned cattle imports from other countries when tainted beef becomes an issue causing a decrease in available supply and a spike in price (Wolcutt, 2003). Such was the case in 2003 when an incident of mad-cow disease in Canada led to a ban of Canadian beef imports to United States, this decreased U. S. supply by 8% and caused a 30% rise in cattle prices (Wolcutt, 2003). McDonald’s must stay alert to any possible incidents of mad-cow disease or other beef tainting problems for both price and quality control reasons. Managing Price Changes in beef prices are predominantly effected by economic conditions of supply and demand. Hence McDonald’s, in their pricing strategy, needs to be conscious of the flow of market price fluctuations. There are two indexes that the company can use to do this: the Producer Price Index (PPI) and the Consumer Price Index (CPI) both of which are maintained by the U. S. Bureau of Labor Statistics. A consumer price index (CPI) is a measure that estimates the average price of consumer goods and services as well as changes in the price of those goods and services from one period to the next within a certain area (Cretog8, 2009). The percent change in the CPI indicates estimated inflation, the prices of a variety of different items such as beef, chicken, bananas, and eggs are available to be investigated in addition to their average price data. In addition to price fluctuations and inflation, McDonald’s should also take quality into consideration when deciding on what price to negotiate. When McDonald, as a buyer, purchases beef from their suppliers, the PPI may also give McDonald’s useful information concerning price fluctuations.

The Producer Price Index (PPI) “measures the average change over time in the selling prices received by domestic producers for their output” (Bureau of Labor Statistics), “it allows buyers to shift their pricing strategies by historical suppliers’ price change compared with the PPI” (Bureau of Labor Statistics). If beef suppliers are not following the market price trends and either not decreasing prices as much as they should or increasing prices too greatly, McDonald’s can use this tool to negotiate with suppliers while also taking into account such considerations as the company’s break-even analysis, quality requirements, or quantity discounts based on competitors’ pricing (Monczka, 398, 404, 275, 595 SCM455). Other sources of commodity price data are “Pink sheets”, and global commodity market data which are available at the World Bank website (Monczka, 398 SCM355). Through this price information about the domestic and international market, McDonald’s can observe economic market situations and commodity trends and alter their pricing strategy to confront them. Based on the price data from the “Pink sheets”, quarterly price changes of USDA Choice beef are as follows in the graph below. [pic] A USDA chart showing past beef production and average market prices is shown below: average market price per 100 pounds, and beef production in hundred million pounds (McDonald’s). [pic] [pic] The volatility of beef price is shown to the chart above (Triarc Companies). McDonald’s can use this information to estimate when to stockpile larger quantities of beef in order to hedge against anticipated rises in price.

Cost Analysis The production of beef incurs costs at many different levels. Beef production starts out with the cattle being raised. At this point the farmers who raise them incur such costs as the cost of the farm land, labor, and feed for the cows. After the cows are ready they are sent to a slaughterhouse and from there to a meet processing plant. The meat processing plants are where McDonald’s purchases their beef from. Since these plants are where McDonald’s gets their beef directly from, this is where they have good opportunities to cut costs. We do not have information about exactly what costs are incurred by each step at a meet processing plant but we do know that there are certain things that these plants can do in order to control their costs. McDonald’s should encourage their current suppliers to control costs as far as possible in order to obtain cost savings for both of them. For example, when it comes to what quantities of beef the plants should be ordered at a time; when frequent order are economical and it is possible to implement just-in-time inventory replenishment it is recommended that the plants use a lot-sizing technique called “lot-for-lot”. This is when the organization only orders exactly what quantities of inventory are needed for a certain period (Pearson, 214, SCM432). If making frequent order and implementing just-in-time inventory replenishment is not practical for the processing plant then it is recommended that they place orders in accordance with their “economic order quantity”. The Economic order quantity is the level of inventory that minimizes the total inventory holding costs and ordering costs” (Faridani, 2009). EOQ is a good lot sizing technique especially when demand is relatively constant (Pearson, 214, SCM432). Other ways of controlling costs include building and implementing close to accurate forecasts for labor schedules in order to make sure that there are enough workers to perform the necessary tasks for the day while ensuring that the company does not end up paying workers who do not need to be present. Also, the plants should make sure that their processing equipment is set-up and laid out in a way that minimizes errors and inefficiencies in their operations. If McDonald’s pursues a strategy of supply base rationalization and optimization and maintains close open relationship with their suppliers it will be easier for them to encourage their suppliers to take these actions.

After the beef is finished being processed it is sent to McDonald’s who sells it to the final customer. McDonald’s should also keep some of these aspects of cost control in mind if they want to keep costs down on their end as well. They also need to find to most cost effective way to order, store and transport the inventory. For example, it would be inefficient for the overall supply chain for them to order small lot sizes from a supplier that requires long runs to minimize costs. If they cause the supplier to incur greater costs those costs may end up being passed on to McDonald’s. Recommendations Since we do not have access to information regarding any price bids given by suppliers to McDonalds, the price that McDonald’s themselves or any of their fast food competitors pay for beef, or the costs that go into making a beef patty, our price recommendation will be market-based as opposed to cost-based. The change in the quarterly wholesale price of beef over the past few years has exhibited no discernable pattern or trend (Figure 1). Therefore, we believe that a moving average forecast is appropriate for forecasting the price of beef in the future (Pfund, lecture, SCM432). By taking a five year moving average for the wholesale price of beef we find that in the near future beef will probably cost around $2. 27 per pound for those buying it wholesale (Figure 1). However, given McDonalds’ tremendous demand and their opportunity to take advantage of economies of scale in procurement, they should clearly be paying much less. One large American buyer of beef whose price information we were able to access was the U. S. Department of Agriculture. The USDA has purchased about 31,384,000 lbs. of beef so far this year for various purposes (Figure 2). Although it is unclear exactly how many different beef suppliers the USDA has, it is likely that they take advantage of large economies of scale in their procurement practices because the price that they paid for beef in 2009 was about 69% of the average wholesale price for beef this year. The average wholesale beef price for 2009 was $2. 18 per pound (Figure 1) and the price that the USDA bought it for this year was about $1. 49 per pound (Figure 2). If the USDA, making a purchase of 31,384,000 lbs of beef, is able to buy it for that price through the use of economies of scale or other price reduction practices, then McDonalds who purchases 1,000,000,000 lbs of beef per year should be able to get it for at least an equivalent price if not less. 69% of $2. 27 (the projected price of beef in the fourth quarter of 2009) is $1. 56. Therefore, we suggest that McDonalds should set their target negotiating price for $1. 56 per pound for beef.

The greatest amount that McDonalds should pay for beef should be around $2. 27 per pound or whatever the average wholesale price turns out to be in the future because there is no way that an organization with the buying power of McDonalds should be having to pay full wholesale price for the item. If any supplier tried to charge them full wholesale price for beef we are sure that they could easily get a lower price by going with another supplier. According to the USDA efficiency gains obtained through larger and more commercialized livestock systems will cause a long-term increase in beef production after 2010 (Westcott, 2003). This increase in production however will be counteracted by a simultaneous increase in the domestic demand for beef, resulting in a net increase in beef prices in the future (Westcott, 2003). As a result, in order to ensure a continued steady supply of beef McDonald’s might have to increase their sourcing of beef from outside the United States in order to access cheaper markets. If the price of beef is expected to rise McDonald’s might want to try to establish fixed-price contracts with their current beef suppliers in order to lock in a price at the current market rate before it increases (Monczka, 508 SCM355). However, since suppliers might not agree to that type of contract, and since contracts do have to get renegotiated at some point, we have outlined procurement strategies below that go beyond simply locking in a low market price with a supplier. As we previously stated in the demand analysis, McDonalds needs to take advantage of economies of scale in their procurement process. They buy roughly 1/27 of all the beef that is consumed by the United States. Exactly what quantities of beef McDonalds buys from each of their suppliers is proprietary information. However, what we do know is the more product a company sources from a certain supplier the lower of a per unit price they will probably be able to get. Therefore, it makes sense for a company who buys so much of a certain product to use economies of scale in procurement to their benefit to as great of a degree as reasonably possible. McDonalds says that they do not want to simply seek out whichever supplier will offer them the lowest price, and they do not want to compromise on quality and safety (Food Chain Centre). We also know that beef is a critical commodity for McDonalds. We know this because it is critical to the success of McDonalds, it is a large expenditure for the company, its quality is critical, and because as a result of McDonald’s high quality standards there are probably not a very large number of suppliers for them to choose from (Monczka, 211, SCM355/SCM455). In order for McDonalds to get high quality beef at a low price they need to determine a small group of highly performing, well-trusted, strategic preferred suppliers and source their beef exclusively from them (Monczka, 211, SCM355/SCM455). In addition to allowing McDonalds to gain from economies of scale and guarantee that they are sourcing high quality products this will also allow them to achieve a high level of information sharing and continuous process improvement with each of these chosen providers (Monczka, 211, SCM355/SCM455). Of course before McDonalds chooses who these suppliers will be they must first go through a process of supplier evaluation.

One criterion that McDonalds might want to look at might be the supplier’s process capabilities; McDonalds must make sure that any supplier they choose has sufficient capability to process the amount of beef that they require (Monczka, 214, SCM355/SCM455). McDonalds should also asses each potentials supplier’s management capabilities, they need to make sure that they choose a company whose management is committed to continuous process and quality improvement, has a high level of professional ability, has sufficient experience, can sustain a good relationship with their workforce, and is willing and able to develop a close working relationship with the buyer (Monczka, 214, SCM355/SCM455). The financial condition of a supplier is also something that McDonalds should look at. McDonalds should also look at each potential supplier’s financial ratios in order to determine if a supplier can invest in the resources necessary to supply the company, if they can pay their own suppliers as well as their workforce, and if they can continue to meet their financial obligations (Monczka, 214, SCM355/SCM455). McDonalds would not want to begin a strategic sourcing relationship with a supplier who ends up going out of business. McDonalds should also evaluate the suppliers planning and control systems, these systems can have significant impact on the performance of the supply chain (Monczka, 214, SCM355/SCM455). Another important criterion for McDonalds to consider is the extent to which the potential supplier complies with environmental regulations, if the supplier is hurt by fines or sanctions from the government for violating environmental regulations it could hurt their customers too (Monczka, 214, SCM355/SCM455). Furthermore, since McDonalds claims to have “the highest standards for food quality and food safety (including feed certification) in the fast food industry (and state that they) use only the products that meet or exceed (their) highest standards” (McDonald’s Customer Response Center, personal communication, November 7, 2009) we are sure that they would want to thoroughly inspect any potential supplier’s operational practices to make sure that they meet McDonalds’ safety and quality requirements. Finally, McDonalds should make certain that the suppliers that they choose are able and willing to share the company’s goals, establish metrics to ensure an ongoing improvement of processes, and commit to having discussions on how to resolve issues in a manner that is mutually beneficial (Monczka, 215, SCM355/SCM455). Since we do not have access to any of this information concerning any of McDonalds’ actual potential or current suppliers, we cannot actually make any recommendations as to which beef suppliers McDonalds should purchase from. However we do believe, based on the information that we do have, that if McDonalds were to follow this strategy of sourcing from a few carefully selected strategic suppliers, it would help their ability to maintain a steady flow of beef in order to meet their customer’s demand at a price that is good for them. Pursuing a strategy of supply base optimization and rationalization will not only allow McDonalds to achieve a lower product cost, be better equipped to ensure the safety and quality of their beef, and be able to work towards continuous process improvement with their suppliers. It will also allow them to achieve lower administrative costs. By having to interact with fewer suppliers McDonalds will save money on the costs associated with those interactions in terms of time, effort and having to clear up any miscommunications (Monczka, 318, SCM355). The costs that McDonalds saves here could serve as a buffer against any price increases the suppliers may ask for during negotiations (Brown, lecture, SCM455). However, McDonalds should be aware that there are risks associated with the strategy of supply base optimization and rationalization (Monczka, 319, SCM355). Yet, most of these risks can be mitigated. McDonalds should make sure that they do not lose the advantage of a competitive market place and get taken advantage of by a supplier (Monczka, 319, SCM355). McDonalds can avoid this through selecting suppliers carefully and constructing contracts that emphasize continuous supplier improvement with them (Monczka, 319, SCM355). Supplier disruption is also something that McDonalds should look out for (Monczka, 319, SCM355). Occurrences such as natural disasters, labor strikes, vandalism, or problems with the supplier’s suppliers can prevent McDonalds from obtaining the inventory that they need (Monczka, 320, SCM355). This is one of the reasons why we suggest that the company source beef from a small group of suppliers as opposed to just one. Moreover, McDonalds might want to practice cross-sourcing which is a practice in which a company selects suppliers with multiple capabilities so that the buying company can source more than one product from them if they have to (Monczka, 319, SCM355). For example, when choosing chicken suppliers McDonalds may want to choose ones who could sell them beef too just in case something happens to all of their beef suppliers. Another strategy that McDonalds could utilize to keep their procurements costs down is stockpiling. The price of beef is somewhat volatile due to factors such as weather conditions, mad-cow disease, and economic situations in the area from which the beef is sourced. McDonalds should purchase large amounts of beef when they know they can get it for a relatively low price in order to stockpile it for the future when beef prices rise. McDonalds is well equipped to do this because they freeze their beef after it is bought. This gives them an advantage over competitors like Wendy’s who insist on never freezing their beef and would therefore have a harder time stockpiling this inventory (Wikinvest, 2009). Of course this approach should only be pursued to the extent that the increased holding costs that will be incurred from stockpiling the beef do not outweigh the cost savings gained from not having to buy beef at a higher price.

One more way for McDonalds to decrease the overall costs of their beef procurement is through the use of commodity derivatives to hedge against the fluctuations of beef price. “A derivative is a financial instrument whose payoffs and values are derived from, or dependent on, something else” (Ross, 2008, FIN303). If McDonalds believes that the price of beef is going to increase they could purchase a commodity derivative for beef for a certain price and date anticipating that that the actual price of beef on that date will be higher than the price stated on the derivative (Dye, 2009). This will allow McDonalds to purchase the beef on that date for the (hopefully) lower price stated on the derivative as opposed to the (hopefully) higher market price at that time (Dye, 2009). Although this investment tool, like all other investment tools, carries with it a certain egree of risk, some of McDonalds’ competitors already use it as a method of controlling procurement costs (Wikinvest, 2009). This strategy would also be in-line with McDonald’s new Worldwide Beef Supply Chain director Jose-Luis Bretones’ wish to implement the use of more global beef trading options into McDonald’s beef supply chain (Murphy, 2009). Appendix Figure 1 |Quarterly averages |Retail Wholesale Farm Byprod. Net Farm Total Whl. to Rt. Farm to W Fr. share 5mkt steer Fresh Rt. | 2006 |IV. |394. 4 |223. 1 |209. 9 |21. 3 |188. 6 |205. 8 |171. 3 |34. |47. 8 |87. 44 |363. 0 | |2007 |I. |405. 4 |235. 8 |218. 6 |22. 8 |195. 8 |209. 6 |169. 6 |40. 0 |48. 3 |91. 09 |368. 2 | |2007 |II. |426. 5 |241. 5 |226. 8 |24. 8 |202. 0 |224. 5 |185. 0 |39. 5 |47. 4 |94. 48 |379. 4 | |2007 |III. |417. 7 |222. 5 |221. 6 |25. 6 |196. 0 |221. 7 |195. 2 |26. 5 |46. 9 |92. 34 |381. 9 | |2007 |IV. |413. 4 |224. 4 |223. 2 |26. 1 |197. 1 |216. 3 |189. 0 |27. 3 |47. 7 |93. 01 |380. 1 | |2008 |I. |416. 3 |224. 8 |218. 5 |27. 3 |191. 2 |225. 1 |191. 5 |33. 6 |45. 9 |91. 05 |386. 9 | |2008 |II. |423. 6 |235. 3 |223. 0 |27. 3 |195. 7 |227. 9 |188. 3 |39. 6 |46. 2 |92. 0 |389. 2 | |2008 |III. |445. 9 |249. 7 |236. 9 |29. 5 |207. 4 |238. 5 |196. 2 |42. 3 |46. 5 |98. 72 |406. 5 | |2008 |IV. |444. 0 |229. 5 |214. 3 |20. 7 |193. 6 |250. 4 |214. 5 |35. 9 |43. 6 |89. 29 |404. 0 | |2009 |I. |433. 1 |216. 3 |197. 8 |16. 4 |181. 4 |251. 7 |216. 8 |34. 9 |41. 9 |82. 43 |396. 1 | |2009 |II. |429. 4 |221. 5 |202. 6 |17. 4 |185. 2 |244. 2 |207. 9 |36. 3 |43. 1 |84. 43 |391. 4 | |2009 |III. |417. 6 |216. 8 |200. 1 |21. 6 |178. 5 |239. 1 |200. 8 |38. 3 |42. 7 |83. 37 |381. 5 | |(Hahn, 2009) Figure 2 USDA 2009 Beef Purchases [pic] (USDA, 2009) Works Cited Association, N. C. 008. Beef Production Fact – Beef from Pasture to Plate.

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