CASE STUDY - McDONALD'S

McDonald's is a global restaurant chain, with 36,000 restaurants in 119 countries at the end of 2015. Fifteen per cent of the restaurants are operated by the McDonald Corporation, with others operated through a variety of franchise agreements and joint ventures. McDonald's latest annual accounts revealed a sales turnover of $27.4 billion and an operating profit of $2.8 billion, after foreign currency adjustments.

Typically, the products sold in its restaurants are hamburgers, chicken, French fries, salads, soft drinks, breakfast items and desserts. Apart from food materials, other items which must be sourced include plastic trays and branded brown paper bags. As a matter of policy, McDonald's does not sell foodstuffs or materials directly to franchisees. Instead, it instructs franchisees to purchase these from approved third party suppliers, which are pre-qualified by McDonald's procurement team. The performance of suppliers is then monitored closely by McDonald's to ensure that the company's requirements are being met.

The procurement teams at McDonald's are constantly looking for new suppliers, as the scale of its operations increases. Also, as the company enters new markets which often have different cultures, customs and taboos, it introduces different products. In such situations, McDonald's has a sourcing plan, in order to achieve the best results. For example, it opened vegetarian-only restaurants in India in 2016. Rice dishes were added to the menus in Indonesia and prawn burgers in Japan, because of local consumer demand. These developments resulted in different products being sourced.

The total annual spend on foodstuffs and materials across the globe is almost $6 billion. Effective and efficient sourcing is a key factor in a fast-food environment to minimise the risk of supplier failure. McDonald's ensures that potential suppliers have sufficient financial liquidity to fulfil contracts. The procurement teams at McDonald's are aware that, if a potential supplier does not have sufficient financial resources, there is a danger that the supply of some foodstuffs and materials might not be delivered when required.

Because of the global nature and the large size of its business, McDonald's uses electronic systems extensively to source its requirements from external suppliers.

In the past McDonald's has been criticised for its environmental, sustainability and ethical records. In response to this, the company has changed some aspects of its operations. In an effort to respond to growing consumer awareness of food sources, it has changed its suppliers of coffee beans and milk. All coffee beans are now sourced from ethical suppliers that are certified by the Rainforest Alliance, a conservation group. McDonald's UK restaurants now source all the milk used in its restaurants from organic milk suppliers.

The company has also designed more efficient packaging and promotes the use of recycled materials. In the 1970's, a typical McDonald's meal required 45 grams of packaging materials, but by 2015, this had been reduced to 25 grams, a saving of 45%.

You have just been appointed the role of Procurement Manager at Mcdonald's.

In your first month in the role, you notice some procurement practices that have you a little concerned:

1. After realising that McDonald's were being significantly overcharged, McDonald's sought to terminate its relationship with a cleaning supplier. The cleaning company responded that under the terms of their contract with McDonald's, McDonald's must give 5 years notice of their intent to terminate. The contract furnished by the cleaning company hasn't been signed and McDonalds have no internal record of the contract. The cleaning company insisted the agreement had been agreed verbally with a Shift Supervisor at one of the site locations.

2. In Corporate Services, purchase orders were raised after invoices had been received to enable invoices to be cleared.

3. Marketing did place purchase orders but regularly exceeded their transaction expenditure limit of $10,000.

4. Invoices for services on sites are charged by the hour without any timesheet evidence. There were also isolated examples where construction-related invoices have been paid twice.

5. You have heard that some sites are procuring food materials from non-approved suppliers, but don't have any evidence of this. 6. Some suppliers have supplied to McDonald's for over 17 years without having gone through a competitive tender process and without having a contract in place.

Question 1: Procurement policies and procedures

You have been asked, in your role as Procurement Manager, to attend the next Commercial Lead Team Meeting. You have been given 10 minutes to talk on the subject of 'Control of procurement activities through effective procedures'.

a. How would you explain the corporate benefits of effective procurement procedures?

b. How will introducing such procedures reduce risk?

c. Would you recommend internal audit conduct a complete review of the Procurement function? Why or why not?

Question 2: Strategic Sourcing and Contract Law

You are aware that a strategic sourcing review will need to be undertaken for a new packaging contract and are mindful of the risk of supplier failure.

a. Explain the strategic sourcing process and describe the benefits and limitations of the strategic sourcing process.

b. List at least FIVE areas that should be appraised with potential suppliers. For each area provide a brief description of the appraisal criteria and identify how this information would be obtained from a supplier.

c. Describe the elements that need to exist in order for a legally binding contract to be established.

Question 3: E-Procurement

a. Explain the application of TWO e-procurement tools that an organisation such as McDonald's might use in procurement.

b. Assess THREE benefits for an organisation such as McDonald's of using e-procurement tools.

c. List THREE challenges that an organisation such as McDonald's might face through the use of e-procurement tools.

Question 4: Procurement Function

All new graduates from across the globe will convene for a 3-day Global Graduate Summit to learn about the Mcdonald's business and connect with other graduates. You have been asked to present on behalf of Procurement. Prepare some brief speaking notes to explain the purpose of the Procurement function, how your team add value to the business and some of the strategic priorities of the function. Assume you will only have a short time to make the presentation, so make your notes as persuasive and memorable as possible