Problem Statement
McDonald’s Japan uses just over 1 million pounds of French fries daily, purchased in the Columbia basin from three suppliers, including Lamb Weston, Simplot, and McCain, at 40 cents a pound (“Never Run Out”). Each distribution center in Japan keeps between 4-6 weeks of inventory of French fries, and there is a maximum storage space of 6 weeks of inventory. French fries are shipped to Tokyo, Kobe, and Kyushu, with shipping times of 3, 4, and 5 weeks, respectively.
All containers usually ship out of Tacoma, Washington, every week, with one 40’ container costing $2,500 to send to Japan (“Never Run Out”). Additionally, the Yen/USD exchange rate has recently fluctuated, indicating that it is weakening.
As per these details, assuming there are 30 days in a month, the cost of French fries for a normal month can be calculated as follows:
Cost of French fries in a day = 1,000,000 pounds x $0.40/pound = $400,000
Cost of French fries for a month = $400,000 x 30 = $12,000,000
The cost of shipping one container of French fries is $2,500, and each container is proposed to hold 50,400 pounds (1,400 boxes x 36 pounds per box).
Consequently, the shipping cost of one pound of French fries is $0.049.
The shipping cost of all French fries for a normal month is calculated as follows:
Cost of shipping to Tokyo = 1,000,000 x 0.5 x 0.049 x 3 = $73,500
Cost of shipping to Kobe = 1,000,000 x 0.3 x 0.049 x 4 = $58,800
Shipping cost to Kyushu = 1,000,000 x 0.2 x 0.049 x 5 = $49,000
Total shipping cost for a month = $181,300
Therefore, the total cost for a normal month is $12,000,000 + $181,300 = $12,181,300.
Situation Analysis
The Worst Case
At the point of a worst-case scenario, assuming the strike happens and is sustained for seven weeks, McDonald’s Japan needs to seek an alternative source supplier of French fries. The airfreight cost for one week of inventory is $1,000,000. This is 2.5 times the cost of purchasing French fries and shipping them from the Columbia Basin. Hence, airfreight is not a viable option for the entire seven weeks.
One option is to source French fries from Australia and New Zealand, but shipping is 20% more expensive (“Never Run Out”). Another alternative is to source French fries from Europe, which are also approved for sale in Japan, but the product cost is 10% more expensive, and shipping is 20% more expensive.
Assuming McDonald’s Japan sources French fries from Europe for seven weeks, a day costs $0.40 x 1.1 = $0.44. Shipping one pound of French fries costs $0.049 x 1.2 = $0.059. Therefore, the cost of French fries and shipping for a day is $0.44 + $0.059 = $0.499.
The total cost of French fries and shipping for seven weeks is $0.499 x 1,000,000 x 7 = $3,493,000.
Alternative Scenario Development
Two alternative scenarios are suggested to attain a least-cost option while maintaining 100% availability. The first option is to implement overflow storage in other cities in Japan. McDonald’s Japan should consider utilizing overflow storage facilities in alternative cities such as Hiroshima, Sapporo, and Nagoya. Such resources can accommodate more extensive inventory than the maximum storage space in individual distribution centers. Overflow storage costs 3 cents per pound per month (“Never Run Out”). Hence, overflow storage in other regions can expand inventory capacity and lower the risk of stockouts in the high-demand holiday season at a lower cost than outside frozen storage.
The second suggestion is to buy French fries from Australia and New Zealand. Shipping from these countries is approximately 20% more expensive than shipping from the U.S. (“Never Run Out”). However, the prevailing geopolitical climate has weakened the Yen, and importing from these countries may lower costs relative to the U.S. if the trend continues. Utilizing a combination of the two alternatives can provide redundancy and flexibility in supply sources, which reduces the risk of supply chain disruptions.
Sensitivity Analysis
One of the significant potential impacts that could impact the supply chain of McDonald’s Japan is the West Coast dock workers’ strike. Therefore, a sensitivity analysis is performed on the shipping time and cost of alternative supply sources from Europe, Australia, and New Zealand. The shipping cost from Europe is 10% more expensive than sourcing from the U.S. (“Never Run Out”). Shipping from Australia and New Zealand is 20% more expensive than shipping from the U.S. (“Never Run Out”). If the strike occurs, the supply chain of McDonald’s Japan may face increased shipping time and cost from alternative sources.
The additional shipping cost and lead time from these alternative sources involve an additional fee of 10% and three weeks of lead time in Europe. In Australia and New Zealand, there is an additional cost of 20% and 4-5 weeks of lead time (“Never Run Out”). The sensitivity analysis highlights that alternative sources are more expensive and may delay delivery during a supply chain disruption. This suggests that it is essential to have an effective contingency plan to retain 100% availability.
Recommendations
In summary, the proposed plan to maintain 100% availability during the holiday season involves implementing overflow storage in other cities in Japan and sourcing French fries from Australia and New Zealand. In the event of a strike, the sensitivity analysis indicates that the cost of sourcing from alternative sources will likely increase, and lead time will probably be longer.
Therefore, it is recommended that McDonald’s Japan should consider building strategic inventories in advance of the holiday season to reduce the risk of stockouts. McDonald’s Japan should also engage with its suppliers to develop contingency plans in case of supply chain disruptions. Finally, McDonald’s Japan should consider exploring other cost-effective and sustainable sourcing options to mitigate the impact of any future supply chain disruptions.
Work Cited
Never Run Out: Anticipating Supply Chain Variance. (n.d.). Unpublished case study.