Executive Summary
Many companies in the hospitality industry were performing exceptionally well in the market. However, during the pandemic, most of them failed to hit the same heights they did before. Despite the harsh times, McDonald’s has managed to maintain its excellent performance and top spot in the sector. It is ranked as the best and most accomplished organization in the field. By the end of last year, it opened over forty thousand restaurants worldwide as franchises. Two years ago, according to a public financial report, the business earned more than forty billion dollars, which was remarkable and praised the company management across the industry. The figure is estimated to have been nearly twenty billion dollars more than the secondly-ranked organization. In 2021, it was again ranked first among the brands with the most value in the sector. One of its closest rivals, Starbucks, has been discovered to find ways to attract some of its employees to work for them. Moreover, due to McDonald’s success, Asian countries want this corporation to invest more in their markets.
The main reason behind this company’s success is believed to be the fact that the firm focuses on delivering food on time and at low costs. Understanding that most customers are families, it is essential to maintain the culture of people enjoying their products in groups. Additionally, McDonald’s possesses peculiar restaurant equipment to make customers’ work more accessible. The technologies enable it to maintain low expenses on human resources because only a few employees are needed to execute multiple operations. Since it is involved in the franchising model, it must consider its procurement process.
Paper-driven procurement may have a significant impact on a firm or business. It refers to methods, structured techniques, and means utilized to streamline an organization’s procurement procedure and attain desired outcomes while saving time and cost and creating win-win supplier associations. It can be done in direct, reactive, indirect, or proactive forms. Inefficiencies result in unnecessary costs for companies in long purchase cycles, transaction conflicts, and missed discounts. Attempting to make the processes faster with old tools such as emails and spreadsheets is outdated and cannot yield good outcomes in the modern era. Firms must stop employing old methods and embrace new technology to capitalize on early purchase and payment discounts. This approach can help an organization to create a competitive advantage in the industry. However, it is essential to be aware of the risks associated with different stages of the procurement process. This paper aims to identify various stages of this process and evaluate how McDonald’s can achieving a competitive advantage.
Introduction
Mcdonald’s holds the title of the world’s most prominent fast food restaurant cooperation. By the end of the year 2021, they were operating 40,031 restaurants (Yahoo Finance, 2022). About 9000 restaurants are company-owned and managed, while the rest of the outlets are run by franchise partners across the globe in 119 countries on six continents with their local suppliers (Reference for Business, 2022). This corporation built an incredible food network over its 80-years long history (Figure 1). According to Forbes Magazine, Mcdonald’s will be the 10th wealthiest company in the world in 2022 (EcoCnn, 2022). This fact makes it the world’s most successful firm in the hospitality industry.
Current Position in the Market
McDonald’s is among the biggest organizations that specialize in fast food worldwide. According to CNN Business (2022), McDonald’s has long been known as a low-cost restaurant with multiple franchises in various countries. Recently, the management of the firm has tried to broaden the scope to appeal to new customers. Furthermore, according to The Wall Street Journal (2022) and EcoCnn (2022), they chose to modify the menu to a healthier alternative when restaurants like Subway started to rise on the market. Focusing on providing healthy and affordable options to families allowed the company to remain competitive.
McDonald’s is a leading quick-service restaurant chain in North America. In 2020 alone, the business earned more than $40 billion, which is $19 billion more than its rivals (Reference for Business, 2022, para. 1). The Chief Executive Officer of McDonald’s explained that one of the primary reasons for the firm’s success is timely delivery and low costs (Reference for Business, 2022). The company possesses the most unique and well-improved restaurant equipment to make the employees’ work easier. The computer-aided machinery enables them to maintain low costs by only requiring a few workers to execute various operations. It allows the staff to accomplish tasks faster. All McDonald’s strategies aim to minimize the time wasted waiting and increase the number of individuals served. Business analysts claim that the firm has maintained its emphasis on the core market for a long time despite the changing times (Reference for Business, 2022). McDonald’s has included playgrounds in the majority of its restaurants. Furthermore, their marketing schemes highlight family-friendly advertisements and slogans (Reference for Business, 2022). Indeed, a narrow focus allowed this firm to constantly have a large cohort of clients.
McDonald’s Supply Chain
McDonald’s supply chain is efficient, cost-effective, and reliable, as seen in Figure 2. It is an excellent example of how vertical integration can result in low costs and boost profits. According to Weigel and Ruecker (2017), the company focuses on growing their beef, potatoes, and other vegetables, processing their meat, and creating spices via reliable manufacturers. The Wall Street Journal (2022) suggests that the business owns the land on which the restaurants are built, which allows them to avoid dealing with leasing issues. All their activities are conducted via a vertical integration supply chain. Being a great volume purchaser forces the brand to rely on using that system (Khan, 2018). It gives McDonald’s the advantage of controlling its supply chain (PricewaterhouseCoopers, 2022). Indeed, having the power to regulate this network is crucial for such restaurants as McDonald’s if they want to continue delivering high-quality food to consumers.
The Four-Block Model
The four-block model can be used to analyze McDonald’s position on the market and assess the potential dangers and opportunities. It was developed by Clay Christensen and Mark Johnson in 2008 (Caredda, 2021). The four components of this model are customer value proposition (CVP), profit formula, essential resources, and key processes (Caredda, 2021). Firstly, CVP assesses whether an organization has identified its customers, defined the tasks to be done to satisfy them, and decides how the product should be sold (Caredda, 2021). Secondly, the company must calculate how it will profit by simultaneously delivering value to the consumer (Caredda, 2021). Thirdly, the firm should determine the resources, materials, finances, and people for creating the product (Caredda, 2021). Fourthly, the essential processes need to be identified and made cyclical (Caredda, 2021). These four elements can be utilized to assess McDonald’s presentation in this field.
Figure 3 shows the four-block model for McDonald’s, highlighting the essential points. The company identified its target consumers as families, striving to deliver large portions. Furthermore, McDonald’s should remember that such concepts as a revenue model, cost structure, resource velocity, and margin model are essential to consider when calculating profit (Caredda, 2021). This firm’s key resources are its employees, the AI it utilizes, and food products from suppliers. Lastly, the main processes in this business are ordering the right amount of raw materials from partners, preparing meals, and delivering them to clients on time.
Stages of the Procurement Process
The procurement procedure refers to a series of essential processes to get services or products from request to purchase the order to invoice approval and delivery. According to Love et al. (2021), although the terms purchasing and procurement are utilized interchangeably, they differ. The former means getting necessary goods or services on behalf of a firm, while the latter describes the activities involved in gaining them.
Competitive Advantage
A competitive advantage in procurement by an organization such as McDonald’s refers to its ability to offer customers quality goods or products with more value than competitors. According to Briedon (2022), it is built over time and involves complex contributions from various organizational departments. A company’s procurement section is critical and contributes to its competitive edge. An effective procurement process allows the selection of optimal suppliers and aligns them to the organization’s mission (Britt, 2022). Notably, an organization’s procurement department contributes to its competitive advantage. Such a process can result in tangible cost improvements, supply flexibility, and agility. Costs improvements in the procurement process, while being a key performance indicator to procurement professional, leads to an organization’s competitive advantage by allowing the implementation of strategic procurement.
Achieving a competitive advantage requires optimizing the procurement process to reduce inefficiencies, mitigate risks, and offer quality products. This process involves seven stages: organizational needs identification, supplier market assessment, gathering information about the provider, formulation of purchase strategy, actualizing purchasing plan, negotiation and bid selection, and turnaround strategy implementation (Acquisition International, 2022). These stages in the procurement process can help McDonald’s maintain its competitive advantage.
Organizational Needs Identification
Achieving a competitive advantage through organizational need identification requires a company to forecast its needs before they arise (Briedon, 2022). For a multinational like McDonald’s, it involves using data and artificial intelligence to predict the organization’s needs (Zsidisin and Henke, 2019). Using artificial intelligence eliminates the labor-intensive and often untimely needs identification process. These strategies ensure that the company is prepared to handle any issues that may arise in the future.
Many companies experience difficulty handling harsh economic times or technological changes due to a lack of willingness to predict their future needs. For example, according to Britt (2022), amid the COVID-19 pandemic, most decided to close as they could not provide food to their consumers due to immense lockdown restrictions. Others, who had more remarkable foresight, started implementing online ordering of food items several years before the coronavirus crisis (Britt, 2022). This approach allowed them to continue operating in the new realm of strict social distancing since they could deliver food to their customers.
Supplier Market Assessment
The aim or role of the supplier market assessment stage is to identify and evaluate the alternatives of the available vendors and auto rise them concerning the approaches for attaining improvement in the supplier performance. According to Lyson and Farrington (2020), it is crucial to know and understand different aspects of the suppliers, especially for an organization as vast as McDonald’s. Furthermore, Lyson and Farrington (2020) claim that unscrupulous individuals or groups might ruin one’s reputation, which is valuable in business. With this phase of the procurement process, the company’s image is always protected, giving it a competitive edge over rivals.
If the method of pre-qualifying the suppliers was ineffective, there is a high possibility that it could damage the company’s image. In the food industry, reputation is delicate and must be protected because its loss causes significant damage to the business (Cramer, 2022). Food poisoning can happen when the quality of raw products is not assessed adequately before meal preparation (Cramer, 2022). Apart from legal issues that may arise after such an event, social media and the public would cause an uproar that would ensure the firm stops operating or loses its customers and subsequently the revenue.
Information Gathering about Providers
The possible reason why many organizations gather consumer information is that it aids them in obtaining a better comprehension of how customers act online, defining their demographics, and identifying how they can improve. Peterson (2021) suggests that data enables an easy understanding of what the customers desire from the company. In particular, it gives an idea of the specific services, goods, and modes of interaction with the firm people demand (Peterson, 2021). In the event management concerning the consumers, the company managers can tailor every activity toward fitting the clients’ needs, establishing the grounds for a competitive edge.
Actualizing the Procurement Plan
For a massive company like McDonald’s, actualizing the procurement plan would be an enormous undertaking if goods were centrally procured. However, with each restaurant free to procure goods from approved suppliers, the only difficulty which can arise is not delivering the products on time (Cramer, 2022). Still, the semi-autonomy afforded to outlets and franchisees by McDonald’s ensures a competitive advantage by making the company’s supply chain agile.
Negotiation and Bid Selection
Fortunately, all McDonald’s suppliers are pre-approved by the company, with franchisees and the corporation’s outlets being required to source their needs directly from them. According to Khan (2018), for a firm to qualify as a supplier for McDonald’s, it must meet specific legal, regulatory, and quality criteria. Furthermore, the suppliers are audited regularly to ensure compliance, creating a competitive advantage by constantly maintaining high quality.
As discussed earlier, if the technique used in pre-qualifying the suppliers is ineffective, it will likely damage the brand name. The food industry or hospitality is a delicate field, and every action can significantly impact an organization (Cramer, 2022). The reason behind it is that a human’s health and sometimes life can be affected if the quality of supplies is poor and unsatisfactory. Some individuals have been found to supply goods unsuitable for human consumption (Cramer, 2022). This certainly undesirable approach to business has not only caused some companies millions but left them in bankruptcy due to many lawsuits filed against these organizations (Cramer, 2022). Even if the fallen victim starts business operations again, the social media era will not allow people to forget the past incidents.
Turnaround Strategy Implementation
A process is ineffective if the turnaround for goods ordered from suppliers is poor. Bettering the approach needs the company to develop effective communication channels with suppliers. Indeed, improving the turnaround strategy requires McDonald’s to have effective communication as well. Proper communication ensures that orders are received when sent, products are delivered on time, and interaction with suppliers is maintained in real-time. Fortunately, advances in technology allow the integration of supplier systems with their clients, ensuring real-time monitoring of the inventory levels as well as timely intervention and correction when a certain inventory level is breached.
Key Risks that McDonald’s Faces in the Procurement Stages
Strategic procurement is a process that allows an organization to plan in advance to receive goods on time, in the quantity and quality ordered, as well as on budget. Furthermore, strategic procurement requires careful optimization of the procurement process. Compared to regular procurement, strategic procurement requires deliberate actions to find efficiencies across spend categories, minimization of supply risk, and greater emphasis on bringing to the fore pricing and forecasting. Procurement process optimization aims to achieve competitive advantages that allow an organization to enjoy more excellent returns on investment (Peterson, 2021). Ultimately, the objective of the optimization is to accomplish a competitive edge that allows companies to increase profit (Sharma, Sengupta, and Panja, 2019). In essence, creating an organization’s competitive advantage is a process that creates value by balancing cost savings with product quality and compliance (Lyson and Fariington, 2020). This entire process is complex and delicate, but the outcome is a better competitive edge for a firm.
The strategic procurement process is key to establishing an organization’s competitive advantage and comprises seven stages when appropriately optimized. However, the seven stages also pose severe risks to an organization if they are not adequately implemented. For example, a needs analysis mechanism that does not consider McDonald’s organizational structure, market requirements, and procurement strategy may fail to bring value to the company (Weigel and Ruecker, 2017). McDonald’s necessities should be stated accurately, within budget, and under a realistic schedule.
McDonald’s Procurement Risk Matrix
A risk matrix is a tool that can be utilized during risk evaluation to define the extent of dangers by considering the category of likelihood or probability against that of effect severity. It is a simple technique that increases the visibility of the risks as well as aids in reaching decisions by managers, as seen in Table 1A (Loosemore, Alkilani, and Mathenge, 2019). It is a term that means a lack of certainty concerning the result of making a specific choice (Loosemore, Alkilani, and Mathenge, 2019). The level of downside risk statistically can be computed as the multiplication of the probability that harm happens by severity.
Practically, the risk matrix method for businesses is a helpful tool where either the harm severity or probability is hard to estimate with precision. Even though standard versions are available in particular contexts, companies may need to establish their own (Loosemore, Alkilani, and Mathenge, 2019). For instance, the harm severity can be classified as catastrophic, critical, marginal, and minor. The first-class means major and irreversible impact, while the second means significant damage but reversible (Loosemore, Alkilani, and Mathenge, 2019). The third class affects the environment but can be reversed, while the last category indicates minimum effect. This information is essential when discussing the risks that may arise following the procurement process stages.
Inefficiency in Contract Management
This risk, with a score of 1 on a scale from 1 to 10, belongs to the negotiation and bid selection stage. In addition, the failure of McDonald’s to gather adequate information concerning the providers adds to the risk of inefficiency in contract management. One action suggested as a control mechanism for this danger is pre-qualifying the business partners to ensure the firm partners with competent groups only. Some companies or business groups solely focus on matters about the contract during the negotiation process.
After completing the process, they do not return to the contract to check for different issues until they renew it. This approach is risky and can result in severe problems for the organization (Bodal, 2022). If they sign a contract with a party that is later sued for breaching their agreements, their public image may tarnish. A business using the franchising model should be keen on identifying any red flags in terms of partners who may fail to meet specific criteria. Like any other organization worldwide, McDonald’s has a mission statement that guides them. When selecting firms with whom to conduct business, it is crucial to refer to these statements that were initially written by the firm’s leadership.
Poor Supplier Selection
Studying the risk matrix, as shown in figure 3.0, this risk, with a score of 7 on a scale of 1-10, belongs to the supplier market assessment stage. Failing to thoroughly assess the supplier market creates the danger of poor selection of suppliers (Bodal, 2022). The action can be dangerous regarding its impact on the final product served to the consumers. Despite the measures by McDonald’s to ensure only the top suppliers are pre-approved, unprincipled suppliers still find ways to escape the mechanisms set to capture them.
Letting suppliers provide goods or services to the business outlets establishes fiscal and reputational dangers for the whole organization. Notably, it may result in a loss of competitive edge for the firm (Zsidisin and Henke, 2019). The outcome of this could determine the end of profitability. Furthermore, the company could become prey to disorganized supplier associations. The management possesses a fiduciary duty to the shareholders to sustain excellent relationships with every stakeholder. Indeed, McDonald’s management is obliged to maintain good relationships with the corporation’s stakeholders. If the relationship with suppliers were to fall apart, it would mean the disintegration of the company’s supply chain loss of McDonald’s competitive advantage.
Supply Chain Disruption
With an established vertical integration supply chain system employed at McDonald’s, the probability of disruptions is low, as seen in figure 3.0. However, the impact is very high when it happens and can cause significant damage. The risk belongs to the information gathering stage, which suggests its control mechanism. The company must realize that there is always the risk of supply chain disruption when the information on providers and distributors is incomprehensive. Moreover, running close to capacity makes production and distribution more cost-effective. However, it does not take much to become overwhelming, which is undesirable for the business (Bosio et al., 2022). Since it occurs at different points of the supply chain, it is challenging to bring supply and demand into balance. The role of a supply chain is to ensure that goods produced are not only distributed but delivered to the destination and in the right amount.
In the case of McDonald’s or any other business in the food industry, it is only successful or effective when the customer’s demand is fulfilled. Last year, several companies complained about the individuals and groups that purport to be experienced suppliers (Bosio et al., 2022). These people presented themselves to unsuspecting companies who trusted them with their goods. It was discovered that they changed the products to appear similar and provided to the customers (Bosio et al., 2022). This situation caused an uproar among the consumers on social media, and an investigation was conducted. The solution to such an issue has its foundation in one of the procurement stages, which is information gathering and assessment.
Decreasing Profits
The risk of decreasing profits is low for an established organization such as McDonald’s. On a scale of 1 to 10, it scored two and belonged to the actualizing the procurement plan stage. For a business to position itself well in the market and avoid such risks, it should thoroughly follow the procurement process and its phases. As discussed earlier, it is vital to perform the suppliers’ selection process properly. It is required due to the level of impact, both financial and reputational, they make on the company’s success. If poor quality goods or services are provided to different outlets, this may result in a bad image because the customers will associate these products with the entire brand of McDonald’s. Since it is a social media era, news about a poor-quality product can spread quickly to millions of people. Eventually, the company may lose its customers and experience a drop in sales, leading to revenue loss.
Conclusion
This paper has identified the various stages of the procurement process and evaluated how they can aid McDonald’s in achieving a competitive edge and address the risks it will face. The company is one of the most accomplished and successful fast-food restaurants worldwide. According to the top business analysts, the business will be the tenth wealthiest organization globally by the end of this year.
Procurement can describe the techniques, organized methods, and means utilized to rationalize a company’s procuring procedure and obtain expected outcomes. It can occur in various forms, including direct, reactive, indirect, or proactive. An inefficient procurement process leads to unanticipated costs for businesses in missed discounts, transaction conflicts, and long purchase cycles. Attempting to increase the speed of the procedures while employing old tools is a practice that is outdated and yields poor outcomes. The procurement process can help McDonald’s to gain a competitive edge over its rivals in the industry. It refers to the capacity to offer the consumers quality products rich in value. Nevertheless, it is essential to note that there are risks associated with different stages of the procedure. For example, despite the organization’s measures to ensure only the top suppliers are approved, unprincipled suppliers could ruin the process with the products of poor quality. Their impact can be felt financially and reputationally, which is terrible for the brand.
Lastly, having a procurement plan is essential, but actualizing it is even more beneficial for an organization. Without accomplishing this, the business may be trapped in a bad image of low-quality products or inefficient delivery. McDonald’s would be embracing the risk of failing in the future without adequately checking, qualifying, and selecting suppliers. Wrong suppliers might lead to a poor reputation which is valued highly in the food industry.
Reference List
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Appendix A
Table 1A: McDonald’s risk matrix.