Supply Chain Management

A Project On

“Mc Donalds”

SUBMITTED TO: Dr.Jayant Sonwalkar SUBMITTED BY:

MUGDHA BIYANI
PANKAJ SINGH
 ACKNOWLEDGEMENT

This Supply Chain Management project on McDonalds

is the outcome of sincere and positive contribution of various
individuals. We can not justifiably translate there help, cooperation
and guidance extended to us in completing this project work in
words. However we shall be failing in our duty if we don’t express
our thanks to a few people in particular.
We would like to thank Mr. Akhilesh Mishra(floor manager) at
McDonalds for his cooperation and it has been high privilege to
work under the able supervision of our respected teacher,
Dr. Jayant Sonwalkar

Mugdha Biyani
Pankaj Singh Parihar

Table of Contents

1. Introduction to McDonalds .
 1.1 History.

1.2 Corporate overview.

1.3 Why the Project?

1.4 Types of Restaurants .

2. Methodology used.

3. Business model.

4. Advertising.

5. Global operations and locations.

6. McDonalds in India.

7. Understanding Supply Chain Management.

8. Inventory Management.

9. How Purchasing cycle works?

10. Understanding Supply Chain at McDonalds.

11. Suppliers and Distributors of McDonalds.

12. findings of study conducted.

 McDonald's

Is the leading global foodservice retailer with more than 30,000 local restaurants serving
52 million people in more than 100 countries each day. More than 70% of McDonald's
restaurants worldwide are owned and operated by independent local men and women.
 Is one of the world's most well-known and valuable brands and holds a leading share in
the globally branded quick service restaurant segment of the informal eating-out market
in virtually every country in which we do business.

Serves the world some of its favorite foods - World Famous French Fries, Big Mac,
Quarter Pounder, Chicken McNuggets and Egg McMuffin.

Our rich history began with our founder, Ray Kroc. The strong foundation that he built
continues today with McDonald's vision and the commitment of our talented executives
to keep the shine on McDonald's arches for years to come. To read more about
McDonald's history, vision and executives, click on their links in the left menu.

History

1955 Ray Kroc opens his first restaurant in Des Plaines, Illinois and the McDonald's
Corporation is created.
1957 Quality, Service, Cleanliness and Value (QSC& V) becomes the company motto.
1959 The 100th McDonald's opens in Chicago.
1961 Hamburger University opens in Elk Grove, near Chicago.
1963 One billion hamburgers sold.
Ronald McDonald makes his debut.
1964 Filet-O-Fish sandwich is introduced.
1965 McDonald's Corporation goes public.
1967 The first restaurants outside of the USA open in Canada and Puerto Rico.
1968 The Big Mac is introduced.
The 1,000th restaurant opens in Des Plaines, Illinois.
1972 A new McDonald's restaurant opens every day.
The Quarter Pounder is introduced.
1973 Egg McMuffin is introduced.
1974 The first Ronald McDonald House opens in Philadelphia.
The Happy Meal is launched.
1983 Chicken McNuggets is introduced.
New Hamburger University campus opens in Oak Brook, Illinois. Set in 80 wooded
acres. Training is provided for every level of McDonald's management worldwide.
50 billionth hamburger sold.
1984 Ronald McDonald Children's Charities is founded in Ray Kroc’s memory to raise
funds in support of child welfare.
1989 McDonald's is listed on the Frankfurt, Munich, Paris and Tokyo stock exchanges.
1990 McDonald's opens in Pushkin Square and Gorky Street, Moscow.
1993 The first McDonald's at sea opens aboard the Silja Europa, the world's largest ferry
sailing between Stockholm and Helsinki.
1994 Restaurants open in Bahrain, Bulgaria, Egypt, Kuwait, Latvia, Oman, New Caledonia,
Trinidad and United Arab Emirates, bringing the total to over 15,000 in 79 countries
on 6 continents.
1996 McDonald's opens in India – the 95th country.

The business began in 1940, with a restaurant opened by siblings Dick and Mac
McDonald in San Bernardino, California. Their introduction of the "Speedee Service
System" in 1948 established the principles of the modern fast-food restaurant. The
present corporation dates its founding to the opening of a franchised restaurant by Ray
Kroc, in Des Plaines, Illinois on April 15, 1955, the ninth McDonald's restaurant overall.
Kroc later purchased the McDonald brothers' equity in the company and led its
worldwide expansion.

With the successful expansion of McDonald's into many international markets, the
company has become a symbol of globalization and the spread of the American way of
life. Its prominence has also made it a frequent topic of public debates about obesity,
corporate ethics and consumer responsibility.

Corporate overview
Facts and figures

A McDonald's restaurant in Times Square.

McDonald's restaurants are found in 120 countries and territories around the world and
serve nearly 54 million customers each day. The company also operates other restaurant
brands, such as Piles Café, and has a minority stake in Pret a Manger. The company
owned a majority stake in Chipotle Mexican Grill until completing its divestment in
October 2006. Until December 2003, it also owned Donatos Pizza. On August 27, 2007,
McDonald's sold Boston Market to Sun Capital Partners.[3] It also has a subsidiary,
Redbox, which started in 2003 as 18-foot (5.5 m) wide automated convenience stores, but
as of 2005, has focused on DVD rental machines.

WHY THE PROJECT

 • To strengthen our knowledge
• To develop practical approach
• To understand real supply chain practices
• To know the cold chain system

Methodology Used

• Through Questioners
• Personal interviews

Types of restaurants

A McDonald's restaurant in Kristiansand, Norway.

Inside a Dublin McCafé.

Most standalone McDonald's restaurants offer both counter service and drive-through
service, with indoor and sometimes outdoor seating. Drive-Thru, Auto-Mac, Pay and
Drive, or McDrive as it is known in many countries, often has separate stations for
placing, paying for, and picking up orders, though the latter two steps are frequently
combined; it was first introduced in Arizona in 1975, following the lead of other fast-
food chains. In some countries "McDrive" locations near highways offer no counter
service or seating. In contrast, locations in high-density city neighborhoods often omit
drive-through service. There are also a few locations, located mostly in downtown
districts, that offer Walk-Thru service in place of Drive-Thru.

Specially themed restaurants also exist, such as the "Solid Gold McDonald's," a 1950s
rock-and-roll themed restaurant. In Victoria, British Columbia, there is also a
McDonald's with a 24 carat (100%) gold chandelier and similar light fixtures.

The site of the first McDonald's to be franchised by Ray Kroc is now a museum in Des
Plaines, Illinois. The building is a replica of the original, which was the ninth McDonald's
restaurant opened.

To accommodate the current trend for high quality coffee and the popularity of coffee
shops in general, McDonald's introduced McCafés. The McCafé concept is a café-style
accompaniment to McDonald's restaurants. McCafé is a concept of McDonald's
Australia, starting with Melbourne in 1993. Today, most McDonald's in Australia have
McCafés located within the existing McDonald's restaurant. In Tasmania there are
McCafés in every store, with the rest of the states quickly following suite. After
upgrading to the new McCafe look and feel, some Australian stores have noticed up to a
60% increase in sales.

As of the end of 2003 there were over 600 McCafés worldwide.

Some locations are connected to BP gas stations/convenience stores,[4] while others called
McDonald's Express have limited seating and/or menu or may be located in a shopping
mall. Other McDonald's are located in Wal-Mart stores. McStop is a location targeted at
truckers and travelers which may have services found at truck stops.[5]

Playgrounds

Some McDonald's in suburban areas and certain cities feature large indoor or outdoor
playgrounds, called "McDonald's PlayPlace" (if indoors) or "Playland" (outdoors)[citation
needed]
. The first PlayPlace with the familiar crawl-tube design with ball pits and slides was
introduced in 1987 in the USA, with many more being constructed soon after. Some
PlayPlace playgrounds have been renovated into "R Gym" areas.

"R Gyms" are in-restaurant play area that features interactive game zones designed for
children aged 4 to 12. Equipped with stationary bicycles attached to video games, dance
pads, basketball hoops, monkey bars, an obstacle course, and other games which
emphasize physical activity.[6]

The "R Gym" features the Toddler Zone, an active play environment with age appropriate
games that develop physical coordination and social skills; the Active Zone, designed for
children aged four-to-eight that promotes physical fitness through fun play; the Sports
Zone which features a series of sport oriented activities to promote aerobic exercise for
children aged 9-to-12; the Parent Zone which features seating and provides a monitoring
area for their children; and the Dining Area which allows families to eat.

Redesign

A UK McDonald's before the redesign, August 2006

The same McDonald's after the redesign, August 2007

In 2006, McDonald's introduced its "Forever Young" brand by redesigning all of their
restaurants, the first major redesign since the 1970s.[7][8]

The new design will include the traditional McDonald's yellow and red colors, but the red
will be muted to terra cotta, the yellow will turn golden for a more "sunny" look, and
olive and sage green will be added. To warm up their look, the restaurants will have less
plastic and more brick and wood, with modern hanging lights to produce a softer glow.
Contemporary art or framed photographs will hang on the walls.

The exterior will have golden awnings and a "swish brow" instead of the traditional
double-slanted mansard roof.

The new restaurants will feature areas:

• The "linger" zone will offer armchairs, sofas, and Wi-Fi connections.

• The "grab and go" zone will feature tall counters with bar stools for customers
who eat alone; Plasma TVs will offer them news and weather reports.

• The "flexible" zone will be targeted toward families and will have booths
featuring fabric cushions with colorful patterns and flexible seating.

Different music will be targeted to each zone.

Business model

The McDonald's Corporation's business model is slightly different from that of most
other fast-food chains. In addition to ordinary franchise fees, supplies, and percentage of
sales, McDonald's also collects rent, partially linked to sales. As a condition of the
franchise agreement, the Corporation owns the properties on which most McDonald's
franchises are located. The UK business model is different, in that fewer than 30% of
restaurants are franchised, with the majority under the ownership of the company.
McDonald's trains its franchisees and others at Hamburger University in Oak Brook,
Illinois.

According to Fast Food Nation by Eric Schlosser (2001), nearly one in eight workers in
the U.S. have at some time been employed by McDonald's. (According to a news piece
on Fox News this figure is one in ten). The book also states that McDonald's is the largest
private operator of playgrounds in the U.S., as well as the single largest purchaser of
beef, pork, potatoes, and apples. The selection of meats McDonald's uses varies with the
culture of the host country.

Products

McDonald's predominantly sells hamburgers, various types of chicken sandwiches and

products, french fries, soft drinks, breakfast items, and desserts. In most markets,
McDonald's offers salads and vegetarian items, wraps and other localized fare. This local
deviation from the standard menu is a characteristic for which the chain is particularly
known, and one which is employed either to abide by regional food taboos (such as the
religious prohibition of beef consumption in India) or to make available foods with which
the regional market is more familiar (such as the sale of McRice in Indonesia).
Advertising

Ronald McDonald

McDonald's has for decades maintained an extensive advertising campaign. In addition to

the usual media (television, radio, and newspaper), the company makes significant use of
billboards and signage, sponsors sporting events from ranging from Little League to the
Olympic Games, and makes coolers of orange drink with their logo available for local
events of all kinds. Nonetheless, television has always played a central role in the
company's advertising strategy.

To date, McDonald's has used 23 different slogans in United States advertising, as well as
a few other slogans for select countries and regions. At times, it has run into trouble with
its campaigns.
Global operations

Countries with McDonald's stores

McDonald's has become emblematic of globalization, sometimes referred as the

"McDonaldization" of society. The Economist magazine uses the "Big Mac Index": the
comparison of a Big Mac's cost in various world currencies can be used to informally
judge these currencies' purchasing power parity.

The EFTA countries are leading the Big Mac Index with the top 3 most expensive Big
Mac's. Iceland has the most expensive Big Mac, followed by Norway and Switzerland.
The brand is known informally as "Mickey D's" (in the US and Canada), "Macky D's" (in
the UK), "Mäkkäri" (in Finland), "McDo" (in France, Quebec, the Philippines, and the
Kansai region of Japan), "Maccer's" (in Ireland), "Macarrannis" (in Mexico), "Maccas"
(in New Zealand and Australia), "McD's" (in New Zealand), "Donken" (in Sweden), "de
Mac" (in the Netherlands), or "Mac" (in Brazil).

Thomas Friedman once said that no country with a McDonald's had gone to war with
another.[14] However, the "Golden Arches Theory of Conflict Prevention" is not strictly
true. Careful historians point to the 1989 United States invasion of Panama, NATO's
bombing of Serbia in 1999, and the 2006 Lebanon War as exceptions.

Some observers have suggested that the company should be given credit for increasing
the standard of service in markets that it enters. A group of anthropologists in a study
entitled Golden Arches East (Stanford University Press, 1998, edited by James L.
Watson) looked at the impact McDonald's had on East Asia, and Hong Kong in
particular. When it opened in Hong Kong in 1975, McDonald's was the first restaurant to
consistently offer clean restrooms, driving customers to demand the same of other
restaurants and institutions. In East Asia in particular, McDonald's have become a symbol
for the desire to embrace Western cultural norms. McDonald's have recently taken to
partnering up with Sinopec, China's second largest oil company, in the People's Republic
of China, as it begins to take advantage of China's growing use of personal vehicles by
opening numerous drive-thru restaurants.[15]
 Global locations

• Argentina • Dominican • Latvia • Singapore

• Aruba Republic • Lebanon • Slovakia
• Australia • Ecuador • Lithuania • Slovenia
• Austria • Egypt • Malaysia • South Africa
• Azerbaijan • El Salvador • Malta • South Korea
• Bahamas • Estonia • Mauritius • Spain
• Bahrain • Fiji • Mexico • Sri Lanka
• Bangladesh • Finland • Moldova • Sweden
• Barbados • France • Morocco • Switzerland
• Belgium • Georgia • Netherlan • Syria
• Bermuda • Germany ds • Taiwan
• Botswana • Greece • New • Thailand
• Brazil • Grenada Zealand • Trinidad and Tobago
• Bulgaria • Guatemala • Nicaragua • Turkey
• Canada • Guyana • Oman • Ukraine
• Cayman Islands • Honduras • Pakistan • United Arab Emirates
• Chile • Hungary • Panama • United Kingdom
• People's Republic of • Iceland • Peru • United States
China • Italy • Paraguay o Guam
o Hong Kong • India • Philippine o Puerto Rico
o Macau • Indonesia s o United States
• Colombia • Ireland • Poland Virgin Islands
• Costa Rica • Israel • Portugal • Uruguay
• Croatia • Jamaica • Qatar • Venezuela
• Cyprus • Japan • Romania • Yemen
• Czech Republic • Jordan • Russia
• Denmark • Saint •
• Kuwait Lucia
• Dominica • Saudi
Arabia

• Serbia
 MCDONALDS IN INDIA

McDonald's opened its doors in India in October 1996. Ever since then, our family
restaurants in Mumbai, Delhi, Pune, Ahmedabad, Vadodara, Ludhiana, Jaipur, Noida
Faridabad, Doraha, Manesar and Gurgaon have proceeded to demonstrate, much to the
delight of all our customers, what the McDonald's experience is all about.

Our first restaurant opened on 15th April 1955 in Des Plaines, Illinois, U.S.A. Almost 50
years down the line, we are the world's largest food service system with more than 30,000
restaurants in 100 countries, serving more than 46 million customers every day. Click
here for more information on the history of McDonald’s.

Locally Owned

McDonald’s in India is a 50-50 joint venture partnership between McDonald’s

Corporation [USA] and two Indian businessmen. Amit Jatia’s company Hardcastle
Restaurants Pvt. Ltd. owns and operates McDonald's restaurants in Western India. While
Connaught Plaza Restaurants Pvt. Ltd headed by Vikram Bakshi owns and operates the
Northern operations.

Amit Jatia and Vikram Bakshi are like-minded visionaries who share McDonald's
complete commitment to Quality, Service, Cleanliness and Value (QSC&V). Having
signed their joint-venture agreements with McDonald's in April 1995, they trained
extensively, along with their Indian management team, in McDonald's restaurants in
Indonesia and the U.S.A. before opening the first McDonald’s restaurant in India.

Respect for local culture

McDonald's India has developed a special menu with vegetarian selections to suit Indian
tastes and preferences. McDonald's does not offer any beef or pork items in India. Only
the freshest chicken, fish and vegetable products find their way into our Indian
restaurants.

In addition, we've re-formulated some of our products using spices favoured by Indians.
Among these are McVeggie™ burger, McAloo Tikki™ burger, Veg. Pizza McPuff™ and
Chicken McGrill™ burger. We've also created eggless sandwich sauces for our
vegetarian customers. Even our soft serves and McShakes™ are egg-less, offering a
larger variety to our vegetarian consumers.

International Standards

McDonald's India's local suppliers provide us with the highest quality, freshest
ingredients. Complete adherence to the Indian Government regulations on food, health
and hygiene is ensured, while maintaining our own recognized international standards.
Fast, friendly service - the hallmark of McDonald's restaurants the world over is the
mantra we abide by.

Stringent cleaning standards ensure that all tables, chairs, highchairs and trays are
sanitised several times each hour. Such meticulous attention to cleanliness extends
beyond the lobby and kitchen to even the pavement and immediate areas outside the
restaurant.

Our Philosophy

"We take the burger business more seriously than anyone else." When McDonald's
founder, Ray Kroc made that memorable statement, he was letting the world in on the
philosophy and secret behind McDonald's phenomenal success.

Our vision to be India’s "best" quick service restaurant experience is supported by a set of
principles and core values [McDonald’s Way]

The principles that guide us …

• Quality, Service, Cleanliness & Value - It is an unflinching McDonald's ideology

that our customers must always get quality products, served quickly and with a
smile, in a clean and pleasant environment; and all at a fair price
 • We are committed to exceeding our customers' expectations in every restaurant
every time.

• We have a passion and a responsibility for enhancing and protecting the

McDonald's brand.

• We believe in a collaborative management approach, employing a mutually

respectful business philosophy,

• We will seize every opportunity to innovate and lead the industry on behalf of our
customers.

It was early evening and one of the 25 McDonald's outlets in India was bustling with
activity with hungry souls trooping in all the time. No matter what one ordered - a hot
Maharaja Mac or an apple pie - the very best was served every time.

But did anyone ever wonder as to how this US giant managed the show so perfectly? The
answer seemed to lie in a brilliantly articulated food chain, which extended from these
outlets right up to farms all across India.

US-based fast food giant, McDonald's success in India had been built on four pillars:
limited menu, fresh food, fast service and affordable price. Intense competition and
demands for a wider menu, drive-through and sit-down meals - encouraged the fast food
giant to customize product variety without hampering the efficacy of its supply chain.

Around the world (including India), approximately 85% of McDonald's restaurants were
owned and operated by independent franchisees. Yet, McDonald's was able to run the
show seamlessly by outsourcing nine different ingredients used in making a burger from
over 35 suppliers spread all over India through a massive value chain.

Between 1992 and 1996, when McDonald's opened its first outlet in India, it worked
frenetically to put the perfect supply chain in place. It trained the local farmers to produce
lettuces or potatoes to specifications and worked with a vendor to get the perfect cold
chain1 in place. And explained to the suppliers precisely why only one particular size of
peas was acceptable (if they were too large, they would pop out of the patty and get
burnt).

These efforts paid off in the form of joint ventures between McDonald's India (a 100%
wholly-owned subsidiary of McDonald's
What is supply chain management

Supply chain management (SCM) is the process of planning, implementing, and

controlling the operations of the supply chain as efficiently as possible. Supply Chain
Management spans all movement and storage of raw materials, work-in-process
inventory, and finished goods from point-of-origin to point-of-consumption.

The definition one American professional association put forward is that Supply Chain
Management encompasses the planning and management of all activities involved in
sourcing, procurement, conversion, and logistics management activities. Importantly, it
also includes coordination and collaboration with channel partners, which can be
suppliers, intermediaries, third-party service providers, and customers. In essence, Supply
Chain Management integrates supply and demand management within and across
companies. More recently, the loosely coupled, self-organizing network of businesses
that cooperates to provide product and service offerings has been called the extended
enterprise.[1]

Some experts distinguish Supply Chain Management and logistics, while others consider
the terms to be interchangeable.

Supply Chain Management is also a category of software product.

Supply chain event management (abbreviated as SCEM) is a consideration of all possible

occurring events and factors that can cause a disruption in a supply chain. With SCEM
possible scenarios can be created and solutions can be planned.

Supply Chain Management Problems

Supply chain management must address the following problems:

• Distribution Network Configuration: Number, location and network missions of

suppliers, production facilities, distribution centers, warehouses, cross-docks and
customers.
• Distribution Strategy: Including questions of operating control (centralized,
decentralized or shared); delivery scheme (e.g., direct shipment, pool point
shipping, Cross docking, DSD (direct store delivery), closed loop shipping); mode
of transportation (e.g., motor carrier, including truckload, LTL, parcel; railroad;
 intermodal, including TOFC and COFC; ocean freight; airfreight); replenishment
strategy (e.g., pull, push or hybrid); and transportation control (e.g., owner-
operated, private carrier, common carrier, contract carrier, or 3PL.
• Information: Integration of and processes through the supply chain to share
valuable information, including demand signals, forecasts, inventory and
transportation etc.
• Inventory Management: Quantity and location of inventory including raw
materials, work-in-process and finished goods.
• Cash-Flow: Arranging the payment terms and the methodologies for exchanging
funds across entities within the supply chain.

Supply chain execution is managing and coordinating the movement of materials,

information and funds across the supply chain. The flow is bi-directional.

Activities/functions

Supply chain management is a cross-functional approach to managing the movement of

raw materials into an organization, certain aspects of the internal processing of materials
into finished goods, and then the movement of finished goods out of the organization
toward the end-consumer. As organizations strive to focus on core competencies and
becoming more flexible, they have reduced their ownership of raw materials sources and
distribution channels. These functions are increasingly being outsourced to other entities
that can perform the activities better or more cost effectively. The effect is to increase the
number of organizations involved in satisfying customer demand, while reducing
management control of daily logistics operations. Less control and more supply chain
partners led to the creation of supply chain management concepts. The purpose of supply
chain management is to improve trust and collaboration among supply chain partners,
thus improving inventory visibility and improving inventory velocity.

Several models have been proposed for understanding the activities required to manage
material movements across organizational and functional boundaries. SCOR is a supply
chain management model promoted by the Supply Chain Management Council. Another
model is the SCM Model proposed by the Global Supply Chain Forum (GSCF). Supply
chain activities can be grouped into strategic, tactical, and operational levels of activities.

Strategic

• Strategic network optimization, including the number, location, and size of

warehouses, distribution centers and facilities.
• Strategic partnership with suppliers, distributors, and customers, creating
communication channels for critical information and operational improvements
such as cross docking, direct shipping, and third-party logistics.
 • Product design coordination, so that new and existing products can be optimally
integrated into the supply chain, load management
• Information Technology infrastructure, to support supply chain operations.
• Where-to-make and what-to-make-or-buy decisions
• Aligning overall organizational strategy with supply strategy.

Tactical

• Sourcing contracts and other purchasing decisions.

• Production decisions, including contracting, locations, scheduling, and planning
process definition.
• Inventory decisions, including quantity, location, and quality of inventory.
• Transportation strategy, including frequency, routes, and contracting.
• Benchmarking of all operations against competitors and implementation of best
practices throughout the enterprise.
• Milestone payments

Operational

• Daily production and distribution planning, including all nodes in the supply
chain.
• Production scheduling for each manufacturing facility in the supply chain (minute
by minute).
• Demand planning and forecasting, coordinating the demand forecast of all
customers and sharing the forecast with all suppliers.
• Sourcing planning, including current inventory and forecast demand, in
collaboration with all suppliers.
• Inbound operations, including transportation from suppliers and receiving
inventory.
• Production operations, including the consumption of materials and flow of
finished goods.
• Outbound operations, including all fulfillment activities and transportation to
customers.
• Order promising, accounting for all constraints in the supply chain, including all
suppliers, manufacturing facilities, distribution centers, and other customers.

Supply chain management

Organizations increasingly find that they must rely on effective supply chains, or
networks, to successfully compete in the global market and networked economy.[2] In
Peter Drucker's (1998) management's new paradigms, this concept of business
relationships extends beyond traditional enterprise boundaries and seeks to organize
entire business processes throughout a value chain of multiple companies.

During the past decades, globalization, outsourcing and information technology have
enabled many organizations, such as Dell and Hewlett Packard, to successfully operate
solid collaborative supply networks in which each specialized business partner focuses on
only a few key strategic activities (Scott, 1993). This inter-organizational supply network
can be acknowledged as a new form of organization. However, with the complicated
interactions among the players, the network structure fits neither "market" nor
"hierarchy" categories (Powell, 1990). It is not clear what kind of performance impacts
that different supply network structures could have on firms, and little is known about the
coordination conditions and trade-offs that may exist among the players. From a system's
point of view, a complex network structure can be decomposed into individual
component firms (Zhang and Dilts, 2004). Traditionally, companies in a supply network
concentrate on the inputs and outputs of the processes, with little concern for the internal
management working of other individual players. Therefore, the choice of an internal
management control structure is known to impact local firm performance (Mintzberg,
1979).

In the 21st century, there have been a few changes in business environment that have
contributed to the development of supply chain networks. First, as an outcome of
globalization and the proliferation of multi-national companies, joint ventures, strategic
alliances and business partnerships, there were found to be significant success factors,
following the earlier "Just-In-Time", "Lean Management" and "Agile Manufacturing"
practices.[3] Second, technological changes, particularly the dramatic fall in information
communication costs, which are a paramount component of transaction costs, have led to
changes in coordination among the members of the supply chain network (Coase, 1998).

Many researchers have recognized these kinds of supply network structures as a new
organization form, using terms such as "Keiretsu", "Extended Enterprise", "Virtual
Corporation", Global Production Network", and "Next Generation Manufacturing
System".[4] In general, such a structure can be defined as "a group of semi-independent
organizations, each with their capabilities, which collaborate in ever-changing
constellations to serve one or more markets in order to achieve some business goal
specific to that collaboration" (Akkermans, 2001).

Successful SCM requires a change from managing individual functions to integrating

activities into key supply chain processes. An example scenario: the purchasing
department places orders as requirements become appropriate. Marketing, responding to
customer demand, communicates with several distributors and retailers, and attempts to
satisfy this demand. Shared information between supply chain partners can only be fully
leveraged through process integration.

Supply chain business process integration involves collaborative work between buyers
and suppliers, joint product development, common systems and shared information.
According to Lambert and Cooper (2000) operating an integrated supply chain requires
continuous information flows, which in turn assist to achieve the best product flows.
However, in many companies, management has reached the conclusion that optimizing
the product flows cannot be accomplished without implementing a process approach to
the business. The key supply chain processes stated by Lambert (2004) are:

• Customer relationship management

• Customer service management
• Demand management
• Order fulfillment
• Manufacturing flow management
• Supplier relationship management
• Product development and commercialization
• Returns management

One could suggest other key critical supply business processes combining these processes
stated by Lambert such as:

a. Customer service management

b. Procurement
c. Product development and commercialization
d. Manufacturing flow management/support
e. Physical distribution
f. Outsourcing/partnerships
g. Performance measurement

a) Customer service management process

Customer Relationship Management concerns the relationship between the organization

and its customers.Customer service provides the source of customer information. It also
provides the customer with real-time information on promising dates and product
availability through interfaces with the company's production and distribution operations.
Successful organizations use following steps to build customer relationships:

• determine mutually satisfying goals between organization and customers

• establish and maintain customer rapport
• produce positive feelings in the organization and the customers

b) Procurement process

Strategic plans are developed with suppliers to support the manufacturing flow
management process and development of new products. In firms where operations extend
globally, sourcing should be managed on a global basis. The desired outcome is a win-
win relationship, where both parties benefit, and reduction times in the design cycle and
product development are achieved. Also, the purchasing function develops rapid
communication systems, such as electronic data interchange (EDI) and Internet linkages
to transfer possible requirements more rapidly. Activities related to obtaining products
and materials from outside suppliers requires performing resource planning, supply
sourcing, negotiation, order placement, inbound transportation, storage, handling and
quality assurance, many of which include the responsibility to coordinate with suppliers
in scheduling, supply continuity, hedging, and research into new sources or programmes.

c) Product development and commercialization

Here, customers and suppliers must be united into the product development process, thus
to reduce time to market. As product life cycles shorten, the appropriate products must be
developed and successfully launched in ever shorter time-schedules to remain
competitive. According to Lambert and Cooper (2000), managers of the product
development and commercialization process must:

1. coordinate with customer relationship management to identify customer-

articulated needs;
2. select materials and suppliers in conjunction with procurement, and
3. develop production technology in manufacturing flow to manufacture and
integrate into the best supply chain flow for the product/market combination.

d) Manufacturing flow management process

The manufacturing process is produced and supplies products to the distribution channels
based on past forecasts. Manufacturing processes must be flexible to respond to market
changes, and must accommodate mass customization. Orders are processes operating on
a just-in-time (JIT) basis in minimum lot sizes. Also, changes in the manufacturing flow
process lead to shorter cycle times, meaning improved responsiveness and efficiency of
demand to customers. Activities related to planning, scheduling and supporting
manufacturing operations, such as work-in-process storage, handling, transportation, and
time phasing of components, inventory at manufacturing sites and maximum flexibility in
the coordination of geographic and final assemblies postponement of physical
distribution operations.

e) Physical distribution

This concerns movement of a finished product/service to customers. In physical

distribution, the customer is the final destination of a marketing channel, and the
availability of the product/service is a vital part of each channel participant's marketing
effort. It is also through the physical distribution process that the time and space of
customer service become an integral part of marketing, thus it links a marketing channel
with its customers (e.g. links manufacturers, wholesalers, retailers).

f) Outsourcing/partnerships
This is not just outsourcing the procurement of materials and components, but also
outsourcing of services that traditionally have been provided in-house. The logic of this
trend is that the company will increasingly focus on those activities in the value chain
where it has a distinctive advantage and everything else it will outsource. This movement
has been particularly evident in logistics where the provision of transport, warehousing
and inventory control is increasingly subcontracted to specialists or logistics partners.
Also, to manage and control this network of partners and suppliers requires a blend of
both central and local involvement. Hence, strategic decisions need to be taken centrally
with the monitoring and control of supplier performance and day-to-day liaison with
logistics partners being best managed at a local level.

g) Performance measurement

Experts found a strong relationship from the largest arcs of supplier and customer
integration to market share and profitability. By taking advantage of supplier capabilities
and emphasizing a long-term supply chain perspective in customer relationships can be
both correlated with firm performance. As logistics competency becomes a more critical
factor in creating and maintaining competitive advantage, logistics measurement becomes
increasingly important because the difference between profitable and unprofitable
operations becomes more narrow. A.T. Kearney Consultants (1985) noted that firms
engaging in comprehensive performance measurement realized improvements in overall
productivity. According to experts internal measures are generally collected and analyzed
by the firm including

1. Cost
2. Customer Service
3. Productivity measures
4. Asset measurement, and
5. Quality.

External performance measurement is examined through customer perception measures

and "best practice" benchmarking, and includes 1) customer perception measurement,
and 2) best practice benchmarking.

Components of Supply Chain Management are 1. Standardization 2. Postponement 3.

Customization

Supply chain management components integration

The management components of SCM

The SCM components are the third element of the four-square circulation framework.
The level of integration and management of a business process link is a function of the
number and level, ranging from low to high, of components added to the link (Ellram and
Cooper, 1990; Houlihan, 1985). Consequently, adding more management components or
increasing the level of each component can increase the level of integration of the
business process link. The literature on business process reengineering,[5] buyer-supplier
relationships,[6] and SCM[7] suggests various possible components that must receive
managerial attention when managing supply relationships. Lambert and Cooper (2000)
identified the following components which are:

• Planning and control

• Work structure
• Organization structure
• Product flow facility structure
• Information flow facility structure
• Management methods
• Power and leadership structure
• Risk and reward structure
• Culture and attitude

However, a more careful examination of the existing literature[8] will lead us to a more
comprehensive structure of what should be the key critical supply chain components, the
"branches" of the previous identified supply chain business processes, that is, what kind
of relationship the components may have that are related with suppliers and customers
accordingly. Bowersox and Closs states that the emphasis on cooperation represents the
synergism leading to the highest level of joint achievement (Bowersox and Closs, 1996).
A primary level channel participant is a business that is willing to participate in the
inventory ownership responsibility or assume other aspects of financial risk, thus
including primary level components (Bowersox and Closs, 1996). A secondary level
participant (specialized), is a business that participates in channel relationships by
performing essential services for primary participants, thus including secondary level
components, which are in support of primary participants. Third level channel
participants and components that will support the primary level channel participants, and
which are the fundamental branches of the secondary level components, may also be
included.

Consequently, Lambert and Cooper's framework of supply chain components does not
lead us to the conclusion about what are the primary or secondary (specialized) level
supply chain components (see Bowersox and Closs, 1996, p.g. 93). That is, what supply
chain components should be viewed as primary or secondary, how these components
should be structured in order to have a more comprehensive supply chain structure, and
to examine the supply chain as an integrative one (See above sections 2.1 and 3.1).

Baziotopoulos reviewed the literature to identify supply chain components. Based on this
study, Baziotopoulos (2004) suggests the following supply chain components:
 1. For customer service management: Includes the primary level component of
customer relationship management, and secondary level components such as
benchmarking and order fulfillment.
2. For product development and commercialization: Includes the primary level
component of Product Data Management (PDM), and secondary level
components such as market share, customer satisfaction, profit margins, and
returns to stakeholders.
3. For physical distribution, manufacturing support and procurement: Includes
the primary level component of enterprise resource planning (ERP), with
secondary level components such as warehouse management, material
management, manufacturing planning, personnel management, and postponement
(order management).
4. For performance measurement: Includes the primary level component of
logistics performance measurement, which is correlated with the information flow
facility structure within the organization. Secondary level components may
include four types of measurement such as: variation, direction, decision and
policy measurements. More specifically, in accordance with these secondary level
components, total cost analysis (TCA), customer profitability analysis (CPA), and
asset management could be concerned as well.
5. For outsourcing: Includes the primary level component of management methods,
and the strategic objectives for particular initiatives in key areas of information
technology, operations, manufacturing capabilities, and logistics (secondary level
components).

Reverse Supply Chain Reverse Logistics is the process of planning,implementing and

controlling the efficient, effective inbound flow and storage of secondary goods and
related information opposite to the traditional supply chain direction for the purpose of
recovering value or proper disposal. Reverse logistics is also referred to as "Aftermarket
Customer Services". In other words, anytime money is taken from a company's Warranty
Reserve or Service Logistics budget, that is a Reverse Logistics operation.
Traditional and Supply Chain Management Approaches Compared

______________________________________________________________
Approach
Element Traditional Supply Chain
Inventory management Independent efforts Joint reduction in channel
approach: inventories
Total cost approach: Minimize firm costs Channel-wide cost
efficiencies
Time horizon: Short-term Long-term
Amount of information Limited to needs of current As required for planning
sharing and monitoring: transaction and monitoring processes
Amount of coordination of Single contact for the Multiple contacts between
multiple levels in the transaction between channel levels in firms and levels of
channel: pairs channel
Joint planning Transaction-based Ongoing
Compatibility of corporate Not relevant Compatible at least for key
philosophies: relationships
Breadth of supplier base: Large to increase Small to increase
competition and spread risk coordination
Channel leadership: Not needed Needed for coordination
focus
Amount of sharing of risks Each on its own Risks and rewards shared
and rewards: over the long-term
Speed of operations, “Warehouse” orientation “Distribution Center”
information and inventory (storage, safety stock) orientation (inventory
flows: interrupted by barriers to velocity) interconnecting
flows; Localize to channel flows; JIT; Quick Response
pairs across the channel.
 INTRODUCTION

 Some of the important observable changes in today’s global context are :

1. Shorter product life cycles.

2. Shorter product change-over cycles
3. Higher rate of new product development
4. Shorter production runs.
5. Quality and productivity-quality integration, in terms of zero-defect production.
6. Total Quality Control (TQC) or company-wide Total Quality Management (TQM).
7. Equipment and process technology as a strategic resource
8. Flexible Manufacturing Systems (FMS)
9. Increasing importance of project management.
10. Technological changes in information handling equipment and office automation.
11. Competitive strategy based on technology and training of employees in multiple work
skills, participation and responsibility.
12. Computer Aided Design (CAD), and Manufacturing (CAM).
13. Increasing role of technological forecasting.
14. Increasing use of automated decision aids like Decision Support Systems (DSS),
Expert Systems (ES), and Simulation Experiments.
15. Combination of technologies i.e. ‘technology fusion’ for development of ‘hybrid’
technologies.

These and related changes have led to certain ongoing trends that dominate the world
industrial scene, presently.

These trends are:

♦ Globalization.
♦ Automation.
♦ Knowledge intensive nature of production and service activities.
♦ Information technology based faster economic metabolism of organizations, markets
and production systems in industrially advanced nations and
♦ Transnational strategic alliances between firms, organization network and inter
organizational structures.
The following factors and their interactions further complicate the issue:

♦ Over capacity of production facilities in many industries.

♦ Saturation and increasing segmentation of markets.
♦ Changing customer values, and more exacting requirements of product cost, quality,
and performance of the users.
♦ Need to lower breakeven point owing to increasing fractioning of markets.
♦ Emergence of unexpected competitors across the world.
♦ Unanticipated connections among industries owing to equipment and process
technology changes in one branch of industry producing a cascading impact on other
branches and sectors.

The foregoing picture of the state of global industrial competition brings out the
exceedingly difficult and demanding nature of the requirements for coping with such a
dynamic situation.

INVENTORY MANAGEMENT

 INTRODUCTORY CONCEPT AND DEFINITION

Inventory control cannot be treated in isolation. Inventories grow
because of large lead times, long setup times, erratic output, etc.
Inventory managers have an unenviable task on their hands. They are
blamed at the drop of a hat. However the nature of the problem is such
that, they on their own can do very little about the inventory on hand.
Inventory management is but a part of the greater system that we may
well call as the production materials management system.

Traditionally, inventory control systems have been reactive in nature.

The rule has been to provide for extra inventory as a means to tackle
the wide range of variability that confronts any organization.

Inventories must flow. This becomes all the more important when cost
is considered, for cost is like dust- it has a tendency to settle on
anything sitting around. Rapid flow of materials allows little time for
cost to accumulate.

Conflicting Pressures on Inventory Levels

Pressures for Small Pressures for Large

Inventories
1. Interest or opportunity
cost
2. Storage and handling
cost
3. Property taxes
4. Insurance premiums
5. Shrinkage costs:
Pilferage, obsolescence
and deterioration.
Inventories
1. Customer service
2. Ordering or setup cost
3. Labour and facility
utilisation
4. Transportation cost
5. Cost of purchased items

Four reasons for its importance are

• Inventories can be a major commitment of monetary resources.

• Inventories affect virtually every aspect of daily operations.
• Inventories can be a major competitive weapon.
• Inventories are the major control problem in many companies.

 Functions and types of inventories:

Inventory serves various functions in a firm. Firms hold inventories to
buffer against uncertainties in supply, in the production process, and in
demand.
Irrespective of whether a certain inventory is planned or not, it always
serves the basic function of de-coupling supply from demand.
Inventories can be classified in various ways depending on the specific
purpose. Manufacturing companies have broadly two categories of
inventories. They are:
1. Manufacturing inventory
2. Distribution inventory
1. Manufacturing Inventory
(a) Raw materials (eg.steel)
(b)Semi-finished components (eg Tata junction control, tata toyo
making radiators)
(c) Finished components(eg tyres)
(d)Sub-assemblies(eg.gear box)
(e) Work in progress (WIP)(eg steel body)
(f) Finished goods(eg Tata indica V2)
(g)Supplies/consumables(eg cotton,oil)
(h)Spares(eg m/c spare parts)

2. Distribution Inventory
(a) Finished products in warehouse
(b)Finished products in transit
 FUNCTIONS OF INVENTORY CONTROL
1. To de-couple demand and supply (marketing and production).
2. To take care of physical impracticality of getting right amount of
stock at exact time of requirement.
3. To economize production level or smoother manufacturing.
4. To de-link various successive stages in a production process.
5. To reduce material handling costs.
6. To take advantage of quantity discounts – bulk purchases.
7. To buffer to reduce uncertainty regarding raw material supply and
prices.
8. To earn favourable return on investment,
9. To take care of variable, seasonal, immediate customer demands.
10. To stabilize direct labour requirements to improve labour
relations.
11. To facilitate manufacture of a range of products on the same
facilities.
12. To take advantage of lower bulk transportation cost.
13. To disclose slow moving and non-moving items.
14. To prevent loss through loss, damage, pilferage, etc.
 ELEMENTS OF INVENTORY COSTS
The types of costs that usually affect the inventory decision are:
1. The cost to place replenishment order. These are also referred
to as replenishment costs or procurement or indenting costs.
• Cost of paperwork, typing and dispatching an order,
• Costs incurred in following up timely deliveries, travelling costs,
purchase follow up costs, telephone, telegrams, telex, postal, email
and other correspondence costs,
• Costs involved in receiving the order, incoming inspection,
checking, physical handing over to stores,
• Any setup machine cost, if any, directly charged by the supplier to
the batch size,
• Salaries and wages of the purchase department.
2. The cost to hold inventory: These costs include all expenses
incurred because of the volume of inventory carried. These are also
called as inventory carrying costs. This may be a fixed sum per unit
per time period, or it may be a fixed percent of value per time
period. In more complex models it may consist of more than one
element. That is, holding costs may consist of both physical storage
and capital costs (foregone earnings). Among the relevant costs are
warehouse rental (implicit or explicit), clerical costs of counting
inventory, insurance for goods and warehouses, security, taxes on
inventory, obsolescence, damage, pilferage, theft (burglars and
employees), reduced item life, spoilage, and the value associated
with funds tied up in inventory. This cost of capital may be the
actual cost of funds borrowed to purchase inventory, the interest
that could be saved if that money were used to retire debt, the
interest that could have been earned by depositing the funds, or
and internal rate of return, representing gains made from using the
same funds on, for example, a plant expansion. The components of
this cost are – cycle stock costs and buffer stock costs.

 The Challenges of Inventory Management:

• Maximize the level of customer service, and

• Minimizing the cost of providing an adequate level of customer
service, promoting efficiency in production or purchasing

The organization’s Inventory Management System must carry out

objectives set by upper management. It must perform in such a way to
enhance the organization’s profit or performance. The objectives set
by management will frequently fall into either of two categories:

1. Customer service objectives, and

2. Inventory investment objectives.

Thus we see the basic conflict of inventory management: some

objectives call for economizing on inventory levels, while other
objectives call for increasing inventories. These objectives may create
conflict along departmental lines: finance wants smaller sums tied up
in inventory, while marketing wants larger amounts so that customer
orders can be more promptly satisfied.

COSTS ASSOCIATED WITH INVENTORIES

From a managerial point of view, two basic categories of costs are

associated with inventories: (1) inventory carrying costs and (2)
inventory acquisition costs. These plus a related variable costs are
discussed in the following paragraphs.
Carrying Costs

Carrying material in inventory is expensive. Prior to the relatively

recent periods of higher rates, a number of studies determined that
the annual cost of carrying a production inventory averaged
approximately 25 percent of the value of the inventory. The escalating
and volatile cost of money in recent years, however, has increased the
typical firm’s annual inventory carrying cost to figure between 25 and
35 percent of the value of the inventory. Five major elements make up
these costs in the following manner:

___________________________________________
1 Opportunity cost of invested funds 12-20%
2 Insurance costs 2-4%
3 Property taxes 1-3%
4 Storage costs 1-3%
5 Obsolescence and deterioration 4-10%
__________
Total carrying costs 20-40%
_____________________________________________

Let us briefly examine these carrying costs.

1. Opportunity cost of invested funds. When a firm purchases

Rs.500,000 worth of a production material and keeps it in inventory,
it simply has this much less cash to spend for other purposes.
Money invested in productive equipment or in external securities
earns a return for the company. Conceptually, then, it is logical for
the firm to charge all money invested in inventory an amount equal
to that it could earn if invested elsewhere in the company. This is
the “opportunity cost” associated with inventory investment.
2. Insurance costs. Most firms insure their assets against possible
loss from fire and other forms of damage. An extra Rs.500,000
worth of inventory represents an additional asset on which
insurance premiums must be paid.
3. Property taxes. As with insurance, property taxes are levied on
the assessed value of a firm’s assets; the greater the inventory
value, the greater the asset value, the greater the asset value, and
consequently the higher the firm’s tax bill.
4. Storage costs. The warehouse in which a firm stores its inventory
is depreciated a certain number of rupees per year over the length
of its life. One may say, then, that the cost of warehouse space is a
given number of Rs. per cubic foot per year. And this cost
conceptually can be charged against inventory occupying in the
space.
5. Obsolescence and deterioration. In most inventory operation, a
certain percentage of the stock spoils, is damaged, is pilfered, or
eventually becomes obsolete. No matter how diligently warehouse
managers guard against these occurrences, a certain number
always take place. With new products being introduced at an
increasing rate, the probability of obsolescence is increased
accordingly. Consequently, the larger the inventory, typically the
greater the absolute loss from this source.

Generally speaking, this group of carrying costs rises and falls

nearly proportionately with the rise and fall of the inventory level.
Further, the inventory level is directly related to the quantity in which
the ordered material is delivered. When the complete order is shipped
at one time, the larger the order quantity; the higher the average
inventory level vary nearly directly with the size of the delivery
quantity.
Relationship of inventory-related costs to inventory level ( AC =
acquisition costs; CC= carrying costs.)

If a firm has estimated its approximately inventory carrying cost, as a

percentage of inventory value, the annual inventory carrying costs that
would be generated by delivery quantities of various sizes can be
calculated as follows:

(Carrying cost per year) = (average inventory value) x (inv. carrying

cost as a % of inv.
value)

(Carrying cost per year) = (average inventory in units) x (material unit

cost)
x (inv. carrying cost as % of inv. value)

CC = Q/2 x C x I
Where CC = carrying cost per year for the material in question
Q = order or delivery quantity for the material, in units
C = delivered unit cost of the material
I = inventory carrying cost for the material, expressed as a
percentage of inventory value
Acquisition Costs
Looking at inventory costs in another light, a different set of indirect
materials cost factors emerges. These factors all contribute to the cost
of generating, processing, and handling an order, along with its related
paperwork. Examples of these costs are listed below and can be
thought of as inventory acquisition costs.
1. A certain portion of wages and operating expenses of such
departments as purchasing and supply, production control,
 receiving, inspection, stores, and accounts payable - those
departments whose personnel devote time to the generation and
handling of the order.
2. The cost of supplies such as engineering drawings, envelops,
stationary, and forms for purchasing, production control, receiving,
accounting , and so forth.
3. The cost of services such as computer time, telephone, fax
machine, telegraphs, and postage expended in procuring material
When considering this group of acquisition costs, observe that they
behave quite differently from carrying costs. Acquisition costs are not
related to inventory size per se; rather, they are a function of the
number of orders placed or deliveries received during a given period of
time.
One simplified example will illustrate this point. Suppose a buyer
in the purchasing and supply department receives a requisition for a
special fabricated part used in the manufacture of one of the firm’s
products. Assume further that the part has been purchased before and
that price quotations from three or four shops are on file. The buyer
first reviews the present inventory situation and probably checks with
production control to see if any significant changes are anticipated in
future production. Drawings and specifications of the part are then
reviewed to refresh his or her memory regarding required tooling and
other technical details of the purchase. Next, the buyer reviews the
quotations to determine why the order was placed with supplier A last
time. Before deciding if supplier A should again receive the order, the
buyer must also review supplier performance data. Finally, the buyer
decides which supplier should receive the order and subsequently
inquiries about the firm’s current shop loads and any other matters
that have arisen during the investigation. It is entirely possible that a
negotiation session may also be required.
In total, the buyer’s investigation may require anywhere from an
hour to several days. The total cost of the buyer’s time to the
company will be the same whether the purchase order is written for 20
parts or 200 parts. This process may result in the development of a
term contract with the supplier, in which case the buyer’s effort is
spread over all deliveries of the item during the life of the contract. If
this is not the case, however, the next time the buyer receives another
requisition for this part, he or she will go through somewhat the same
process, generating almost the same indirect cost for the company.
In largest segment of the acquisition cost element is made up of
these types of indirect labor and overhead costs, generated in
purchasing and in the other departments that subsequently become
involved in handling some activity associated with the purchase. The
cost of suppliers and services consumed in the placement and handling
of an order typically varies directly with the number of order placed.
While these costs are significant, they are considerably less so that the
human and related overhead cost figures just discussed. Although the
variable acquisition cost per order varies widely among firms,
depending on the specific cost inclusions, today the range appears to
run from approximately $50 to $125 per order.
If a firm experiences a certain annual usage of an item, the
number of orders placed during the year will decline as the individual
order quantity increases, thus generating lower annual acquisition
costs. The experience of numerous firms over the years reveals that
this relationship is not linear, but that if follows the approximate
contour of the AC curve shown in fig.
If a firm’s cost accounting department can estimate its
approximately acquisition cost per order, the annual acquisition costs
that would be generated by order quantities of various sizes can be
calculated as follows:
( Acquisition cost per year) = (number of orders placed per year) x
(acquisition cost per
orde
r)

AC = U/Q x A

Where AC = acquisition cost per year for the material in question

U = expected annual usage of the material, in units
Q = order or delivery quantity for the material, in units.
A = acquisition cost per order or per delivery for the material

Economic Order Quantity Concept (EOQ)

If one has to make decisions about managing an inventory, it is useful

to understand the behavior of the inventory-related cost factors just
discussed. These factors often help a manager determine which items
should or should not be carried in inventory, what inventory levels
should be carried for specific items, and what order quantities are
appropriate for given items.

As its name suggests, this concept holds that the appropriate

quantity to order may be the one that tends to minimize all the costs
associated with the order -carrying costs, acquisition costs, and the
cost of the material itself.

Concentrating for the moment on the first two costs, fig. shows
clearly that as the order or delivery quantity increases, carrying costs
rise-and at the same time acquisition costs decrease. To see the total
picture more clearly, if carrying costs and acquisition costs are added
together over the order quantity range shown on the graph, the total
indirect materials cost curve, TC, is produced. This transformation is
shown in fig. The economic order quantity concept simply says that the
sum of all the indirect costs associated with inventory will be
minimized on an annual basis if the material, for which the graph is
drawn, is ordered (or delivered) consistently in the quantity that
corresponds with the low point on the TC curve. This is the economic
order quantity.
Note that the low point on the total cost curve coincides with the
point at which the carrying cost curve intersects the acquisition cost
curve. This makes it easy to develop the basic formula that can always
be used to calculate a materials basic EOQ. Recall the two simple cost
formulas developed for annual carrying costs and annual acquisition
costs. These can be now be used to develop the EOQ formula.
Fig.: Graphic representation of the EOQ concept ( AC =
incremental acquisition costs; CC = incremental carrying costs;
TC = total incremental costs).
EOQ occurs when

Annual carrying cost = annual acquisition cost

CC = AC
QCI/2 = UA/2
Solving for Q :
Q2CI = 2UA
Q = sq. root of 2 UA/CI
This formula, then, is the fundamental mathematical
representation of the EOQ concept. It can be modified to
accommodate numerous special conditions, but in practice it probably
finds its most effective application in this form.
Professor Daniel Jones, who has researched various lot sizing
concepts, says that the EOQ concept can be used in conjunction with a
variety of inventory management systems, including JIT. He writes:
“When the EOQ model is properly employed, there is a little difference
between lot sizes based on the JIT model and the EOQ model.” He
points out that all relevant incremental costs must be included when
using the EOQ model. This is perhaps an obvious observation, but one
that he finds frequently is violated in practice.
So, despite some criticisms, the EOQ concept continues to be a
versatile and useful too if it is properly applied.
T
Various types of inventory management techniques.

• ABC analysis
• VED analysis
• HML analysis
• GOLF analysis
• SOS analysis
• LIFO FIFO technique
• MNG analysis
• FSN analysis
• XYZ analysis

a) ABC analysis

ABC analysis is based on "80 - 20" principle or principle of "Vital few"

& "trivial many".

According to this principle it is said that 80% of the inventory cost is

due to 20% of the items (which are expensive) and hence their
management is very much required to keep down the inventory cost.
ABC analysis is based on "value analysis". (value of item based on its
consumption)

'A' items are those whose cost is very high, hence proper inventory
management and regular check for such items are required. 'A'
category items should be managed by senior executive and monthly
inspection for such products is required.

These items should not be purchased in 'bulk’ but it must be

purchased regularly in small quantities supplier of such items should
be informed about the requirement of the product as per
manufacturing plan.

These items are 5% to 10% present and cost about 70% to 80% of
total inventory.

'B' category items are not very expensive as compared to 'A' category.
Minimum inventory control should be done. These items are 15% to
20% present and cost 15% to 20% of total inventory.

'C' category items are purchased in bulk. They constitute 70% to 80%
of total product and cost about 5% to 10%. They do not require regular
inventory control. They are purchased in bulk to avail price discount
benefit.

b) VED analysis
VED analysis is based on criticality, availability etc. e.g. Car.
V - Vital items
E - Essential items
D - Desirable items
Vital items are those which when not present, the production may
come to halt.
Essential items are those which when not present may not affect the
production for short period but during long run or hire cost of
production may go up.
Desirable products are those which do not matter of much important &
production may go without it for long period of time.

c) HML analysis
This is based on price analysis.
H - High cost (e.g. Rs.10,000 & above price)
M - Medium cost (e.g. Rs.5000 to 10,000)
L - Low cost (e.g. below Rs.5000)
d) GOLF analysis
G - Government
NG - Non Government
L - Local
F - Foreign
Golf analysis states that products which are bought from Government
sources require more time and advance payment.
e.g. STC, MMTC, ONGC etc.
Non government products require less time in purchasing, less paper
work & are given on credit.
Goods from local suppliers can be bought on credit purchase easily.
Foreign goods require more terms and conditions, more paper work &
legal documents like custom clearance etc.
e) SOS analysis
S - Seasonal
OS - Off Seasonal
Seasonal goods should be purchased in bulk during season and stored
for off season.
f) LIFO FIFO technique
LIFO - Last in First out
FIFO - First in First out
g) FSN analysis
F - Fast moving items
S - Slow moving items
N - Non moving items
Non moving items should not be kept.

These are scientific inventory management techniques which are in

current use and helps in effective inventory control and management
easy to adopt and easy to be understood.
 PURCHASING CYCLE

A.ESTABLISHING THE NEED FOR PROCUREMENT

 Recognising the need for procurement
 Determining the requirements
 Spelling out specifications
 Communicating requirements to purchase:
1. Purchase indents/Bill-of-material(Production items)
2. Purchase indents(Other items)

B.SCRUTINY OF PURCHASE INDENT

 Completeness of description
 Appropriateness of request
 Routing of indent through stores.
 Logging indents into indent registrar

C.MARKET RESEARCH

Telephonic quotations
Written quotations
Scheduled buying
Source selection & source development
D.ORDER PREPEARTION

Scrutiny of quotations
Negotiations placing orders on suppliers
Obtaining suppliers’ acceptance of purchase order

E.FOLLOW UP

Pre-delivery follow up
Shortage chasing Reminders
Personal visits
Telephones/Telegrams
Faxes/Telexes
Posting of personnel at suppliers’ works

F.RECEIVING & INSPECTION

Receiving dispatch details (RR/LR/CAN) & logging them into the

consignment register Collection of material from transporter godown
Inspection for physical damages to the packages & number of packages
Entering consignment details in GRN register
Uncrating of goods Quantity certification Raising of GRN
Intimating receipt of materials to the indentor
Inspection of goods
G.STORAGE & RECORD KEEPING

Movement of materials to concerned store/rejection store

Quality certification
Application of protective coating/marking
Storage of materials into appropriate racks
Posting of receipt into stock card

H.INVOICING & PAYMENT

Receiving GRN s in accounts department

Receiving suppliers’ bills
Posting of purchase register
Passing of bills
Effecting payments

A) Supplier and Vendor/Ancillary

Supplier
• Caters to a number of manufacturers
• May or may not be on contract
• Relationship is that of buyer and seller
and superficial
• Breach may not affect both intensely
• Relationship does not involve joint
decision making
Vendor/Ancillary
• Caters to upto 50% for the manufacturer
(single)
• Supply based on a longer period of time
contract
• Partner's in progress and relationship is
deep-rooted
• Any one backing out can cause intense
harm to other or breach of relationship
can harm both
• Involved in decision making with the
manufacturer

B) Centralized v/s Decentralized Purchase

Centralized
• Purchase carried out for various units
at the head office / purchase office at a
central location
• Heavy discounts offered due to
economics of scale
• Standardization is the key reason
• Logistics cost is high
• Supplier is big, national player
• CSD canteen purchases centrally
• TAJ GROUP has stationary material
supplied by a central re-cycle paper
manufacturer in Delhi
C. Make v/s Buy Decisions
Make
• Manufacturers produce in house
• Cost of acquisition > cost of
manufacture
• Company has the capacity to invest
• Company has no plans to divest or
focus to core competencies
• L & T forges ahead into LTITL
• Requires 5 M's
- Men
- Material
- Machinery
- Method
- Money
• When secrecy in involved
Decentralized
• Each manufacturing unit buys locally
• Discounts are less as compared to
centralized
• Standardization is not the key factor.
• Logistics cost is low
• Supplier is local
• TELCO Pune,Jamshedpur & Lucknow
purchases welding materials from
different suppliers
• Mc Donald’s in Pune is supplied chicken
by Venky's and in Delhi by Sunrise
hatcheries
Buy
• Manufacturers outsource
• Cost of manufacture > cost of
acquisition
• Company cannot afford to block huge
capital
• Company plans to divest and focus on
core competencies
• SBI out sources its 17 functions
• Not Required
• No secrecy involved
The Distribution Cost Analysis

For achieving the objectives of physical distribution, the company must have such a
system which will minimize the costs. Any proposed system will have to include the
following costs in the total distribution costs.

1. The Freight Costs

2. Fixed Warehouse Costs
3. Variable Warehouse (inventory) costs

There is another cost which is difficult to measure. That is the cost of lost sales due to
delivery delay or the product not being available to the customer.

For reducing the costs of various levels, it is necessary to analyze the costs. After
examining the analysis, the distribution manager can identify the areas where costs can be
reduced.

The steps for distribution costs analysis are :

1. Getting the Details of Cost Data.
2. Finding out the Effects of Handling.
3. Calculating the Cost per unit.
4. Using Quantitative Techniques.
5. Analyzing the Information.
6. Setting the Priority Areas.

1. Getting the Details of Cost Data : These can be obtained mostly internally; some
information may be required externally.
2. Finding out the Effects of Handling : In some products like cement or fertilizers or
glassware, it will be imperative to have minimum handling. Each handling will
increase the probability of damage, breakage, pilferage.

3. Calculating the Cost per unit : After knowing the fixed costs and the variable costs,
unit costs can be worked out for different numbers of units distributed.

4. Using Quantitative Techniques : It will be meaningful to know whether some

quantitative techniques could be used to advantage.

5. Analysing the Information : After getting all the information, its analysis will indicate
the areas where action is required.

6. Setting the Priority Areas : The distribution manager can think of the strengths and
weaknesses of the Company and then set the priorities for cost reduction.

The entire exercise of collection of cost data and its analysis will be of tremendous help is
arriving at a decision as to how to reduce the costs. It is not an easy task due to various
reasons. The interdepartmental nature of the work creates many mental barriers also.

The cost components can be categorized as under :

1. Costs at the Production Point

2. Costs related to Materials Movement
3. Costs of Warehousing
4. Costs of holding the Inventories
5. Costs incurred by the Dealers
6. Costs incurred by the Consumer

Further, the costs could be of :

7. Shortage of goods, damaged goods costs

8. Distribution Administration Costs
9. Packaging Costs

The details of the above can now be discussed.

1. Costs at the Production Point : These would include raw material, direct labour,
machine time, power & fuel cost.

a) Costs of Storage and Handling : These would consist cost of labour as well as space.
b) Financial costs which would involve costs of working capital for finished goods
inventory. Costs of deteriorating of goods can also be there at the production point.

c) Packaging costs would include the costs of material for packaging as well as the cost
of labour needed for that.

2. Costs related to Movement of Materials

a) Freight costs would be incurred for the goods to be carried from the plant/factory to
warehouse and then to the distributor/dealer.

b) The company may possess its own transportation equipment in which case it will
have capital costs as well as operating costs. Alternatively, it may be contracting the
transport carriers with hiring charges.

c) Insurance charges will be paid for transport insurance.

3. Costs of Warehousing

a) Here also cost of storage is incurred. If it is company's own warehouse, capital costs
and also operating costs are incurred. If it is a hired warehouse, then rentals are to be
provided for.

b) Financial costs and administrative costs are incurred.

c) Sometimes, location of the warehouse is not ideal. More costs are incurred due to a
wrong location. In such a case, the costs are called 'Improper Location Costs.'

4. Costs of Handling Inventories

a) The inventories are most likely to be at three places :

(i) at the Production Point, (ii) at the Warehouse, (iii) at stock points. At all the above
places, capital would be employed and interest will be paid. That cost is to be calculated.

b) The servicing cost of inventory would include, (i) handling costs, (ii) insurance, (iii)
pilferage, (iv) deterioration, (v) obsolescence, (vi) Taxes.

c) There is one more aspect to carrying the inventories. A minimum level of inventories
(Safety Stock) will have to be maintained. In addition to this, the stock levels would
have to be increased during a particular time-specially when the demand of that
product is likely to increase.

5. Costs incurred by the Dealers

a) From the warehouse, the material will be going to the distributor/dealer. As per the
terms of the contractual arrangements, the material may be delivered at the warehouse
and thereafter, all the charges like transportation will be borne by the dealer.

b) The dealer will be incurring costs for storing of inventories and handling as well as
the financial costs involved in these.

c) Sometimes, the containers are returnable, like in soft drinks glass bottles. The costs of
returning would also be an element of costs at this level.

6. Costs incurred by the Consumer

It can be debated whether some of the costs incurred by the consumer-specially for
transportation should form part of the distribution costs analysis. In rural markets in
India, when fertilizers are purchased in bulk quantities by the cultivators, they have to
think of the delivery point and the costs incurred by them thereafter. In competitive
markets, Consumers would expect some discounts/rebate towards these costs.

7. Cost of Storage’s, Damages, Pilferage’s :

For bulk quantities - there is an insurance during transit and storage. But at some point,
the goods would be uninsured. There may be damages due to handling or shortages due
to theft. There may be a difference between the value of insurance and the claims
settlement. Provision has to be made for taking care of these costs.

8. Distribution Administration Costs :

At the distribution manager's office, there would be costs incurred for office maintenance
as well as administrative and managerial staff. These also need to be analyzed.

9. Packaging Costs :

Apart from the normal costs related to the immediate wrapping of the product, costs
would be necessary for special packaging for transportation and warehousing. For export
markets again, specific packaging would be mandatory. All these packaging costs would
form the costs of distribution.

The distribution cost analysis is very important for the distribution manager. It would
help him in identifying the weaker areas in the system and apply corrective measures.
 Supply chain management at McDonalds (India)

Did you know that every year, Rs. 50,000 crore worth of food produce is wasted in India?
This is mainly because of the lack of proper infrastructure for storage and transportation
under controlled conditions. McDonald's is committed to providing quality products
while supporting other Indian businesses. And so, we spent a few years setting up a
unique Supply Chain, even before we opened our first restaurant in India.

A Supply Chain is a network of facilities including - material flow from suppliers and
their "upstream" suppliers at all levels, transformation of materials into semi-finished and
finished products, and distribution of products to customers and their "downstream"
customers at all levels. So, raw material flows as follows: supplier - manufacturer –
distributor – retailer – consumer. Information and money flows in the reverse direction.
The balance between these 3 flows is what a Supply Chain is all about.

When there is a balance in the finished product ordering, the Supply Chain operates at its
best. Any major fluctuation in the product ordering pattern causes excess / fluctuating
inventories, shortages / stock outs, longer lead times, higher transportation and
manufacturing costs, and mistrust between supply chain partners. This is called the
Bullwhip Effect.

Depending on the situation, the Supply Chain may include major product elements,
various suppliers, geographically dispersed activities, and both upstream and downstream
activities. It is critical to go beyond one’s immediate suppliers and customers to
encompass the entire chain, since hidden value often emerges once the entire chain is
visualized. For example, a diesel engine manufacturer may be able to integrate a GPS
locator system into its engine control system. Its immediate customer, a heavy truck
manufacturer, may see no need for this functionality. However, the downstream
customer, a trucking company with a large fleet, may be very interested in a locator
system. Understanding the value to the downstream customer is part of the supply chain
management process.
Big Mac's supply chain success

The seed of McDonald's success was sown in 1990 - six years before it started its actual
operations. Sanjeev Bhar traces its supply chain management that played a vital role in
its growth.

About two decades ago, the QSR wouldn't have meant much to the Indian F&B
segment. Today, the acronym has been seamlessly absorbed in the industry lingo.
McDonald's, arguably, one of the first brands that left a strong imprint on the Indian
QSR history, has much to do with this. And its success is credited to its well-established
supply management chain.

According to Vikram Bakshi, managing director and joint venture partner of

McDonald's India (North & East), the company invested about Rs 400 crore even before
its first restaurant commenced operations in October 1996. "We had to ensure that we
had the back-end linked up to the farm level for delivery commitment."

The company also deployed the latest state-of-the-art food processing technology for
having a sound supply chain. The transition towards the latest technology, which has
been subsequently noticed in other QSRs as well, changed the Indian fast food scenario
to match international standards.

Tracing its success path

McDonald's had been working critically on its supply chain part. Considering, an
international brand trying to make inroads into the Indian consciousness, its Indian
supplier partners were developed in such a manner that made them stay with the
company from the beginning. Bakshi explains, "The success of McDonald's India is a
result of its commitment to sourcing almost all its products from within the country. For
this purpose, it has developed local Indian businesses, which can supply them the
highest quality products required for their Indian operations." As per today's standings,
McDonald's India works with as many as 38 Indian suppliers on a long-term basis,
besides several others standalone restaurants working with it, for various requirements.

In the supply chain management for a QSR, the distribution centres hold special place
for bringing food right to the outlet counters. For McDonald's India, the distribution
centres came in the following order: Noida and Kalamboli (Mumbai) in 1996, Bangalore
in 2004, and the latest one in Kolkata (2007).

McDonald's entered its first distribution partnership agreement with Radha Krishna
Foodland, a part of the Radha Krishna Group engaged in food-related service
Vital Links in McDonald’s Cold Chain

All suppliers adhere to Indian government regulations on food, health and hygiene while
continuously maintaining McDonald's recognised standards. As the ingredients move
from farms to processing plants to the restaurant, McDonald's Quality Inspection
Programme (QIP) carries out quality checks at over 20 different points in the Cold Chain
system. Setting up of the Cold Chain has also enabled us to cut down on operational
wastage

Hazard Analysis Critical Control Point (HACCP) is a systematic approach to food safety
that emphasizes prevention within our suppliers' facility and restaurants rather than
detection through inspection of illness or presence of microbiological data. Based on
HACCP guidelines, control points and critical control points for all McDonald's major
food processing plands and restaurants in India have ben identified. The limits have been
established for those followed by monitoring, recording and correcting any deviations.
The HACCP verification is done at least twice in a year and certified.

The relationship between McDonald's and its Indian suppliers is mutually beneficial. As
McDonald's expands in India, the supplier gets the opportunity to expand his business,
have access to the latest in food technology, exposure to advanced agricultural practices
and the ability to grow or to export. There are many cases of local suppliers operating out
of small towns who have benefited from their association with McDonald's India.

Trikaya Agriculture

Suppier of Iceberg Lettuce

Implementation of advancved agricultural practices has enabled Trikaya to successfully
grow speciality crops like iceberg lettuce, special herbs and many oriental vegetables.
Farm infrastructure features:

• A specialised nursery with a team of agricultural experts.

 • Drip and sprinkler irrigation in raised farm beds with fertiliser mixing plant.
• Pre-cooling room and a large cold room for post harvest handling.
• Refrigerated truck for transportation.

Vista Processed Foods Pvt. Ltd.

Supplier of Chicken and Vegetable range of products (including Fruit Pies)

A joint venture with OSI Industries Inc., USA, McDonald's India Pvt. Ltd. and Vista
Processed Foods Pvt. Ltd., produces a range of frozen chicken and vegetable foods. A
world class infrastructure at their plant at Taloja, Maharashtra, has :

• Separate processing lines for chicken and vegetable foods.

• Capability to produce frozen foods at temperature as low as -35 Degree Cel. to
retain total freshness.
• International stardards, procedures and support services.
Dynamix Diary

Supplier of Cheese
Dynamix has brought immense benefits to farmers in Baramati, Maharashtra by setting
up a network of milk collection centres equipped with bulk coolers. Easy accessibility has
enabled farmers augment their income by finding a new market for surplus milk. The
factory has:

• Fully automatic international stardard processing facility.

• Capability to convert milk into cheese, butter/ghee, skimmed milk powder,
lactose, casein & whey protein and humanised baby food.
• Stringent quality control measures and continuous Research & Development

Amrit Food

Supplier of long life UHT Milk and Milk Products for Frozen Desserts
Amrit Food, an ISO 9000 company, manufactures widely popular brands - Gagan Milk
and Nandan Ghee at its factory at Ghaziabad, Uttar Pradesh. The factory has:

• State-of-the-art fully automatic machinery requiring no human contact with

product, for total hygiene.
• Installed capacity of 6000 ltrs/hr for producing homegenised UHT (Ultra High
Temperature) processed milk and milk products.
• Strict quality control supported by a fully equipped
quality control laboratory.

Radhakrishna Foodland

Distribution Centres for Delhi and Mumbai

An integral part of the Radhakrishna Group, Foodland specialises in handling large
volumes, providing the entire range of services including procurement, quality
inspection, storage, inventory management, deliveries, data collection, recording and
reporting. Salient strenghts are :
 • A one-stop shop for all distribution management services.
• Dry and cold storage facility to store and transport perishable products at
temperatures upto -22 Degree Cel.
• Effective process control for minimum distribution cost.

Cold Chain

The Cold Chain is necessary to maintain the integrity of food products and retain their
freshness and nutritional value. The Cold Chain is an integral part of the Supply Chain

Setting up the Cold Chain has involved the transfer of state-of-the-art food processing
technology by McDonald's and its international suppliers to pioneering Indian
entrepreneurs, who have now become an integral part of the Cold Chain.

The term Cold Chain describes the network for the procurement, warehousing,
transportation and retailing of food products under controlled temperatures.
McDonald’s restaurants store products to be used on a daily basis, within a temperature
range of –18ºC to 4ºC. About 52% of our food products need to be stored under these
conditions before they are used.

Local Sourcing

McDonald's has always been committed to sourcing its requirements from local suppliers
and farmers. This assurance is rooted in the philosophy of our company's founder, Ray
Kroc. He firmly believed in mutual benefits arising from a partnership between
McDonald's and the local businesses, thus ensuring that McDonald's commitment to
growth was mirrored by that of its partners.

In keeping with this belief, we have carefully identified local Indian businesses that take
pride in satisfying customers by presenting them with the highest quality products.
Adherence to Indian Government regulations on food, health and hygiene were a top
priority.

McDonald's India today purchases more than 96% of its products and supplies from
Indian suppliers. Even our restaurants are constructed using local architects, contractors,
labour and maximum local content in materials.

The relationship between McDonald's and its Indian suppliers is mutually beneficial. As
McDonald's expands in India, the supplier gets the opportunity to expand his business,
have access to the latest in food technology, get exposure to advanced agricultural
practices and the ability to grow or to export. There are many cases of local suppliers
operating out of small towns who have benefited from their association with McDonald's
India.

All suppliers adhere to Indian government regulations on food, health and hygiene while
continuously maintaining McDonald's recognised standards. As the ingredients move
from farms to processing plants to the restaurant, McDonald's Quality Inspection
Programme (QIP) carries out quality checks at over 20 different points in the Cold Chain
system. Setting up of the Cold Chain has also enabled us to cut down on operational
wastage

Hazard Analysis Critical Control Point (HACCP) is a systematic approach to food safety
that emphasizes prevention of illness or presence of microbiological data within our
suppliers' facilities and our restaurants rather than its detection through inspection. Based
on HACCP guidelines, control points and critical control points for all McDonald's major
food processing plants and restaurants in India have been identified. The HACCP
verification is done at least twice in a year and certified.

Suppliers
Trikaya Agriculture - Supplier of Iceberg Lettuce
Implementation of advanced agricultural practices
has enabled Trikaya to successfully grow speciality
crops like iceberg lettuce, special herbs and many
oriental vegetables. Farm infrastructure features:

• A specialised nursery with a team of

agricultural experts.

• Drip and sprinkler irrigation in raised farm

beds with fertiliser mixing plant.

• Pre-cooling room and a large cold room for

post harvest handling.

• Refrigerated truck for transportation.

Vista Processed Foods Pvt. Ltd. - Supplier of

Chicken and Vegetable range of products
A joint venture with OSI Industries Inc., USA, and
McDonald's India Pvt. Ltd. Vista Processed Foods
Pvt. Ltd. produces a range of frozen chicken and
vegetable foods. A world class infrastructure at its
plant at Taloja, Maharashtra, has :

• Separate processing lines for chicken and

vegetable foods.

• Capability to produce frozen foods at

temperature as low as -35 Degree Celsius to
retain total freshness.

• International standards, procedures and

support services.
Dynamix Diary - Supplier of Cheese
Dynamix has brought immense benefits to farmers in
Baramati, Maharashtra by setting up a network of
milk collection centres equipped with bulk coolers.
Easy accessibility has enabled farmers augment their
income by finding a new market for surplus milk.
The factory has:

• Fully automatic international standard

processing facility.

• Capability to convert milk into cheese,

butter/ghee, skimmed milk powder, lactose,
casein & whey protein and humanised baby
food.

• Stringent quality control measures and

continuous Research & Development

Amrit Food - Supplier of long life UHT Milk and

Milk Products for Frozen Desserts
Amrit Food, an ISO 9000 company, manufactures
widely popular brands - Gagan Milk and Nandan
Ghee at its factory at Ghaziabad, Uttar Pradesh. Its
plant has:

• State-of-the-art fully automatic machinery

requiring no human contact with product, for
total hygiene.

• Installed capacity of 6000 litres / hour for

producing homogenised UHT (Ultra High
Temperature) processed milk and milk
products.

• Strict quality control supported by a fully

equipped quality control laboratory.
 Radhakrishna Foodland - Distribution Centre
An integral part of the Radhakrishna Group,
Foodland specialises in handling large volumes,
providing the entire range of services including
procurement, quality inspection, storage, inventory
management, deliveries, data collection, recording
and reporting. Salient strengths are :

• A one-stop shop for all distribution

management services.

• Dry and cold storage facility to store and

transport perishable products at temperatures
up to - 22 Degrees Celsius.

• Effective process control for minimum

distribution cost.
• McDonald's opened its first store in India in October, 1996 and currently has 113
stores, spread across the North, West & South of the country.
• We have the sole responsibility of McDonald's entire supply chain all across
India.
• We handle their entire range of services including procurement, quality
inspection, storage, inventory management, deliveries, data collection, recording
and reporting.

Over the years, subsequent to the commencement of our relationship, Foodland has
regularly won the Best Supplier Award from McDonald's.

McDonald's - Challenges

• Full Supply Chain responsibility

• Multi Temp. Products - Over 65 % temperature controlled
• Stores as far as 500 – 1000 kms
• Drops per month - Over 1000
• Movement mainly by road
• Regular movement of perishables by air
• Routing Challenges
• No margin for error – Operations critical client
• No Stock Outs at store
• On time delivery record – above 97 %
• Clean delivery record – above 99 %
• Unfailing inbound supply chain

Foodland : how it helps in supply chain of McDonalds?

Foodland provides Customized Distribution & Logistics services encompassing the entire
supply chain, such as storage, handling and distribution solutions to various clients. The
services are tailor made to suit each client’s requirements, which include organisations
such as

McDonald's and Radhakrishna Hospitality Services Pvt. Ltd. (RKHS)

Objective

To provide a cost effective solution to our customers ensuring product integrity

throughout the supply chain.

Platter Of Services

• Supply Chain Structuring

• Inventory Planning & Replenishment Management
• Warehouse Management
• Customer Order Fulfillment
• Logistics – Temperature Controlled
It handles bulk transportation of temperature sensitive products.

Key Features:

1. Dedicated to ‘cold chain’ movement

2. The only logistics solution provider with expertise in handling agri – produce
3. Total kilometer run per month is – 7,00,000 km
4. Perishable tonnage handled per month – 7,000 tons
5. Robust quality systems & processes
6. First in the country to use multi temperature vehicles
7. Use of innovative methods to ensure temperature integrity during transit
8. Experienced staff – The BEST in the industry.

Its experience of over a decade in the logistics & distribution industry has led us to
believe that there is still one area which remains poorly serviced – that of

movement of small volumes of perishable items

across the country.
 Our experience also tells us that many companies, for
want of a cost-effective and reliable logistics solution, end up deciding not to market their
products which are of a perishable nature in certain markets, thus losing out on potential
revenue opportunities. And because currently, there is no reliable service provider to
cater to this need, companies have to move goods either by air, which is expensive, or
through bulk carriers with very little control on the delivery schedule. Given the current
scenario, combined with our domain expertise in the logistics & distribution area, we
have launched a new service - Fresh Rush. Fresh Rush is a temperature controlled
transportation service addressing the needs of small volume cargo.

Fresh Rush – Features

• Multi temperature products, such as Frozen (below –18ºC) and Chilled (1ºC to
4ºC) can be transported
• Flexibility of load movement - A minimum of 500 kgs to maximum of 5000 kgs
can be transported
• In transit temperature tracking
• Fixed schedule of pickup and delivery
• Well trained and experienced manpower
• Adherence to strict hygiene standards
• Consignment can be tracked through GPS system
1. Food Park, Kalamboli

• First of its kind in India

• Designed as per global standards
• The centre procures, value adds, stores and distributes various kinds of perishable and non-perishable food
products

Food Park – Features

• Spread over 33,000 sq meters

• Multi Temperature Zones
• Integrated Facility – Storage and Value Addition capabilities under one roof
• Ensured / Guaranteed Food Safety
• Paradigm shift in the way food is handled in the supply chain in India
• First of its kind in the region
 • Benchmarked against global standards
• Codex / USDA / PFA compliant
• Scalable
• Dedicated storage for specific categories
• Sanitation / Hygiene standards – Trash handling
• Air / Water Quality – Treatment Plant / ETP
• Ripening Rooms, Crate Wash Facilities, Blast Freezer, Flake Ice Machine
• Value Added Services – Processing of Vegetables & Fruits, Meat, Sea Food and Poultry
• Controls – Building Management System (BMS)
• 100 % Power Back Up

Food Park – Capacity

• Capacity to manage over 6000 SKUs

• Can store 70,000 cases with 1,700 pallet positions and over 4,000 pick faces
• Processing
o
o Vegetable & Fruits – 21 tonnes per day
o Meat – 3 tonnes per day
o Fish – 3 tonnes per day
• Blast Freezing – 6 tonnes – per day
• Ice Machine – 2.4 tonnes per day

2. Kanjur Marg DC

• Spread over 3,500 sq meters

• Dry Provisions DC
• Capacity to manage over 9000 SKUs
• Can store 80,000 cases with 1400 pallet position and 3,600 pick faces
3. Delhi DC (Noida)

• Dedicated to operations in the North

• Highly functional DC
• Chiller / Freezer / Dry Storage

• Capacity to manage 576 pallet positions

Findings of study conducted

1. Every organisation, no matter how big or small in size,has its own forecasting
techniques.This is because without forecasting the demand and supply requirements, the
orders cant be fulfilled. Similarly, for order processing, Mc Donalds forecast its
requirements on a daily basis.
The study that we did in Indore, where there are three outlets of Mc Donalds, each one in
a multiplex, revealed that their forecasting depends on a few factors like the upcoming
movie release in that week and its response.
Likewise, we conducted this study in the month of March and the demand during this
time is affected by the school and college examinations.The demand for different
departments also vary from one outlet to another.

2.Mc Donalds has its outlets in different parts of the globe.

In India too, Mc Donalds has numerous outletsin different cities, but they do not have any
local vendor.
They have a fixed vendor, that is The Radhakrishna Foodland, which caters the range of
230 products that Mc Donalds require.
The Radhakrishna Foodland not only process the fooditems but also handle the logistics
partially.The delivery center is at Mumbaiwhere from the required stock is transported to
different locations.
The concerned person told us, that due to the ephimeral shelf-life of tomatoes, it i sthe
only commodity that they make purchase from local markets; specifically of four to five
inches diameter which undergoes a thorough sanitization process, only after which it is
used.

3.Every organisation has its inventory cycle.The Mc Donalds outlets do keep a safety
inventory.
They keep the buffer stock for a period of three days,and their stock is stored at the
outlets itself. Every product used in preparing the menu items come with an expiry date,
like the French-fries served in Mc Donalds has a life of two hundred and seventy days.
But once the menu items are cooked,they are not kept for more than
ten minutes, after which they are dumped as waste.
There are daily product safety checklist which is maintained manually as well as with the
help of computer softwares too,helping the staff in assessing the stock quantity at the end
of each day.

4.Radhakrishna Foodland had been working with Mc Donalds for the past ten yearsand
the trems abd conditions for choosing the network design was decided by the
headquarters of Mc Donalds itself.The food items are transported via air conditioned
trucks having different chambers.Each chamber is designed for the different kind of stock
at different temperature levels,as per the suitability and requirements of the stock.All the
raw material comes in a frozen form.The trucks have pre-defined destinations to reach
each day.The sources at Mc Donalds told u sthat the trucks from Mumbai reach Indore on
Monday,Pune on tuesday, Hyderabad on wednesday and so on at Bangalore and Gujarat
too.
The items which are to be procured from foreign territories comes to India via ships, like
the french fries are obtained from new Zealand via shipments.
5.They do assess their daily requirements via safety checklists.The rounding and
scheduling of ouput and input is done manually and through computer based softwares
too.

6.Mc Donalds does not have any third party logistics.

7.With the evolvement of the new technologies and convenient softwares, the
conventional methods of maintaining suplly chain records are now a passe`.
Mc Donalds too use a standardized visual Foxpro based program via which the outlets are
linked with the head office and the Radhakrishna Foodland too.

8.Mc Donalds believe in the saying "Customer is the King" and thus the the complaints ,
if any, from the customers end are duly heard and resolved as per the need of the
situation.