I'm lovin' it

By Elaine Watson

- Last updated on GMT

I'm lovin' it
McDonald's head of supply chain Dean McKenna talks to Elaine Watson about life working under the golden arches

Rudely awoken by a loud noise at an uncivilised hour on Sunday, December 11, 2005, Dean McKenna peered out of the window. Unable to make anything out, he wandered down the road to see what was happening. The sky had turned red and smoke was filling the air.

Minutes later, his phone rang, and his day began to get a whole lot worse. The smoke, he was told, was coming from a massive explosion at the Buncefield oil depot in Hemel Hempstead - just a few hundred yards away from a bakery supplying McDonald's.

The good news, said McKenna's colleague, was that the staff were all OK, barring minor injuries. The bad news was that 45% of McDonald's UK bakery capacity, 35% of its distribution capacity and 25% of its vehicle fleet, had been wiped out overnight.

If every purchasing boss has a day of reckoning, this was McKenna's. An hour later, he was in McDonald's East Finchley head office assembling a crisis team to work out how to keep the nation's largest fast food business stocked with burger buns.

But nobody panicked, recalls McKenna, who grew up in Australia and moved to the UK in 1989 after completing a degree in business. "It was difficult to start with because the supplier's head office was also hit along with their business continuity planning documents, so they had to set themselves up at a local hotel. But there was a real 'can do' attitude."

A few conference calls later plans were put in place to ramp up capacity at the supplier's other bakery in Manchester, while factories on the Continent were tasked with producing buns to McDonald's specifications. Distribution was initially rerouted through depots in Basingstoke and Manchester but within five days McKenna had struck a deal to divert it back through a Booker depot in Hatfield.

Buncefield demonstrated both the strengths and potential chinks in the armour of McDonald's supply chain, which relies on a small number of strategic suppliers.

While supermarkets deal with scores of suppliers, and constantly chop and change them, McDonald's has a different approach, says McKenna, who progressed through the ranks at Sainsbury's purchasing department before joining McDonald's in 2001. "With this level of interdependence, suppliers have to be partners. When I was at Sainsbury we used the word 'partnership' a lot, but it was only when I joined McDonald's that I really understood what it meant. Companies like McCain [which supplies the fries] have been working with us for more than 20 years."

That's not to say that McDonald's doesn't drive a hard bargain, he stresses. "We are a challenging customer. For a start, you have to be able to provide significant volumes. We have a small number of lines, so we cannot be out of stock. My number one priority is quality, second is security of supply. Price is probably third, or even fourth or fifth on the list."

Planning new ranges at McDonald's is therefore a big deal, says McKenna, who is head of supply chain for the UK, Irish and Scandinavian markets, and divisional boss for sourcing poultry, packaging, eggs and other lines for Europe. For example, the decision to use organic milk in its hot drinks - coming hot on the heels of moves to switch its entire coffee bean supply to stocks certified by the Rainforest Alliance - was not made lightly. "We spent months preparing for it. Likewise, when we decided to use batavia lettuce in our Chicken Legend sandwiches, there wasn't enough available, so we had to plan its planting six months before we introduced it."

Similarly, nutritional improvements cannot always be achieved overnight owing to the sheer volumes of product that McDonald's requires, says McKenna. Take frying oil. The new blend McDonald's uses is lower in saturated fat because it contains a blend of rapeseed and sunflower oil high in oleic acid. But this did not come off the peg. "We had to work well in advance with our oil supplier and go out to farmers and offer a premium to get them to plant the right seeds [for high oleic rapeseed]," he recalls. "We're taking 100% of the UK crop."

Doing it by the (open) book

Negotiating prices - what we imagine a buyer does for a living - is only one aspect of the day job for McKenna, who effectively has two bosses: the UK chief financial officer, and the European supply chain boss. For some products, such as Coca-Cola, deals will be struck globally. Others are handled on a regional (eg European) basis, while many are still handled locally (at a national level).

For a select number of accounts, McDonald's operates open book costing, says McKenna. "We get to see their profit and loss figures and we pay cost plus an agreed profit margin. Complete transparency really helps us understand the key drivers in our suppliers' businesses." It also enables both parties to focus on constructive things like improving quality and taking cost out of the supply chain, rather than constantly arguing over price, he says.

This proved particularly important last year, when the price of many commodities surged to unprecedented levels and McDonald's had to work very closely with suppliers to find ways of offsetting higher input costs within the constraints of its business model (a limited menu and relatively fixed retail prices).

While Tesco or Asda can change the price of a loaf every week and tweak recipes, downsize or simply drop unprofitable lines to keep profit margins steady, McDonald's cannot delist Big Macs or change the price of a Happy Meal every week just because the price of flour or beef has gone up, points out McKenna.

On the plus side, the 3.2% growth seen in McDonald's European business over the first quarter at a time when many foodservice outlets have struggled has eased some of the pain, he agrees. "Increasing volumes is one of the easiest ways to get efficiencies."

The recent consolidation of beef pattie production to a single site at Scunthorpe operated by Esca Food Solutions has also generated significant cost savings to help offset higher prices at the farmgate.

While McDonald's is partially insulated from the weak pound as 60-70% of what it sells is sourced from the UK, it has also hedged its currency pretty effectively, adds McKenna. "But we also buy from the UK where we can - things like rapeseed, lettuce in the summer, and potatoes. All of our beef is supplied by British or Irish farms. Poultry is a mixture. We get some from the UK, some from Continental Europe and some from Thailand and South America."

While McDonald's has made a significant commitment to animal welfare through its decision to use free range eggs, it has not made a similar commitment to using free range, organic or higher-welfare chicken, no doubt due to the challenge of securing the volumes required at an affordable price point. McKenna will not be drawn on this topic, but stresses he will "not work with any supplier who does not adhere to high standards and those required by UK and EU legislation"

While the firm will "explore advancements and opportunities moving forward", he says, "We have to be absolutely sure that they are sustainable in the long-term."

Healthy flak

Compromising quality to cut costs is never an option, however, not least because any attempt to 'value engineer' products as scrutinised as those on a McDonald's menu is simply not worth it if you have got the world's media and every non-governmental organisation known to man watching your every move - not to mention Morgan Spurlock, notes McKenna.

Indeed, as even a brief glance at some of the questions posted on McDonald's website (www.makeupyourownmind.co.uk) reveals, many consumers, journalists and lobbyists still appear to be convinced that the Golden Arches has something to hide.

Despite the fact that the ingredients contained in every single item on the McDonald's menu are listed on its website, McKenna's team is still bombarded with questions covering everything from whether lard is added to milkshakes (it's not) to whether cocaine is added to Coca-Cola "to make it more addictive" (that's another 'no', in case you were wondering).

Many also remain deeply suspicious of the firm's repeated claims that its beef patties really do just contain minced beef and seasoning (they do).

But the commitment to transparency is such that replies are politely provided to all questions, however mischievous. To give a typical example, one anonymous enquirer asks whether 'jizz' is added to mayonnaise (prompted by a highly publicised rumour that disgruntled kitchen staff let off steam by masturbating into condiments).

This, responds the firm earnestly, "is an urban myth and is not true"

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