CASE: GS-79
DATE: 11/19/13 (REV’D 5/14/15)
MCDONALD’S INDIA:
OPTIMIZING THE FRENCH FRIES SUPPLY CHAIN
A potato is a complex animal.
1
—Tony VanLeersum, Former Corporate Vice President of Agriculture, McCain Foods Ltd.
Before opening its first store in India in 1996, McDonald’s spent six years building its supply
chain.2 During those six years, the company worked to source as many ingredients as possible
from India, and their efforts were successful. However, MacFries, as McDonald’s french fries
were popularly known, were a particularly tough product to source locally—and importing fries
was undesirable for both cost and availability reasons. There were many complexities related to
growing the potato best suited for fries in India’s agricultural conditions. By 2007, 11 years after
opening its first restaurant, the MacFry was finally being produced in India. McDonald’s main
MacFry supplier was the Canadian company McCain, which established a potato processing
factory in the city of Ahmedabad, located in the state of Gujarat. McCain spent many years
working on potato agronomy and with farmers to build up supply in India. This was beginning
to pay off. From 2007 to 2011, local MacFry production increased from none to more than 80
percent, giving McDonald’s tremendous benefits in terms of cost savings, inventory reduction,
and assured supply (Exhibit 1).
Despite the strides made in recent years, by 2011 Abhijit Upadhye, McDonald’s then senior
director of Supply Chain India was still a worried man. Since September 2008, double-digit
food inflation in India had been adding huge cost pressures on the company.3 In addition,
McDonald’s had aggressive growth plans for the coming years. The MacFry was the single
1
Cited during an interview with KS Narayanan, former managing director, McCain India.
McDonald’s India presentation, 2010 Stanford Responsible Supply Chains Conference by Abhijit Upadhye.
3
http://www.thehindubusinessline.com/industry-and-economy/economy/article2717938.ece?homepage=true
(February 13, 2012).
Sonali Rammohan prepared this case under the supervision of Professor Hau Lee as the basis for class discussion
rather than to illustrate either effective or ineffective handling of an administrative situation.
2
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McDonald’s India: Optimizing the French Fries Supply Chain: GS-79
p. 2
largest procurement item, so having a 100 percent local supply was critical to avoiding high
import duties. The question that troubled him was: “Will I ever be able to eliminate imported
fries from my supply chain?”4
ABOUT MCDONALD’S AND MCCAIN
McDonald’s
Founder Ray Kroc opened his first McDonald’s in 1955 in Des Plains, Illinois.5 By 2011, 33,000
McDonald’s restaurants served more than 64 million customers in 119 countries every day. In
2010, the company had over $24 billion in revenues and $4.9 billion in net income. McDonald’s
had a long-standing belief in a local approach to doing business. Ray Kroc’s philosophy was to
work with suppliers who shared McDonald’s dream and concrete goals. In the U.S., around 80
percent of restaurants were franchised, allowing for local control of stores.
McDonald’s in India was created through joint ventures between McDonald’s Corp. and two
Indian businessmen, Amit Jatia and Vikram Bakshi. By 2011, McDonald’s India had 240
restaurants, and planned to grow this number to 500 restaurants by 2014.6
McCain
Founded in 1957, McCain was the world’s largest producer of frozen french fries and potato
specialties.7 The company produced many other frozen food items, such as pizza, veggie
burgers, peas, and juice concentrate. Headquartered in Florenceville, New Brunswick, Canada,
the company had three main divisions: McCain Foods, McCain Produce, and the Day & Gross
Transportation Group. McCain produced 33 percent of all french fries in the world, and was the
world’s third largest grower of potatoes. The company had 50 manufacturing facilities around
the world, 3,200 grower partners, and $6 billion in net sales. In India, McCain had a potato
processing facility in Ahmedabad, Gujarat which supplied french fries to McDonald’s. The
company also sold specialty products such as potato wedges, hash browns and potato patties to
hotels, service restaurants, and in retail. From India, McCain exported these products to
Pakistan, Sri Lanka, Bangladesh, China, South Africa and other markets. The company did not
export french fries, given the heavy Indian demand.
BUILDING A SUPPLY CHAIN FROM SCRATCH
Not All Potatoes Are Created Equal
While India was the third-largest producer of potatoes in the world, less than 1 percent were
process grade.8 To qualify for french fry production, a potato must have high solids, low sugars,
4
Quotations are from interviews with the author, unless otherwise noted.
Data in this section from http://www.aboutmcdonalds.com/mcd/our_company/mcdonalds_history_timeline.html
(January 12, 2012) unless otherwise noted.
6
http://www.mcdonaldsindia.com/pdf/news/BS03-Dec-20-2011.pdf (January 12, 2012).
7
Data in this section from http://www.mccain.com/GoodBusiness/business/Pages/mccainfoods.aspx (January 12,
2012) and from interviews.
8
Source: McCain India.
5
McDonald’s India: Optimizing the French Fries Supply Chain: GS-79
p. 3
a large, oblong shape, disease resistance and a long dormancy. Ideally, a french fry potato needs
a growing season of 120 to 150 days, long daylight (14 to 16 hours) when photosynthesis takes
place, and cool nights, when potato bulking takes place. Sandy-loam soil is ideal, and the
potatoes grow better with controlled irrigation.
In India, ideal potato growing and storage conditions simply do not exist. The Indian climate
allows growth only in the winter versus the long summers in parts of the U.S. and Europe. The
growing season in India is between 90 to 100 days as opposed to 120 to 140 days during the
summers in the U.S. and Europe. This limited the number of days that potatoes could be
harvested. Outdated farming and irrigation practices limited yields as well. Typical Indian
potatoes have high sugars, low solids, and are small―not a good fit for long french fries. When
a normal Indian table potato is sliced into a french fry and put into oil, due to high moisture
levels, the result is an oily, soggy mass of potatoes rather than crispy golden fries. Storage was
also a problem. Potatoes need cold storage with special controls (for humidity and temperature)
to maximize their shelf life, and this type of storage was not available in India at the time.
McDonald’s India Demand and Supply in the 1990s
There were compelling reasons for McDonald’s to expand in India in the 1990s. The country
had the second-largest overall population in the world next to China. Early in the 1990s, then
Prime Minister PV Narasimha Rao and Finance Minister Manmohan Singh implemented
financial reforms which helped to open the Indian economy to trade. Prior to this period, an
elaborate set of licenses and regulations existed and these were required to set up and run
businesses in India after the country’s independence from the British in 1947.9 The country had
a fast-growing middle class which now had more discretionary spending power.
To cater to the Indian consumer, McDonald’s worked on developing a completely new menu
geared to local tastes (Exhibit 3). It developed a vegetarian menu, and focused on fish and
chicken products since beef is not eaten by most Hindus, who represented around 80 percent of
the population,10 and pork is not commonly eaten. Through India-based research and
development, the company built a menu that was 60 percent vegetarian. The company initially
reached out to upper-income consumers and some middle-income consumers. But Bakshi
believed that they had to eventually reach out to the burgeoning middle class that was growing at
a rapid pace.
When the first stores opened, the lowest-priced sandwich was approximately Rs. 13 (around
$.37) and an order of fries was about Rs. 20 (around $.57).11
India had the second-largest acreage of arable land in the world and was the second-largest
producer of potatoes and other vegetables in the world. However, yields for cereals and
vegetables remained substantially lower than the world average in 2011.12 In addition, 500
billion Indian rupees (approximately $10 billion) worth of fruits and vegetables were wasted
9
http://news.bbc.co.uk/2/hi/south_asia/55427.stm (January 12, 2012).
http://censusindia.gov.in/Ad_Campaign/drop_in_articles/04-Distribution_by_Religion.pdf (January 12, 2012).
11
http://www.tradingeconomics.com/india/currency (data about 1996 exchange rate accessed January 20, 2012).
12
http://www.rba.gov.au/publications/bulletin/2011/jun/pdf/bu-0611-3.pdf (January 30, 2012).
10
McDonald’s India: Optimizing the French Fries Supply Chain: GS-79
p. 4
every year due to supply chain inefficiencies such as poor cold storage, and poor warehousing
and distribution infrastructure.13
Agriculture constituted 19 percent of GDP in India.14 While things were rapidly changing in
many food sectors, agriculture practices were outdated compared to developed economies. The
Indian government encouraged small-scale farming, which caused landholdings to be very small.
This made it difficult to gain economies of scale. It was common to have 50 to 100 farms across
a 100-acre region, compared to the United States, where the average farm size was 418 acres in
2007.15
In 1990, when McDonald’s began investigating entry into India, the company observed very
outdated farming and irrigation practices in the country. Water and electricity were wasted in the
farming process, and there were no facilities at the farm level to store post-harvest produce.
Most raw materials such as wheat flour, milk and potatoes did not meet McDonald’s target
specifications. Logistics and distribution were real challenges as well. Roads were extremely
poor, and a cold chain barely existed. There were only 200 refrigerated trucks in the entire
country. Temperature controlled warehouses for products like potatoes were not available. The
quality of food processing was quite low. McDonald’s could not buy processed chickens, as
India had mostly a live bird market. There was no deboning facility available. Vegetable
processing was very rare, as most Indians used fresh vegetables purchased at the local market. It
was clear that the company had a lot of work to do to develop the supply chain it needed to
deliver food to customers that met McDonald’s specifications. According to Upadhye,
“McDonald’s had to develop everything from scratch.” Keeping in line with its philosophy
around the world, and despite challenges with obtaining local supplies of ingredients, the
company planned to use local sources for ingredients to the fullest extent possible. Sourcing
from within the country was particularly important in India, given steep import duties.
The Building Blocks of a Local Approach
McDonald’s local approach to doing business shaped its entry into India. The company wanted
to have partners that understood Indian operating conditions and Indian consumers. The
company also wanted to build a local supply chain in order to drive agricultural growth, generate
employment and show the Indian government the company’s commitment to development. With
the India supply chain, the company used a mix of international suppliers, local supplies and
joint ventures. Jatia and Bakshi, McDonald’s joint venture partners, provided intimate
knowledge of the Indian market. Jatia was responsible for the west and south, and Bakshi was
responsible for the north and east. This was critical since all the elements, from the menu, cost
structure and overall economics were very different from their counterparts in the U.S. The joint
venture model, where McDonald’s corporate partnered with local entities, was typical of how
McDonald’s operated in many international markets. In certain cases, after the business was on
a solid footing, local partners could be given a developmental license, which meant the business
was 100 percent locally owned.
13
http://www.isb.edu/faculty/Working_Papers_pdfs/Can_India_be_the_Food_Basket_for_the_World.pdf (January
30, 2012).
14
https://www.cia.gov/library/publications/the-world-factbook/fields/2012.html (January 12, 2012).
15
http://www.ers.usda.gov/StateFacts/US.htm (January 12, 2012).
McDonald’s India: Optimizing the French Fries Supply Chain: GS-79
p. 5
In the early 1990s, the company developed joint ventures between Indian partners and
international suppliers. Many items, from sandwich sauces, chicken and vegetable patties to
distribution center services were developed through joint ventures between local suppliers and an
international McDonald’s supplier. In some cases, McDonald’s could rely on 100 percent
domestic sources, such as with fish patties, dairy mixes and buns. Where local sources or
partnerships could not satisfy McDonald’s needs, the company resorted to imports. This was the
case with oil, toys used in Happy Meals, and for many years, MacFries.
McDonald’s opened its first two Indian restaurants, in Delhi and Mumbai, in 1996, only after
years of developing the supply chain and knowledge of the Indian market. The company focused
on four key principles: quality, service, cleanliness and value (QSC and V). In the Indian market
in the 1990s, the quality of ingredients was the big challenge. According to Jatia, “The challenge
was not really about volume; it was more about getting everything right.” Most agricultural
products were grown for home consumption, so they did not conform to standards required for
processing. Therefore McDonald’s looked at each of the components required to service all of
its products and started creating backwards linkages all the way to the farm level. The company
spent over $100 million to develop the supply chain before stores were opened. And yet, they
would need to build restaurants one store at a time. During these early years, the company had to
absorb the supply chain costs until they could earn revenues from opening up many restaurants.
After years of setting up the basic foundation to open its first store in 1996, McDonald’s turned
its focus to building food, safety and quality standards, meeting service standards, and clearing
bottlenecks in the supply chain. Growth accelerated from 2003 to 2007, when compounded
annual growth was around 31 percent. From 2007 to 2011, compounded growth was around 35
percent. McDonald’s began to focus more attention on fulfilling capacity needs, adjusting
supply and service models, and further localizing its products.
POTATO AND FARMER MATTERS
French fries were very popular with Indian customers, and the supply of MacFries was critical to
the company’s success in India. According to Jatia, “French fries are something that our
consumers absolutely love at McDonald’s, and for us to not be able to bring it at an affordable
price was not acceptable.”
In order to supply french fries to India, in the early 1990s McDonald’s helped create a joint
venture between international french fry supplier Lamb Weston and India-based Tarai Foods.
The joint venture invested 10 million dollars to set up the first french fry line in the country.
This money was invested in land, plant and machinery. Given the challenges around raw
material quality and storage conditions, the joint venture focused on identifying and growing a
suitable variety of potato for making MacFries. New storage facilities were created to help store
potatoes in the right conditions. While McDonald's knew the specifications it needed to produce
MacFries, the joint venture’s agricultural techniques were not successful in developing a potato
that contained the ideal amount of solids and the desired size. When the potatoes developed by
the venture were used on the processing line, they produced fries which were oily and limp. The
huge investment of time and money that went into producing a MacFry had failed because the
company could not grow the right variety of potato. McDonald's could not open its first store
McDonald’s India: Optimizing the French Fries Supply Chain: GS-79
p. 6
without MacFries on the menu, so it had to react quickly to develop another plan. At this point,
the company realized that importing frozen fries was the best option to get fries quickly.
After failing to develop a local potato supply, Lamb Weston petitioned the Indian government to
allow imports of fries into India. The process for obtaining an import license was complex and
time consuming. First, a case had to be presented for allowing the import of an item which was
in a restricted category. The case had to make clear why the import was initially required for
starting and establishing a market. At the same time, the company had to explicate its plan to set
up the required agriculture and plant so that it could ultimately produce local fries. The entire
process for approval took almost six months. In 1996, for the first time, frozen french fries were
introduced into the customs classification so that Lamb Weston could import fries. The Indian
government allowed the imports, but under a restricted category, so import quantities were
limited to 800 metric tons of french fries. In addition, import duties were 56 percent. The lead
time for importing fries from the U.S. to India was around 60 days; 40 days of shipping plus time
for handling and customs clearance. It was becoming clear that imports would not be a longterm solution to satisfy the demand for MacFries.
Given McDonald’s aggressive growth plans and limitations on import quantities under one
license, McDonald’s invited another one of its international suppliers, McCain, to augment the
import supply. McCain was also allowed to import 800 metric tons of frozen french fries, which
it sourced from its plants in the U.S., New Zealand and Europe. Both Lamb Weston and McCain
were then helping import french fries to serve the growing demand for McDonald’s in India. By
1999, the quantity restriction was removed by the government. However, the steep import duties
and unfavorable exchange rate meant that fries would continue to be an expensive item unless
localized. Relying on imports was not a tenable strategy.
Making a Structural Change
Though the initial attempt to localize french fries had failed, McDonald’s decided to try again in
1998 with McCain. As Jaideep Mukherji, McCain India’s first managing director said, “We
needed to discard bleak predictions.” McCain understood that growing the right potato was the
key. As Harrison McCain, founder and chairman of McCain Foods said, “If you don’t get the
agronomy right nothing else matters in this business.” McCain India’s first employee was an
agronomist and its second was a supply chain manager. McCain began to work on potato
agronomy―a branch of agriculture dealing with field crop production and soil management.
This way, they could develop the right variety of potato so that potatoes could be grown and
produced into french fries within India.
In India, the government strictly controls certain imports, and raw potatoes were not allowed to
be imported. So McCain had to bring in the potato germplasm (a collection of genetic resources
that could be used to grow potatoes more suitable for french fry production). The local supply
strategy was an exercise in risk management. If Indian licensing requirements changed in the
future, McDonald’s could be in a position where they did not have a license to import fries. And
even if imports were not restricted, in order to retain its low cost structure, McDonald’s needed
to ultimately figure out a way to avoid high import duties on MacFries.
McDonald’s India: Optimizing the French Fries Supply Chain: GS-79
p. 7
From McCain’s perspective, it was important to localize production to the extent possible
wherever the company operated around the world. Given import duties levied on foreign
agricultural products in many countries, McCain believed that having a local strategy was often
an advantage.
The first big focus would have to be cultivating the appropriate variety of potato where other
suppliers had failed. McCain learned that cultivating potato seeds in high elevations was ideal
because seeds grown at high altitude had high vigor, enabling a commercial crop planted with
those seeds to have higher yield and larger-sized potatoes. So it instituted a Shepody potato seed
multiplication program in the 13,000-foot high Lahaul Spiti Valley, part of the Himalayan
mountain range in Northern India. Seeds were sown in May, and harvested in September. Given
the heavy snows in the region, they were transported down from the mountains by donkeys.
Second, farmers would need to grow the full potatoes in a suitable, more accessible location than
the Himalayas. At the same time, McCain had to test its production capabilities in India.
Vista Foods, which supplied McDonald’s with patties, puffs and pies, had some excess capacity
in India. True to its supplier partnership philosophy, McDonald’s helped McCain get access to
this excess capacity without a huge investment. McCain had to bring in equipment in order to
produce potato wedges and patties (potato products that were easier to provide in India due to the
less stringent raw material requirements compared to fries), while the rest of the infrastructure
was provided by Vista Foods. This gave McCain enough potato product volume to build up
some business with local farmers. If McCain had not been given production capability to test the
Indian potatoes, farmers would have been reluctant to try something new. So with wedges,
McCain was able to test the Indian market and develop confidence that it was a market worth
pursuing. This proved to be a win-win-win arrangement in Jatia’s eyes. The patty supplier
Vista’s excess capacity was utilized, McCain was able to test the Indian market with small-scale
production, and McDonald’s had found a route to developing a local supply of french fries.
Knowing that they would have McDonald’s commitment to buy fries, McCain then decided to
build a $25 million (Canadian) manufacturing facility dedicated to processing french fries. The
plant had the capacity to process 40,000 tons of potatoes per year. Seeds were planted in Gujarat
farms in September and October, and potatoes were harvested in February and March.
Once they were processed, fries were frozen and sent to third-party logistics storage facilities or
to McDonald’s distribution centers. From here, they were shipped to restaurants.
Partnering with Farmers to Improve Quality and Build Quantity: a Win-Win
McCain conducted regional trials to locate the ideal growing area, and experimented with 13
types of potatoes to pinpoint the right variety. They also conducted management trials to
identify the best combination of growing practices, and storage trials to figure out the best
protocol for storing potatoes. From this experimentation, McCain zeroed in on the central Indian
state Gujarat as the prime growing area. Three varieties were identified that could work.
McCain established a one-acre demonstration farm near Ahmedabad in Gujarat for farmers to
learn how to grow this new crop. As Narayanan put it, “Seeing is believing.” McCain showed
farmers the seeds to use, how to improve yields through better sowing, drip irrigation, and better
harvesting techniques. The new drip irrigation techniques used 33 percent less water than
McDonald’s India: Optimizing the French Fries Supply Chain: GS-79
p. 8
traditional flood irrigation. By 2011, around 100,000 acres were under drip or sprinkler
irrigation, compared with just 67 acres in 2002. The company transformed storage practices by
applying a potato sprout suppressant in combination with using controlled temperature storage.
This helped to avoid deterioration in potato quality during storage. The local Gujarat
government had a scheme to subsidize farmers’ drip/sprinkler irrigation system purchases.
Meanwhile, after gaining confidence that the market for fries was solid and the production
capability available, McCain invested 25 million dollars in a manufacturing facility capable of
producing fries, coated wedges, hash browns, mashed products and coated formed products.
Exhibit 4 shows the potato farms in Gujarat.
Key agricultural breakthroughs were demonstrated to farmers growing potatoes for McCain.
These included shifting from traditional row planting to mechanical field preparation, shifting
from hand picking of potatoes to mechanical picking, and planting in double rows to utilize
space better and reduce water consumption. Since Indian potatoes were an annual crop, making
improvements to growing practices and then assessing the impact took many years. McCain
needed to demonstrate to farmers that the improved yields they were seeing were sustainable
over time and were not just a one-time occurrence. There were many variables which affected
potatoes: the type of seed used, temperature, rainfall, irrigation techniques, fertilizers, pesticides,
and more. The company conducted management trials and only put techniques into practice
after they had been seen to work for three years. As Narayanan said “… [A]t the end of the day,
the farmer is also an entrepreneur. He’s putting in a lot of his effort, his land, his resources at
play, and on top of that, you need something that is really sustainable.” Given that it took six
months to pass government quarantine clearance followed by three to four years to develop the
right seed and then three years to test it in the fields, it took between six and seven years to
develop a commercial variety of potato. According to McCain’s Gujarat plant manager Rajeev
Chauhan, “The seed pipeline is the most critical to ensure future supply.” Enough seeds needed
to be planted to meet demand many years in the future.
In 2007, after many years of refinements to agronomy and developing farmer partnerships,
McCain was finally able to produce fries that met McCain and McDonald’s specifications. Jatia
gave McCain credit for doing what everyone said was not possible. Most potato-growing
experts McDonald’s had consulted in the past said that India could never grow the type of potato
needed to make a MacFry. But against all odds, and after years of effort, McCain made this
happen. By 2008, 30 percent of McDonald’s India’s supply was being manufactured locally. By
2010, that number had grown to 75 percent. McCain’s efforts were in line with McDonald’s
approach with other farmers. For iceberg lettuce (another key ingredient in McDonald’s menu),
the farmers were taken by McDonald’s to various countries like Australia and China to give
them exposure to different growing techniques and farming practices.
The benefits to McDonald’s from using local fries were a 30 percent lower cost structure and no
exposure to the fluctuating exchange rate. In the second half of 2011, for example, the Indian
rupee exchange rate had gone from 44.5 INR to 53 INR per U.S. dollar. This meant that local
fries were saving an additional 19 percent in import costs. With local fries, inventory levels were
reduced from an average holding of 15 days for imported fries to 6 days for local fries. The
reduction in shipping time (60 days from the U.S. to less than a day for getting local product)
also had a significant benefit for risk management and contingency planning.
McDonald’s India: Optimizing the French Fries Supply Chain: GS-79
p. 9
In addition, McCain’s close relationships with farmers helped ensure a secure supply. While
collaborating with so many different farmers had its complexities, Bakshi also saw the diverse
supply base as a positive to securing supply: “Even if one or two farmers are not able to work
with you, it doesn’t really change the model … it’s the best insurance for yourself.”
There were benefits to farmers as well. Traditionally, farmers sold produce at the local “mandi,”
or village market. When potatoes were traditionally harvested in February and March, they were
at the mercy of the mandi, where prices could be manipulated. Mandi sales and prices could
fluctuate dramatically. The benefits to farmers of doing business with McCain were: guaranteed
sales of farm output, an increase in yields of 30-40 percent compared with “regular” potatoes,
reduction in operating costs, increased and predictable farm income, and reduction in
consumption of natural resources like water. Another benefit was trust. One farmer said, “Our
money is safe with them [McCain]. We can’t trust the brokers [middlemen].”
By avoiding selling to a middle man at the mandi, many farmers reported making more money.
Farmer Hitesh C. Patel used to grow cotton, corn and other items and switched to french fry
potatoes. After switching products, he reported getting higher prices, yields and quality
production, which enabled him to purchase a Honda City car after using a bicycle for many
years. He said, “My lifestyle has changed, my personality has changed. Farmers today are being
treated as first class, not fourth class.” Many farmers reported seeing an increase in yields after
receiving guidance and training from McCain, and ultimately their profits rose. Farmer Amrit B.
Patel reported seeing an increase in income. In his opinion, the risk in doing business with
McCain was zero, since the price he and other farmers received was fixed. He reported that, of
all the companies he knew of, McCain was the only one that worked directly with farmers rather
than going through brokers. Bakshi observed, “They [farmers] are eager to learn, they’re eager
to change; they’re eager to innovate so they can have a better life.” The Gujarat government also
supported farmers by providing subsidies for drip irrigation equipment, submersible pumps, and
other items which helped farmers to improve yields.
While collaboration with source suppliers had yielded many benefits, parties always had to
balance the needs of everyone involved. According to Jatia, “We say it’s about the end
customer, and we expect our suppliers and the whole system to do whatever it takes to meet the
needs of the end customer because that’s what is important. And sometimes in that bargain there
are conflicts that are thrown up, and resolving those conflicts in terms of pricing protocols, in
terms of adding capacity and who retains what margin, becomes challenging.”
After more and more french fries began to be processed locally, McDonald’s fries costs declined,
which helped the company launch Extra Value meals. These were designed to provide an entrée,
drink and fries at everyday low prices. Jatia said this decision to launch extra value meals helped
McDonald’s improve its position as an affordable meal destination, thereby increasing customer
visits and average spend per visit.
OPTIMIZING THE SUPPLY CHAIN NETWORK
While McDonald’s and McCain had made great strides in growing the local MacFry supply,
McDonald’s still faced many challenges looking ahead.
McDonald’s India: Optimizing the French Fries Supply Chain: GS-79
p. 10
The first challenge revolved around quantity and quality. How could the company deal with
volume increases while still getting the quality product it required? In 2011, the company had
about 240 restaurants. The goal was to grow this number to 500 by 2014 and reach out even
more to the growing middle class of over 250 million people. How was the company going to
source better, cheaper and faster than the competition? Quality food processing suppliers were
still in relatively short supply—assuring a sufficient supply of product was management’s most
serious concern. There were other supply chain challenges that exacerbated the problem, such as
poor roads from farms to highways, and a lack of quality warehousing space. Management was
also concerned about product costs. But constraints on the physical product or manufacturing
capacity would be a severe barrier to growth.
To meet rapidly growing demand, rather than simply focus on its own supply chain, McDonald’s
had begun to focus on its suppliers’ supply chains. With the MacFry, since only 75 percent of
fries were being processed locally, the challenge would be meeting ever-growing demand while
increasing the portion of fries processed in India. Bakshi had a long-term vision to even become
a net exporter of fries to other countries within the McDonald’s system.
The second challenge had to do with costs, since everyday value to the customer was such a key
aspect of McDonald’s business proposition. Although McCain, the potato farmers and
McDonald’s had come a long way from conditions in the 1990s, inflation continued to hover in
the double digits in India, making it all the more important that McDonald’s manage its supply
chain costs (Exhibit 5). Jatia and Bakshi wanted to grow productivity and manage costs rather
than increase prices, since consumers’ discretionary spending was being threatened by inflation.
One benefit of McCain working directly with farmers was that, with the middlemen out of the
picture, farmers retained more profits. So even if inflation was high, farmers would experience a
modest increase in their income since they no longer had to give some profits to the middleman.
With french fries being the largest volume purchase item, its costs mattered. How could
McDonald’s get to 100 percent local fries? The Indian climate allowed growth only in the
winters versus the long summers in the U.S. and Europe. The growing season in India was 90 to
100 days, as opposed to 120 to 140 days during summers in the U.S. and Europe. In India, the
window for harvesting a full year’s crop was about 15 to 30 days, whereas it was 60 to 90 days
in the U.S. and Europe.
In addition, limitations existed in the type of cold storage technology available, so potatoes could
not be stored for more than six to eight months. With these limitations, the McCain
manufacturing line would only be used for fries six to eight months in the year. McDonald’s still
faced importing some fries at a high cost. McCain wanted to stretch the shelf life of potatoes to
10 to 11 months, which would enable them to produce fries 365 days a year. In terms of
production costs, local fries cost about 70 percent of imported fries. Inventory holding for
imported fries was 275 metric tons, compared to 110 metric tons for local fries. With cold
storage available, McDonald’s could explore multiple ways to get potatoes from farmers (see
Exhibit 6).
A third related challenge involved keeping up with production needs without increasing supply
chain costs. For example, if McCain eventually would have to consider adding an entirely new
McDonald’s India: Optimizing the French Fries Supply Chain: GS-79
p. 11
plant to manage growing demand, the cost structure would again be mismatched with restaurant
revenues, as was the case in the late 1990s. This would make it challenging to deliver affordable
product and value to the customer.
A fourth challenge the company faced was competition for supply from other international food
companies. Companies like PepsiCo had the same quality standards as McDonald’s, and would
be looking at the same suppliers and many of the same farms for supply. An advantage
McDonald’s had was in volume. Even during an economic downturn such as the one in 2011,
McDonald’s volume was relatively stable—suppliers were still able to cover their fixed costs.
Due to this and the long-standing relationships it had built with nearly 1,000 farmers, company
management felt confident that they could continue to depend on their suppliers.
McDonald’s India and McCain India had come a long way and had discovered that close
collaboration with farmers was essential to their collective success. They have been successful
in sourcing locally for their demands (see Exhibit 7). Given the pressure of food inflation,
reducing reliance on imports was becoming even more critical. There were several avenues
McCain could take to better optimize the supply chain network. The company’s close
collaboration with farmers over many years would help them address the current challenge of
cost control. But the question remained: Could McDonald’s ever achieve 100 percent local
supply and stay there amidst growing demand?
STUDY QUESTIONS
1. What were the pitfalls of the initial attempts by McDonald’s India to create its french fry
supply chain? What were the critical factors that enabled McCain’s success?
2. Under McCain’s management, the MacFry supply chain has been effective. What are the
risks of this model? How can McDonald’s address the competitive threats from other
firms moving in and capitalizing on the large investments of time and money that
McDonald’s has made?
3. What are the options McDonald’s India can pursue to meet the huge growth in demand
that has been predicted in India?
McDonald’s India: Optimizing the French Fries Supply Chain: GS-79
p. 12
Exhibit 1
McDonald’s India - Imported versus Local Fries
Source: McDonald’s India (with permission).
Exhibit 2
Selected Financial Data
The Contribution of McDonald’s French Fries to Costs and Revenues
As a percentage of total purchase
10%
As a percentage of total revenue
Approximately 15%
Capital Costs for French Fry Manufacturing
Lamb Weston/Tarai Foods joint venture
$10 million
McCain India
$40 million *
Source: McDonald’s India (with permission).
* Note: 25 million Canadian dollars were invested in the facility. The US dollar estimate was made based on
USD/Canadian dollar exchange rate in 2002, http://www.tradingeconomics.com/canada/currency (accessed January
30, 2012).
McDonald’s India: Optimizing the French Fries Supply Chain: GS-79
Exhibit 3
McDonald’s India Menu Board with Fries
Source: McDonald’s India (with permission).
Exhibit 4
French Fries Potato Farms – Gujarat, India
Source: McDonald’s India (with permission).
p. 13
McDonald’s India: Optimizing the French Fries Supply Chain: GS-79
p. 14
Exhibit 5
Indian Inflation Rate (Annual Change of Consumer Price Index)
2003
3.72%
2004
3.78%
2005
5.57%
2006
6.53%
2007
5.51%
2008
9.70%
2009
14.97%
2010
9.47%
2011
6.49%
Source: Inflation.eu, http://tinyurl.com/7ga23aa (accessed November 19, 2013)
Exhibit 6
Multi-Channel Potato Value Chain in India
Source: McDonald’s India (with permission).
2012
11.17%
McDonald’s India: Optimizing the French Fries Supply Chain: GS-79
Exhibit 7
Sourcing for McDonald’s India
Source: McDonald’s India (with permission).
p. 15