Inventory Management - McDonalds, Nestle - Essay Example

? Inventory Management of the of the Table of Contents Table of Contents 2 Introduction 3 Part McDonald’s 3 Part 2-Nestle 7 Conclusion 9 References 11 Introduction In this paper, the researcher will shed light on inventory management which is one of the most important aspects of logistics and supply chain management. This study has selected two companies such as McDonald’s (major player in food service industry) and Nestle (market leader in nutrition and consumer goods industry) in order to understand their inventory management policy. It is essential to understand the concept of inventory in order to create background for the study. Research scholars such as Handfield (2002), Zinn and Bowersox (1988) and Pagh and Cooper (1998) state that organizations keep additional stocks or inventories in order to continue the process flow. Maintaining an optimal inventory level can help companies to meet demand for products in optimal manner, decrease down time and decrease lead time of operation. Bucklin (1965) has segregated inventory into four types such as, 1- Raw Material- purchased materials that will be needed during production process but has not been used yet in the manufacturing system, 2-Work-In-Process (WIP) - materials that have been already used in the manufacturing process but has not been converted into final product, 3- Semi Finished Goods (SFG) - materials that have been intentionally half completed and exported from origin country to the country where the material would get completed and sold and 4- Finished Goods- completed good which are awaiting for shipment. Part 1- McDonald’s McDonald’s is a renowned fast food company which has strong presence as a service marketer since 1955. The company maintains a strong product portfolio of Hamburger, sandwiches, beverages etc in order to cater to the demand of customers (Mcdonald’s, 2013). To maintain a the process flow in smooth manner, McDonald’s faces challenges to maintain optimal inventory level which can help them to cater to the demand of customers in lesser amount of time. Another important objective for the inventory management function of Mcdonald’s is to reduce the amount of waste and decrease the cost for inventory management (McDonald’s, 2008). Two major problems associated with the inventory management of McDonald’s can be summarized in the following manner. Forecasting the demand accurately in order to decrease the waste in the logistic process. Predicting the optimal demand for raw materials in order to meet the customer requirement in efficient and time bound manner. Competition in fast food industry has been increased due to entry of players with almost equal resource capabilities in the same market place and shifting of customer demand from fast food products to healthy food items. In such context, McDonald’s has deployed its resources in order to offer new fast food items to customers and simultaneously chance for wastage in the production process has increased. In the past years, restaurant managers undertake the stock ordering responsibilities while they ordered stock in accordance with their knowledge of local demand. The company maintains its stock by analyzing the historical data, such as, amount of inventory sold in previous day, week or month. For example, if the company has sold 100 units of Berger in the last month with net sells is growing at a rate of 10% annually, then managers of McDonald’s forecast that the sales will reach the volume of 110 units in the next week. However, the company has understood that such simplistic method of calculation might not help them to forecast the actual amount of inventory in precise manner. The company has recognized the fact that, macro-economic condition, demand inequalities and lifestyle change of customers can have significant amount of impact on inventory management. To modernize the inventory management system, McDonald’s has introduced central inventory management function which communicates with restaurant managers in periodic manner in order to get knowledge about the local demands. After gather the data regarding local consumption pattern, central inventory management team put the data in a customized demand forecasting system known as Manugistics and forecast the optimal level of inventory is required to meet the demand (McDonald’s, 2008). Current inventory management system of McDonald’s can be compared with VMI arrangements or Vendor-Managed Inventory as mentioned in the research work of Dong and Xu (2002); Cetinkaya and Lee (2000). In case of McDonald’s, there are three types of inventory such as Raw Materials, Work-in-progress (WIP) and Finished Products. The company deals with perishable goods and has manufacturing and logistics facilities in different locations in foreign countries. Another important thing is that, fast foods are low priced products hence companies try to set logistic facilities near restaurants in order to decrease cost of the value chain and improve the margin. Hence, technically or financially, the concept of semi-finished goods cannot be applied to service marketer like McDonald’s. Three types of inventories of McDonald’s can be explained in the following manner. Raw Materials For McDonald’s, raw materials include beef patties, buns, salad ingredients, packaging materials, paper cups, vegetables, meat etc. These raw materials are replenished at a frequency of 3 to 5 times per week in restaurants. There are three sections such as chilled, frozen and ambient for storing the raw materials. Raw materials are replenished with the help of transportation vehicles like lorry and stored in ideal temperature (McDonald’s, 2008). Work-in-progress (WIP) The company has established separate storing unit known as Big Mac which consists of processed materials like cheese, lettuce, onions, pickles, seasoned meat, beef patties, sauce etc. These items are processed in such a manner that restaurants can just combine these items and serve the food whenever customers place order. Due to these processed items, Big Macs can serve hot and fresh food items to customers. Finished Products McDonalds maintain very small range of finished products such as Fileto-Fish, side salads in order to bring the feel among customers that they are getting hot and fresh food items. In broad context, all the food items including patties, sandwiches, burgers etc can be classified as finished goods for the company. The company uses First In, First Out (FIFO) in order to handle all the raw materials, work-in-progress and finished products in order to address the threat associated with the perishable nature of the goods. Critical responsibilities of restaurant managers in McDonalds include checking the inventory level, collecting feedback from employees regarding the choice of customers and communicating the same to central inventory management team, running lean stock control management program to reduce holding cost. These managers need to closely work with the inventory management team in order to decrease the cost and improve the service delivery efficiency. However, there are chances that managers of restaurants fail to understand the local demand in accurate manner due to their lack of expertise in the field of demand forecasting and ultimately the whole inventory management system will get dysfunctional. The viable inventory management should work in the following manner. (Source: McDonald’s, 2008) A separate inventory control team (ICT) should work in close loop with restaurant managers in some cases the team should help managers to forecast the local demand in accurate manner. Managers should communicate with central inventory management team via e-mail and telephone in order to update the help inventory team to update the local demand data in periodic manner. Restaurant managers should collect the local level customer demand data and forecast future demand by using three principles, such as, 1- collecting historic data of store specific product mix for last three years, 2- collecting information regarding location specific events, holidays and national promotion and 3- sending information regarding chance factors such road closure, accidents in the transportation route. By using these three verticals, it is expected that restaurant managers can forecast the demand and help central inventory management team to manage the inventory in efficient manner. Part 2- Nestle After analyzing the inventory management of a service driven food retailer, the study will shift its gear and try to understand the nature of inventory management in a food manufacturing organization such as Nestle. For a product marketer such as Nestle, inventory management process is far more complex due to involvement of number of intermediate layers while in most of the cases, service marketers like McDonald’s do not need such complex inventory system to provide food service. Actually, nature of value offering creates the demarcation between service marketers like McDonald’s and product marketers like Nestle. For example, McDonald’s do need to manufacture anything rather they can combine the raw material or WIPs and serve dish to customers standing at sales window whereas such simplistic model cannot be used by Nestle because they need to manufacture products and move the product to customers through distribution channel. Price dependent demand can be treated as another point of demarcation between service organization like McDonald’s and manufacturing firm like Nestle. Abad (2001) and Lodree (2007) have pointed out that manufacturing companies need to put all possible costs incurred during manufacturing process in the inventory management system in order to predict forecast the holding cost whereas such complex process is not required by service organizations. Now, the study will try to understand nature of inventories and inventory management in Nestle. Nestle is renowned Swiss multinational nutritional and food-product company which has headquarter in Vevey, Switzerland. The company was founded by Henri Nestle during the year 1866. The company maintains varied product segments such as nutritional divisions, consumer food segment, healthcare segment etc. Many of the products of Nestle such as Stouffer's, Maggi, Nescafe and KitKat are global leaders in terms of market share and revenue (Nestle, 2012a). However, Nestle is a multi segment and multi Product Company and the company changes its inventory management policy in accordance with the nature of products hence it will not be possible to cover all the inventories or inventory management of Nestle in short space of this essay. For this reason, the study has decided to concentrate on food product division of Nestle and explore existing inventory management policy of the Swiss giant for its food division. Nestle USA is the manufacturing subsidiary of the Swiss giant and the subsidiary is located in Jonesboro, Arkansas, USA (Food Processing, 2012). Major inventories for Nestle USA include frozen food, dairy product, 'Lean Cuisine', nutritional ingredients and Stouffer's. Raw materials are arrived in the manufacturing plants in packaged through local transport whereas the same procedure is followed by the staff in the manufacturing facility when the send the finished items to distributors. Nestle USA uses 5.1 million ft? convertible freezer spaces in order to store the nutritional and perishable goods whereas the inventory has divided into two separate ammonia refrigeration sections in order to decrease the chance of inventory wastage (Food Processing, 2012). In the warehouse, radio frequency scanning (RFS) has been used in order to check the batch number of inventories and separate ID number and bar code are assigned to each delivery pallet. Orders from customers (vendor and retailers) are processed through electronic data interchange (EDI) and can be filled within 8 hours. Wide area network (WAN) is used for updating the inventories in every working day. The inventory system uses individual quick frozen (IQF) in order to preserve the freshness and ingredients of food products. For example, the manufacturing facility uses hydrocolloid mixture of guar gum and Xanthan gum as stabilizer for frozen products. A small disk is used for distribute the required chemicals over the food ingredients. Nestle USA maintains all four of inventories and these inventories can be segregated in the following manner. Raw Materials Raw materials for the manufacturing facilities include chemicals, herbs, cocoa granules, milk, sugar, liquid cocoa, active pharmaceutical ingredients, enzymes and many others. Work in Progress (WIP) WIP for Nestle’s food division includes Xanthan gum, guar gum, processed herbs, processed cocoa, pasteurized milk, refined etc. These WIPs are used in extensive manner in order to continue the process flow of food product manufacturing. Semi Finished Goods (SFG) There are very few products that need external care apart from fully equipped manufacturing facilities of Nestle USA. However, the company exports its nutritional products in semi finished manner to Asian countries like India, China and then manufacturing subsidiary of the company in these countries complete the finishing of semi-finished nutritional products and sell it. Generally, nutritional products such as baby food, baby growth substitutes are very much sensitive and perishable in nature hence there is possibility that these products might get infected or perished while exporting to long distance countries. Hence, Nestle maintains SFGs in order to decrease the risk of infection and damage of sensitive goods. Finished Goods Packaged products like Cerelac, Boost, Nutren, Maggi, Stouffer's, Nescafe, KitKat etc which are ready for transportation can be treated as finished goods for the company. Although the inventory management system of Nestle is quite different from inventory management system of McDonald’s in terms of presence of layers, depth of the system, technology integration but critical responsibilities of manager in both the companies remain almost same. These responsibilities can be summarized in the following manner; To handle the material flow in the manufacturing site. To reduce the inventory maintenance cost by accurate forecasting To increase the size of inventory space by optimal utilization of floor space To track down the inventories and arrange it in systematic manner Apart from these responsibilities, managers of Nestle food inventory section need to communicate with vendors regarding the requirement of raw materials and stock replenishment. Taking help of the vendor specific inventory system proposed by San-Jose, Sicilia and Garcia-Laguna (2005), the study will recommend that inventory managers need to take help of vendor management software, hand held device or RFID devices for communicating with vendors in efficient manner and update the stock in optimal manner in order to reduce holding cost. Managers should also use low-density polyethylene (LDPE) for packaging the good in order to reduce the floor space and store more number of stocks. Conclusion It is evident from the above discussion that inventory plays a vital role in maintaining the process flow for both service organization McDonalds or manufacturing organization like Nestle. Technology integration in the inventory management process changes with the nature of product-mix and service mix. Hence, there cannot be one standardized inventory management policy for all the companies. 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