Doing it the McDonald’s way

We often marvel at the great prices offered by businesses such as Amazon.com and flipkart.com, wondering what it is that makes them tick. While the behemoth, Amazon, has pioneered the e­commerce domain in the last 15 years, Flipkart is still nascent, struggling to make a profit year ­after­ year. So, then how is it still able to sell at a discount?

Quite contrary to popular belief, it is not the competition that forces such business to sell cheap; rather, it is their operational efficiency that allows them to have a low cost, which in turn enables them to sell at a low price. There is a very subtle difference between the two – low price entails lowering the profit margin, while low cost ensures a higher profit margin.

T h e  l o w ­ c o s t m o d e l was c h a m p i o n e d b y McDonalds, way back in the early 1940s. McDonalds changed the quick service industry with its quality of service and a plethora of food options – all at unbelievably low prices. This enabled its growth from a small drive-in outlet in the 1940s to the biggest fast-food chain in the world by the 1960s.

McDonalds was the first organization to give importance to its supply chain. It worked with the suppliers to conduct research in coming up with cost­ saving techniques in food production and processing. Ensuring timely orders to every supplier, McDonalds gave the suppliers enough confidence to innovate in making the supply chain more efficient. As a result, McDonalds was able to procure raw material at a very low cost, which enabled them to provide their products and services at a low price. Even their competitors in the 1960s marveled at their operational efficiency, and in changing the landscape of the quick service industry.

To put things into perspective, it was McDonalds who perfected the cold storage technology, to transport raw materials over long distances. This technology is used even today by almost all suppliers of perishable food products.  McDonalds was also one of the first organizations to adopt the Just-in-time (JIT) procurement and delivery models, which is in widespread use today.

Twenty years after McDonalds first pioneered the supply chain integration and created a new benchmark in operational efficiency, many organizations started realizing the importance of such a supply chain integration. Thus started an era of backward integration, where the suppliers were given a larger share of the pie. From here emerged organizations such as Amazon.com, who further revolutionized the supply chain, by completely eliminating the middle­men i.e. distributors and wholesalers.

The Amazon model is unique in its own way. Eliminating the middle­men reduced costs and allowed them to sell at low prices, a phenomenon that led to Amazon becoming one of the most visited website in the US in the 2000s.

Organizations like McDonalds and Amazon have, today, become the way of life for more than 50% of Americans. Their operational excellence is marveled at even today. The fact that no other organization has been able to compete with them for the last several decades speaks volumes about their innovative practices and supply chain management.