McDonald’s Supply Chain: A Must-Know for Investors

McDonald’s (MCD) operates over 38,000 restaurants that require a variety of ingredients. McDonald’s doesn’t make any of its products. Instead, it contracts with suppliers to meet this massive requirement. Suppliers are part of McDonalds’ three-legged stool. The other two parts are the owner or operators and the company employees.

McDonalds’ suppliers include Tyson Foods (TSN), Lopez Foods, 100 Circle Farms, Gaviña Gourmet Coffee, Hildebrandt Farms, and many more. These companies supply bakery supplies, meat, poultry, fish, produce, and dairy products.

Each day, McDonald’s serves almost 1% of the global population. Moreover, the company sells over 75 hamburgers a second. With its large-scale operations, McDonald’s suppliers are also numerous.

McDonald’s supply chain

McDonald’s supply chain is a complex web of direct and indirect suppliers that are held to clear standards for quality and efficiency. The company uses direct suppliers that coordinate purchasing and distributing to restaurants. In comparison, indirect suppliers operate facilities such as grain mills and abattoirs. Farms and ranches raise cattle or grow wheat, lettuce, and other essential ingredients.

Similarly, distribution centers coordinate purchasing and distribution to restaurants. Products are transported to restaurants by special vehicles equipped with temperature-control mechanisms. McDonald’s only accept products transported in ideal conditions. Finally, processing facilities produce finished products like beverages, buns, and meat patties.

The company states that it has a sustainable supply chain that focuses on its three E’s: ethics, environment, and economics.

McDonald’s focus on sustainability: Ethics

McDonald’s works with its suppliers to ensure the health and safety of people, as well as the health and welfare of the animals in its supply chain. As an example, McDonald’s endorses animal production practices that reduce the use of antibiotics in food animals.

Similarly, the company has a zero-tolerance policy for cruelty to animals in its supply chain. For example, 100% of the chickens used for meat in its global supply chain are raised only in cage-free systems. McDonald’s does not accept chickens raised in caged housing.

The company aims to reduce pre-slaughter transport times in its supply chain. Additionally, suppliers’ slaughterhouses are audited annually to ensure compliance with industry best practices.

Environment and supply chain

McDonald’s aims to reduce climate impact, including greenhouse gas emissions, relating to its supply chain and restaurants. It also works with its suppliers to reduce food and packaging waste. The other areas of environmental impact are the protection of water and conservation of forests. As an example, McDonald’s works with its suppliers to reduce the water footprints of its supply chain.

Economics in supply chain

The economics in the supply chain relate to ensuring the long-term livelihoods of farmers and suppliers. McDonald’s works with its suppliers to research, share, and scale best practices to increase productivity and efficiency. At the same time, it aims to protect land, livestock, and livelihoods.

The company’s work in this area is based on the United Nations’ sustainable development goals. It aims to reduce hunger and provide decent work and economic growth to its suppliers. Its Flagship Farmers program aims to highlight best practices with respect to suppliers of farm produce.

Consistency in McDonald’s supplies

Serving meals to more than 70 million customers daily requires consistency, which comes from the ingredients as well as the food preparation process. McDonald’s has set strict standards that its suppliers must adhere to. Suppliers bear full responsibility for the quality, consistency, and safety of the products they deliver.

The company seeks consistency in texture, color, freshness, and cut to meet its consistent standards. Additionally, its suppliers are required to meet animal welfare standards, where applicable.

Food safety

Food safety is a serious responsibility, and McDonald’s must ensure it has robust procedures to protect the public and to avoid lawsuits. To help with this, suppliers have traceability programs that enable them to track food in the supply chain. For example, Lamb Weston provides french fries and has processes that can track the fries back to the farm where the potatoes were grown.

McDonald’s has a Food Safety Advisory Council, which provides strategic leadership for the company’s food safety matters. Moreover, the company has ongoing programs to educate its employees about food safety. McDonald’s suppliers participate in these programs and share best practices.

Food safety issues can severely tarnish a restaurant chain’s performance. An example is Chipotle Mexican Grill (CMG). A series of incidents relating to food safety significantly impacted this company as well as its stock. So, it’s extremely important for restaurants to have robust mechanisms in place to avoid food safety concerns. Suppliers of food products have a crucial role to play here.

Cost efficiency

McDonald’s scale allows it to collaborate with its suppliers to achieve competitive and predictable food and paper costs. This helps the company to achieve cost efficiency.

Disruptions in the supply chain

Like any other company, McDonald’s works to minimize disruptions in its supply chain. One of the main factors that work in McDonald’s favor is that it sources products from a number of suppliers in a variety of geographies. This reduces its dependence on a particular supplier.

Moreover, most of McDonald’s raw material input is generic. So, it’s easy to source them from some other suppliers, in the event any of its suppliers faces any issues. However, some of its inputs are from limited suppliers. So, any interruption here is more difficult to manage.

An investor can gain exposure to the restaurant industry through the Invesco Dynamic Leisure and Entertainment ETF (PEJ) and the Invesco Dynamic Food & Beverage ETF (PBJ). Additionally, investors can directly invest in individual stocks such as McDonald’s (MCD), Yum Brands! (YUM), and Chipotle Mexican Grill (CMG). McDonald’s forms approximately 4.5% of PEJ and 4.6% of PBJ.

To learn more about McDonald’s supply chain, please visit the company’s website.

(The above post is an update of posts written by Samantha Nielson and Adam Jones for Market Realist)