Food Factories
OM Blog 3: October 30, 2009
By Ken Boyer, Fisher College of Business and Rohit Verma, Cornell University
Authors: Operations and Supply Chain Management for the 21st Century, 2009, Southwestern Cengage Publishing
Food Factories
What is involved in running a grocery store? A lot. Every day, managers must make thousands of decisions regarding inventory (what to buy and how much), job scheduling and assignment (i.e. how many employees in which departments and what jobs should be done and in what order), and quality (how to ensure good products are sold and good service is provided). Pretty daunting eh? And this is for just one store. Consider Kroger Co., headquartered in Cincinnati, Ohio, it operates over 2,400 supermarkets, with revenues of more than $70 billion and has over 300,000 employees. It is the second largest grocery retailer in the U.S. after Wal-Mart. Efficient and effective operations are one of its keys to excellence.
Yet, when we think of groceries it is usually in terms of services – after all, stores don’t make anything do they? Actually, they do. Kroger owns 40 different manufacturing plants (a competitor, Safeway, owns 32). These manufacturing plants make roughly 14,400 in-house (also known as generic) products, including 38,000 “party pails” of ice cream per day – which sell for $2.99 each, or approximately 30% of the cost for name brand ice cream such as Dreyer’s, Ben & Jerry’s or Graeter’s. Stores like making their own because they often can get a higher profit margin on in-house products than for name brand products – because they are controlling more of the process, hence are providing more value.
Kroger is selling 15% more in-house products by volume this year due to the down economy. Consumers often will trade a lower cost for that name brand. In fact, industry wide, sales of store-branded items increased nearly 10% over the past year. In-house products account for 35% of Kroger’s sales, up from 31 percent five years ago. In a down economy, this growth is resulting in increased hiring – Kroger created 400 new manufacturing jobs in the last year for a total of 7,400.
So, the next time you shop for groceries, give a thought to where those groceries came from – it might not be where you think.
Discussion questions:
- How do the practices described above relate to operations and supply chain strategy (chapter 1), process design and analysis (Chapter 4)? Capacity planning (chapter 10) and technology and integrated supply management (Chapter 13)?
- Describe the main challenges of running a food manufacturing plant. How are these similar to or different from running a grocery chain or store?
- Do you think that Kroger ships directly from the factories to its individual stores? Or does it ship products to an intermediate distribution center and from there to its stores?
- How should Kroger treat these facilities? Should they be exclusive to Kroger, or should they provide sales to other retailers? How does this effect capacity planning and forecasting? What are the advantages and disadvantages if Kroger uses the factories to produce products for other retailers?
Sources:
- Information for this story comes from the article “Food Factories”, by Dan Sewell, Columbus Dispatch, October 21, 2009 – to see the full story click here (http://www.dispatch.com/live/content/business/stories/2009/10/21/kroger_food.ART_ART_10-21-09_A12_H1FE63G.html?sid=101)
McDonald’s Pursuit of the Perfect Potato
Authors: Operations and Supply Chain Management for the 21st Century, 2009, Southwestern Cengage Publishing
Next time you bite into a hot, crunchy, delicious French fry give a moment’s thought to the journey that this lone fry took from the field to your mouth. This is something that occupies much of the waking thoughts of Mitch Smith, McDonald’s agricultural products director. The company buys over 3 billion pounds of potatoes per year – that’s a lot of spuds. And getting on the coveted list of McDonald’s supplier’s is the key goal of farmers around the world.
After Ray Kroc developed the franchising system for McDonald’s in the early 1950s, the company took off, growing to become the world’s biggest restaurant system – with 31,967 restaurants in 118 countries around the globe. The company had sales of $23.5 billion in 2008 and it is estimated that the company serves food to 1% of the individuals on planet earth on a given day and over 5% of all Americans. Most of this success is due to the company’s keen attention to the numerous details, challenges and opportunities of managing its daily operations and supply chain. The company has excelled both in creating a standardized system for providing reliable, consistent quality in service of millions of meals per day as well as a supply chain system par excellence long before the term was coined and in a service sector business rather than a manufacturing oriented business that many people presume “need supply chain expertise”.
Jack Simplot founder of Simplot approached Ray Kroc with the idea of switching from fresh to frozen French fries in the early 1960s. The company had been having substantial problems managing the distribution, inventory and supply of fresh potatoes – according to Simplot “They were having a hell of a time maintaining potato quality in their stores. The sugar content of the potatoes was constantly going up and down, and they would get fries with every color of the rainbow. I told him that frozen fries would allow him to better control the quality and consistency of McDonald’s potato supply.” In 1964, Simplot invested $400,000 (equivalent to over $5 million today) to put potatoes in cold storage during the summer – but the experiment failed when all of the potatoes rotted. Undeterred, Simplot returned in 1965 with another proposal – converting from fresh to frozen potatoes. McDonald’s executives carefully researched the possibilities and discovered that the traditional freezing process drained structure and flavor from French fries. Ice crystals would form in the potato during freezing, resulting in ruptured starch granulates. McDonalds worked with Simplot to develop a process to dry French fries with air, run them through a quick freezing cycle, then freeze them. The result was a reduction of moisture in the frozen French fry, which improves its crispness. After Simplot volunteered to build a production line for the new process, McDonalds rewarded the company with 50% of its potato business (up from 20%) – which in 1992 meant a total of 1.8 billion pounds of French fries. Today, Simplot is a more than $4 billion a year business and supplies approximately 40% of McDonald’s total demand.
Today the competition among suppliers for a piece of the potato pie is intense. It has been seven years since the fast food behemoth has approved a new variety of potato to the three approved varieties currently on its list. The mainstay potato is the Russet Burbank which provides the best taste, but has some substantial limitations – it takes a long time to mature/grow, requires huge quantities of water and is vulnerable to rots and disease. This means that farmers must douse it in chemicals – a practice that customers and socially conscious investors would like McDonald’s to reduce or eliminate. And yet … these are the best tasting potatoes. The second major variety is early-maturing Canadian-bred Shepody potatoes that make up a large percentage of fries sold in August – October. Unfortunately, these potatoes don’t store very well.
So, in November the company switches focus to Ranger Russet fries, followed by Umatilla Russets, which store better and fill our bellies from December until February. Umatilla Russets were the last potato variety approved by the company in 2002. The remainder of the year (March – August) consists of the standby Burbank Russets brought west to prime potato country of Idaho, Oregon and Washington by Luther Burbank in 1875.
In 2008, Idaho farmers planted 57% percent of their land with Russet Burbanks, while it accounted for 41% of all potato production across the 8 largest potato-growing states in the U.S. Yet, because of the high cost of growing Russet Burbanks and the need to use massive quantities of pesticides, the search for a new variety is intense. The tasting rooms at McDonald’s corporate headquarters in Oak Brook, IL employ scores of people to test for taste, texture and consistency. Perfume-wearing intruders are chased from tasting rooms in order to prevent contamination from fry samples randomly pulled from restaurants across the U.S. for monthly examination by representatives of the three main supplier’s to the giant: J.R. Simplot, Canada’s McCain Foods Ltd. And Omaha, Nebraska based Con-Agra Foods.
While these suppliers may resent McDonald’s ability to supervise them and control their actions, they are also eager to maintain or increase their current level of business. The same is true of the thousands of farmers that contract or sell to Simplot, McCain or Con-Agra. As Jeanne Debons, the director of the Potato Variety Management Institute notes: “It’s a card game, where McDonald’s holds nine-tenths of the cards”. The institute was established in 2005 by the Idaho, Oregon and Washington potato commissions to handle licensing and royalties from new varieties developed at federal research facilities and universities.
So, in this multi-billion dollar business, McDonald’s will test and taste and suppliers/farmers will jockey for position. According to Mitch Smith: “If we [McDonald's] can find a variety that … with less inputs, water or whatever, that’s something we’re looking for. To date, there are not a lot of varieties that perform consistently enough”. In other words, in the stomachs of people around the world, French fries are no small potatoes.
Discussion questions:
- How do the practices described above relate to quality management techniques (Chapters 2 and 11)? Inventory management and forecasting (chapters 5-7) and global supply chain (Chapter 14)?
- How should/does McDonald’s manage the trade-offs between taste (i.e. product excellence/quality), cost and social concerns?
- Describe how McDonald’s works with suppliers to improve the potato supply chain. Also discuss how there may be conflicts of interest of different parties within this chain.
Sources:
- The idea and much of the information for this entry comes from the article “The Next Super Spud“, John Miller, Columbus Dispatch, October 3, 2009.
- For a great read on McDonald’s, its history and the many ways it has used operational and supply chain excellence, check out the book McDonald’s: Behind the Arches by John Love, originally published in September 1986. Available on Amazon.com at: (http://www.amazon.com/McDonalds-Behind-John-F-Love/dp/0553347594).
- McDonald’s financial and corporate data comes from its annual report.
- Simplot financial data comes from Business and Company Resource Center on Gale Group’s Infotrac system (http://galenet.galegroup.com).
Airline Security: Efficiency vs. Safety
How often have you stood in line to go through security at the airport and been mildly annoyed … or downright angry. Being an operations professor I can’t help but observe the process and think of ways to “do it better” – while also feeling pressure to “keep the line moving”. While there is clearly a need to maintain security, one wonders if the many hoops that we have to jump through are the right hoops. And then, there is always the one annoying individual who seems to have no comprehension that:
- There are other people in the line
- They can’t take their pocket knife, 5 gallons of water or 92 pound suitcase through.
- The poor TSA employees (in the U.S. – in other countries there is another acronym) face three conflicting pressures: keep the line moving, catch the bad guys/gals and deal with the public – who often can be inept, clueless or downright difficult.
I’m sure you have bumped into one or more of these people. Recently, I was in line and in the process of getting naked. Taking off my shoes, belt, wedding and class rings, watch, medical ID bracelet, phone and spare change (believe it or not I am not a jewelry wearing kind of guy). Did I forget the part about taking out my laptop? We might as well have to get naked ….
So, I had just put my cellphone in one of the plastic trays – precariously balanced on top of a 6 foot high stack of empty trays – because the people in front of me were taking their precious time and talking to their friends in the next line. So, this older gentleman takes a break from his critically important conversation with his friend in the other line, turns and without looking, grabs the tray with my cell phone and starts to walk off. Given that I was busy, and I was in another country where I speak very little of the native tongue, all that I could manage to do was yell – NO! at about 150 decibels. This stopped cell phone grabber in his tracks and I received an apology – I think in French – and we all proceeded on our way. I was a bit embarrassed, but my cellphone was OK.
Similar scenes play out thousands of times per day at airports around the world. Almost no one involved in this dance enjoys it, but we must do it. …. And yet, does this process have even a reasonable chance of catching the bad guys/gals? We all want the process to work – and yet there are enormous operational challenges. There are tradeoffs between efficiency and the quality of the safety scan. There are human challenges – no matter how the system is designed and what technology is used, there is always the issue of 1) getting employees to do the proper things thousands of times per day and of 2) getting passengers to understand and follow the rules.
So, next time you are experiencing the security line, see what you can do to make it flow more smoothly, make the TSA employees feel appreciated and observe the process and think about ways it can be improved to make it less burdensome, more efficient, less costly and/or more reliable.
Discussion questions:
- Describe how managing the security process at airlines uses principles or methods of quality management (Chapters 2 and 11), process design and analysis (Chapter 4), technology (Chapter 13) or lean production (Chapter 12).
- How might optimization or simulation modeling be employed to improve the process?
- What suggestion(s) do you have for improving this process?
- How might TSA officials better “train” or communicate with passengers to streamline security?
- What is your most interesting security experience? Why did this occur? Was this a system flaw or simply an outlier – i.e. is it an assignable cause or is it an alpha error?
Sources:
- Many, many personal experiences.
