Christopher Tang
What did McDonald’s Corp do when its customers start going to In-N-Out Burger for burgers and Chick-fil-A for chicken? It launched a multi-prong approach to capture all customers.
To lure price conscious customers, McDonald’s introduced special low price items frequently: dollar menu items, extra value items, special deal of the day, etc. To attract customers who are health conscious or bored with the buns, it started new items: salads, fruits, oatmeal, egg white items, fruit smoothies, and tortilla items. To entice variety seekers, it offered premium McCafé drinks that require blenders, coffee bean grinders, and dispensing machines, etc.
After all these efforts, what happened? Between 2011 and 2013, McDonald’s revenue ($27-28 billion) and net income ($5.5 billion) stayed flat, but the Cost of Goods Sold (COGS) increased from 60% to 62% (percentage of revenue). This all-out effort did not work, and here is why.
There are multiple dimensions of the “cost of variety” that one must take into consideration. First, let us consider the front-end operations (i.e., customer-facing operations). Many customers expect fast service when they enter McDonald’s, but its current menu has become very complex (Figure). With so many choices, customers need extra time to read the menu, process the information (different options, different prices), and then decide what to order. In many instances, cashiers amy need extra time to explain things to customers. This will hold up the ordering process at the front of the line, which can frustrate other customers who are waiting at the back of the line.
Second, let us consider the back-end operations (i.e., the kitchen operations). Except the traditional items (e.g., Big Macs, Chicken McNuggets, Fries, etc.) that can be produced in batches in advance, most new items require customization and/or fresh ingredients that cannot be produced in advance. Therefore, the kitchen operations can be hectic and even chaotic at times esepcially when a customer ordered some customized items during peak hours. For example, Jargon (2014) reported that many McDonald’s franchisees called its McWrap the “showstopper” because the kitchen may come to a halt: crew members need to read and follow the instructions to assemble many fresh ingredients.[1] When the kitchen is disrupted by customized orders, the processing time will increase and the throughput will decrease. Consequently, customers may need to wait for their items, which can disappoint those customers who want fast service to begin with!
Currently, McDonald’s lacks a clear strategy: is it competing on low price and fast service? or is it competing on product variety at a premium price? If it is the former, then McDonld’s should trim its product line and regain its focus on operational efficiency. If it is the latter, then it needs to change its front-end and back-end opeations by having two separate counters/kitchens: one focuses on traditional items for fast service without customization, and the other focuses on premium customizable items.
Using the same process for producing standardized items and customizable items is a bad idea! I know so because we all teach the “product and process alignment” concept in our operations course. If you don’t believe me, perhaps we can learn from a Chinese proverb that sums it up: 鱼与熊掌,不可兼得.
You can't have both fish and bear's paw: In order to get something, you have to sacrifice something else!
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