McDonald’s Corporation dominates the QSR hamburger category, thanks to its successful raw material partnerships with grinding and patty processors at home and abroad.

Successful strategies for marketing beef at home and abroad prevail, despite the current business environment fraught with food-safety and related setbacks, coupled with escalating regulatory demands, and the daunting forces tied to various other business-operating challenges.

To be sure, there is no shortage of high-voltage issues — whether related to raw material costs, the impact of inclement weather on grain production and pricing, including the ravages of recent hurricanes Katrina and Rita — among a host of other challenges. Although operating struggles, at times catastrophic, currently define the beef industry, demand for this red-meat category remains constant — especially in the foodservice arena.

No foodservice enterprise accommodates and delights consumers and their eating patterns more than McDonald’s Corporation, which played a major role early on in reshaping how Americans consume their meals.

Undoubtedly, foodservice fare — especially consumed in quick-service restaurants (QSR) — represents the epicenter of the evolving consumer dietary options outside their homes — with beef at the center of the plate. In that regard, the hamburger represents a key building block in the power behind the beef category.

Who could have guessed that the first McDonald’s shop in California would explode into more than a restaurant franchise, but also an American icon under the ingenuity and insight of Ray Kroc, the first franchising agent and later the owner.

Today’s organization operates as a global chain with broad menu options. The hamburger maintains its glorified food status, however, thanks in part to McDonald’s beef-processing partners, who provide the raw material force behind the product. Their part involves more than churning out millions of patties, however. A successful partnership with the global restaurant leader depends upon the development of new products exhibiting consistent quality in flavor profile and palatability, among other requirements. Food safety tops the list concerning meat quality for McDonald’s and its raw product suppliers.

This special report looks at the relationship between the supply-chain-management team for McDonald’s and its four manufacturing partners on the beef-processing side — with an extensive report on two of its six manufacturing facilities, one operated by IL-based Otto & Sons, a division of OSI Group LLC, along with Lopez Foods of Oklahoma City. The other facilities producing patties for McDonald’s, under dedicated supply-chain terms, belong to Golden States Foods based in Irvine, CA, and West Conshohocken, PA-based Keystone Foods LLC.

When McDonald’s Corporation’s executives, in charge of its supply chain system, visit one of the beef processing facilities supplying ground beef to its more than 13,700 U.S. restaurants, they mean business. Since its suppliers produce nearly a billion pounds of ground beef product a year for the McDonald’s franchising system, this is serious business.

On a recent Friday afternoon, three-members of McDonald’s supply chain team left their corporate offices in Oak Brook, IL, and journeyed to West Chicago, home to Otto & Sons, one of the beef processing plants in the OSI Group’s family of 82 facilities around the world. The McDonald’s trio included John Hayes, senior director, USA food and packaging, and his associates Todd Bacon, quality systems director, and Robert Cannell, supply chain director.

Today’s business predictably included meetings and discussions, but a revolutionary pump-and-grinding system installed in the Otto & Sons facility this past spring was a key agenda item.

“Our facilities are continually being updated with new technology that is frequently developed by our suppliers and put into their plants,” Hayes reports. “It’s a significant reinvestment from a capital standpoint. The people within those facilities reflect the right combination of talent and experience to make sure we have the resources in our system that can not only meet our current needs, but they also represent someone with whom we can grow.”

The pump-and-grinding system is an example of innovations McDonald’s and its processing partners developed to ultimately benefit the entire meat industry.

“There has not been a significant innovation in grinders in about fifty years since the development of the old screw auger grinding system,” Hayes notes. Designed and built by a division of Beef Products Inc. based in Dakota Dunes, SD, the new system facilitates grind consistency while offering enhanced defect elimination capability.

‘We all [representatives from McDonald’s and OSI] worked with BPI to develop an entire new way to grind and process hamburger,” Hayes reports. “It improves the quality and food-safety profile while improving performance of our burger process related to juiciness, tenderness, mouthfeel, color, aroma, and consistent size — all the features that define quality standards.”

There may be only one king to a castle, but even monarchs appreciate the benefits of complementary alliances. In the modern business realm, partnership alliances have become pivot points for business success — especially concerning McDonald’s and its beef processing suppliers with whom its relationships go back years. In OSI’s case, the relationship began when a family–owned butcher shop on the West Side of Chicago sold ground beef on credit to Ray Kroc for his first restaurant. Now, more than 50 years later, OSI’s business relationship with McDonald’s remains a solid source of prosperity.

“All the companies [beef processing firms] relate back to the beginning with Ray Kroc,” Hayes notes. “We create an environment at McDonald’s so that the suppliers we do business with are focused on our customers, food-safety issues, and delivering the best value possible. It’s our approach to how we do business that gives us the long-term staying power that a lot of our competitors lack.” NP

As senior director of food and packaging for McDonald’s USA, Hayes is a leader in charge of the food-buying systems (beef, pork, produce, bakery, and dairy) that stocks McDonald’s 13,700 U.S. restaurants.

Q: What is supply-chain management?

Hayes: We purchase close to 4 percent of the red meat produced in this country. McDonald’s is a huge customer in every category, amounting to more than $7 billion in purchases. We call it supply chain rather than purchasing. In the QSR industry, McDonald’s probably has the smallest — in terms of numbers compared to dollars — staff of supply chain professionals. My area alone is close to $2 billion in purchasing and we manage with a staff of four people. If you went to any other QSR food company that buys on the order that we buy, you would find a bigger staff.

Q: What does that mean exactly?

Hayes: We don’t do purchasing at McDonald’s. We spend little time negotiating contracts and pricing. We operate with long-time predefined programs. We call ourselves supply chain because we build net worth that goes in a piece of beef going all the way back to the live animal and ending up as a consumer product. We build the entire system that manages that delivery.

Q: How do you manage with a four-member staff?

Hayes: We can do what we do because we vest in our suppliers much of the decision-making and brand maintenance, so it is unnecessary to check and audit them continuously. We do some of that, but we don’t have to look over their shoulder every minute because, at the end of the day, they have committed to us that they will deliver against our brand promise. You always have to have a relationship where there is accountability, but at the same time the nature of how we deal with them says they understand our expectations and they have accepted responsibility to deliver against those.

Q: What are the key benefits of this partnership model?

Hayes: For us it’s efficiency, quality, continuous re-investment, and continuous pursuit to deliver better value and safer products to our customers. It is not an entitlement program. There is no more competitive industry than the QSR segment and our suppliers have to earn their reputation everyday. They, with us, have to figure out how to deliver value to meet our customers’ needs.

Q: How do these relationships evolve?

Hayes: I think this is unique, certainly within the QSR industry. The partnering concept gained popularity 15 years or so ago. It was how Ray Kroc thought about the business when he opened his first restaurant 50 years ago. If he were still with us, he’d say ‘oh, others are finally starting to get it.’ He understood as a salesman early on that if you expect to get a good and fair deal from your suppliers and you want to have quality products and have your values maintained, then you have to work in an environment where your supplier is profitable. Everybody will prosper in the supply chain with suppliers supporting the brand. That was the genius of Ray. Most supply chain organizations think that by trying to pressure their supplier’s margins in an arms-length-transaction model, somehow they will gain an advantage. For core products that are essential to our brand, partnership philosophies make up the bulk of how our relationships will work.

Q: How does this partnership specifically benefit the meat industry?

Hayes: On the technical side, if you look at how ground beef for the QSR industry is processed today — whether it is the grinding system, or freezing and forming systems — all of those processes originated in McDonald’s suppliers’ plants. It’s the continuing reinvestment and the model that McDonald’s has developed, which we execute with our suppliers, that ensures we remain competitive and have safe, high-quality products.

Our focus is on the hamburger patty manufacturers. They work with their suppliers in similar types of environments to get them to bring forth innovations. Even though raw material and equipment suppliers are usually a step removed from McDonald’s, they are moving in the right direction. A lot of our food-safety innovations, would be an example. Our ground beef suppliers are able to take the innovations and ideas that are developed with McDonald’s and filter them out to the rest of the industry. They expect the suppliers they buy their raw materials or equipment from to have that same kind of attitude they have to contribute to a positive relationship with McDonald’s. It’s not quite the same level as our immediate suppliers, but when somebody connected with McDonald’s comes knocking at your door, it won’t be to take advantage of you. They will be seeking to work together to find innovations, a new widget, or a new process to make the product better.

It’s that reputation that gives McDonald’s the ability to develop new processes and controls and equipment. It’s our recognition that our suppliers should prosper and our suppliers’ suppliers should prosper that gives us the credibility to go in and have it be more than just talk when we are meeting with an equipment manufacturer or raw-material supplier. We come in with a certain amount of credibility because of our attitude about business.

Q: Is there room for new beef suppliers?

Hayes: We look for opportunities for new suppliers, but our first view is of the companies that have grown with us. It’s about McDonald’s and our supplier companies being focused on satisfying the customer, creating value, and believing that if we all do our jobs, the system will then prosper. That doesn’t mean it is a closed shop. There have been incidents where we have brought in new suppliers in the beef category. We have not brought in anybody new in hamburger in quite some time, but we have had other new beef products that provided opportunities for other companies to produce products for us. NP McDonald`s beef product suppliers

OSI Group LLC, Aurora, IL Born as Otto & Sons in Oak Park, IL, in 1900 and became the first McDonald’s beef patty supplier. Annual sales estimated at $3.2 billion with 12,000 employees

Lopez Foods, Oklahoma City Private family-operated business since 1968. Plants operate in Oklahoma City and in Columbus, NE, as Carneco Foods. Products include fully cooked breakfast sausage and sliced fully cooked ham and fresh ground chubs in a variety of grinds. Annual sales total $400 million with 755 employees.

Keystone Foods, West Conshohocken, PA An international leader of processing and distribution to the food industry with annual sales estimated at $2.8 billion and 6,500 employees

Golden State Foods (GSF), Irvine, CA A food processor and distributor to the foodservice industry, GSF provides one-stop shopping to more than 2,900 U.S. McDonald's restaurants. GSF produces frozen beef patties, cooked beef crumbles, pork sausage, sandwich sauces, salad dressings, ketchup, dipping sauces, dessert toppings, and other food items. The firm supplies more 150 products to 45 countries, and has foreign operations in Egypt, Australia, and Malaysia. Annual sales estimated at $2.5 billion with 2,500 employees. NP

Robert Cannell, Ph.D., and R. Todd Bacon, Ph.D., provide the hands-on leadership as the supply-chain management duo for McDonald’s Corporation. Both men spent previous lives on the processing side of the food business in the red-meat category — Cannell, a meat scientist, in production and quality assurance. Bacon, who holds degrees in meat science and food microbiology, concentrated on food safety.

Q: Describe your responsibilities.

Cannell: I interact with our ground beef as well as our raw material suppliers – the packers on our approved supplier list. I look at long-term strategies in terms of costs and product availability, assured supply options, and maintaining the kind of products that meet our food-safety and quality standards. Certainly my focus would be on assured supply and good value. That does not mean cheapest, but the best price and efficiency that can be achieved while delivering the safety and quality we demand. I also concentrate on continuously improving production efficiency.

Q: How are the duties between the two of you broken down?

Bacon: Rob manages the business relationship and I am director of quality systems. We both handle the commodities. If an initiative I am working on improves quality but is costly, Rob needs to understand the additional cost because that goes into his area. We work together, but we have separate areas of concentration within the meat products we procure, which include beef patties, pork sausage, regular bacon, and deli meats.

Cannell: There really is not a clear distinction between quality and price because I won’t buy the wrong product at any cost. I get the best prices I can for what gives us the best quality.  There is no adversarial relationship between the quality manager and what I do. Everything we do goes toward getting the quality product we want.

Q: How is it that the two of you manage to single-handedly keep the ship sailing, so to speak?

Cannell: There are so many more than the two of us, there are all the people at different levels in each of our suppliers’ plants. If something needs to be done, it’s as if they work for me and we all work for McDonald’s. They don’t report to me, but we are all working for the brand. All of our suppliers work as if they work for McDonald’s.

Bacon: Suppliers are an important part of the business. Because there are only two of us, it becomes very important for us to manage at a high level and set direction. It is equally important that our suppliers are involved in the process. For example, this week we had a meeting of the red meat quality and safety team, comprised of representatives from McDonald’s and our suppliers, including key people involved in the quality and safety process. I could not do it alone; I require a lot of buy-in and participation from the suppliers.

Q: Identify the major benefits of the processing partnerships.

Cannell: Efficiency and good price are important, but never more important than our expectations for quality and meeting our product specifications. We are very upfront concerning our expectations. That leads to the major advantage, which is there is no benefit for suppliers to take shortcuts. If there is additional cost for doing something better, the McDonald’s system bears it. This is a system that takes a complete level of trust and years to construct – hence our long-term suppliers.

Bacon: The things we accomplish as a QSR business would not happen without their participation — not with a two-member team on our side of the fence.

Q: Describe supply contingency model.

Cannell: I work on assured supply. It would be more efficient to run our plants as close to 100-percent capacity as possible, then you would not need as many plants. The reality is that if any one of those plants went down, I need assured supply for the entire United States. With that in mind, I have to make sure there are built-in-capacity buffers. Again, this is not the least expensive or most efficient way to acquire beef patties or have them produced. But assured supply is something that is extremely important to McDonald’s and is one of the foundations of the supply chain. So we build that into our planning.

Bacon: There are things built into the inventory and product rotation to address the contingency issue. Six plants are a relatively small number when you think about the total volume out there, however. There are pros and cons to having six plants. The pros are you are better able to embrace technology from an economic standpoint. The downside is that a large portion of your supply is contributed by each of the six facilities. That means you have to have very aggressive and robust contingency plans.

Q: What are the building blocks of the plan?

Cannell: Any given plant may only be running at 85 percent of potential. It is necessary to keep that little buffer in reserve. If one plant goes down another can increase production to fill the void. All suppliers know their designated contingency suppliers. We constantly review those plans as things change in the business.

Q: Is outsourcing part of the contingency?

Bacon: The approved supplier process focuses on assessing a candidate’s ability to produce the right finished product. It is a rigorous process on our part. A company can start out with the right raw material and the right program in place, but that does not mean it can deliver the right finished product. Not only must you have the right programs in place, but you must also be process capable and able to demonstrate it. If one of our facilities went down on Friday, it is not likely we could approve a new facility on Monday.

Q: Are there other challenges?

Cannell: We will not alter our specifications or our expectations for product, but there are various ways we can blend raw material from different sources to achieve the same end. Over the past four years, it became apparent that the domestic supply of lean cow beef, a traditional source for our system was becoming extremely tight and promising to become even more so in the future. One of the challenges we had was to identify an alternative source, not to replace but to augment and supplement. For the first time, the McDonald’s system moved to imported beef from Australia and New Zealand. We identified those countries as producing products to the standards we demand. That was a difficult change, because for 45 years, McDonald’s had never used anything but U.S. beef in our U.S. restaurants. There was much planning and a lot of communication involved, both internally and externally. Now, with the various border closings and the further tightening of supply, if we had not gone down that path a few years ago, we would be in real trouble today.  Even with the use of some imported beef, we are still the largest purchaser of U.S. beef.

Q: Were special accommodations necessary to integrate the imported beef?

Cannell: We had to bring in new grinding technologies and set up a means of getting the product over here. It was quite an undertaking. Bottom line is those plants had to meet the exact same standards as the U.S. plants. We had to communicate the standards and then verify them. We did not seek to expand import quotas, however, because we were not bringing additional meat into the United States. Recent challenges to the beef industry, such as BSE, have made us more aware of the need to have back-up plans. We continue to look at ways to optimize freight to keep plants well supplied. NP

Company’s unequaled expertise in processing boneless lean beef evolves to machinery development and more.

Beef Products Inc., Dakota Dunes, SD, is the world’s leading manufacturer of boneless lean beef. And through its association with Freezing Machines Inc., it also offers a new series of high-quality pumps and grinders assembled at its new machinery manufacturing wing.

BPI‚ Boneless Lean Beef Trimmings are lean and flavorful ingredients that are essential to processing a range of lean, high-quality, and cost-effective products that millions of Americans consume every day. Products include fresh and frozen hamburger patties, taco meats, low-fat hot dogs, beef-stick snacks, sausage, and more.

BPI‚ Boneless Lean Beef Trimmings are found in most ground beef made in the United States. BPI’s trimmings are used by major packers and processors as an integral part of their ground beef or hamburger blends. And they are also used by the majority of QSR (quick-service restaurant) chains, HRI (hotel, restaurant, and institution) suppliers, and foodservice suppliers in the country. These trimmings are also approved for use in the USDA’s AMS (Agricultural Marketing Service) School Lunch Program.

BPI’s products are made by processes, controls, safeguards, and custom-designed equipment the company has developed. All BPI plants, located in South Sioux City, NE; Waterloo, IA; Amarillo, TX; and Finney Country, KS, as well as its refrigerated warehouse and equipment assembly facility, are computer linked and interlinked to a master-control station at corporate headquarters in Dakota Dunes, SD. These controls ensure the most consistent, high-quality beef available industry-wide. Each facility communicates critical real-time information, including temperatures, times, pressures, production speeds, refrigeration and hydraulic data, and more to the master control room 24 hours a day, seven days a week.

Ensuring and enhancing food safety is a must at BPI. Its product naturally has a higher pH than typical ground beef due to its process and patented pH-enhancing technology. BPI’s quality-assurance department monitors and records microbiological results on both incoming raw materials and finished product.

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Freezing Machines Inc. (FMI), an affiliated company, offers the FMI-BPI Series of pumps and grinders.

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