McDonald's and Beyond — Partnering with Big Customers Can Have Its Perks

Friederich Nietzsche once said, "That which does not kill us makes us stronger." When a smaller company becomes an important supplier to a larger company, this saying certainly applies. I wrote about the challenges of a small company (my company, to be exact) landing then working with a big, gorilla customer in a post that I penned a year ago, Customer-Supplier Relationships: Dancing with Elephants. Just recently, I was reading a Chicago Tribune article about Distant Lands, McDonald's coffee supplier and the transition it had to make when it was chosen to supply the espresso-based coffee for McDonald's rollout of its new coffee offerings. The rollout took four years and helped transform Distant Lands into a much bigger player. Until it became McDonald's lead coffee supplier, its biggest restaurant customer had only 3% as many outlets as McDonald's 14,000 restaurants. This gives you some idea of the opportunity, particularly since Distant Lands is a privately-held company that does not publish its financials.

One reason that McDonald's was attracted to Distant Lands as a supplier was not just its expertise in coffee roasting, but the fact that it owned its own coffee farm. McDonald's must have felt that this vertical integration would help reduce its risks. But supplying a behemoth like McDonald's can have its challenges, such as having to adhere to its stringent set of supplier requirements. For example, Distant Lands had to upgrade its quality control process from manual (with inspection stickers stuck on each sack of coffee) to electronic and real-time inspections that McDonald's could instantly review.

Distant Lands had to invest some of its own resources into the design and rollout of McDonald's coffee products, for which it was not paid royalties. But becoming an approved McDonald's supplier in a potentially market-making product rollout seems to have been worth the time and expense to the company. For a large customer like McDonald's, choosing a small supplier with the right capabilities, potential, and a willingness to collaborate on developing new products was a shrewd and cost-effective route. Often smaller suppliers with potential can be better picks than their larger competitors who may not be as hungry for the business or as willing and able to change their business processes to accommodate a large customer.

There are, of course, risks to partnering with a smaller supplier. Distant Lands could have been completely overwhelmed and potentially put out of business if they had not had the ability to grow and adjust to handling McDonald's business. McDonald's had chosen this supplier wisely. However, risks still lie ahead for both McDonald's and Distant Lands as they see whether entering the espresso-based coffee business and competing directly with Starbucks will continue to pay off. The benefits and learning curve for Distant Lands in working with and learning from a large company with supply management skills and good business processes in place will be transferable and marketable to future customers, no matter what the outcome of this particular venture.

- Sherry Gordon

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