Executive Briefings

Following McDonald's to China Was Not As Easy as Pie

When Bama Companies, a Tulsa, Okla.-based pie maker, found it too costly to continue exporting to China to supply McDonald's, its biggest customer, Bama officials decided to set up operations there. Implementing that decision involved numerous challenges.

McDonald's cooks its hamburgers and famous french fries on site, but the pie you order to finish off a Big-Mac attack more than likely comes pre-baked from Bama Companies of Tulsa, Okla., and only is reheated prior to serving.

That's nearly always true in the U.S. and, increasingly, in other far-flung regions of the world where McDonald's is introducing fast-food restaurants. Like suppliers in numerous other industries, Bama is following its biggest customer around the globe, exporting to many areas and, more recently, setting up foreign production. Today, both companies are busy making inroads into what may be their biggest plum yet - the vast market of China.

Bama's 30-year relationship with McDonald's has not been without its ups and downs. Ironically, there was a time when the pie and biscuit maker was not sure it could handle the McDonald's account in the U.S., let alone consider servicing an overseas market like China. In 1966 when McDonald's asked Bama if it could supply 600 stores nationwide, Bama CEO Paul Marshall said, "I doubt it." He was concerned that the company had neither the equipment nor the personnel for such a large undertaking. By 1968, however, Bama had upgraded its plants and was making 75 percent of the apple and cherry pies served to McDonald's customers, a percentage that has remained fairly constant since then.

There have been other ups and downs as this long relationship evolved. In the mid-1980s, McDonald's threatened to pull Bama's contract because of a large number of product recalls. Bama re-won McDonald's confidence by again modernizing its equipment, practicing strict quality control and introducing ISO standards.

Today, the company supplies McDonald's restaurants in 25 countries with apple pies from its Tulsa operations, in addition to making bakery goods, frozen dough and desserts for such companies as Pizza Hut, Nabisco, Pillsbury, TCBY, Wal-Mart, Kroger Foods and Food Lion.

The task in China - its first plant outside the U.S. - is to assure quality food processing, transportation and storage in a country where hygiene in these areas often is below U.S. standards.

The reason Bama decided to take on the difficult job of establishing production in China was simple: cost of operations. A 75 percent to 100 percent import duty on Bama products proved too steep for the pie and biscuit manufacturer to continue exporting.

McDonald's encouraged Bama to set up operations in China, "but no guarantees or investment on their part was involved," said Karen Kiely, Bama's director of international business development.

There was, however, an implied promise of rapid growth. Since first entering China in the early 1990s with one restaurant, McDonald's has quickly expanded and plans to open more than 1,000 outlets by the end of the decade.

Still, it was not a decision that Bama took lightly. While Paula Marshall-Chapman, CEO of Bama Pies Ltd. and Bama Foods Ltd., had decided as early as 1991 that it was time to go global, it was not until 1993 that the company actually took the plunge. In the interim it had conducted an extensive feasibility study on China's market and had located a joint-venture partner, Red Star. Together, the two companies invested $1.1m in a pre-existing production facility, with Bama holding a 60 percent share. The facility opened in Beijing in March 1993.


"For us, the advantages of going into business with this Chinese government-owned entity was that it had a frozen-storage facility," said Kiely. Another advantage: Red Star is a subsidiary of Nanjiao Farms, a huge Chinese government conglomerate that operates farms and manufacturing sites south of Beijing.

"Nanjiao Farms is a joint-venture partner with many companies in China," she added. Among them is McDonald's.

Scott Silkwood, Bama's senior vice president of operations, emphasized how critical it was to choose the right Chinese partner. "If your partner is integrated in the government, they know what political channels to maneuver that will facilitate business activities more easily," he said.

Moreover, Bama's involvement with Red Star helped Bama learn what it needed to do to become an effective logistics manager and dependable service provider.

This was important for both inbound - where Bama was using a third-party transportation provider to ship ingredients to its processing plant - and outbound, where two domestic trucking companies were used, one in south China and another in the north. Kiely declined to name its Chinese truck providers, since the company considers that information proprietary.

"Meeting the intense standards of McDonald's was and continues to be one
of our biggest challenges." .
- Karen Kiely of Bama

"Our products are very temperature-sensitive," said Silkwood, noting that proper handling and on-time delivery are highly important as well. In addition, a key to success for any food-processing company is fresh and bacteria-free ingredients transported in a manner that prevents spoilage.

"Meeting the intense standards of McDonald's was and continues to be one of our biggest challenges," Kiely said. These include maintaining a sanitary environment, consistency in raw materials (to control taste) and standardized worker training.

At first, Kiely, didn't trust the Beijing-based trucking firm to keep Bama's products and ingredients at the right temperature. "But we gained confidence, since they never lost a shipment," she said.

Service improved with experience and as a result of McDonald's convincing the trucking company to invest in more vehicles.

"There aren't a lot of refrigerated trucking companies in China," said Silkwood. "We tried to pick the best system out there, but trucking is more unpredictable in China than in the United States. It needs to be managed more."

As additional refrigerated trucks were added to the provider's fleet, Bama continued inspecting them at various strategic points to make certain they were bacteria-free. But total quality assurance demanded that the company go a step beyond transportation and ensure that distributors maintained safe-food standards.

"Picking out the best distributors also is less predictable than in the U.S.," said Silkwood. An absence of regulatory processes in China to control food handling and safety makes careful selection even more imperative. It also demands more rigorous inspections.

"Today it is impossible in China to purchase known quality products," said Scott Cole, Bama's training and quality systems manager. "So we have to inspect everything."

This includes equipment and employees, who have little or no experience in food-handling requirements. "When we went into business there we quickly found that not only did Chinese employees have to be trained on personal hygiene; they also had to learn how to work the food-processing equipment and maintain its cleanliness," said Kiely.

Recognizing a need for a system in which quality and safety can be built in, Bama is applying a modified version of its U.S. manufacturing and management processes to the plant in Beijing. "Everyone involved, whether they are with Bama U.S.A. or Bama Beijing, is required to use the same standards to ensure food safety," said Cole. While Bama has introduced modern equipment to its China plant, the system there is not as automated as its main plant in Tulsa. There, no ingredients are touched by human hands. In fact, the first and only handling occurs when the pie is heated by McDonald's employees just before being served.

Both at home and abroad Bama also has begun to implement a new quality-control system based on the HACCP 9001 Quality Management System, an ISO derivative that incorporates product quality and product safety into a single unified program.

Such standards are a total culture change for the Chinese work force. "Up until now, there have been no inherent processes to watch," Cole said. "So we find ourselves in the position of saying, here is the system to use." Helping with the effort is a recently hired Chinese citizen with a doctorate in food technology from a U.S. university.

Bama also relies on communications and training to ensure compliance with its standards. To bridge any gaps in understanding between U.S. corporate executives and managers in China, Bama has brought Chinese managers to Tulsa to meet with corporate officials. The company also has sent some of its U.S. staff to China to help introduce the Chinese workers to the Bama culture through formalized training. For factory workers, continuous training in food preparation is provided. It offers its U.S. executives lessons in Mandarin and its Chinese employees an opportunity to study English.

In its relationship with suppliers, Bama also has gone to great lengths to maintain standards that result in consistency of product. Although a challenge, the company has located suppliers of key ingredients, such as apples and pineapples, that can match the quality and flavor of its U.S. ingredients.

"For apples, the U.S. Department of Commerce in Washington gave us a lead on who could help us," Kiely recalled. Treetop, a U.S. apple supplier, directed Bama to an apple grower in eastern China that offered a product with the consistency Bama was after.

Unlike in the U.S. market, Bama does not manufacture hot jam pies for the Chinese. "Those taste too different to them," said Silkwood. The bulk of the pies Bama produces for Chinese consumption have apple and pineapple fillings.

"We are looking into product development to modify our product for geographic preferences," said Silkwood.

Only 3 percent to 5 percent of the ingredients used in Bama products in China are imported from the United States, with the rest coming from China or elsewhere in Southeast Asia. U.S. ingredients are trucked to the Port of Los Angeles or the Port of Houston for shipping to Tianjin, near Beijing.

Bama uses freight forwarders, including Fritz Cos., to handle its imports to China. Fritz, in turn, selects the appropriate ocean carrier to haul the shipment.

Since its early days in China, Bama's business has grown at a rapid pace. The company's apple pies became an immediate success, particularly since they did not compete with traditional Chinese desserts. And when Bama introduced pineapple pies, sales doubled.

"The success of our product immediately changed our plans in China," Kiely said. "The plant quickly ran out of capacity."

In response, Bama decided an expansion was due. In September 1996, the company, along with its joint-venture partner, broke ground on a new 56,000-square-foot, $13m greenfield manufacturing and storage facility.

"The major difference between the new facility and the older one is the area of frozen and cold storage is proportionally very large," said Kiely. "This is because of our unique supply system in China that requires us to store ingredients for a longer period of time." For example, since China has a short growing season for apples and the produce is picked only once a year, Bama must store them frozen longer.

If anything makes Bama executives cautious about the future in China, it is credit.

Kiely worked through McDonald's suppliers to locate a site, which happened to be near its apple supplier.

The company expects to supply all of China and other Asian markets for the next 10 years from the new cold-storage facility.

The expansion is somewhat of a gamble for the company. Corporate executives know Bama's success is contingent on McDonald's success in China, and all Bama-McDonald's agreements were done with a handshake. But with McDonald's planning to have 1,000 restaurants in China by the end of the year 2000, Bama officials are confident.

McDonalds's executives see the China mainland market as their largest growth area outside of the U.S. Expansion in China has been nothing short of meteoric. McDonald's restaurants are found in Beijing, the Shenzhen Special Economic Zone and Hong Kong. Following its buy-out of the company's Hong Kong partner in April 1995, McDonald's worked to bring its China development unit and its Hong Kong operations closer.

McDonald's China Development Co. President Marvin Whaley said McDonald's experienced the same frustrations in establishing its mainland presence as it did elsewhere. "Things are very complicated in China because they're trying to do so much," he said. One of the biggest obstacles has been the availability of management personnel.

But just as it had recommended to Bama, McDonald's has forged joint-venture ties with powerful mainland partners, such as Beijing General Corp. of Agriculture, Industry and Commerce in the north and Guangdong International Trust and Investment in the south. It also used its know-how and resources to create infrastructure where none existed previously.

If anything makes Bama executives cautious about the future in China, it is credit. "Bank financing has never been easy in China since it is regulated by the government," said Kiely. "Interest rates are set by the government instead of the open market, and up until now, it has been difficult to secure funds for capital projects for longer than one year." While the current economic crisis is Asia could exacerbate that problem, Bama was fortunate in otbtaining favorable financing of its new project. "The rates were not cheap, but they were on terms we would accept," she said.

McDonald's cooks its hamburgers and famous french fries on site, but the pie you order to finish off a Big-Mac attack more than likely comes pre-baked from Bama Companies of Tulsa, Okla., and only is reheated prior to serving.

That's nearly always true in the U.S. and, increasingly, in other far-flung regions of the world where McDonald's is introducing fast-food restaurants. Like suppliers in numerous other industries, Bama is following its biggest customer around the globe, exporting to many areas and, more recently, setting up foreign production. Today, both companies are busy making inroads into what may be their biggest plum yet - the vast market of China.

Bama's 30-year relationship with McDonald's has not been without its ups and downs. Ironically, there was a time when the pie and biscuit maker was not sure it could handle the McDonald's account in the U.S., let alone consider servicing an overseas market like China. In 1966 when McDonald's asked Bama if it could supply 600 stores nationwide, Bama CEO Paul Marshall said, "I doubt it." He was concerned that the company had neither the equipment nor the personnel for such a large undertaking. By 1968, however, Bama had upgraded its plants and was making 75 percent of the apple and cherry pies served to McDonald's customers, a percentage that has remained fairly constant since then.

There have been other ups and downs as this long relationship evolved. In the mid-1980s, McDonald's threatened to pull Bama's contract because of a large number of product recalls. Bama re-won McDonald's confidence by again modernizing its equipment, practicing strict quality control and introducing ISO standards.

Today, the company supplies McDonald's restaurants in 25 countries with apple pies from its Tulsa operations, in addition to making bakery goods, frozen dough and desserts for such companies as Pizza Hut, Nabisco, Pillsbury, TCBY, Wal-Mart, Kroger Foods and Food Lion.

The task in China - its first plant outside the U.S. - is to assure quality food processing, transportation and storage in a country where hygiene in these areas often is below U.S. standards.

The reason Bama decided to take on the difficult job of establishing production in China was simple: cost of operations. A 75 percent to 100 percent import duty on Bama products proved too steep for the pie and biscuit manufacturer to continue exporting.

McDonald's encouraged Bama to set up operations in China, "but no guarantees or investment on their part was involved," said Karen Kiely, Bama's director of international business development.

There was, however, an implied promise of rapid growth. Since first entering China in the early 1990s with one restaurant, McDonald's has quickly expanded and plans to open more than 1,000 outlets by the end of the decade.

Still, it was not a decision that Bama took lightly. While Paula Marshall-Chapman, CEO of Bama Pies Ltd. and Bama Foods Ltd., had decided as early as 1991 that it was time to go global, it was not until 1993 that the company actually took the plunge. In the interim it had conducted an extensive feasibility study on China's market and had located a joint-venture partner, Red Star. Together, the two companies invested $1.1m in a pre-existing production facility, with Bama holding a 60 percent share. The facility opened in Beijing in March 1993.


"For us, the advantages of going into business with this Chinese government-owned entity was that it had a frozen-storage facility," said Kiely. Another advantage: Red Star is a subsidiary of Nanjiao Farms, a huge Chinese government conglomerate that operates farms and manufacturing sites south of Beijing.

"Nanjiao Farms is a joint-venture partner with many companies in China," she added. Among them is McDonald's.

Scott Silkwood, Bama's senior vice president of operations, emphasized how critical it was to choose the right Chinese partner. "If your partner is integrated in the government, they know what political channels to maneuver that will facilitate business activities more easily," he said.

Moreover, Bama's involvement with Red Star helped Bama learn what it needed to do to become an effective logistics manager and dependable service provider.

This was important for both inbound - where Bama was using a third-party transportation provider to ship ingredients to its processing plant - and outbound, where two domestic trucking companies were used, one in south China and another in the north. Kiely declined to name its Chinese truck providers, since the company considers that information proprietary.

"Meeting the intense standards of McDonald's was and continues to be one
of our biggest challenges." .
- Karen Kiely of Bama

"Our products are very temperature-sensitive," said Silkwood, noting that proper handling and on-time delivery are highly important as well. In addition, a key to success for any food-processing company is fresh and bacteria-free ingredients transported in a manner that prevents spoilage.

"Meeting the intense standards of McDonald's was and continues to be one of our biggest challenges," Kiely said. These include maintaining a sanitary environment, consistency in raw materials (to control taste) and standardized worker training.

At first, Kiely, didn't trust the Beijing-based trucking firm to keep Bama's products and ingredients at the right temperature. "But we gained confidence, since they never lost a shipment," she said.

Service improved with experience and as a result of McDonald's convincing the trucking company to invest in more vehicles.

"There aren't a lot of refrigerated trucking companies in China," said Silkwood. "We tried to pick the best system out there, but trucking is more unpredictable in China than in the United States. It needs to be managed more."

As additional refrigerated trucks were added to the provider's fleet, Bama continued inspecting them at various strategic points to make certain they were bacteria-free. But total quality assurance demanded that the company go a step beyond transportation and ensure that distributors maintained safe-food standards.

"Picking out the best distributors also is less predictable than in the U.S.," said Silkwood. An absence of regulatory processes in China to control food handling and safety makes careful selection even more imperative. It also demands more rigorous inspections.

"Today it is impossible in China to purchase known quality products," said Scott Cole, Bama's training and quality systems manager. "So we have to inspect everything."

This includes equipment and employees, who have little or no experience in food-handling requirements. "When we went into business there we quickly found that not only did Chinese employees have to be trained on personal hygiene; they also had to learn how to work the food-processing equipment and maintain its cleanliness," said Kiely.

Recognizing a need for a system in which quality and safety can be built in, Bama is applying a modified version of its U.S. manufacturing and management processes to the plant in Beijing. "Everyone involved, whether they are with Bama U.S.A. or Bama Beijing, is required to use the same standards to ensure food safety," said Cole. While Bama has introduced modern equipment to its China plant, the system there is not as automated as its main plant in Tulsa. There, no ingredients are touched by human hands. In fact, the first and only handling occurs when the pie is heated by McDonald's employees just before being served.

Both at home and abroad Bama also has begun to implement a new quality-control system based on the HACCP 9001 Quality Management System, an ISO derivative that incorporates product quality and product safety into a single unified program.

Such standards are a total culture change for the Chinese work force. "Up until now, there have been no inherent processes to watch," Cole said. "So we find ourselves in the position of saying, here is the system to use." Helping with the effort is a recently hired Chinese citizen with a doctorate in food technology from a U.S. university.

Bama also relies on communications and training to ensure compliance with its standards. To bridge any gaps in understanding between U.S. corporate executives and managers in China, Bama has brought Chinese managers to Tulsa to meet with corporate officials. The company also has sent some of its U.S. staff to China to help introduce the Chinese workers to the Bama culture through formalized training. For factory workers, continuous training in food preparation is provided. It offers its U.S. executives lessons in Mandarin and its Chinese employees an opportunity to study English.

In its relationship with suppliers, Bama also has gone to great lengths to maintain standards that result in consistency of product. Although a challenge, the company has located suppliers of key ingredients, such as apples and pineapples, that can match the quality and flavor of its U.S. ingredients.

"For apples, the U.S. Department of Commerce in Washington gave us a lead on who could help us," Kiely recalled. Treetop, a U.S. apple supplier, directed Bama to an apple grower in eastern China that offered a product with the consistency Bama was after.

Unlike in the U.S. market, Bama does not manufacture hot jam pies for the Chinese. "Those taste too different to them," said Silkwood. The bulk of the pies Bama produces for Chinese consumption have apple and pineapple fillings.

"We are looking into product development to modify our product for geographic preferences," said Silkwood.

Only 3 percent to 5 percent of the ingredients used in Bama products in China are imported from the United States, with the rest coming from China or elsewhere in Southeast Asia. U.S. ingredients are trucked to the Port of Los Angeles or the Port of Houston for shipping to Tianjin, near Beijing.

Bama uses freight forwarders, including Fritz Cos., to handle its imports to China. Fritz, in turn, selects the appropriate ocean carrier to haul the shipment.

Since its early days in China, Bama's business has grown at a rapid pace. The company's apple pies became an immediate success, particularly since they did not compete with traditional Chinese desserts. And when Bama introduced pineapple pies, sales doubled.

"The success of our product immediately changed our plans in China," Kiely said. "The plant quickly ran out of capacity."

In response, Bama decided an expansion was due. In September 1996, the company, along with its joint-venture partner, broke ground on a new 56,000-square-foot, $13m greenfield manufacturing and storage facility.

"The major difference between the new facility and the older one is the area of frozen and cold storage is proportionally very large," said Kiely. "This is because of our unique supply system in China that requires us to store ingredients for a longer period of time." For example, since China has a short growing season for apples and the produce is picked only once a year, Bama must store them frozen longer.

If anything makes Bama executives cautious about the future in China, it is credit.

Kiely worked through McDonald's suppliers to locate a site, which happened to be near its apple supplier.

The company expects to supply all of China and other Asian markets for the next 10 years from the new cold-storage facility.

The expansion is somewhat of a gamble for the company. Corporate executives know Bama's success is contingent on McDonald's success in China, and all Bama-McDonald's agreements were done with a handshake. But with McDonald's planning to have 1,000 restaurants in China by the end of the year 2000, Bama officials are confident.

McDonalds's executives see the China mainland market as their largest growth area outside of the U.S. Expansion in China has been nothing short of meteoric. McDonald's restaurants are found in Beijing, the Shenzhen Special Economic Zone and Hong Kong. Following its buy-out of the company's Hong Kong partner in April 1995, McDonald's worked to bring its China development unit and its Hong Kong operations closer.

McDonald's China Development Co. President Marvin Whaley said McDonald's experienced the same frustrations in establishing its mainland presence as it did elsewhere. "Things are very complicated in China because they're trying to do so much," he said. One of the biggest obstacles has been the availability of management personnel.

But just as it had recommended to Bama, McDonald's has forged joint-venture ties with powerful mainland partners, such as Beijing General Corp. of Agriculture, Industry and Commerce in the north and Guangdong International Trust and Investment in the south. It also used its know-how and resources to create infrastructure where none existed previously.

If anything makes Bama executives cautious about the future in China, it is credit. "Bank financing has never been easy in China since it is regulated by the government," said Kiely. "Interest rates are set by the government instead of the open market, and up until now, it has been difficult to secure funds for capital projects for longer than one year." While the current economic crisis is Asia could exacerbate that problem, Bama was fortunate in otbtaining favorable financing of its new project. "The rates were not cheap, but they were on terms we would accept," she said.