HPC 125 Notes #1

Supply chain management offers businesses with

INTRODUCTION TO SUPPLY CHAIN several ways to increase their profit margins
MANAGEMENT
Advanced analytic tools further improve results.
Examples include:
1. Identifying potential problems before
they occur
a. When a customer orders more
product than the manufacturer can
deliver, the traditional response has
been to short the order. This leaves
the buyer feeling unimportant and
convinced the manufacturer's service
is poor. Manufacturers who
anticipate the shortage before the
buyer is disappointed may be able to
Supply Chain Management offer a substitute product or other
- The management of flow of products and incentive to keep the buyer happy.
services, which begins from the origin of
products and ends at the product's 2. Optimizing price dynamically
consumption. a. Seasonal products, particularly
- It also comprises movement and storage of fashion products, have a limited shelf
raw materials that are involved in work in life. Any that don't sell by the end of
progress, inventory and fully furnished the season are scrapped or sold at
goods. deep discounts to empty the
- This includes material and information flows warehouse. Airlines, hotels, and
both up and down supply chain. other companies with a limited, but
- A full variety of processes such as systems perishable product, adjust prices
management, operations and assembly, dynamically to meet demand. While
procurement. Production plan, order this is more difficult with clothing
processing, inventory management, and other products where the supply
transport, warehousing, and customer can vary widely, similar forecasting
support techniques can improve margins.

3. Improving the allocation of available to

The main objective of supply chain management is promise inventory
to monitor and relate production, distribution, and a. Today's tools dynamically allocate
shipment of products and services. resources and schedule work based
on the sales forecast, actual orders,
IMPORTANCE OF SUPPLY CHAIN and promised delivery of raw
MANAGEMENT materials. Manufacturers are able to
confirm a product delivery date when
the order is placed, significantly
reducing incorrectly filled orders.

SUPPLY CHAIN MANAGEMENT - ADVANTAGES

1. Assists companies in adapting to the
challenges of globalization, economic
upheaval, expanding consumer
expectations, and related differences.
2. Assists companies in minimizing waste,
driving out costs, and achieving efficiencies
throughout the supply chain process.
Supply chain management is important since it can 3. Assists in achieving shipping of right
help meet many company goals. products to the right place at the right time.
1. It can increase product quality by regulating 4. Creates better delivery mechanisms for
production processes products and services in demand with
2. Minimizing the possibility of recalls and minimum delay.
litigation while helping to create a strong 5. Develops better customer relationship and
customer brand service.
3. Avoiding expensive shortages or cycles of 6. Enhances inventory management,
product oversupply, restrictions over supporting the successful execution of just-
shipping procedures will enhance customer in- time stock models.
support.
HPC 125 Notes #1
7. Improvises productivity and business chain, a business can take steps to
functions. alleviate the risk.
8. Minimizes direct and indirect costs.
9. Minimizes warehouse and transportation SIX (6) COMPONENTS OF SUPPLY CHAIN
costs. MANAGEMENT

THE OVERALL GOAL OF SUPPLY CHAIN Effective supply chain systems help both
MANAGEMENT manufacturers and retailers reduce excess
inventory. This decreases the cost of producing,
1. Improving Efficiency shipping, insuring, and storing product that cannot
a. Efficiency refers to the minimization be sold.
of waste. Waste can exist in terms of
wasted materials, wasted money, 1. Planning
wasted man hours, wasted delivery a. Enterprises need to plan and manage
time, and much more. Making sure all resources required to meet
that waste is at a minimum is a key customer demand for their product
component of supply chain or service. They also need to design
management. their supply chain and then
b. By managing production, inventory, determine which metrics to use in
transportation and logistics, supply order to ensure the supply chain is
chain management aims to look for efficient, effective, delivers value to
opportunities to change procedures customers, and meets enterprise
in order to cut down on waste. goals.
c. For example, by sharing inventory b. Planning is imperative to control
data with your supplier, and keeping inventory and manufacturing
it updated in real time using ERP processes. Companies always try to
software, the business can replenish match supply with aggregate
inventory quickly to keep up with demand by developing a course of
customer demand. action using analytics. To procure
what is planned is Source'. To plan
2. Improving Quality what is ample for production is
a. Reducing waste isn't the only goal of 'Make' and to attain significant
supply chain management. Making service levels by delivering on time
sure that the product and the with quoted lead time is 'Deliver'.
customer experience are as positive
and as effective as they can be is 2. Sourcing
another significant goal. a. Companies must choose suppliers to
b. For example, if retailers are able to provide the goods and services
communicate feedback from the needed to create their product. After
customer to your company about suppliers are under contract, supply
your product's experience, you'll be chain managers use a variety of
able to know what things you can processes to monitor and manage
change in order to improve it. Or, if supplier relationships. Key processes
there's an issue with a supplier for a include ordering, receiving,
specific part that a customer has managing inventory, and authorizing
discovered, you can address that supplier payments.
issue with customer feedback and b. Sourcing is identifying vendors who
relay those changes back to that will procure goods and services to
supplier or switch suppliers. meet planned/actual demand in the
most economical and efficient way.
3. Improving Stability There are certain standards that
a. Supply chain management is also suppliers need to fulfil, thus assuring
about improving and maintaining the firm to deliver quality goods to
overall stability of the supply chain. the client. Sourcing can be of
Companies can aim to forge and perishable as well as non-perishable
maintain strong relationships with products. In the case of perishable
their suppliers and distributors to products, it is mandated to have a
make sure that business continues to minimum supplier's lead time which
run smoothly. will support a minimal inventory
b. There are other aspects to stability, approach. On the other hand, in the
mainly with risk management. By case of non-perishable products, the
keeping an eye on possible risks supplier's quoted lead time must be
associated with parts of the supply less than the number of days by
HPC 125 Notes #1
when inventory reaches zero, thus customers. The supplier needs a
leading to no loss in revenue. responsive and flexible network to
take back defective, excess, or
3. Making unwanted products. If the produce is
a. Supply chain managers coordinate defective it needs to be reworked or
the activities required to accept raw scrapped. If the product is simply
materials, manufacture the product, unwanted or excess it needs to be
test for quality, package for shipping, returned to the warehouse for sale.
and schedule for delivery. Most On the flip side, this process
enterprises measure quality, provides the same course of action
production output, and worker for the firm towards its suppliers.
productivity to ensure the enterprise The firm returns the low quality,
creates products that meet quality defective, expired or excessive raw
standards. materials to the suppliers/vendors.
b. As per the preference of the
consumer, the firm will perform all 6. Enabling
activities related to the a. To operate efficiently, the supply
transformation of raw material to the chain requires a number of support
final product. Activities such as processes to monitor information
assembling, testing and packing throughout the supply chain and
happen at this element of Supply assure compliance with all
Chain Management. Feedback from regulations. Enabling processes
consumers creates a Win-Win include finance, HR, IT, facilities,
situation for both (manufacturer and portfolio management, product
end-user) as for the firm it is design, sales, and quality assurance.
improving their production
operations continuously. COMPETITIVE AND SUPPLY CHAIN
STRATEGIES
4. Delivering
a. Another most important component I. Competitive strategy defines the set of
of supply chain management is customer needs a firm seeks to satisfy
contributing to direct/indirect through its products and services.
integration with the consumers. II. Product development strategy specifies the
Often called logistics, this involves portfolio of new products that the company
coordinating customer orders, will try to develop.Marketing and sales
scheduling delivery, dispatching strategy specifies how the market will be
loads, invoicing customers, and segmented and product positioned, priced,
receiving payments. It relies on a and promoted.
fleet of vehicles to ship product to III. Supply chain strategy determines the nature
customers. Many organizations of material procurement, transportation of
outsource large parts of the delivery materials, manufacture of product or
process to specialist organizations, creation of service, distribution of product.
particularly if the product requires IV. All functional strategies must support one
special handling or is to be delivered another and the competitive strategy.
to a consumer's home.
b. It has a significant contribution to SUPPLY CHAIN MANAGEMENT IN THE
surge the brand image of the firm. HOSPITALITY INDUSTRY
Finished goods and services, as
demanded by consumers, have to In the service industry, the hospitality industry is a
meet expectations through the wide group of industries including accommodation,
company's delivery channels and restaurants, event planning, theme parks, shipping,
logistics services. To have a cruise ship, and additional fields within the tourism
seamless delivery, the firm utilizes industryA hospitality unit such as a restaurant,
various freights - road, air and rail. hotel, or even an amusement park consists of
multiple groups such as facility maintenance, direct
5. Returning operations (servers, housekeepers, porters, kitchen
a. It is a post-delivery customer workers, etc.), management, marketing, and
support process that is associated human resources.
with all kinds of returned products. It
is also known as 'Reverse Logistics'. The supply chain is an important element within the
It is one of the most important hotel and catering industry. For staff in this
components of supply chain industry, it is crucial to build steady relationships
management to minimize potential with suppliers and work with a good ordering
deterioration of relationships with system in order to improve the service level
HPC 125 Notes #1
towards customers. Cutting- edge hospitality chains THE COMPONENTS OF SUPPLY CHAIN
are reaching beyond inventory control systems to MANAGEMENT
spend intelligence tools, which help gather,
rationalize, and analyze historic and real-time
purchasing information. The creation of a supply
chain leads to a better understanding of the whole
chain and thus implementation of common
standards becomes easier. It is implied and obvious
that in coming era of hyper-competition the basis of
competition in many industries will revolve around
supply chain development.

THE SUPPLY CHAIN MANAGEMENT PROCESS

Supply chain management is a process used by 1. Plan

companies to ensure that their supply chain is a. The initial stage of the supply chain
efficient and cost-effective. A supply chain is the process is the planning stage. We
collection of steps that a company takes to need to develop a plan or strategy in
transform raw materials into a final product. order to address how the products
and services will satisfy the demands
How does supply chain management work? and necessities of the customers. In
this stage, the planning should
Supply chain management operates by managing mainly focus on designing a strategy
procurement, suppliers, manufacturing facilities, that yields maximum profit.
dealers, distributors and consumers as they step b. For managing all the resources
forward through the production, sales and required for designing products and
purchasing processes. The supply chain needs providing services, a strategy has to
active management because many variables beyond be designed by the companies.
the reach of the firm, such as gas prices and Supply chain management mainly
environmental situations, influence it. When a focuses on planning and developing a
company is acutely aware of those factors, it can set of metrics.
manage through them more effectively. With
effective SCM, inventory, production, distribution, 2. Develop (Source)
sales and vendor inventory are all tightly controlled. a. After planning, the next step involves
developing or sourcing. In this stage,
SCM means managing costs at every step and we mainly concentrate on building a
delivering goods to consumers as quickly as strong relationship with suppliers of
possible. It assumes that every product that is for the raw materials required for
sale exists because of the various participants in the production. This involves not only
supply chain. A supply chain manager is a trained identifying dependable suppliers but
professional responsible for five essential also determining different planning
components of the chain: methods for shipping, delivery, and
1. The carefully researched and developed payment of the product.
strategy of the supply chain. b. Companies need to select suppliers
2. The source of the materials used to make to deliver the items and services
the goods to sell. they require to develop their
3. The efficient production of the product. So in this stage, the supply
manufacturing process in getting the goods chain managers need to construct a
ready for the market. set of pricing, delivery and payment
4. The delivery mechanisms and logistics that processes with suppliers and also
move the products to the consumers and create the metrics for controlling and
distributors. improving the relationships. Finally,
5. The system for managing the return of the supply chain managers can
defective or unwanted products. combine all these processes for
handling their goods and services
The manager works to prevent shortages and inventory. This handling comprises
reduce costs through these five elements, which has receiving and examining shipments,
a direct impact on profits. transferring them to the
manufacturing facilities and
authorizing supplier payments.
HPC 125 Notes #1
advantages, modern marketing tendency which is
Supplier Development facilitated by the advanced technology.

Supplier Identification: Generally supplier base is According to the Kotler's primary of product
huge in the hotel industry, this has its positives, development, three phases of product such as
conscious steps should be taken to identify center product, augmented product and tangible
committed suppliers who are willing to go by the product. Basic level of the every selling product is
objectives of the organization, and be involved and known as the central product. For a good example,
appreciate and support the changes of the Hilton hotel holiday resort may provide well-
organizational requirements. appointed rooms, excellent dinner and the other
services for their customers.
Supplier evaluation and selection: Supplier
evaluation is a critical process, supplier's ability to Augmented product can include the excess services
supply the right goods at the right time with correct and value added services which might give their
specifications has to be reviewed. Contracts are customers. For an example, fitness center facilities,
awarded after careful negotiations with the supplier. spa facilities and the other packages relevant to the
different sports activities. Tangible products can be
Supplier management: After the suppliers fulfills recognized as the products that can be in physical
its obligation by delivering the required goods as form feel by the client. For a good example,
per specifications it's the responsibility of the restaurant of Intercontinental Sea Bq provides sea
Purchase department to ensure suppliers bills are foods for the customers.
paid promptly, at times good suppliers are lost due
to the payment delays. Therefore, its very essential Product development process five major steps can
to maintain a strong relationship with the supplier be diagnosed.
hence supplier management has to be
strengthened. Generation of Idea
Screening process
Supplier development and improvement: It's a Evaluation of Idea / Development of Concept
very crucial step in the supplier chain management. Product development / Business Analysis
A careful consideration of this process would Commercialization process
contribute towards efficiency and cost saving.
Idea technology process may be considered a result
3. MAKE of market research. It might be the confirmation of
a. The third step in the supply chain a requirement of a product or service predicated on
management process is the existing consumer need. Inside the screening
manufacturing or making of products process, ideas may be gathered from media,
that were demanded by the customers and employees. By, using those ideas,
customer. In this stage, the products the expected competition for the merchandise may
are designed, produced, tested, justify based on the market trends. Income, cost as
packaged, and synchronized for well as the expected earnings may recognized in the
delivery. idea evaluation step. Market research may be
b. Here, the task of the supply chain important with regards to this step. In this step, the
manager is to schedule all the expected first customers may illustrate
activities required for manufacturing, theoretically. In the merchandise development step,
testing, packaging and preparation physical production and making process can do and
for delivery. This stage is considered the selling price could also determine. Not merely
as the most metric-intensive unit of will that, evaluation of the merchandise also be
the supply chain, where firms can done. As the last step, the production marketing
gauge the quality levels, production campaign process may be achieved in the
output and worker productivity. commercialization process.

The Product Development within Hospitality 4. Deliver

Environments a. The fourth stage is the delivery
stage. Here the products are
Product development can be recognized as the delivered to the customer at the
examination of product and services to recognize destined location by the supplier.
the probability of improvement, earnings as well as This stage is basically the logistics
the client satisfaction. This technique is important in phase, where customer orders are
changes of existing products to handle discovered accepted and delivery of the goods is
opportunities and the modern marketing trends. It planned. The delivery stage is often
could provide the much better quality for the referred as logistics, where firms
product and the client satisfaction. Product collaborate for the receipt of orders
development process should be consisting of from customers, establish a network
knowledge on the merchandise weaknesses and of warehouses, pick carriers to
HPC 125 Notes #1
deliver products to customers and reconciliation and final disposition and
set up an invoicing system to receive quality assurance.
payments.
● Post - Sales Service
5. Return Now that the ordered shipment is over, what
a. The last and final stage of supply is the next step? The post sales service in
chain management is referred as the supply chain tends to be an increasingly
return. In the stage, defective or essential factor as businesses offer solution
damaged goods are returned to the instead of products.
supplier by the customer. Here, the
companies need to deal with The post sales services comprise selling
customer queries and respond to spare parts, installing upgrades, performing
their complaints etc. This stage often inspection, maintenance and repairs,
tends to be a problematic section of offering training & education and consulting.
the supply chain for many
companies. The planners of supply Presently, with the growing demands of the
chain need to discover a responsive clients, a high volume of after sales service
and flexible network for accepting proves to be a profitable business. Here, the
damaged, defective and extra services are basically heterogeneous and the
products back from their customers value-added services are different from
and facilitating the return process for those provided prior to sales service.
customers who have issues with
delivered products. Consumables in Hospitality

Returns Management Regardless of how large or small your hotel is, just
imagine how bad it would be if you could not supply
Returns management can be defined as the your guests with breakfast because you had run out
management that invites the merger of challenges of supplies. What happens if you use all of your
and opportunities for inbound logistics. A cost- beers and have none to replace them? When
effective reverse logistics program links the evening meals are due, how embarrassing it would
available supply of returns with the product be to say you can only offer half the menu because
information and demand for repairable items or re- you do not have the products to complete all the
captured materials. We have three pillars that meals shown.
support returns management processes. These are
as follows: The same applies to restaurants. Not being able to
fulfill their menu looks really bad and will stop
● Speed - It is a must to have quick and easy customers returning. A bar that runs out of wine or
returns management and automate beer will suffer by customers going elsewhere, and
decisions regarding whether to produce once they have done that, it is hard to get them to
return material authorizations (RMAs) and if return to your establishment.
so, how to process them. Basically, the tools
of speed return processing include Successful businesses are built on loyal customers
automated workflows, labels & attachments bases, but this will not happen with yours if you
and user profiles. keep letting customers down. Food and drink are an
important part of any hotel stay, and eating out is
● Visibility - For improving the visibility and often part of consumers' vacations. It is vital that
predictability, information needs to be you can fulfil your obligations with food and drink,
captured initially in the process, ideally prior and effective chain supply management is the way
to delivering the return to the receiving to do it. Without it, there would be no foods in
dock. Most effective and easily restaurants and no beer or wine in bars, and that
implementable approaches for obtaining will basically kill the hospitality that your venture
visibility are web-based portals, carrier should be providing.
integration and bar-coded identifiers.
Your establishment also needs to have enough clean
● Control - In case of returns management, bed linen to be able to change it when required, and
synchronizing material movements is a an ample supply of things such as table napkins,
common issue that needs to be handled. The cutlery and crockery. This might all seem very
producers need to be very cautious and pay obvious, but you would be surprised by how many
close attention to receipts and reconciliation hotels fall down in these areas.
and update the stakeholders of impending
quality issues. In this case, reconciliation
activates visibility and control all over the Implement Supply Chain Management in Hotel
enterprise. The key control points in this Industry
process are regulatory compliance,
HPC 125 Notes #1
Different concepts have been developed to implementation in different areas, from making
understand how the successful implementation of changes to the whole process or fixing issues with
logistics and supply chain management can be vendors. With the fast pace of the hotel industry
achieved. For the hotel industry logistics and supply during implementation, it is important for managers
chain activities are grouped into tactical, strategic to think and act in real time to help enable
and operational levels to help create a more innovation and change, as people will always
systematic approach by focusing on how challenge the process.
implementation will happen from a higher level,
then linking that to long-term goals and finally how Think Lean and Green-Even though lean started
these results translate in the short-term. in the automotive industry, it can be used in any
business process like in the hotel industry. Hotel
1. Tactical Level managers need to use lean strategies when logistics
and supply chain is implemented immediately
Executive support-The tactical level of instead of later. Since lean is focused on the end
implementation of logistics and supply chain user, the main focus during implementation is to
management focuses on steps that are taken at a maintain profitability, save money, and add value
higher level for successful implementation. It is that fulfills customer needs. During the lean
important that, during the tactical stage of implementation phase, it is important for managers
implementation there is 100% executive support to identify the service value stream focusing on
and buy-in from senior managers and having the design layout, development, procurement, and
right people in place who understand the value distribution process strategies.
logistics and supply chain implementation will bring
to their properties. Managers need to take a lead in Top talent and Accountability-When implementing
communication and making sure all employees logistics and supply chain management in any
understand why the initiatives are essential to the company, it is important to be able to sustain the
company's business strategy. implementation, which involves building a solid
foundation that includes top managers to drive the
Visibility and Control-It is important to have process with deep expertise in logistics and supply
visibility and control to implement logistics and chain functions and business skills.
supply chain practices to help make better
decisions. The hotel environment has seen an Right information technology-Today as information
increase in the need for visibility and control to help technology has become an important and integral
understand the decisions made by vendors and part of every business process, when implementing
suppliers to help managers make well-informed logistics and supply chain management in the hotel
logistics and supply chain decisions. This helps hotel industry, it is important to have the capabilities of
managers make important decisions on parts of ensuring that most company decisions are done at
costs in areas of transportation and shipping the speed of light. With the right information
technology, the hotel can communicate information
Benchmarking-This goal of benchmarking during on supply chain and demand changes easily in areas
logistics and supply chain implementation is to of inventory, distribution, transportation, and
enhance design and operational effectiveness. It is logistics management, since the accurate
important for hotel managers to measure set information is produced due to the analytical and
targets against results in the different areas of visibility capabilities to make efficient business
operation like order filling, transportation, and decisions quickly.
vendor compliance. Hotels can use information from
benchmarking to improve processes and make 3. Operational level
better decisions.
Costs-The operational level of logistics and supply
Creative solutions and risk taking-The goal of chain management implementation focuses on
developing creative solutions and willingness to take decisions that are related to how to make the tactic
risk during logistics and supply chain approach happen in the short term. Today hotel
implementation is important since a lot of focus has costs associated with logistics and supply chain
been placed on reducing costs and increasing strategies have placed the emphasis on increasing
margins wherever possible. This helps focus on efficiency and reducing total costs to stay
negotiating better costs and focus is placed on the competitive (IBM, 2009). During implementation,
customer's demands. costs need to focus on purchase and inventory
costs. It is important to monitor purchase costs with
2. Strategic Level products that have a short life cycle and have to be
replenished frequently, since hotels usually buy too
Change management-The strategic level of many stock-keeping units (SKU) for the same use.
implementation of logistics and supply chain
management is linked to the long-term benefits Simplifying complexities-lt is important in
over a period of time. Change management plays a logistics and supply chain implementation for hotel
big part in logistics and supply chain managers to manage strategies to eliminate
HPC 125 Notes #1
complexities that do not add any value to the In a hotel operation, the role of procurement is not
organization. It is important that logistics and immediately apparent. Procurement costs, however,
supply chain functions are broken down into are a key part of a hotel business's profitability
different areas based on which areas matter the efficiency. The continuous supply of goods and
most in the supply chain. This segmentation helps services used in revenue stream generation as well
hotel managers easily identify the relationship as for internal use keeps the organization working
between costs and price with suppliers and helps in like a well-oiled machine. Moreover, such
negotiating better prices. availability at the best quality for the least cost is
what businesses strive for. Procurement costs are
Right metrics-Applying key performance indicators different for an operating and opening hotel.
(KPI's) to logistics and supply chain operations However, before we look at that, it is important to
during implementation is vital to help monitor how understand what constitutes procurement and what
well suppliers and vendors are meeting set targets, costs are involved in that.
which helps improve top and bottom line
performance. Starbucks created a weekly scorecard Success in hospitality is closely tied to procurement.
to monitor third party carrier performance in areas All the purchased and used equipment, materials,
of costs, service, and productivity agreed upon with and services have a significant effect on the guest
their partners. Applying KPI's to operations will help experience. It is important for the beds you
create transparency, improve costs, and help serve purchase to be comfortable. It is important that the
customers better, as well as lay the foundation for computers and digital resources used are accurate.
future logistics and supply chain initiatives. Vendors of food and beverages need quality service
to be rendered.
Risk management-Considering risk management
is critical during logistics and supply chain All of these elements affect the opinions your guests
implementation for hotel managers in order to have about your hotel, and it mostly falls on hotel
evaluate risk associated with implementation in procurentent teams to deliver. That means having
their strategy. Managers should have a good the right solutions available. Here are some of the
understanding of the benefits involved with sharing top software, services, and procurement companies
risk information across the network. your team can use to better manage its purchasing
process.

STRATEGIC SOURCING CENTRALIZED - DECENTRALIZED

PROCUREMENT
Strategic sourcing can be defined as a collective and
organized approach to supply chain management For international hotel chains today, we are seeing
that defines the way information is gathered and more and more of a combination of decentralized
used so that an organization can leverage its and centralized procurement operation. More often
consolidated purchasing power to find the best than not, procurement is centralized for product and
possible values in the marketplace. service materials that require conformity and
compliance to standard operation procedure. This
We cannot build up the significance of operating in a compliance forces chain hotels to have their certain
collaborative manner. Several decades have lists of products and services to be used and served
witnessed a major transformation in the profession at their group of hotels. The objective is to
of supply chain, from the purchasing agent standardize hotel operations by promoting the
comprehension, where staying in repository was the commonality of products used and services offered
criterion, to emerging into a supply chain across the board. Pavia and Ivanomic (2007) also
management surrounding, where working with explained that decentralized procurement means
cross functional and cross location teams is property level procurement will in-charge of the
important, to achieve success. planning and acquisition of hotel supplies as the
department find appropriate and best suit to the
Strategic sourcing is organized because of the designated operation and condition.
necessity of some methodology or process. It is
collective because one of the most essential Hotel chains serve global travelers, are catering to
necessities for any successful strategic sourcing guests from different countries and parts of the
attempt is of receiving operational components, world. Considering the design of beverage drink-
apart from the procurement, engaged in the list; in general would set to offer standard and
decision-making and assessment process. sometimes even wide range lists of alcoholic and
non-alcoholic beverages; spirit or distilled beverage
(gin, vodka, rum, tequila, whisky, brandy), liqueur,
wine, beer, carbonated drink, juice, coffee and tea
and etc. Whether a hotel to offer great numbers of
PROCUREMENT MANAGEMENT selections or limited menu items (brand and product
choice) depends on the extent to which
HPC 125 Notes #1
classification of hotels (star rating) a particular
establishment is operating under. Problem: Let's face it. Most suppliers didn't get
into the business because they excelled at customer
COMMON ISSUES ABOUT PURCHASING IN service and communication. They did their best
HOSPITALITY INDUSTRY when they could focus their energies on fulfilling
orders.
1. Blind Spots
Solution: Purchasing programs served as a bridge
Problem: Very few hospitality companies had or intermediary between vendors and customers,
visibility into their procurement operations because meaning they facilitate communication. This helped
purchasing data was simply not captured. the supplier's customers better manage inventory
and expectations and kept relationships between
Solution: Since purchasing one allowed access to the suppliers and customers strong. For example,
robust programs are. SO reporting and data- rushing a huge, unexpected order for a customer
focused, joining insightful data dashboards. This could deplete supplies for others. Suppliers typically
meant hotels were able to get the customized did not have the bandwidth to balance orders, but
information they needed and wanted, all without purchasing programs' built-in customer service
draining their resources. helped to manage these orders and ensure all were
filled in a timely fashion.
2. Limited Resources, Limited Rewards
6. Fear of Collaboration
Problem: Companies needed to constantly
negotiate with vendors to get the best price, but Problem: At first glance, collaborating with
they often didn't have the personnel for this competitors in their own industry felt strange and
resource-intensive endeavor. even dangerous. When Avendra, the leading
purchasing program in the hospitality industry, was
Solution: By combining the purchasing volume of first formed in 2001, many hotel executives were
many companies in one collective, each business wary-and some flatly refused to join.
benefited by receiving the best possible price. This
set-up also freed suppliers from having constant Solution: The executives who discerned the
negotiations, so they had more resources to devote potential advantages and overcame their fears
to getting orders out quickly and accurately. realized tremendous savings for their hotels when
they joined. (As a note, purchasing programs are
3. No Volume Control set up in a way that protects each hotel's
proprietary data with NDAs and agreements.) Now
Problem: When you work for a single hotel vs. a purchasing programs are accepted and even
chain, the only way to get better prices is to embraced throughout the hotel industry.
increase your purchasing volume by growing your
business. As a result, a company that's not growing 7. Focusing on Weaknesses Instead of
gets hit with a double-whammy: stagnant growth Strengths
and static-or even higher-prices at a time when the
business can least afford it. Problem: Even though most hospitality companies
realized that procurement was not their area of
Solution: Hotels found that one of the advantages expertise, a pre-purchasing program industry meant
of a purchasing program is that they could always there wasn't much in the way of choice. Hotels still
add other hospitality businesses to the collective in had to devote time to procurement, even though
order to procure a higher volume at a better price- that wasn't an area that truly differentiated their
so if one (or even all) hotel was facing setbacks, businesses.
pricing needn't suffer.
Solution: Many hotels took the money saved
4. Order Disasters through purchasing programs and used it to better
train their employees to become masters in their
Problem: MRO orders were notorious for being areas of expertise (e.g., service). As a result, they
imperfect and the hospitality industry was no were spending more time and dollars on brand
different. For example, missing items and building efforts.
unapproved, often unwelcome substitutions
occurred constantly. ASSESSING EXISTING AND NEW HOTEL
SUPPLY
Solution: When hotels joined forces in a collective,
they found that purchasing programs solved this Since guest expectations are constantly changing,
problem by tying supplier compensation to accurate hotel markets are competitive. An artifact of
and efficient order fulfillment. Problem solved! historical guest expectations is the inventory of
existing hotels, while current and potential
5. Communication Mishaps expectations are demonstrated by the latest hotel
HPC 125 Notes #1
supply pipeline. When supply meets demand, a Quality and Brands
market achieves balance, but this can be elusive,
especially during and during economic growth. Get on the ground and walk the major competitive
Therefore, it is important to start with a firm hotels. TripAdvisor can give you a sense of asset
understanding of hotel supply before committing to quality, but those reviews are subjective. They only
an investment. represent a fraction of guests. The 95% of guests
that don't use TripAdvisor or leave reviews on OTAs
Market Survey may have a completely different opinion. You can
only get that from visiting the hotels yourself.
Understanding what exists is the first step in
assessing a market. At the most simple level, all Years of construction and renovation have a huge
hotels along the chain scale should be considered by effect on successful placement. Guest preferences
a consumer survey. Depending on your investment are evolving and older hotels are trying to uphold
strategy, you may be able to limit the survey to new norms. This can be as basic as the layout of a
properties with more than 50 rooms and less than certain lobby or space. A hotel constructed in 1995
500 rooms. This is where most brands play. gives a somewhat different atmosphere to a
However, you should include smaller or bigger building built in 2015, although it may have
hotels if they are competitive within your strategy. equivalent finishes.

Your survey should include the finer details of each Note, the quality of the structure and interiors is
hotel, including: important, but much of this may be overshadowed
by property culture. A stunning new hotel with a
● Number of Rooms. poor culture would be underperformed by a shabby
● Function Space Sq. Ft. hotel that any day of the week places its guests on
● Year Built. a pedestal.
● Year Last Renovated.
● Asset Quality. In developing a hotel brand, guest profiles are the
● Brand. key influence. Therefore, inside the same brand
● Management Company. family, a brand with another definition would cater
● Owner/Major Partners. to a particular guest. Competitive brands though,
● Last Sale Date and Price. cater to virtually the exact same ethnic and
● Financing Information - Lender, Loan psychographic profile of visitors. In this situation, a
Amount, and Maturity Date. guest's judgment boils down to loyalty and
consistency.
A comprehensive survey allows you to apply some
analytical techniques that define the market. For Get to know the offerings of each brand in your
example, you could categorize many of these investment strategy. This knowledge comes from
factors into three or more broad buckets. Count the experience and exposure. The more hotels you see
number of rooms or properties that fit into each the better. Hotel brands are in the franchising
category to draw conclusions about over or business. Their primary concern is consistently
underrepresented product. accumulating a larger share of the total revenue in
a market. Therefore, they do better with the more
An analytical approach allows you to quickly filter brands they can fit into an area. Guest experience
hotels in a market by investment or operating and increasing revenue are important
characteristics that will fall within your investment complementary objectives, but brand presence is a
criteria. When you pair this data with what you real consideration.
know about demand coming to the market, you'll be
able to assess where there are glaring holes. Development Stages

Consider Local Retail New hotel supply can be difficult to gauge. The
announcement of a new development does not
Other aspects of the sector are to be considered in ensure delivery. There are many steps between
restaurants and retail. If you 0 are interested in full buying the land and opening the door. Further, the
service hotels or select service with F&B selections, abilities and track record of the developer behind
such as Courtyard or Hilton Garden Inn, expect the project have a huge impact on the likelihood of
them to be competitive. Anything that brings the completion.
customer out of your hotel would have a major
influence on your hotel's perception. National A variety of factors influence the success of a new
retailers spend tremendous resources to analyze a development, including sponsor, government, and
market. While their research targets the demand market timing. Other factors, beyond these three,
side of the equation, your market survey will point combine to make it a challenging undertaking. Each
to additional opportunities that may exist for new of these factors are at play in progressing through
hotel supply. the following development stages:
HPC 125 Notes #1
1. Early Plan- feasibility and announcement. Before you get on-board with your supplier
2. Planning- preparation of materials for management process, it is important to identify the
government approval submission. set of business goals and objectives for which
3. Final Planning - government approvals received suppliers are required. Setting goals and objectives
and preparing construction documents. for a small business is vitally important to
4. Construction - active building and pre-opening determining its strategy for growth and in
activities. implementing its organizational policies and
5. Opening- product launch and ramping up procedures.
operations.
It will highlight what every department requires
Your market survey should uncover where each from third-parties so that you can map the relevant
proposed new hotel is in this process and how long suppliers to every need without duplicating efforts
they've been sitting at that stage. A new hotel and resources. Goal-setting is important to
development takes 2-3 years to open from the measuring the success a business. Determining
initial announcement. Government approvals can goals and objectives and implementing plans to
hold up a process, but once the developer breaks achieve them is a proactive stance on the part of
ground, you can expect to have a competitor open the business owners. For example, start a hotel
its doors within 16-22 months. business with a mission, vision and strategy.
Strategy is based on partnership with guests,
New hotels are not directly competitive from day employees, relationships with suppliers and
one, but they quickly become a threat after working satisfaction of interesting parties.
out the operational kinks. Existing hotels must
examine how their property quality and operations 2. Identifying Relevant Criteria for Supplier
hold up against the new entrant. For example, an Selection
existing property may require some renovations just
to maintain a defensive position. Once you know the goals and requirements that
require supplier engagement, you need to identify
Investment Trends the supplier selection criteria to have the maximum
benefits for the requirement.
Investment trends ebb and flow along two major
currents cyclical and secular. All investors are very While the standards for selection depend on the
aware of the business cycle. Business and consumer form of company and the supplier needs, basic
sentiment, money supply, and other factors measures include pricing, quality of prior
influence business and consumer spending. employment, industrial acceptance, legal standing,
Favorable macroeconomic conditions usually result etc. In order to select appropriate suppliers,
in good times, while low sentiment and tight organizations often engage in RFQs, RFPs, and RFIs,
monetary supply end up in slower growth. particularly when the specifications are critical.

Most investors and commentators try to

prognosticate about the status of "the cycle" to time
a good entry and exit point. However, nobody has
ever been 100% correct on this, and they miss
great opportunities by getting out too early. Secular
trends are based on social, technological,
governmental, and other factors that influence how
businesses and consumers behave. This is the
undercurrent that dictates the popularity of a
location or product type.

Think of a secular trend as the line between two 3. Evaluating and Selecting Suppliers
points on a map as the crow flies. If you could go
from point A to B without taking surface roads, the The next step is to evaluate all potential suppliers
journey would be a breeze. Gravity and the natural on the basis of your defined selection criteria. The
and built environment limit our ability to do that. majority of companies assess suppliers on the basis
Therefore, we must contend with the inefficient of their quoted prices. It is equally necessary,
surface streets market cycles to get from here to however, to weigh in the other parameters you
there. All the greatest investors are more focused have defined. Assess the quotations and proposals
on the secular trends than business cycles. given by the potential suppliers and ensure you are
deriving maximum cost savings opportunities.
SUPPLIER SELECTION Analyze the terms and conditions to see how well
the suppliers are planning to meet the
1. Identifying the Set of Business Goals and organizational requirements. At the same time,
Objectives make sure you have done a thorough, holistic
analysis of the suppliers' strengths and weakness
HPC 125 Notes #1
and study how the external environment's threats can set an approved or preferred vendor list for
and opportunities can impact your engagement with those potential suppliers.
the suppliers.
Make sure you have established KPIs for measure
supplier performance. This process helps to ensure
a smooth and effective practical evaluation. This will
also provide insights into areas for improvement to
maximize supplier performance. It also tells us how
effective our supplier management process is and
how it can optimize it further.

4. Negotiating and Contracting with the

Selected Suppliers

Now that you have selected the right vendors, you

need to carry out the procurement process to
actually get them on board. Ensure that in the
contracting process you engage all applicable
parties and gain useful insights into how the deal
will ensure optimum benefit performance.

In a lot of business cases, the contracting process is

executed by the finance or procurement team with
the senior executives of business units whereas the
groups that will work with the suppliers on a day-to-
day basis are not consulted.

Negotiations are often thought of as situations

where one side wins and the other loses. But it
doesn't always have to be that way. There may be
ways that you can work with your supplier to save
you both time and money. For example, you may
be able to utilize your networks to help each other
find additional customers. You may be reluctant to
provide another hotel with access to your suppliers,
but perhaps you know someone in a related field.
Even if it does not save you money, creating more
ties and better relationships between you and your
supplier can yield benefits such as favorable
treatment during difficult times.

5. Evaluating Supplier Performance

The supplier management process doesn't just end

once you choose the suppliers. After their selection
and onboarding, you need to periodically evaluate
their performance to see how well they are fulfilling
the set objectives and requirements.

Supplier evaluation is the process to access new or

existing supplier base on their delivery, price,
production, and quality of management, technical
and services. A standard supplier evaluation
framework shall be used in all cases for the existing
and potential suppliers. The supplier evaluation
framework can help to set up a benchmark and
corrective action plan for the existing supplier. You
can decide to reward supplier based on their
excellence performance and penalizing or de-listing
them if the performance is not in standard. You also