Buying Power
Thanks to automation, e-commerce and other advances, hoteliers today are saving time and money while gaining greater expertise in the once mundane task of purchasing equipment and supplies for their properties.
By Tony Dela Cruz, Managing Editor -- HOTELS Magazine, 9/1/1999
Ask the people responsible for
the procurement of hotel furnishings, fixtures and
equipment (FF&E) what has
been the most welcome technological advance of the past
decade, and one might expect a multitude of answers.
Some might cite a new manufacturing process, or the adoption
of computer-aided design or the overall explosion of
the Internet. All of these have played major roles in
refining the art of purchasing, however most experts
say their most valuable, relatively new tool is e-mail.
This underscores the notion that the procurement process
remains highly reliant on efficient, timely and accurate
two-way communications. A generation ago, if a carpet
installation in a hotel lobby turned problematic because
of a difficult pattern lay-down, it might have required
an on-site visit from the designer or the manufacturer
to rectify matters. Today, the hotel owner can photograph
the problem area with a digital camera, send the images
via e-mail to all interested parties and have the installation
difficulties defined and resolved without unnecessary
cross-country trekking. Even in its simplest usage, e-mail
saves postage and paper, allowing hotel operators and
vendors to exchange purchasing data at a fraction of
what it once cost in human effort.
As a result, an overall theme of
simplicity through technology has emerged on all fronts,
for the in-house purchasing divisions at major chains
and management companies, for the purchasing companies
who buy FF&E for hotels
on a contract basis and for the vendor/distributor community
as well.
Richard Barrett, vice president
of procurement, Starwood Hotels and Resorts Worldwide,
White Plains, New York, says technology promises lower
procurement costs through e-commerce and also makes
it easier to facilitate purchasing to "outlying" properties,
not necessarily those sitting furthest from headquarters,
but those for which it can be difficult upon which
to impose brand standards.
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He compares purchasing to solving
a simultaneous equation for which price is one of several
variables. "Buying
smart means managing that price variable along with others
for the sake of optimizing the purchase," he says.
Beyond that, e-commerce is redefining the deployment
of human resources in purchasing, shifting away from
people who simply oversee transactions toward experts
who can analyze and manage the process. "I don't
see it as adding heads, but changing the nature of the
function."
In some cases, the close analysis of the procurement
function has led to the creation of major buying infrastructure
within a hotel company. Marriott International, Washington,
D.C., created at the end of 1998 the Marketplace by Marriott,
an in-house purchasing division with a staff of 130 that
has revamped the way the company buys hotel furnishings
and supplies.
Karen Blair, senior vice president
of sales and marketing, Marketplace, says Marriott
approached its franchisees to see how it could help
reduce their operating costs. "For
some owners, as much as 50% of the operating budget can
be spent with suppliers, so we went to the franchisees
and ranked the operating items that hit them in cost," Blair
says. Marriott has since set up commodity teams for every
cost area in a hotel, detailing everything from ironing
boards and linen to design and construction. The traditional
three-bid process for selecting a vendor has been replaced
with a network of preferred supplier relationships and
negotiated contracts.
The impact on some areas and vendors
has been profound. The new linen program meant switching
suppliers for the first time in years. "What we did was totally change
the way we buy linen," Blair says. "We now
buy it on a per pound versus a cost-plus basis." She
asserts there is a sea change happening in hotel purchasing,
with Marriott and other industry giants "looking
at procurement as a core competency that they can expand."
Similar in scope is Provisions,
the in-house procurement facility set up by Minneapolis-based
Carlson Hospitality Worldwide in 1987. While the common
franchisee complaint against preferred vendor programs
set up by franchisors is that they become sources of
profit for both franchisor and the largest vendor,
the counter argument is that the large franchisee communities
typified by companies like Cendant, Choice, Marriott
and Carlson are best serviced by the largest vendors. "We always enter into an
agreement with the supplier by bringing our volume and
our distribution and marketing into effect on their behalf,
so that we will contract the best product," explains
John McDonald, Provisions' executive director, business
development. Provisions only selects vendors with a competent
distribution system, he says. "I get calls from
a lot of start-up companies and they couldn't handle
success in our marketplace."
If there is a downside to the vigorous
vendor programs set up by large hotel companies, it
is lost sales volume among suppliers. Sharon Beach,
vice president of purchasing for Dallas-based Bristol
Hotels & Resorts, the largest
franchisee of London-based Bass Hotels & Resorts,
says this trend in reducing vendor bases nevertheless
results in more profit for suppliers in general and better
cost controls for hotel companies. "It's a new way
of doing business--more open ended contracts and no dates
on them."
Beach, who is a Certified Purchasing
Manager (C.P.M.), explains that such vendor controls
come from purchasing professionals being more involved
in strategic operations than they were a decade ago. "The
dollars saved in purchasing go straight to the bottom
line," she
says. Something else that has developed just over the
past four or five years is more open communication between
senior procurement executives at different companies.
Beach views it as a real possibility for otherwise non-aligned
companies to form buying consortiums similar to Marriott
by Marketplace. "If I have US$20 million in buying
volume and four others have that, we can find some efficiencies
somewhere."
Despite Bristol's prominence among
Bass franchisees, Beach says Bristol doesn't necessarily
get the best prices on furnishings or equipment through
Bass. She considers that a reflection on a tough stance
taken by suppliers. "At
some point the manufacturers tell you they don't care
if you have US$500 million in volume," she says.
Chris Ruth, director of purchasing, the Americas, Bass
Hotels & Resorts, says Bass has no problem where
its franchisees procure from, provided the FF&E meet
franchise standards. "Any company that has critical
mass to leverage and mandate purchases probably should
be pursuing that sort of stuff," Ruth says.
Nor does critical mass have to
mean a portfolio of 100 hotels, according to Steve
Brandman, general manager for the new Central Park
Inter-Continental Hotel in New York. When Bass picked
up the contract for the former Ritz-Carlton from Starwood,
the property became Bass's second Inter-Continental
in New York, and that alone gives both hotels the chance
to buy better food. "We
can demand better quality because of the bulk buying," he
says. "There's a knee-jerk reaction to say it's
just price-driven, it's quality driven."
The players in the equation caught
in the middle of all the corporate strides in procurement
process and strategy are the contract purchasing companies,
or purchasing agents. They make the bulk of their revenue
from FF&E
installations on new construction or major renovations.
As an example, FF&E represents about 10% of a hotel's
new construction cost, or about US$10 million for a US$100
million hotel, and a purchasing company will make between
US$100,000 and US$200,000 if contracted as the FF&E
vendor. It is from these types of fees that developers
and hotel owners try to create cost efficiencies, by
cutting out the proverbial middle man and fulfilling
the role in-house for less money.
However, the purchasing agent community--there are about
two dozen North American purchasing companies that do
most of the work--says their experience is conducive
to most of the goals hotel builders set forth in terms
of time savings and cost efficiencies.
"More and more people who had in-house purchasing
are outsourcing now," says Alan Benjamin, managing
partner of Benjamin West, LLP, a Boulder, Colorado purchasing
company. "Our best client is somebody who is trying
to do it themselves or someone who has been in the industry
[and knows better]." Purchasing agents are particularly
invaluable when it comes to serving as liaisons between
the designers and vendors, he says, because they can
provide opinion on non-aesthetic issues, such as durability
of fabric. Historically a designer, hired first by the
developer, determines what furnishings and equipment
go into a hotel and issues a thick book of FF&E specifications.
Then, a purchasing company is brought in for the procurement
phase.
Benjamin says a purchasing agent
can spend inordinate amounts of time matching a specification
with one vendor while another may be able to provide
a solution at lower price. "One of the things
the client is buying is our relationship with the key
vendors."
Another purchasing executive, William
Langmade, president of Purchasing Management International,
Dallas, points out an ebb and flow in the demand for
outsourced purchasing. During a building boom, most
hotel companies can use the churn of activity to justify
having the infrastructure of an in-house procurement
team. "And then a downturn
hits, they have overhead but nothing to buy," he
says. At that point, contract purchasing starts to look
attractive again.
Langmade also points out there are ways, even if an
in-house purchasing department can get better pricing
on items, that an independent can still compete, such
as with reduced freight charges and cheaper cartoning.
But Benjamin does not discount
in-house procurement entirely. "One thing that the in-house purchasing
agents do well is set up national accounts with a television,
coffee, or logo-item programs." The bottom line
of this combination of increased corporate buying reach
for hotel companies and aggressive play among purchasing
agents is an unavoidable consolidation among purchasers.
Langmade suggests that as many as 90% of the major purchasing
companies in North America are in some form of merger
discussions with larger entities.
Marketplace by Marriott, in a show of increased buying
horizons, is using its parent company's massive buying
power to branch into new areas, such as energy. In California,
Marriott has contracted a five-year alliance with PGE
Energy Services (not the same company as Pacific Gas
and Electric Co., a public utility) for electricity supply
and energy management services at hundreds of Marriott
hotels.
The program is designed to take
advantage of energy deregulation in the state of California
and will allow PGE to supply electricity as well as
perform audits and other control measures, all aimed
at lowering hotel energy costs by as much as 30%. "We're
trying to affect a lot of areas of cost that traditionally
procurement never really touched," says Marriott's
Blair.
Purchasing Goods For Profit
My strategic partner, Roger Herman,
once said, "Asking
if computers can think is like asking if submarines can
swim." If this statement defies your comprehension,
then join the crowd. Most of us, including the tech-minded,
have the same problem with the Internet and technology
as a whole. I am going to attempt to clean up the misconception
that purchasing is a cost center and not a profit center.
Using purchasing technology, connectivity
is one of the major avenues to insure growth for years
to come in operating earnings, because that penny saved
is truly a penny earned for the bottom line. As a rule,
that is not true in "revenue generating departments." There
are variable costs associated with revenue generated
by food and beverage, rooms division, retail and other
departments.
Generally, a penny is worth 0.8 cents in rooms and only
0.3 cents in food and beverage. If the cost of goods,
including capital and purchasing operating expenses,
decrease for the next three to five years, with an increase
in quality, your management team is probably doing it
right. However, if you are taking costs from prior years
and adding a percentage for inflation, your management
team is probably doing it wrong.
Bottom Line Orientation
I am going to provide an outline
of connectivity that will drive the bottom line with
systems you may already have installed. This example
is based on a mid-size, full-service hotel and is not
intended to be the answer for the entire industry.
However, the principles outlined do apply to virtually
any hotel and/or groupings of smaller hotels. This
example is primarily F&B oriented.
First, your purchasing system needs to connect to your
major providers for the processing of purchase orders
from the hotel's forecasting systems, particularly the
food vendors. Low-cost networking and the Internet have
eliminated the notion of expensive data lines.
The receiving dock would use bar code scanners to inventory
incoming items against the purchasing system and vendor
records. The system could then flag the appropriate person
at the hotel and/or the vendor that a problem may exist
(some call it management by exception). Fix it now, not
at month's end.
By knowing the vendor's exact price, it is then processed
to the food and beverage departments' receipt system
for a breakdown of the exact cost for each menu item.
The catering department would automatically
have their price for the banquet menu's food costs
and automatically calculate what must be charged to
get the level of profit for the F&B portion of
the event. They could do hyptheticals with the client.
What if we exchanged chicken for prime rib? Does that
bring food cost in line with what the client requires?
Automated Knowledge
Since the receipt system knows exactly how much of each
ingredient is used for say, a chef's salad, the system
would automatically create (and combine with your restaurants)
the appropriate purchase orders based on catering banquet
event orders and restaurant projections.
If the receiving dock's scanned information matches
both the vendor and the purchasing departments records,
then the system, or accounts payable system, would generate
and electronically pay the invoice.
The gained efficiency begs a few
questions. Why do we need paper audits if the computer
generated it in the first place? Why do we sell one
menu for a 500-person function and something totally
different for 20 people? Even if you "give away" the
menu for the larger group to the smaller group, you
do not lose money, you make money.
of Stanfield Hospitality Consultants, LLC, based in
Hendersonville, Tennessee. Stanfield is retired senior
vice president of the Opryland Lodging Group, where
he pioneered the "paperless
office" concept.
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