How Hotels Can Win the Supply Chain Game

Managing supply chain and procurement is one of the best ways a hotelier can increase profits and minimize losses, but it's tough to do it well. A hotel must manage hundreds of SKUs. With so many products to buy, it's challenging to find the best sources. Hotel procurement is further complicated by fragmented operations. Bring together franchisees, owner-operators, and multiple brands under one umbrella, and it can be impossible to keep up with procurement. Without centralized processes, managers and operators are more likely to make multiple small-scale purchases from numerous suppliers, making it difficult for corporate officers to ensure hotels purchase high-quality items at the best prices.

Despite the challenges, the two most expensive costs in a hotel are food and labor. While hotels' options for decreasing labor costs are limited, proper supply chain management can significantly drop food costs. But to win the supply chain game, hotel procurement personnel must first know how to identify an ideal supplier.

What Qualities do Strong Suppliers Share?

Hotels managing their own procurement must work with dozens of suppliers, and there are hundreds of companies in each space. How can hotel brands know which supplier is going to deliver the best service at the lowest price? To vet a potential supplier, consider these five factors:
Proximity

We often assume "local" items are more expensive than their far-traveled counterparts, but that's not really the case. When you factor in freight and shipping costs, ordering from distant suppliers can be costly.

Decreased shipping costs are, of course, a desirable feature of local suppliers. But perhaps even more importantly, consumers are increasingly clamoring for locally sourced foods. By providing foods from local suppliers, hotels can save money while offering more desirable products to their customers.

Hilton Hotels has become a leader in hospitality procurement, and one of its strategies is mixing national contracts for its brands with a healthy dose of local suppliers. This gives the hotel brand the most bang for its procurement buck.

Longevity

Startups are hot. In terms of procurement, however, hotels should seek suppliers that have been in business for a long time. The more experienced the company is, the more hotels can trust they won't fold on a big contract.

More established suppliers also tend to weather economic fluctuations such as the 2008 recession better than their younger counterparts. It's impossible to predict when the next economic downturn might hit, and hotels working with more experienced suppliers minimize their chances of operational disruptions due to vendor failures. Don't risk running out of tough-to-find supplies when there are customers to be served.


Reliability

Particularly in the hospitality business, reliability is essential. Will the vendor ship the right number of items on time and in good shape?

One strong indicator of vendor reliability is the accessibility of its inventory information. Vendors that transparently display their current inventory information via a dashboard or other online location tend to be more organized and knowledgeable about what products they have on hand. Look for vendors whose sites detail when more of an out-of-stock product might be available - it's a sign they're committed to minimizing gaps in their inventory.

However, if products ordered from a vendor regularly arrive early, that's a signal that the vendor might be struggling. On the surface, early delivery sounds great, but in reality, it could signal that the company needs a quick payday.

Reputation

Every vendor has a sales pitch, but not every vendor can live up to its promises. Instead of taking the vendor at its word, do some homework before signing a contract.

Thanks to Google, it's not hard to search for a company's history. To dig a little deeper, look for third-party reports on vendors in the industry. Many industry consulting groups offer reports detailing their analyses of vendors' performance.

Another place to get insights about a vendor's reputation is via the Better Business Bureau. If a vendor has numerous unresolved complaints with the Better Business Bureau, it's probably safest to steer clear.
Price

A supplier's prices, of course, must factor into any hotel brand's procurement decisions. Vet suppliers on their on-paper prices, but also call any industry associations the hotel belongs to. Associations often negotiate special pricing with particular vendors, and some vendors offer promotional pricing for new contracts.

A good, fair price for services and products is important, but don't fall into the trap of valuing low prices above all other criteria. The vendor with the lowest prices might fall short on reliability, delivering shoddy service in exchange for low rates. Additionally, a discount supplier could be located thousands of miles away, so beware of added freight and shipping costs atop low per-item prices.

Managing Procurement: In-House vs. Outsourced

Recognizing an ideal vendor is only half the battle. Next, you must choose how to do business with those vendors. You can decide to either handle procurement internally or outsource procurement needs to a group purchasing organization.

Handling procurement internally affords you greater control over individual vendor relationships, but outsourcing decreases the time you must spend managing procurement and often brings more competitive pricing.

The In-House Route

If you choose to work directly with vendors, take the following steps to update and improve your procurement strategy.

First, look into your current procurement strategies. What's driving the internal costs of your hotel? Break down annual spend into various categories - food items, toiletries, and home goods are often hotels' largest supply costs. Note how often you're purchasing items and which items prove persistent headaches to procure.

Too often, hotels rush to change their procurement strategies without detailing their current procurement expenses. Without a solid understanding of how much you're spending and where, it's tough to identify areas to decrease spend or improve reliability.

Next, list your most important purchasing criterion for each category. With food items, for instance, proximity might be the most important - you want food that's fresh, local, and inexpensive to ship. Then, when you're searching for vendors, you can rank candidates based on how well they meet the criterion you selected as the most important for that category. A food vendor, for instance, might offer lower prices and have a reputation for reliable delivery, but if it's five states away, it might not be local enough to meet your needs.

Once you've documented the current state of procurement and written down what you're looking for, solicit referrals to begin your search. Ask colleagues working at other hotels, read trade publications, and look to your industry association for guidance (if you belong to one).

After you've done your research, you should have a list of at least 5 to 10 vendors to contact. Get in touch with each, and request an on-site meeting at your hotel. Remember, this first interaction will set the stage for a potential future relationship - treat the on-site meeting as you might a job interview. Did the vendor representative show up on time and prepared with samples? That's a good indicator of a reliable supplier.

Vendor interviews will narrow the field. Then, it's time to negotiate. At this point, 2 or 3 vendors in each category might stand out. Call each back, and get specific about the needs of your business. Can the vendor do weekly delivery for foodstuffs? Are you concerned about higher prices on sheets and bedding than a previous vendor offered?

Once you've identified a vendor that can provide the supplies you need when you need them and at the prices you want, it's time to do one more round of research. This is akin to the background check you might conduct on the most promising candidate before finally offering him a job. Ask colleagues at other hotels specifically about their relationships with this vendor. Call your industry association. Request information about any complaints the Better Business Bureau might have on file. Assuming the vendor checks out, you've found a match, and it's time to set up the agreement.

If you're thorough in vetting each supplier according to the criterion you identified as the most important for each supply category, you're unlikely to make a poor choice. But don't sign an initial vendor contract for more than a year. The true test of a vendor is how it actually services your hotel, so be sure you negotiate a low-stakes exit clause in case the supplier's service doesn't meet expectations.

The Outsourcing Option

Many hotels and restaurants choose to handle their own procurement through the steps listed above. However, there's another option, and it can be particularly advantageous for small and mid-sized hotels.

GPOs offer smaller companies the chance to band together. By making high-volume purchases and then distributing items to members as needed, GPOs leverage volume to attain prices similar to what large corporations receive.

Using a GPO does have some drawbacks, though. GPOs work with a limited network of distributors and suppliers, and those companies might not offer the specific products you're looking for. Most GPOs require no member fees to join, however, recouping costs instead from the vendors they work with.

Choosing the right GPO for your hotel is similar to choosing individual suppliers. But instead of sourcing dozens of individual suppliers, outsourcing the management of your supply chain means you'll hopefully need to identify just one procurement partner.

Again, outline your current prices and needs for each category of spend. If you're considering partnering with a GPO, this step will give you a baseline against which to judge whether the GPO could decrease extant costs.

After creating a list of potential GPO candidates, interview each one individually to get a better feel for their prices and services - just like you would for any other vendor. The five criteria of a strong supplier also apply to GPOs, so vet each GPO candidate for proximity, longevity, reliability, reputation, and price. Be sure to investigate the reputation of each candidate before signing, and pay attention to exit clauses in case you end up being dissatisfied with the service of your GPO partner.

We've all worked with poor vendors before. When a supplier is unreliable or difficult to work with, procurement can be one of the most time-consuming and frustrating functions of hotel management.
Whether you choose to keep procurement in-house or outsource it, good service is a must-have. Per-item prices are important, but operational disruptions can have an even bigger impact on your bottom line. To ensure your hotel runs smoothly and profitably, make supply chain management a priority before it becomes a problem.

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