In the face of inflation, supply chain disruptions and evolving consumer expectations, procurement within the hospitality sector is undergoing significant changes. Its traditional view — as merely a function of operations — is being challenged, with experts stressing that procurement practices need to form a core part of companies’ long-term strategies.
Not just a cost
“Typically, investors see procurement as a very valuable function when times are tough and margins are being squeezed - it gets a lot of attention and focus. But when cost pressures aren’t so bad, procurement can become more of a hinderance in terms of process time and headcount” says Philip Halanen, Head of Sourcing & Sustainability, EMEA at Wyndham Hotels & Resorts.
However, he notes that procurement is evolving from being just a cost centre, with companies starting to realize the value of procurement as a function that can also be used to generate revenues; whether they be through sales commissions from suppliers selling into company networks or collaboration when it comes to marketing initiatives.
“Procurement can really be a source of added value and cost-control, especially considering the current economic headwinds. Carefully controlled procurement with decisions that take longer-term views into account can really start to pay dividends in difficult times such as those we are facing now” he says.
And with rising costs and supply chain disruption undermining revenue growth and adding millions to cost bases, with inflation continuing to hurt, we’re no doubt in difficult times.
However, Rob Auerbach, senior vice president of purchasing at Island Hospitality Management says that long-term supplier relationships have been critical to keeping hotels running smoothly through these issues.
“Balancing costs and quality, along with the continued supply chain shortages, are the issues that keep us up at night. Our vendor relationships have been instrumental in keeping the supply chain running smoothly.”
Steps to take
While 98 per cent of Wyndham’s business in the EMEA region is franchised with flexibility given to owners on their procurement choices, the company maintains mandatory programs for certain categories where its hotels can secure products or services at low costs by making use of Wyndham’s global buying power to get access to preferential rates, pricing and contract terms.
But for those who don’t have the strength in numbers that Wyndham benefits from, Halanen advises that having very clear needs-based category strategies, is absolutely key.
“Having clear knowledge of what it is that you need and when you need it is very important. You need to have enough time to scope the market and do a robust set of tenders where you can really get into the detail of what different suppliers are offering you.
You need to be able to understand your business requirements and be able to question them, in order to be able to value engineer the final purchase. I think it's very important that procurement always questions the business when there's buying needs – this is to ensure that goods and services aren’t over / under specified.”
Russ Spencer, senior director of restaurant success at Craftable advised that operators consider measuring days on hand (DOH), keeping track of the amount of inventory a business has in stock and the estimated time that inventory will last before running out in order to minimise the risk of waste and reduce the risk of running short on supplies.
Halanen also stresses the importance of the procurement team being involved in the early stages of designing and specifying products or services or software so that they can add the best value and get the best outcome for the business.
“Having procurement involved across the whole of the business is also important as well because it is often involved very late in the day. It could be the case that a product or a service is specified by a team but by the stage the concept gets developed and delivered, it's too late to do any value engineering or any questioning of the requirements.”
Travis Murray, president of McNeill Hotel Co agrees that the procurement process shouldn’t happen in a silo, stressing that involving other hotel departments is critical for success.
“Our department leaders are well-versed in our procurement system and ensure that each department’s budget and forecasted spend are coordinated effectively. Maintaining hotel-specific order guides ensures that all departments are working together towards our common goals,” he says.
ESG
But effective procurement doesn’t only positively impact cost efficiency, it could also have a positive impact in terms of ESG.
Halanen notes Wyndham’s emphasis on sourcing locally where possible as it doesn’t just help to reduce cost but also helps minimise the environmental impact of supply chains.
“An organization can really drive its sustainability strategy forward through its procurement policies and practices.
At Wyndham Hotels & Resorts, we have a global Supplier Code of Conduct which all preferred suppliers we work with have to sign up to. It states our minimum expectations of suppliers and their behavior and covers areas ranging from financial, environmental, ethical and social responsibility. It also addresses our minimum standards for human labor rights as well as expectations around diversity, equity and inclusion.”
He notes that by having a policy that suppliers must adhere to and on which they are audited, is a straightforward way to ensure a business stays on the right path when it comes to ESG.
He adds: “So much risk in a business sits within its supply chain. It’s always important to ensure that the procurement function is right at the very front and centre of your risk management strategy. A lot of potentially damaging risks sits within the supply chain.
“If your procurement function is empowered to have a view of where products are sourced from, how they're made, who is making them and does a high level of due diligence around that, that’s an important part of a company's overall risk management strategy. Procurement is very well placed to understand that risk and put mitigating practices in place to ensure that that risk is managed and reduced,” he says.
Murray adds that when it comes to ensuring that suppliers meet quality and sustainability standards, it’s important to choose a provider whose goals and standards align.
“Established hospitality providers are typically very knowledgeable about brand standards, but we also make sure that our procurement specialist understands the specific standards we want to establish for our organization. This way, we can be confident that our suppliers are meeting the high standards we have set for them.”
Disruption and customer satisfaction
A tighter focus on the supply chain is also of paramount importance when it relates to the cost of operating supplies. Disruption to the supply can can cause prices to shoot up, create scarcity and ultimately have a negative impact on your operations.
"It's very important to understand where you buy your consumable products from and understand what hidden costs there might be in those decisions. He adds: "Major supply chain disruption should always be considered when pricing up contracts from the outset, and you should diversify your sources of supply to minimise exposure to disruption."
Technology and AI
Separately, Halanen says AI could be a helper, especially in the early stages of the sourcing cycle. Procurement teams are now able to use AI to help source entire categories within a matter of minutes to generate lists of potential suppliers.
“Being able to source markets through AI and being able to initially author contracts through AI is a very big opportunity.”
Auerbach agrees that technology has played a big role in improving the procurement process for hoteliers. “Hotels now can make use of real-time, forecasted budgets. As a company, we can control spending based on occupancy and forecast. These tools have allowed us to better understand buying patterns and helped with price negotiations,” he says.
Spencer adds that using data to manage current inventory and help predict future trends can help operators control purchase orders, reduce financial risks and anticipate and adjust to future needs based on past trends.
“Procurement is more than just placing orders; it involves sourcing materials, negotiating contracts and payment terms and assessing and refining these processes. A well-managed procurement program can help increase margins by reducing cost and waste and increasing the efficiency of operations. Using technology to automate these tasks can help streamline efforts, allowing operators to focus on the front-of-house guest experience and brand building,” he says.
And strong procurement could also serve as a draw for attracting new investment. High quality supplier relationships are a source of added value to a business as they often result in market leading prices for goods, resulting in lower cost bases and higher margin.
“If you have a convincing procurement program that offers a real cost savings and revenue opportunities over other competitors, that's a huge source of advantage,” Halanen says.
It seems that although procurement is currently treated as a perfunctory task of operations, it could serve as a large source of added value for hotel companies and investors, saving significant amounts of money and protecting value.