Purchasing and Costing For The Hospitality Industry

PURCHASING AND COSTING FOR
THE HOSPITALITY INDUSTRY

PURCHASING AND COSTING FOR
THE HOSPITALITY INDUSTRY
Maria Rellie B. Kalacas
Publishing
www.societypublishing.com
Purchasing and Costing for the Hospitality Industry
Maria Rellie B. Kalacas
Society Publishing
2010 Winston Park Drive,
2nd Floor
Oakville, ON L6H 5R7
Canada
www.societypublishing.com
Tel: 001-289-291-7705
001-905-616-2116
Fax: 001-289-291-7601
Email: orders@arclereducation.com
e-book Edition 2020

ISBN: 978-1-77407-512-8 (e-book)
This book contains information obtained from highly regarded resources. Reprinted material
sources are indicated and copyright remains with the original owners. Copyright for images and
other graphics remains with the original owners as indicated. A Wide variety of references are
listed. Reasonable efforts have been made to publish reliable data. Authors or Editors or Publish-
ers are not responsible for the accuracy of the information in the published chapters or conse-
quences of their use. The publisher assumes no responsibility for any damage or grievance to the
persons or property arising out of the use of any materials, instructions, methods or thoughts in
the book. The authors or editors and the publisher have attempted to trace the copyright holders
of all material reproduced in this publication and apologize to copyright holders if permission has
not been obtained. If any copyright holder has not been acknowledged, please write to us so we
may rectify.
Notice: Registered trademark of products or corporate names are used only for explanation and
identification without intent of infringement.
© 2020 Society Publishing

ISBN: 978-1-77407-147-2 (Hardcover)
Society Publishing publishes wide variety of books and eBooks. For more information about
Society Publishing and its products, visit our website at www.societypublishing.com.
ABOUT THE AUTHOR
Maria Rellie B. Kalacas is an Assistant Professor III in the College of Industrial

Technology department of Food Technology, Laguna State Polytechnic
University, Santa Cruz, Laguna, Philippines. She finished her Doctor of
Philosophy major in School Leadership and Management at St. Dominic Savio
College, Caloocan City, Philippines. She also completed her Master of Arts
major in Technology and Home Economics from Laguna State Polytechnic
University, Philippines. She also took up Master of Arts in Industrial Education
major in Hotel and Restaurant Management at Eulogio “Amang” Rodriguez
Institute of Science and Technology, Santa Mesa, Manila, Philippines. A
member and awardee of Asian Community Social Response Humanitarian
Ministry (ACSR), May 2018.She also has two (2) Published Utility Model
research work.
TABLE OF CONTENTS
Glossary........................................................................................................ix
List of Figures .............................................................................................xvii
List of Tables.............................................................................................. xxiii
List of Abbreviations ................................................................................... xxv
Preface................................................................................................. ....xxvii
Chapter 1 Introduction to Hospitality Industry.......................................................... 1

1.1. What Is Hospitality Industry?............................................................... 2
1.2. Different Sectors Under Hospitality Industry ....................................... 7
1.3. Role Of Human Resources In The Hospitality Industry ...................... 26
1.4. Management Practices And Organizational Behavior ........................ 32
1.5. Importance Of Budget Planning In Hospitality Industry..................... 44
References ............................................................................................... 52
Chapter 2 Definition And Overview Of Purchasing And Costing In

Hospitality Sector.................................................................................... 55
2.1. Definition And Overview Of Purchasing ........................................... 56
2.2. Definition And Overview Of Costing ................................................ 68
2.3. Why Purchasing And Costing Are Essential In Hospitality Industry? ... 79
2.4. Purchasing And Costing – Changing Trends....................................... 83
References ............................................................................................... 85
Chapter 3 Functions And Key Areas Of Purchasing In The

Hospitality Industry................................................................................. 87
3.1. Common Functions Of The Purchasing Department .......................... 88
3.2. Purchasing In Food And Beverage Sector .......................................... 91
3.3. How Purchasing Works In Accommodation Sector? ........................ 102
3.4. Significance Of Purchasing In Travel And Tourism Sector ................ 104
3.5. Need For Responsible Procurement In Hospitality Industry ............. 109
References ............................................................................................. 127
Chapter 4 Specification, Objectives, And Evaluation of Purchasing ...................... 129

4.1. Purchasing ...................................................................................... 130
4.2. Purchase Specification .................................................................... 131
4.3. Purchasing – Objectives.................................................................. 140
4.4. Purchasing – Evaluation .................................................................. 146
4.5. Conclusion ..................................................................................... 153
References ............................................................................................. 154
Chapter 5 Importance Of Costing In The Hospitality Industry .............................. 155

5.1. Objectives Of Costing In The Hospitality Industry ........................... 156
5.2. Basic Principles Of Costing In The Hospitality Industry ................... 162
5.3. Different Types Of Costing In The Hospitality Sector ....................... 166
5.4. What Is Activity-Based Costing In The Hospitality Industry?............. 177
5.5. Benefits Of Costing And Control ..................................................... 181
References ............................................................................................. 184
Chapter 6 Cost Evaluation and Control.................................................................. 187

6.1. Cost Control And Budgeting............................................................ 188
6.2. Inventory Cost Control .................................................................... 191
6.3. Food And Beverage Cost Control .................................................... 198
6.4. Labor Cost Control.......................................................................... 210
References ............................................................................................. 222
Chapter 7 Standard Procedure And Policies Followed For

Purchasing And Costing ........................................................................ 223
7.1. Policies Followed For Purchasing .................................................... 224
7.2. Costing Policies Followed In Hospitality Industry ............................ 231
7.3. Different Procedures Followed For Purchasing ................................ 231
7.4. Different Procedures Followed For Costing ..................................... 241
References ............................................................................................. 248
Index ..................................................................................................... 249
viii
GLOSSARY
A
Accumulation – a mass or quantity of something that has gradually gathered
or been acquired.
Acquisition – An acquisition is when one company purchases most or all of
another company’s shares to gain control of that company.
Acronym – an abbreviation formed from the initial letters of other words and
pronounced as a word.
Acumen – the ability to make good judgments and take quick decisions.
Adjourning – break off (a meeting, legal case, or game) with the intention of
resuming it later.
Amenities – a desirable or useful feature or facility of a building or place.
Anecdotally – according to or by means of personal accounts rather than facts
or research.
Apportionment – the act of sharing something between several people or
organizations.
Ascertainment – the process of finding something out for certain.
Asset – a useful or valuable thing or person. An item of property owned by
a person or company, regarded as having value and available to meet debts,
commitments, or legacies.
B
Banqueting – A banqueting hall or room is a large room where banquets are
held.
Benchmark – a standard or point of reference against which things may be
compared.
Beverage – a drink other than water.
Bidder – a person or organization making a formal offer for something,
especially at an auction.
Bidding – the offering of particular prices for something, especially at an
auction.
ix
Biodegradable – (of a substance or object) capable of being decomposed by
bacteria or other living organisms and thereby avoiding pollution.
Boycotts – withdraw from commercial or social relations with (a country,
organization, or person) as a punishment or protest.
Budgeting –Budgeting is the process of preparing detailed projections of future
amounts.
C
Campground – a piece of land where people on holiday can camp, usually with
toilets and places for washing.
Canned goods – Canning is a method of preserving food in which the food
contents are processed and sealed in an airtight container.
Catalog – a complete list of items, typically one in alphabetical or other
systematic order.
Cog – one of the tooth-like parts around the edge of a wheel in a machine that
fits between those of a similar wheel, causing both wheels to move.
Commodities – a raw material or primary agricultural product that can be
bought and sold, such as copper or coffee.
Compensation – something, typically money, awarded to someone in
recognition of loss, suffering, or injury.
Compensation – something, typically money, awarded to someone in
recognition of loss, suffering, or injury.
Comprehend – grasp mentally; understand.
Condiments – a substance such as salt, mustard, or pickle that is used to add
flavor to food.
Consumables – a commodity that is intended to be used up relatively quickly.
Contract – a written or spoken agreement, especially one concerning
employment, sales, or tenancy that is intended to be enforceable by law.
Conventions – a way in which something is usually done.
Credibility – the quality of being trusted and believed in.
Creditable – of a performance, effort, or action) deserving public
acknowledgment and praise but not necessarily outstanding or successful.
Crockery – plates, dishes, cups, and other similar items, especially ones made
of earthenware or china.
D
Dangling – hanging or swinging loosely.
x
Deficient – not having enough of a specified quality or ingredient.
Depreciation – The monetary value of an asset decreases over time due to use,
wear, and tear or obsolescence. This decrease is measured as depreciation.
Deteriorating – becoming progressively worse.
Discretionary – decided by officials and not fixed by rules.
Disruptive – causing trouble and therefore stopping something from continuing
as usual.
Downsizing – make (a company or organization) smaller by shedding staff.
E
Eco-friendly – not harmful to the environment.
Economic downtime – an economic downturn is a general slowdown in
economic activity over a sustained period of time.
Economic inflation –Inflation is a sustained increase in the general price level
of goods and services in an economy.
Empower – make (someone) stronger and more confident, especially in
controlling their life and claiming their rights.
Enterprise – a business or company.
eProcurement – e-Procurement or electronic procurement refers to the process
of purchase and sale of goods or services through electronic methods, primarily
the Internet.
Ex-felons – the term felony, in some common law countries, is defined as a
serious crime. A person who has committed a felony is a felon.
Expenditures – an amount of money spent.
F
Feasible – possible to do easily or conveniently.
Fluctuations – an irregular rising and falling in number or amount; a variation.
Food pilferage – the act of stealing things of small value.
Footfall – the number of people entering a shop or shopping area in a given
time.
Foraying – a quick raid, usually for the purpose of taking plunder.
Fragmented – consisting of several separate parts.
Freight – goods transported in bulk by truck, train, ship, or aircraft.
Frieze – a broad horizontal band of sculpted or painted decoration, especially
on a wall near the ceiling.
xi
H
Harassment – aggressive pressure or intimidation.
Harmony – the combination of simultaneously sounded musical notes to
produce a pleasing effect.
Hazardous – risky; dangerous.
Helm – a tiller or wheel for steering a ship or boat.
Hospitality – the friendly and generous reception and entertainment of guests,
visitors, or strangers.
Hypoallergenic – (especially of cosmetics and textiles) relatively unlikely to
cause an allergic reaction.
I
Imperative – of vital importance; crucial.
Inadvertent – not resulting from or achieved through deliberate planning.
Inception – the establishment or starting point of an institution or activity.
Indispensable – absolutely necessary.
Infringements – the action of breaking the terms of a law, agreement, etc.;
violation.
Ingredient – any of the foods or substances that are combined to make a
particular dish.
Inns – a house providing accommodation, food, and drink, especially for
travelers.
Intangibility – impossible to touch, to describe exactly, or to give an exact
value.
Intonation – the rise and fall of the voice in speaking.
Inventories – a complete list of items such as property, goods in stock, or the
contents of a building.
Itineraries – a detailed plan for a journey, especially a list of places to visit;
plan of travel.
L
Laissez-faire – the policy of leaving things to take their own course, without
interfering.
Legitimacy – Ability to be defended with logic or justification; validity.
Lettuce – a cultivated plant of the daisy family, with edible leaves that are eaten
in salads.
xii
Leverage – use (something) to maximum advantage.
Liberality – the quality of giving or spending freely.
Logistics – the commercial activity of transporting goods to customers.
M
Maverick – an unorthodox or independent-minded person.
Merchandising – the activity of promoting the sale of goods, especially by
their presentation in retail outlets.
Meticulously – very careful and with great attention to every detail.
Microbrew – Beer which is produced locally in small quantities or breweries
and not nationally distributed.
Motel – a roadside hotel designed primarily for motorists, typically having the
rooms arranged in low blocks with parking directly outside.
N
Negotiations – are formal discussions between people who have different aims
or intentions.
O
Obsolescence – the process of becoming obsolete or outdated and no longer
used.
Outsourcing – obtain (goods or a service) by contract from an outside supplier.
P
Parchment paper – a type of stiff translucent paper treated to resemble
parchment and used for lampshades, as a writing surface, and in baking.
Pasteurized – to a process of partial sterilization, especially one involving heat
treatment or irradiation, thus making the product safe for consumption and
improving its keeping quality.
Patrons – a customer of a shop, restaurant, etc., especially a regular one.
Perquisites – a benefit which one enjoys or is entitled to on account of one’s
job or position.
Poultry – domestic fowl, such as chickens, turkeys, ducks, and geese.
Procurement – the process by which an organization buys the products or
services it needs from other.
Protocols – the official procedure or system of rules governing affairs of state
or diplomatic occasions.
Prudent – acting with or showing care and thought for the future.
xiii
Q
Quotation – a formal statement setting out the estimated cost for a particular
job or service.
R
Rationalization – the action of attempting to explain or justify behavior or an
attitude with logical reasons, even if these are not appropriate.
Redundancy – the state of being no longer in employment because there is no
more work available.
Regressions – a return to a former or less developed state.
Regulations – a rule or directive made and maintained by an authority.
Rehabilitation – the action of restoring someone to health or normal life
through training and therapy after imprisonment, addiction, or illness.
Retention – The condition of retaining (keeping) something.
S
Salvaged – retrieve or preserve (something) from potential loss or adverse
circumstances.
Showerheads – the part of a shower that water flows out of.
Slack – not taut or held tightly in position; loose.
Solicits – ask for or try to obtain (something) from someone.
Solvency – Solvency is the ability of a company to meet its long-term debts and
financial obligations.
Solvents – a liquid, typically one other than water, used for dissolving other
substances.
Sommelier – A sommelier, or wine steward, is a trained and knowledgeable
wine professional, normally working in fine restaurants, who specializes in all
aspects of wine service as well as wine and food pairing.
Sophisticated – having a good understanding of the way people behave and/or
a good knowledge of culture and fashion.
Stocktaking –the counting of all the goods, materials, etc. kept in a place such
as a shop.
Styrofoam – a kind of expanded polystyrene used especially for making food
containers.
Subsidiaries – a company controlled by a holding company.
Suites – a set of rooms designated for one person’s or family’s use or for a
xiv
particular purpose.
Supply chain – the sequence of processes involved in the production and
distribution of a commodity.
Sustainable – able to be upheld or defended.
T
Taverns – an inn or public house.
Taxation –A means by which governments finance their expenditure by
imposing charges on citizens and corporate entities.
Toxic – poisonous.
Tremendously – in an excellent or impressive way; extremely well.
U
Underpinning – to give support, strength, or a basic structure to something.
Unprecedented – never done or known before.
Ushering – show or guide (someone) somewhere.
V
Vicinity – the area near or surrounding a particular place.
W
Wages – a fixed regular payment earned for work or services, typically paid on
a daily or weekly basis.
Warehouses – a large building where raw materials or manufactured goods
may be stored prior to their distribution for sale.
Z
Zero-tolerance – refusal to accept antisocial behavior, typically by strict and
uncompromising application of the law.
xv
LIST OF FIGURES
Figure 1.1. Hospitality industry – definition

Figure 1.2. Image of the old VanDemark Tavern in Junius
Figure 1.3. Hospitality industry, meaning
Figure 1.4. Customer satisfaction – main principle of hospitality industry
Figure 1.5. International tourist arrivals, 1950–2030
Figure 1.6. Different sectors of the hospitality industry
Figure 1.7. The hospitality industry – full picture
Figure 1.8. Types of accommodation
Figure 1.9. Important types of accommodation
Figure 1.10. Image of lodges
Figure 1.11. Earth Resort in Wayanad, India
Figure 1.12. Emerald suites
Figure 1.13. Sectors of the food-service industry
Figure 1.14. A Fast Food Center in Portland, Oregon
Figure 1.15. Image of a themed restaurant
Figure 1.16. Food catering services
Figure 1.17. What is travel and tourism?
Figure 1.18. Modes of transport
Figure 1.19. Recreational events for tourists
Figure 1.20. Hospitality staffs.’
Figure 1.21. Human resource department
Figure 1.22. Functions of HR department
Figure 1.23. Recruitment challenges in the hospitality industry
Figure 1.24. Reason for low employee turnover
Figure 1.25. Resorts using solar panels
Figure 1.26. Importance of social media
Figure 1.27. Well-groomed employees spread positivity
Figure 1.28. Global hotel industry revenue in billions
Figure 1.29. Factors affecting organizational behavior
Figure 1.30. Stages of team development
Figure 1.31. Budgetary control
Figure 1.32. Steps in budgeting
Figure 1.33. Participatory budgeting method
Figure 1.34. Disadvantages of budgeting
Figure 2.1. Definition of purchasing
Figure 2.2. Purchasing – process flow
Figure 2.3. Different methods of purchasing
Figure 2.4. A purchasing manager
Figure 2.5. Duties of the purchasing manager
Figure 2.6. Lack of planning
Figure 2.7. Business giving importance to money
Figure 2.8. Sourcing
Figure 2.9. Bidding process
Figure 2.10. Managing relationships with suppliers
Figure 2.11. Ways to control cost
Figure 2.12. Purchasing laws of Texas
Figure 2.13. Vendor relationship
Figure 2.14. Benefits of using eProcurement system
Figure 2.15. Costing for internal reporting purposes
Figure 2.16. Fixed costs and variable costs
Figure 2.17. Definition of food cost
Figure 2.18. Food cost percentage
Figure 2.19. Factors to check before calculating food cost
Figure 2.20. Principles to be followed to control cost
Figure 2.21. Food wastage in hotels
Figure 2.22. Change recipe according to the budget
xviii
Figure 2.23. Track the inventory
Figure 2.24. A chef picking up an ingredient from the hotel’s garden
Figure 2.25. Vegetables that form part of ‘root to stem’ cooking technique
Figure 2.26. Costing helps in decision-making
Figure 2.27. A sample purchasing software
Figure 3.1. Perishable food items
Figure 3.2. Non-perishable food items
Figure 3.3. Responsible procurement
Figure 3.4. Hazardous chemicals used for cleaning purposes
Figure 3.5. Organic vegetables
Figure 3.6. Image of a bottle cycler
Figure 3.7. Ecolabel
Figure 3.8. Choosing eco-cleaning in hotels
Figure 3.9. Aquanomic washing system
Figure 3.10. Engage employees
Figure 3.11. Job creation for locals
Figure 3.12. Responsible procurement saves environment
Figure 3.13. Selecting right products and services
Figure 4.1. Purchasing
Figure 4.2. Purpose
Figure 4.3. Developing purchasing specifications
Figure 5.1. Determining cost
Figure 5.2. Definition of cost control
Figure 5.3. Fixing selling price
Figure 5.4. Costing helps reduce cost
Figure 5.5. Costing helps in providing data for decision making
Figure 5.6. Objectives of costing in hospitality industry
Figure 5.7. Fixed cost
Figure 5.8. Direct cost
Figure 5.9. Examples of indirect costs
Figure 5.10. Variable costs
Figure 5.11. Mixed costs
xix
Figure 5.12. Opportunity costs
Figure 5.13. Incremental cost example
Figure 5.14. Imputed costs
Figure 5.15. Out-of-pocket cost meaning with example
Figure 5.16. Sunk cost
Figure 5.17. Product cost
Figure 5.18. Period cost
Figure 5.19. Controllable costs
Figure 5.20. Operating cost
Figure 5.21. Standard costing
Figure 5.22. Marginal cost
Figure 5.23. Absorption costing
Figure 5.24. Historical costing
Figure 5.25. Activity-based costing system classification
Figure 6.1. What is a standard drink?
Figure 6.2. Types of glassware
Figure 6.3. On the job training program
Figure 6.4. Give employees ownership
Figure 7.1. Business goals
Figure 7.2. Checklist to evaluate vendors
Figure 7.3. Different purchasing forms
Figure 7.4. Common steps for purchasing
Figure 7.5. Choosing the right supplier
Figure 7.6. Sample purchase order
Figure 7.7. Delivering goods in a truck
Figure 7.8. An officer inspecting goods
Figure 7.9. Invoice paid receipt
Figure 7.10. Filing of invoices
Figure 7.11. Healthy relation with vendor
Figure 7.12. Methods of costing
Figure 7.13. Unit costing
Figure 7.14. Batch costing
xx
Figure 7.15. Contract costing
Figure 7.16. Nature of operating costing
Figure 7.17. Conditions to use process costing
Figure 7.18. Uniform costing
Figure 7.19. Multiple costing
xxi
LIST OF TABLES
Table 3.1. Purchasing specifications kept in hotel kitchens

Table 3.2. Portion control chart
Table 3.3. Calculating purchase amounts
Table 3.4. Purchase order chart
Table 4.1. Example of a scoring system
LIST OF ABBREVIATIONS
COGS cost of goods sold

CRS computerized reservation system
CSR corporate social responsibility
EMS environmental management system
EPP environmentally preferable purchasing
ISO international organization for standardization
JEDEC Joint Electron Device Engineering Council
KDS kitchen display system
KOT kitchen order ticket
KPIs key performance indicators
LCC costing of the life cycle
PO purchase order
POS point of sale
PPQ pre-qualification questionnaire
RFP request for proposal
RPF request for proposal document
SCM supply chain management
WOTC work opportunity tax credit
PREFACE
The book ‘Purchasing and Costing for the Hospitality Industry’ speaks about
the two significant components of the hospitality business, i.e., Purchasing and
Costing. We all know that the hospitality industry is a billion-dollar industry,
which is growing at a rapid speed and which has its existence all over the world.
For the hospitality industry to run smoothly and to remain in this position, there
are many basic operational components that needs to be set right. Two such
operational components are ‘Purchasing’ and ‘Costing.’
Hospitality business in simple terms can be defined as serving customers by
providing them goods and services. The ‘goods and services’ mentioned here
could be anything right from serving a cup of coffee to a delicious meal or it
can be providing a luxurious place for the customers to stay. For the hospitality
industry to satisfy and please the customers, they must be able to provide all the
services seamlessly.
A hospitality business can provide seamless service only if two of its departments
‘Purchasing’ and ‘Costing’ works effectively. This book covers the importance
of these two departments and explains the concept in a simple and easy way to
the readers.
The book starts with the introduction and overview of hospitality industry. The
first chapter explains in detail about the hospitality industry so that readers will
find it easy to relate to the topic in the later chapters. The different sub-sectors
in the hospitality industry and its way of functioning are explained in detail. The
subsequent chapter gives an overview of the role of Purchasing and Costing
department in the hospitality industry.
Purchasing department is important for fulfilling all the requirements of the
organization. Purchasing department is responsible for maintaining the inventory
and have good rapport with suppliers/ vendors. If the Purchasing department
did not function properly, the business may have to lose its customers. Costing
is equally important as that of the purchasing department. Each and every item
in a business is seen as a cost. A business can taste success and see their success
as profit only if they practice proper cost management procedures. Moreover,
there is no budgeting without costing and no managerial decisions can be made
without costing data.
The later chapters in the book focus more on the different functions of the
purchasing and costing departments and their main objectives. The various
methods of costing are also explained in detail. The need for purchasing and
costing in the hospitality industry is also discussed in detail. In addition to
the costing methods, the book also help the readers understand the necessity
of cost control and the different methods to practice cost control in food and
beverage industry and other sectors. A separate chapter talks about the standard
procedures and policies followed by the purchasing and costing department.
Purchasing and Costing are the two very important concepts in the functioning
of hospitality industry. Overall, this book will help the readers in understanding
these two concepts with clear examples. This book is a real treat for people who
wish to see the hospitality industry from an operational point of view.
xxviii
Introduction to Hospitality
Industry 1
“A satisfied customer is the best business strategy of all.”

—Michael LeBoeuf
CONTENTS
1.1. What Is Hospitality Industry?............................................................... 2

1.2. Different Sectors Under Hospitality Industry ....................................... 7
1.3. Role Of Human Resources In The Hospitality Industry ...................... 26
1.4. Management Practices And Organizational Behavior ........................ 32
1.5. Importance Of Budget Planning In Hospitality Industry..................... 44
References ............................................................................................... 52
2 Purchasing and Costing for the Hospitality Industry
Hospitality industry is a billion-dollar industry and it is also a service-

oriented industry. Each and every business in this world will definitely
have a link towards the hospitality industry. The hospitality industry is a
vast industry; it comprises of several other industries and the hospitality
industry must exist for the other industries to survive. This chapter will
talk about hospitality industry in a way that the readers will understand
the very basis of the industry. Focus is also given on different sectors of
the hospitality industry and the different mechanisms and practices used
by the hospitality industry for it to prosper.
1.1. WHAT IS HOSPITALITY INDUSTRY?

The Hospitality Industry is an industry that most of us can relate to because
even an ordinary man will have some knowledge about this industry when
compared to all other industries in the world. Whenever someone says
hospitality industry, the image that comes first to our mind is hotels and
transport; but hospitality industry does not stop with hotels and travel, there
is more to it.
The Oxford English dictionary explains hospitality in a precise way.
The term ‘hospitality’ was coined from the word ‘hospice,’ which means
a ‘house of rest’ for pilgrims and travelers. During early days, hospice used
to denote a ‘nursing home’ and now we can clearly see from where does the
word ‘hospital’ originated.
It is also said that the term ‘hospitality’ is derived from the Latin word
‘hospes’ which meant both visitor and stranger. The term hospitality was
in existence from historical times. The concept and idea of hospitality has
never changed since the inception of the word. Hospitality means welcoming
visitors, strangers or guests with kindness and offering them with food,
drink, a place to stay and all sorts of amenities so that they feel comfortable.
Hospitality mainly talks about the relationship between the guest and the
host and the way by which the guests are treated (Figure 1.1).
Introduction to Hospitality Industry 3
Figure 1.1: Hospitality industry – definition.

Source: https://www.slideshare.net/guptaank143/overview-ofhospitalityin-
dustry-37865695.
During the ancient period, traveling was not much of a normal activity.
People who traveled for different purposes found it difficult when they
reached some foreign land. They used to make tents for their camps as it
used to be the only means of shelter.
Figure 1.2: Image of the old VanDemark Tavern in Junius.

Source: http://stagecoachdays.blogspot.com/2011/10/old-vandemark-tav-
ern-in-junius.html.
Sometimes when camping was difficult due to bad weather or other
reasons, the kindness of the local people saved the travelers. Slowly, people
started to understand the need and importance of an accommodation for
travelers. Formation of inns and taverns started serving the purpose. When
the trade routes throughout Europe became active and when the age of
pilgrimage evolved, inns, and taverns acted as the hospitality service
providers since they offered cheap rooms for the travelers who came tired
and worn out. Along with all the other services, they catered to the need of
the travelers also (Figure 1.2).
In Europe, until 18th Century, hotels were not building with the sole
intention of serving the travelers alone. The emergence of technology paved
way for newer and fastest modes of transport which made people to look at
long distance travel with interest. When cities started developing, people
from rural areas started moving towards cities and this helped in the opening
of many hotels and accommodation places. This was the start of hospitality
industry and the industry never stopped to grow after that (Figure 1.3).
Figure 1.3: Hospitality industry, meaning.

Source: https://www.slideshare.net/techno-func/techno-func-hospitality-
overview.
The hospitality industry is not a single industry. It is a group of businesses

with the only aim being ‘serving the customers.’ The hospitality industry
can be explained with an example. Let us take the example of a person
going on a vacation. The person going on a vacation will use some mode
of transport to travel; on reaching the destination he will need someplace
to stay and refresh; he needs something to eat; he needs something for
entertainment. All these requirements of the person going on tour come
under hospitality business. Any business or company with strong customer
focus falls into hospitality sector and so this industry is the most wide-spread
in the world. The hospitality industry focuses mainly on customers. The

hospitality industry refers to the businesses and organizations that cater to
the different needs of a person such as food, beverages, accommodation, and
other facilities when they are away from their homes. Right from the time
of welcoming the guest, the hospitality professionals involve themselves
in making the guest happy and comfortable. The hospitality industry is one
of the largest industries in the world employing millions of people across
various sub-sectors. The hospitality industry depends upon discretionary
income and free time. People who opt for vacation will have additional
income to spend as well as free time.
1.1.1. Principles of Hospitality Industry

The main as well as very important principle of hospitality industry is
customer satisfaction. The hospitality industry solely relies on customers
and customer satisfaction. This business normally provides luxury services
and mostly target high-class people. If people do not have extra money to
spend on, then these services will not exist. Whatever the service is, the
industry always aims to provide excellent service (Figure 1.4).
Figure 1.4: Customer satisfaction – main principle of hospitality industry.

Source: https://www.channelfutures.com/best-practices/5-effective-custom-
er-satisfaction-survey-methods.
Only when they receive warm reception and best service, customers
would favor the business by returning to them. A bad service leads to loss of
a customer. Customers remain loyal if they are provided with best service.
Brand name is very important in a hospitality business. Hence, the hospitality
business always does their best to attract customers and retain them.
The hospitality industry is a very unique industry. There are many
elements in this industry that distinguish it from all the other industries. This
is an industry that has the ability to reach out to broad range of customers.
Although hospitality is meant to denote service and luxury, this industry
never misses to make every customer happy. The employees working in this
industry also ensure that they go to any extent and take hardships to give
flawless service to customers.
1.1.2. Global Presence

The hospitality industry is one industry that has its presence felt all over
the world. Even during times of economic slowdown, when all other
industries struggled to survive, hospitality industry fled the storm showing
its resilience. The hotel sector that witnessed a downfall bounced back and
it has been steadily increasing from its fall during year 2009.
Tourism, which is another important sector of the hospitality industry
did not face much of an impact and is normally on top of other industries.
The travel and tourism industry is set to hold almost 9% of the global GDP
and it is also one of the top employers. Travelers and tourists are constantly
on the increase for the past two decades. The number of international tourists
departing has doubled from around 600 million to over 1.4 billion in year
2016 (Figure 1.5).
Figure 1.5: International tourist arrivals, 1950–2030.

Source: https://twitter.com/UNWTO.
The hospitality sector has spread across the world. Restaurants, hotels,
and amusement parks are growing in vast numbers in every corner of the
world. The hospitality industry has many sectors under its umbrella and we
are going to see them in detail in the below section.
1.2. DIFFERENT SECTORS UNDER HOSPITALITY IN-

DUSTRY
The hospitality industry is a billion-dollar industry. But most of them
think that hospitality industry means hotel industry; few others think that
hospitality industry denotes travel and tourism industry. Actually all these
assumptions are partially right and partially wrong because hospitality
industry is complex and it covers a wide range of businesses.
The hospitality industry can be widely categorized under four sectors.
They are represented in Figure 1.6:
Figure 1.6: Different sectors of the hospitality industry.

The hospitality industry includes everything within the service industry
such as restaurants, theme parks, transportation, event planning, gaming,
cruise travel, lodging, etc., and it provides different jobs at different locations,
does various activities under various economic brackets. Each category
under the hospitality umbrella further contains many sub-divisions. Figure
1.7 will give us an idea of the hospitality world.
Figure 1.7: The hospitality industry – full picture.

Source: https://www.soegjobs.com/2016/09/07/different-sectors-hospitali-
ty-industry/.
Let us now understand more about each sector of the hospitality industry:
1.2.1. Accommodation
Accommodation is often referred to as ‘lodging’ and this means a place
to rest, a place to make ourselves comfortable and a place to sleep for
one or more than one night. Under the umbrella of hospitality industries,
accommodation forms a broader sector.
A place of accommodation can be anything from a big restaurant, a
five-star hotel, a hostel, a campground or a highway motel. The place of
accommodation must refresh a person’s body and mind for their future
activities. People have different mindset when they enter a hotel or restaurant
for accommodation purpose and so business owners must look into all these
aspects when they provide such services. A great place of accommodation
should possess high-class infrastructure and world-class amenities (Figure
1.8).
Figure 1.8: Types of accommodation.

Source: http://englishpower.jp/moodle/mod/forum/discuss.php?d=1385.
Customer service is very important in accommodation services. When

people pay fat prices for accommodation it means that they are very
particular on their privacy and the exclusive services. Lodging experience
is given much significance these days. Accommodation places can vary
from campgrounds to luxurious resorts, but if the industry needs to survive,
then it has to provide excellent customer service, great comfort and high-
class amenities. Basic functionalities are very important for any hospitality
industry to thrive. As people travel a lot today, they need places for
accommodation in order to continue on their business or personal purpose.
Different types of accommodation facilities are available that suits the
needs of different class of people. There is much different type of travelers.
Some travel for business purpose, some travel for leisure, some are long-
stay travelers, some are budget travelers, and there are also some special
travelers like people working with the government, airlines, and military.
The three main types of hotel and accommodation services are explained
below (Figure 1.9):
Figure 1.9: Important types of accommodation.
1.2.1.1. Lodging
Lodges are the basic place for accommodation for people who travel from
one place to another. What these travelers need is a place to sleep and a
shelter that will keep them safe from any natural calamities. Lodges provide
these facilities to travelers. Hence, people who need basic facilities for their
stay book lodges in advance or in person (Figure 1.10).
Figure 1.10: Image of lodges.

Source: http://himalayanecolodges.com/.
1.2.1.2. Resorts
Resorts are the sophisticated type of accommodation that gained popularity
even among the middle-class people. Resorts are chosen by people because
it brings them close to nature. Apart from making guests feel comfortable,
the resorts give them a break from their busy lives. We can find that resorts
are not only used by travelers but people from nearby places to book resorts
to experience a different lifestyle and to live in harmony with nature at least
for a few days away from home (Figure 1.11).
Figure 1.11: Earth Resort in Wayanad, India.

Source: https://www.thrillophilia.com/resorts-in-wayanad.
1.2.1.3. Suites
Apart from the normal rooms, branded hotels provide luxury suites also
for the guests. Suites are very much expensive compared to all other rooms
provided by a hotel. Normally suites are often used by celebrities, royal
high-class people, politicians, businessmen and very rich people. Suites are
preferred by guests when their stay is formal or official (Figure 1.12).
In the United States alone, there are more than 60,000 lodging
establishments which cover small boutique hotels and reputed international
resorts as well. According to the reports shared by The American Hotel and
Lodging Association, the lodging industry saw $163 billion in sales in the
year 2013 which is a $7.6 billion increase from that of the year 2012.
Accommodation sector alone cannot bring success to the hospitality
industry. It easily collaborates with the other three sectors of the hospitality
industry because when people travel, accommodation is a must; food and
beverages must be available at the place of stay; travel and tourism industry
cannot survive without accommodation and food. When everything is in
place, people will enjoy themselves and look for recreation services. Thus,
every sector under the hospitality industry is connected with each other.
Figure 1.12: Emerald Suites.

Source: http://www.emerald-villas.gr/emerald-suites.html.
1.2.2. Food and Beverage

Food and beverage industry, also known as the food service industry is
another crucial sector under the hospitality industry. It is also one of the
largest sectors of the hospitality services and is formally known as the F&B
industry. This industry provides food and beverages to customers. The F&B
industry consists of all establishments that are involved in preparing meals,
beverages, and snacks for customers to consume at the shop or consume it
later at their desired location.
The food service industry is part of any business that prepares and
serves meals, snacks or beverages. The industry’s largest segment includes
restaurants that serve full menus and offer table service. Limited-menu,
or fast food, outlets are the second largest segment. Although large fast-
food chains throughout the U.S. are a familiar sight, more than seven out
of ten eating and drinking places are independent single-unit operations.
Other food service industry segments include cafeterias for schools and
employees, catering businesses, hotel restaurants, and sports events and
concerts vendors.
Food and beverage industry is such a wide business that it has many
sub-divisions. From a local petty shop in the street that serves beverages
to a high-end classy restaurant, everything is part of food and beverage
industry. Food and beverage industry also works as part of other businesses.
For example, food courts in movie theatres, beverage, and snack counter at
sport stadiums or grounds, etc.
People love food; tasting local cuisines is part of everyone’s travel
agenda. Everyone loves to keep their taste buds engaged with good food.
Overall, food industry is the most essential of all the hospitality industries.
The different sectors of the food and beverage industry can be categorized
as below (Figure 1.13):
Figure 1.13: Sectors of the food-service industry.

Source: https://www.soegjobs.com/2016/09/07/different-sectors-hospitali-
ty-industry/.
Let us discuss more about the sub-divisions of food service industry.
1.2.2.1. Quick-Serve Centers/Fast food Centers

These are commercial food centers which are also known as fast-food
centers. These centers are established targeting the section of people who
cannot wait for long hours to get their food from hotels. Most of these people
want their snack, meal or drinks quickly since they’ll be on the run for their
work or to catch a bus or train. The big advantage as seen by these fast food
centers is that they need only a fewer employees since most of the fast food
centers follow self-service mechanism. Some big brands which follow this
system are McDonalds, KFC, Pizza Hut, Subway, and Burger King (Figure
1.14).
Figure 1.14: A Fast Food Center in Portland, Oregon.

Source: https://www.cnbc.com/2016/04/29/how-the-fast-casual-boom-is-
changing-the-restaurant-real-estate-game.html.
1.2.2.2. Restaurants
These are the typical restaurants that serve full-course meals, drinks, desserts,
and other special dishes to customers. In restaurants, customers are usually
seated, their food orders are taken and food is delivered to them by waiters on
their request. There are many different types of full-time restaurants; people
who love to sit and have their meal in a relaxed manner choose restaurants.
There are fine dining restaurants, casual dining restaurants and also themed
restaurants which attract more customers. Themed restaurants have grown
into multiple folds like the wave of luxury underwater restaurants of the
world (Figure 1.15).
Figure 1.15: Image of a themed restaurant.

Source: http://midway1942.org/t-rex-birthday-decorations/t-rex-cafe/.
Due to the owing popularity of these restaurants, many professionals of

this industry consider restaurants as a separate category of the hospitality
sector.
1.2.2.3. Catering Services

The work of catering business is to provide food and beverages to special
occasions such as wedding, birthday, baby showers, and conferences, etc.,
The Catering services are considered to be much cheaper because customers
get to select the menu and they can also order the number of plates
beforehand. The catering services are more reliable because the caterers
come to the place of the function and prepare food to the customers; there
are also caterers who prepare food at their centers and just deliver and serve
them at the customer preferred locations. The job of catering services starts
from food production to the stage where food is served in front of the guests
(Figure 1.16).
Figure 1.16: Food catering services.

Source: https://dohalife.com/shaqab-abela-catering-service-review/.
Food management is very important in the food and beverage industry.

The process of food management starts with the production of food. Storing
food and transportation comes next. There are many hotels and restaurants
that serve naturally organic food. Presentation of food plays a very important
role in the food and beverage industry because even if the food is delicious
and if it is not presented in a pleasing manner then people will not like it.
Fifty percent of all the meals eaten in the US today are coming out of
the F&B industry.
1.2.2.4. Trends in Hotel Industry

Hotel chains dominated the industry in the first five years of the twentieth
century. Nearly 70% of the hotel market share in the United States was
controlled by chains in 2000, while less than 40% of all hotels were owned
and operated independently. Nearly 55% of all hotels were independent in
1990 just 10 years earlier. Hotel chains have flourished because a reliable
and predictable visit is offered to consumers. Similar facilities and services
are available in each hotel in a chain. Many are adding services such as
pizzerias or Starbucks coffee shops from nationally known franchises. This
similarity makes them popular because if they stayed in another hotel or
motel in the same chain, travelers who go to an unfamiliar city know what
to expect.
Due to an excessive supply of hotel rooms, the hotel industry is facing

fierce competition. In the early 1990s, a construction boom was followed by
a decline in traveler numbers. Hotel occupancy fell from a high of 72% in
1979 to just 59.2% in 2003, leaving more than one-third of all hotel rooms
empty every night. This oversupply resulted in increased segmentation of
the market. Instead of running huge 500-room hotels to suit every traveler’s
needs, many hotels today target a market segment such as business or budget
travelers.
Some innovative designs of hotels have also successfully captured
markets. The all-suite hotel was a popular trend. A living area and a separate
bedroom are provided in each unit in an all-suite hotel. Some offer a cooking
area as well. Another development is the eco-hotel, which highlights features
such as low-flush toilets, toilet refillable containers and recycled stationery.
An all-inclusive package is one of the most popular promotions in resort
locations, offering travelers not only accommodation, but all meals, drinks,
and entertainment at one price.
Global economic growth has also had an impact on the hotel industry.
Many U.S.-based hotel chains have grown overseas. The hotel industry
at home made a slow recovery from 9/11 but was still coping with the
recession’s effects through the new century’s first decade.
The typical U.S. hotel achieved an estimated 13.3% increase in annual
profits in 2004, according to a March 2005 report in the Fairfield County
Business Journal. In addition, increased confidence in airport security,
decreased fear of a terrorist attack, and a weak U.S. dollar resulted in
increased foreign travel to the U.S. International spending in America rose
for the first time since 9/11 in the first half of 2004.
The United States in 2004 Department of Commerce estimated that
U.S. economic activity accounted for over $71 billion in foreign tourism—a
figure larger than U.S. automotive, engine, and parts exports profits. With
that much at stake, it is little surprise that President George W. Bush has
approved an ad campaign of $50 million for tourists in England, Japan,
Germany, Canada, and Mexico.
Hotels welcome foreign travelers by serving international cuisine in
their restaurants and by providing multi-language room directories and
menus. Some hotels now employ multilingual concierges to help guests
book, arrange tours and answer regional questions.
This trend increases the demand for workers who speak multiple
languages and have different cultures experience. For its Spanish-speaking
employees, Wyndham Hotels announced in April 2005 that it would

implement an English language education program.
1.2.3. Travel and Tourism

The Travel and tourism industry is the large sector of the hospitality industry.
Many of them confuse travel and tourism industry with the hospitality
industry but it is not true; travel and tourism industry is a different sector
under the hospitality industry. But it is considered to be the backbone of the
hospitality industry. This industry helps in moving people from one place to
another.
The industry of travel and tourism is massive. People love to travel in
between for entertainment, relaxation, business, and many other reasons.
Some travelers are looking for peace and quiet, while others are looking for
their next rush of adrenaline. Whatever the reason, there is a demand for
travel and tourism, hospitality, and destination companies have a potential
target market for the whole world (Figure 1.17).
Figure 1.17: What is travel and tourism?

Source: https://www.youtube.com/watch?v=xVRb9EU-bkE.
People across the world travel for many reasons. The various reasons for
traveling include business, vacation, education, entertainment, conferences,
meetings, holidays, etc., there is no limitation in reason for anyone to travel.
The travel and tourism sector is the main reason for the hospitality industry
to grow. The means of travel includes buses, cabs, taxis, trains, airlines,
cruise ships, boats, etc., the travel and tourism industry is growing every day
with new inventions, technological advancements, and different strategies.
The travel agencies, tour operators, cruise companies are all part of the
hospitality industry because their contribution to the travel and tourism

industry is immense (Figure 1.18).
Figure 1.18: Modes of transport.

Source: https://www.slideserve.com/Ava/standard-4-objective-1.
Travel and tourism encourages people to travel because whenever people

travel, may it be for leisure or business, they spend on hospitality. Customer
focus is very important for any industry and travel and tourism sector is
no exception to it. Relationship management and marketing skills are very
important for the smooth running and growth of travel and tourism industry.
The travel and tourism industry provides millions of job opportunities.
According to SelectUSA, a resource of the federal government, the travel
and tourism industry in U.S provided employment for more than 7.8 million
people in year 2012, with accommodations and food services segments
combined accounting for 35% of the total travel and tourism industry’s sales.
The travel and tourism industry is one of the largest industries in the
world with a direct, indirect, and induced global economic contribution of
over $7.6 trillion in 2016. The industry’s direct economic impact, including
accommodation, transportation, entertainment, and attractions, that year
was about $2.3 trillion. A number of countries are consistently popular
tourism destinations, such as France and the United States, but other, less
well-known countries are rapidly emerging to reap the industry’s economic
benefits.
Nearly every year, the tourism industry has experienced steady growth
worldwide. From 528 million in 2005, international tourist arrivals increased
to 1.19 billion in 2015. By 2030, figures were projected to exceed 1.8 billion.
Every year, the most international tourist arrivals are received by Europe. It
also produces the most travelers: the region had more than double that of the
second largest tourist origin, the Asia Pacific region, with about 607 million
outbound tourists in 2015.
Global revenue from international tourism reached about $1.26 trillion
in 2015, almost doubling since 2005. That year, followed by the United
States and Germany, China had the largest international expenditure on
tourism. Dubai, where tourists spent more than $31.3 billion in 2016, was
the leading city in international visitor spending.
1.2.4. Hospitality and Recreation

Recreation refers to any activity that people do for relaxation and enjoyment
purpose. Recreation industry or the entertainment industry is also a part of
the hospitality industry and it depends on customers who have disposable
income to spend on entertainment. The ultimate aim of recreation industry
is to refresh a person’s body and mind. Today entertainment has mixed up
with each and everything in our life. Recreation or entertainment is a main
element of tourism industry. After all traveling is fun and travel without
entertainment is futile. What makes hospitality industry special is the
presence of entertainment in it. Entertainment is a significant part of our
travel these days. If our traveling experience lacks fun and entertainment
then we might not be able to enjoy our time up to the fullest. Any business
that provides enjoyment for people is said to be in recreation business.
The travel and tourism industry has a global scope due to its very
nature. However, travel destinations and holiday activities were changing
by the beginning of the twenty-first century. Perhaps the hottest trend in
travel is the rise of “ecotourism.” According to the Quebec Declaration on
Ecotourism, ecotourism “includes local and indigenous communities in its
planning, interprets the visitor’s destination’s natural and cultural heritage,
and lends itself to independent travelers better.”
Not so long ago, many of the now popular ecotourism destinations were
either unknown or inaccessible to the outside world. Places such as the
Amazon rain forest, African savannas, and the mountains of the Himalayas
and the Andes were simply out of reach for most people. But many countries
are now promoting their remote environmental treasures to seek out
something out of the ordinary for travelers. Tour operators are developing
special packages for eco-friendly travelers and local groups are organizing
tourism associations that attract tourists to out-of-the-way locations. Another

growing trend is archeological tourism. Ancient sites in destinations like
Egypt, Israel, and various other places in the Middle East attract visitors
who had little knowledge of that region of the world just a short time ago. In
2005, New York City’s Archeological Tours offered packages that allowed
travelers to explore China’s ancient Silk Road, Southern Italy’s Byzantine
monuments, and legendary Easter Island statues. Archeologists or university
professors led most of the tours.
The development of ecotourism and archeological tourism coincided
with the growing number of foreign tourists traveling to the United States.
In Asia and Latin America, a growing middle class has come along with a
global economy. According to a 2004 online article by the Travel Industry
Association of America, the outbound travel market in Latin America has
grown nearly 33% since the mid-1990s. Many of these newly prosperous
travelers will eventually make their way to the U.S.
Another travel trend is rooted in the history of America as an immigrant
country. Many Americans have started searching for relatives or ancestors
at home as well as abroad in recent years. As distant parts of the world
grow closer together, travelers are finding more opportunities in Europe,
Asia, Africa, and Central and South America for what has come to be called
“heritage travel” (Figure 1.19).
Figure 1.19: Recreational events for tourists.

Source: https://www.smdp.com/tourism-talks-hospitality-industry-events-
up-the-cool-factor-in-santa-monica-this-summer/167628.
Some of the recreation spots and activities in a hospitality industry:

• Today people prefer to party on a private yacht. They can sing,
dance, play, and enjoy the day as if there is no tomorrow.
• Nightclubs are getting more and more popular because of the
change in lifestyle. The stress in work and mechanical life pushes
people to enjoy their weekends with drinks at nightclubs and
pubs.
• Bars are similar to nightclubs where people hangout alone or
in groups to spend time. Sometimes bars also organize special
events like new year party for people to socialize.
• The basic entertaining factors that most of the people look for
when they are outside are sports and games. Casinos, swimming
pools, golf clubs, etc., are some of the most liked entertainment
attractions.
Movie theatres, parks, museums, zoos – everything comes as part of
recreation business. The increase in the number of entertainment activities
will increase the growth of hospitality industry.
1.2.4.1. Employment Outlook

The hospitality and recreation industry’s health and coinciding job prospects
are greatly affected by fluctuations in the U.S. economy. Consumers have
less income for travel and leisure pursuits during a recession like the one
that started in 2000 and are usually more cautious about spending money on
non-essential items. It is also less likely that they will contribute money to
support historic sites, museums, and zoos.
As less money is spent on hospitality and recreation, fewer workers are
hired and there is a decrease in the number of jobs available. The beginning
of the twenty-first century characterized this scenario. On the other hand,
people have more discretionary income (extra money) during strong
economic times, and the hospitality and recreation industries generally
thrive. The employment outlook for the field therefore becomes favorable.
Changing demographics and lifestyles in hospitality and recreation
also have a major impact on employment. As the United States entered the
twenty-first century, about 25% of the population was over fifty-five years of
age. This growing segment of the market has the money and time to travel
and pursue recreational activities. For this reason, many analysts predict
strong growth in recreational travel designed to attract retirees; this in turn
will stimulate growth in employment in the field.
Technology and training in the hospitality and recreation industries will
be vital for workers. New technology, as in all fields, will help people to
work more effectively. Training programs can help employees keep pace
with new trends and changing needs.
Despite ongoing economic problems and the aftermath of the tragedy
of 9/11, there are still opportunities for employment in hospitality and
recreation. Candidates committed to customer service principles—those
who show patience, knowledge, enthusiasm, and a willingness to go the
extra mile for a customer—are in the best position to enter, succeed, and
move forward in this field.
All these sectors of hospitality industry are connected to each other and
help each other’s progress. As the hospitality sector is so vast with many
sub-categories, the employment opportunities provided by this industry
is enormous. There are many job opportunities in the hospitality industry
that caters to different skill sets of people such as maintenance workers,
housekeepers, kitchen workers, chefs, bartenders, marketing executives,
management staffs, salespersons, managers, HR personnel, financial
analysts, etc., Whenever a financial crisis occurs, people forbid themselves
from spending on hotels, travel or entertainment. But they resume to normal
spending when the economy picks up.
The hospitality industry which is inclusive of all these businesses has a
great effect on the economy of a nation. The multi-billion dollar hospitality
industry is the main source of revenue generator in most of the countries.
1.2.4.2. Recreational Activities

Recreation is a leisure activity, leisure is a discretionary time. The “need to
do something for recreation” is an essential component of human biology
and psychology. Recreational activities are often done for pleasure, fun or
pleasure and are considered “fun.”
Tourism, recreation, and leisure are concepts that overlap and the
definition of terms is difficult. But all of them have certain criteria. Leisure
includes discretionary time, leisure is a leisure time activity, and tourism is
a temporary visit.
It is evident that recreation, people’s physical and intellectual rejuvenation

is one of tourism’s main goals. Increased consumer purchasing power has
made recreational tourism a mass phenomenon due to peoples ‘financial
wealth, paid holidays from work, transport, and production development.
Its driving force–to relieve civilizational stress–is active recreation, well-
being creation, restoring one’s ability to work, preserving, and improving
one’s health. It included a variety of tourism activities from getting to know
distant and exotic places or enjoying seaside holidays and taking part in
cultural programs and various forms of enjoyment.
It is important for sport tourists today to spend quality time during travel.
The main objectives of recreational tourism include active participation in
some kind of recreational activity, or taking part as a spectator in a sport
or cultural event (going to the theater play). In the tourism framework,
intellectual recreational activities are also carried out. It is possible to take
cultural tourism as a good example. Examples can be the visit of castles, folk
art museums, and religious tourism. From this point of view, gastronomy is
also important (Wine degustation, Gáldi, 2011). Tourist recreation primarily
involves recreational activities carried out by travelers. They can use these
opportunities for recreation.
Based on research by the Outdoor Foundation, these are the most popular
recreational activities For First Time Participants.
1.2.4.3. Skiing
Also known as downhill skiing, in 1861 in Kiandra, Australia, Alpine skiing
began as a club sport. Most alpine skiing is currently taking place in ski
resorts with ski lifts carrying skiers up the mountain.
1.2.4.4. Snowboarding
Snowboarding was developed in the 1960s and became part of the Olympics
in 1998, an American born sport that is gaining worldwide attention.
Snowboarding, like any other extreme sport, presents injury risks (especially
for new participants), in fact, while snowboarding; you are twice as likely to
get injured as Alpine skiing.
1.2.4.5. Snorkeling
Snorkeling is for you if you want to check out an underwater world without
the mess of complicated equipment and tanks. Not only is it easier than
scuba diving, but it’s also cheaper because you don’t need a license or
permission to dive.
1.2.4.6. Scuba Diving

With the chance to experience a rare and amazing encounter with a world
beyond the norm, it’s not surprising why so many people try scuba diving.
Just be careful as scuba diving can become a bit expensive and certification
for solo divers is required.
1.2.4.7. White Water Rafting

White water rafting appeals to veterans and novices alike with six grades of
intensity. With that said, be sure to stick to the lower grades if you want to
try rafting for the first time as white water rafting can be dangerous.
1.2.4.8. Kayaking
Kayaking in the sea will enable you to enjoy an active lifestyle as you glide
through open waters. Getting into and mostly safe is a relatively easy sport.
1.2.4.9. Climbing
The hazard factor with this one should be obvious. However, climbing
appeals too many participants for the first time and many more find it to be
a great outdoor activity.
1.2.4.10. Surfing
Surfing is definitely a challenging sport that requires some skill development.
However, this dynamic sport is being tried by many people.
1.2.4.11. Adventure Racing

You just never know what you’re going to do with racing for adventure. As
the name suggests, swimming, running, climbing, kayaking, etc. can be the
‘adventure. ‘There is usually no time limit and some races may last days as
well.
1.2.4.12. Salt Water Fishing

As the title suggests, saltwater fishing takes place at sea, allowing fishermen
to catch large and exotic fish like the Marlin. The big drawback to this
activity is that you must have access to a boat (whether owning it, knowing
someone who does it, or renting it), and your own special gear that can
handle big catches.
1.2.4.13. Bird Watching

With approximately 10,000 bird species and only a handful of people
claiming to have seen more than 7,000 of them, bird watching has become a
popular recreational activity. Bird watching is believed to be an expression
of the male hunting instinct while others connect it to the male “systemizing”
tendency. Watching birds is a great, safe way to enjoy nature anyway.
1.3. ROLE OF HUMAN RESOURCES IN THE HOSPI-

TALITY INDUSTRY
The significant reason for the success and growth of hospitality industry
is that it depends mainly on human interactions. Customers are the assets
for this industry and maintaining a cordial relationship with them is what
it needs to run this industry. This part is taken care of by the talented and
skilled employees working in the hospitality industry. Managing the human
resource and effective hospitality management is the secret for the success of
hospitality business. Be it the food and beverage industry, accommodation
sector, entertainment sector or the travel and tourism industry – the most
important department in all of these industries is the human resource
department (Figure 1.20).
Figure 1.20: Hospitality staffs.’

Source: https://study.com/academy/lesson/hospitality-industry-customer-
service-guest-satisfaction.html.
The difference between a successfully running restaurant and an average

running restaurant will mostly be on how the human resource is managed in
both these restaurants. The human resource department and the HR managers
play such a vital role in the effective functioning of the business. Employees
are the eyes of any organization. So, finding the perfect employees is the
biggest challenge to every business. Even for the hospitality industry,
problems related to employees are said to be the most critical problem.
All these reports suggest that improper wages, long hours, stretched shifts,
no compensation for working on weekends, less flexibility, less importance
for employee welfare, etc., are all reasons for employees dissatisfaction and
this makes them to move out of hospitality industry. Unlike other industries,
the customers are in direct contact with the hospitality staffs and this makes it
more important for the employees to be polite and pleasing to the customers.
Unsatisfied and unhappy employees will not please the customers. If the
hospitality industry staff’s grievances are addressed, then the most important
challenge faced by the hospitality industry will be cleared. This biggest
responsibility lies in the hands of the human resource department.
In this section, we are going to learn the roles and responsibilities of the
human resource department and the key areas that need attention in order to
attract talented workforce to the hospitality industry.
1.3.1. Responsibilities of Human Resource Department

The hospitality industry is totally a people business with great focus to
customer satisfaction and quality service. Providing these effectively lies
in the hands of the hospitality staffs. The hospitality staffs are responsible
for achieving the objectives of the industry. Right from the quality of the
service delivered to the attitude of the staffs towards customers, everything
counts. So, these employees play a big part in the success of the hospitality
business. And, recruiting the right employees is the responsibility of the
human resource department. If the qualities of the staffs are not good, then
the customer satisfaction will take a real hit. In order to meet the demands
of the customers, it is essential that the human resource department not only
recruits employees with skills but also with right attitude (Figure 1.21).
Figure 1.21: Human resource department.

Source: https://www.bngkolkata.com/web/human-resources-department/.
Employees represent the brand of the hospitality business that they
work with. It is their performance that makes the business stand apart from
the competitors. So, the HR department must focus more on recruiting the
right talent, develop their potential by means of providing training and
try to retain employees whom they think as competent, accountable, and
passionate about their work. Employees must be motivated and their skills
must be sharpened at constant intervals (Figure 1.22).
Figure 1.22: Functions of HR department.

Source: https://www.slideshare.net/guestc5daed/creating-new-hr-depart-
ment.
All these tasks rest with the human resource department. In order to
provide a quality service to the customers, three things must be adhered –
development of employees, tracking, and rewarding their performance and
tuning them as committed employees. People who are heading the human
resource department must be an expert in labor laws and must advise and
guide other managers. The human resource department must have effective
communication channels with other departments of the business.
The human resource department is responsible for recruiting employees,
planning, and managing their benefits, administration, and providing
training. Although the human resource department is responsible for all these
activities, taking the final decision of whom to hire, arriving at the training
requirement for the employees and recommending for promotions, etc., lies
with the particular department head under which the employee is working.
So, the effective functioning of the human resource department can be
measured by the ability of the human resource managers to perfectly interact
with the managers of other departments and understand their requirements.
1.3.2. Recruitment
There are certain problems that are found globally in most of the organizations
and one such problem is recruiting the right talent. Due to this, there are
shortages in employees in many hospitality businesses. Only highly skilled
recruiters are capable of finding out quality housekeepers, hotel staffs,
chefs, bartenders, waiters, etc.; also an efficient HR team will conduct
background checks on candidates before placing them in the workplace.
This will help hotels or restaurants not to employee candidates with criminal
background so that theft of food, wine, and kitchen equipments can be
avoided. Moreover, the reputation of the organization can be saved. There
is also another way to rectify shortages and hire skilled labor. According to
the ISHC, HR recruiters have the option to hire guest workers for seasonal
employment (Figure 1.23).
Figure 1.23: Recruitment challenges in the hospitality industry.

Source: https://www.talentlyft.com/en/blog/article/200/hospitality-recruit-
ment-how-to-recruit-professionals-in-hospitality.
1.3.3. Retaining Employees

Retaining employees is a big challenge faced by the hospitality industry. The
Human Resource department works on introducing new initiatives often in
order to make employees remain in the organization. This includes providing
incentives, employee recognition programs, and awards, discounts on
certain goods and services, etc., In order to make employees feel confident
about their hospitality job choice as a better career option, they must be
given professional development programs, says ISHC. We have seen that
the hospitality industry has given to the world many world-renowned
chefs, travel guides, great entrepreneurs, and so on. Highlighting them and
showcasing their popularity and success will motivate the employees to
remain in the hospitality industry and achieve success (Figure 1.24).
Figure 1.24: Reason for low employee turnover.

Source: https://www.softwareadvice.com/resources/what-to-do-about-your-
restaurant-turnover-rate/.
1.3.4. Benefits and Compensation Management

The Human Resource department is responsible for setting the wages and
salaries for employees based on the existing market rates. The HR department
makes sure that the hospitality staffs has different benefits such as overtime
benefits, discounts on food, accommodation, travel for them as well as their
families. The main benefit that most of the hospitality staffs enjoy is the tips
that they get from the customers. The payroll knowledge of HR team helps
the employers handle tips as required under the federal tax code. According
to the ISHC, offering workers shared cash bonuses for raising productivity
has been successful in this labor-intensive industry.
1.3.5. Nature of Labor

Most of the hospitality workers are all members of certain unions. These
unions help employees in negotiating their benefits or any other grievances
with their employers. The Human Resource department must ensure that the
company’s policies, rules, and regulations must comply with the National
Labor Relations Act. This act rules out the option of employers from stopping
workers from joining unions or taking part in union activities while not in
duty. The HR plays an important role in the union negotiations and they act
as intermediaries between the union leaders and the company management
while negotiating on pay, benefits, working hours and working conditions.
1.3.6. Accountability
Every hospitality business must comply with the state and federal employment
laws and the HR department is accountable for monitoring this. The Human
Resource managers must ensure that the business meet Occupational Safety
and Health Administration standards. Safety measures must be followed in
hotels, restaurants, and other hospitality establishments. The businesses that
are non-compliant to these laws are at the risk of facing fines, penalties or
lawsuits. Even inside the organization, the HR is responsible for supervising
whether employees are abiding by the company’s policies. Any behavioral
misconduct, sexual misconduct or not abiding the laws will face severe
consequences. The HR has the right to investigate the matter and recommend
disciplinary action or dismissal, if necessary.
The HR follows Zero-tolerance policy on discrimination and harassment
and they also help managers and employees understand their rights and
obligations under the law. The role of HR is very significant for every business;
the effectiveness of HR can be felt in many areas. The HR operations are the
foundation for any hospitality business to acquire competitive advantage.
1.4. MANAGEMENT PRACTICES AND ORGANIZA-

TIONAL BEHAVIOR
The hospitality industry is already an evolved industry and is still on the path
of progression. The future success of the hospitality industry is guaranteed
only from the different management practices and the organizational
behavior that the industry will continue to follow.
1.4.1. Management Practices

The trend of every business is changing as per the change in lifestyle of
people and the change in customer requirements. The main focus of every
business today is increasing employee productivity, improving the service and
retaining the brand quality. In order to achieve this, the hospitality industry
uses traditional theoretical management methods as well as following the
best practices used in the industry by other competitors. Every management
looks for the common best practices used in the industry in order to take their
business to the top level. Let us look at some of the management practices
that are adopted from the best practices across the industry:
1.4.1.1. Going Green

Hospitality industry is such a vast industry which has its presence all over
the world. Such a big industry must take up some initiatives and show to
the world how responsible they are to the people and to the environment.
Many of the hospitality businesses have adopted ‘Go Green’ measures as a
way to stand responsible from other competitors. This does not only help in
creating goodwill but it also helps in saving money and most importantly
gives a new experience for the guests (Figure 1.25).
Figure 1.25: Resorts using solar panels.

Source: https://edition.cnn.com/travel/article/green-vacations-sustainable-
places/index.html.
Using eco-friendly products helps in a number of ways. Using herbal

cleaning products will cost less as compared to the imported or other
expensive materials; similarly eco-friendly soaps has no chemicals and can
be used by anyone and guests need not fear about any allergic reactions.
When a hotel or resort uses such products, it shows the value that they give
to guests and it makes them happy and they turn into loyal customers. The
green appliances help in reducing the use of energy and help save energy
resource from the environment. ‘Go green’ initiatives are the top best
practices that are followed in the hospitality business.
1.4.1.2. Social Media Presence

In today’s world, people use each and everything by researching details
about it from the world of social media. Hence if a business needs to stay
strong in the market and even if it plans to expand, then it must make its
presence felt by way of social media. Every business is using this strategy
to grow and this is also one of the best practices followed by many of the
hospitality businesses. Every business in the hospitality industry is looking
at new ways through which it can use the social media (Figure 1.26).
Figure 1.26: Importance of social media.

Source: http://webbedfeet.com.au/influence-social-media-travel/.
What many businesses do is to hire a dedicated staff to post

advertisements, promotional events and review and reply to comments in
various social media sites or outsource this task to a specialized third-party
firm. This firm will constantly monitor the updates of its client’s business in
social media forums and on review sites. The main objective of following
this practice is to use the customer’s feedback in a constructive way and to
grow the business.
1.4.1.3. Treating Employees Fairly

This is not only the most important practice that is adhered by the hospitality
businesses but treating employees fairly is the main secret for the success of
any organization. Only when the needs of the employees are addressed and
their concerns are heard, there will be increase in the productivity and there
will be positive and energetic atmosphere in the business (Figure 1.27).
Figure 1.27: Well-groomed employees spread positivity.

Source: https://jsd.co.uk/portfolio/nuffield/.
Proper communication between employees and the management,

providing training to the employees, rewarding, and appreciating them for
their work are some of the ways by which employees can be made happier. All
these metrics encourage employees to be creative, focused, and committed.
Happy and satisfied employees work for the betterment of their company.
1.4.1.4. Showcase Distinguishing Elements

Every business or organization will have certain elements that make them
stand apart from other businesses in the same niche. The best practice followed
by many hospitality businesses is that they identify these core elements and
use this as their marketing tools. For example, the hospitality businesses
can showcase the services that they delivered to popular celebrities as their
hosts; hotels can post pictures of their unique menus in social media sites,
resorts, and star hotels can advertise their luxury rooms to attract guests.
1.4.1.5. Listen to Customer Needs

Every business relies upon its customers for its growth. Best hospitality
practices are the practices that find out what the customer needs and serving
those in an efficient way. Even during the early civilization period, the
needs of the social groups were given utmost importance. The same applies
even today although everything is more commercialized today. Everybody
turns to hospitality industry because of their want and needs; hence it is the
responsibility of the hospitality industry to treat guests in a real satisfying
manner.
1.4.1.6. Efficient Service

Listening to customer’s needs is important but what is more important is
to fulfill their needs. Providing efficient service is the main objective for
every hospitality business. The hospitality industry utilizes the concepts of
service in every facet of its operations. Right from receiving a meal order
to serving the meals, everything is service. Customers stick to a hospitality
business only when the service is good and commendable. Customers pay
repeated visits if they are attracted by the hospitality and service of the
staffs. Providing unmatchable service is one of the best practices that every
hospitality industry must follow.
1.4.1.7. Working for Profit

Although hospitality businesses are service related, no one does this for free.
Every sector of hospitality industry works for making revenue. Customers
are charged for every service depending upon the type and nature of
service. Hospitality practices must include extensive money and resource
management skills in order to achieve profit. A business can sustain only if
it shows its profit for the investors. Management theories become practical
for those who must report revenues to a corporate board or venue owner
(Figure 1.28).
Figure 1.28: Global hotel industry revenue in billions.

Source: https://www.suevio.com/hotel-industry-report.
1.4.2. Organizational Behavior

The hospitality business is often referred to as people’s business. Hospitality
industry is the fifth largest employer in the UK employing more than 2.4
million people. To quote an example, Hilton Hotels Corporation is the
leading global hospitality company with more than 3,000 hotels in over 74
countries (as per Year 2012 data). There are hundreds of such hotels and
so we can approximately calculate the number of employment that they
provide.
Similar to management practices, every hospitality organization must
excel in human relations and this can be achieved if the organization maintains
quality organizational behavior. So, what is organizational behavior? Let us
see what experts have to say about organizational behavior.
According to Mullins, a leading author, organizational behavior is related
to the study of the behavior of the people working in the organization; it is
very important for an organization but examining this is a great challenge.
Another research by Singh in 2007 states that, “organizational behavior is a
way of thinking and it is directly concerned with understanding, prediction,
and control of human behavior and application of knowledge in the
organization.” He also pointed out that technology; structure, people, and
environment are the key elements of organizational behavior.
Another report released by Rollinson in 2008 denotes that organizations

are going to be dominant in this world and the lives of many are going
to be affected by the behavior in organization and people who manage
the organizations must effectively understand the behavior of humans in
an organizational context. Schermerhorn (2011) argues that in today’s
competitive economy, negative job attitude is no good for organization.
Organizational behavior refers to the attitude of individuals at work and
their perception. In particular, employees working in the hospitality industry
are expected to behave with a good attitude towards guests. Kuslovan (2003)
says that in hospitality industry, perception is linked to the organizational
commitment, quality, and turnover.
The attitude of employees varies when they are made to work under very
stressful atmosphere. The hospitality workers undergo various hardships like
long working hours, stretchful shifts, unpredictable shift timing, and mental
stress, emotional demands, etc. It is very important that the HR managers
analyze the behavior patterns of employees and help them to overcome
problems if any. The HR manager of Hilton Kensington Hotel says that
they help their employees manage stress by focusing on team building,
consulting, building confidence and especially offering handling stress with
difficult guests (Figure 1.29).
Figure 1.29: Factors affecting organizational behavior.

The Hawthorne experiments conducted by Elton Mayo on Organizational
behavior suggest that, “all people, including employees, have needs, desires,
and attitudes.” Mayo states that, it is the responsibility of the managers to
encourage good communication with the employees and build a connection
with them because issues like job dissatisfaction are the major cause of
employee’s behavioral problems in the organization.

Organizational behavior plays a significant role in hospitality industry
today, because Hospitality organizations must achieve excellence in human
relations in terms of guests’ satisfaction and competitiveness in marketplace.
Organizational behavior looks at how employees influence each other
and how an organization influences its workers. There are many factors
like corporate culture, leadership, workplace culture, etc., that motivates
employees. There are also other factors that affect how workers feel about
their jobs and their workplace performance. In order to be successful,
every business management must comprehend the forces that drive people.
Whenever a group of people start working together, a relationship develops
between them, and this relationship affect how they respond in the work
environment. It is highly critical to make the relationship work in such a
way that it brings success to the organization (Figure 1.30).
Figure 1.30: Stages of team development.

Source: https://garudaaace2015.wordpress.com/2015/03/02/w1_wrp_tuck-
man-analysis-assignment/
Managers must be in a position to understand organizational behavior

in order to lead an organization. Only when they analyze organizational
behavior, they can create a positive environment. An organization or
a business is not a one-man army; it is where a group of people come
together to accomplish a common goal. So, what they feel about the office
atmosphere is very important because these feelings affect their productivity
and performance.
Sometimes there will be misinterpretations; the authority of managers
often is interpreted to be their power which may lead to internal politics.
Managers must be in a position to convince others on what they have to do
and he has to be clear in explaining the company objectives. Organizational
structure is also a strong force in shaping organizational behavior. Leadership

is very important in every business. Leaders must think through and decide
upon the leadership style that works best for their organization. Depending
on a firm’s industry, management styles can vary from authoritative to
laissez-faire.
The leaders in the hospitality industry will not be able to get the
organization’s pulse unless they use some tools to find out how employees
feel about their working conditions. Organizational behavior of employees
can be boosted if the corporate leaders concentrate on the workload of
employees, reward structure, management style and general working
conditions. The character and personalities of individual employees also
play a role in organizational behavior. More than any other industry, it is
in the hospitality industry the employees are in more direct contact with
customers. Hence, their attitude and personality traits must be evaluated
before they are assigned the job. There are many tools that are used to assess
the employees’ personalities even from those who do not show up openly.
Examples of such tools are projective tests, personality inventories and
assessment centers.
Studying the organizational behavior is an effort to understand individual
and group dynamics. It is an attempt to see how employees are responding in
the workplace. Only when all these area are studied well, one can incorporate
good organizational behavior in all by creating positive outcomes. Experts
believe that by understanding these concepts, the business function can
be improved. Knowing what motivates people, can help leaders manage
workers.
1.4.3. Common Challenges in Hospitality Industry

The hospitality industry is booming, but research shows that there are
many factors that limit Australian hospitality businesses ‘ success. From
restaurants, cafes, bars, nightclubs, and pubs around Australia, owners,
managers, head chefs and even staff members had their say. There are
many issues affecting the success of hospitality businesses, from increased
competition to operating costs.
1.4.3.1. Location
It sounds so obvious, but where you choose to open up is the most basic
factor in giving a good start to a hospitality business or not. Get it wrong
and recovering is nearly impossible. There are many issues associated with
a poor location, such as trouble finding it, no traffic passing by foot (or car)
or no parking.
If you think you’ve found a good location before you finalize your
choice, do your research. How is the area? What is his reputation? What
do you think about your proposed site by other businesses and residents?
Location can really make a business or break it.
1.4.3.2. Worst Customer Service

It can go a long way to compensate for any other potential shortcomings
when staff looks after guests. If, on the other hand, employees are rude and
dismissive, customers will be desperate to leave and you can be sure they
will not return.
Encourage feedback from customers and heed constructive criticism.
Train staff to handle complaints productively in order to satisfy customers
with the result. Sometimes things go wrong, but if you solve the problem in
a way that will satisfy your customers, they will be as happy as if all went
smoothly.
1.4.3.3. Ineffective Management

You can’t do everything, so you’ve got managers to help run your venue.
Although somebody may have all the right qualifications, experience, and
skills, they may not have the right interpersonal skills to fit in with your
business. A bad manager can have a negative impact on the morale and
motivation of the staff, which then pass this bad attitude on to guests and
visitors and drive your reputation to the ground. Poor mouth feedback can
cost you a lot of business and maybe you don’t know why.
Ensure that all your employees have the support and training they need
to do their job. They will care about your venue’s success as much as you
do when you make the effort to invest in your staff and make them happy to
come to work.
1.4.3.4. Wasting Money

A healthy cash flow means a healthy business, so you must always have a
strong understanding of your incomes and outputs. As an entrepreneur, you
are full of new ideas for products or services that are buzzing in your mind,
requiring you to pay attention to them–and money. While new ideas are
fantastic, if you rush with them without prior research or proper planning
and, most importantly, perform a cost-benefit allowance and see if you have
sufficient budget to effectively and professionally implement your idea, you
can waste a lot of money quickly.
Making sensible decisions about how and when to spend your money
and how to make sure each penny works hard for you.
1.4.3.5. Unskilled Marketing

Marketing is crucial to letting people know about your fantastic establishment
and friendly, helpful staff, with the amount of choice available to potential
customers. Effective marketing strategies and carefully targeted advertising
campaigns are key to building your brand and have a massive impact on the
success of your business.
Nevertheless, many hospitality enterprises, even larger ones, still have
no dedicated, skilled marketing person, either on staff or outsourced. Instead,
companies rely on random staff members to take on marketing tasks without
considering whether they have the expertise to get the job done. There’s
having all hands on deck and then there’s wasting everyone’s time.
Do you still rely on mass flyers to attract business but ignore your
website? An outdated, sluggish website can actively harm your business if
it is a hospitality business ‘main sales tool. Despite the fact that effective
digital marketing makes the phone ring, many businesses simply do not seem
to appreciate that an unskilled employee’s generic marketing vs. targeted
marketing by an experienced inbound marketing professional makes a big
difference.
Part of the issue is that modern marketing channels, such as social
media, can be cheap to use or even free and accessible to anyone. This
means that there is an assumption that since they can be used by anyone,
everyone has the skills to use them and this is simply not the case! Marketers
need a very specific set of skills and experience in our digital world. In
terms of how we can market a lot has changed, but the basics of marketing
and communication remain the same, so you need someone who not only
understands modern marketing techniques and channels, but also appreciates
effective communication and the best ways to reach your target audience.
You need to replace inexperienced, fumbling’ marketers’ with an
experienced professional if you really want your marketing efforts to be
successful and profitable. As a freelance marketer specializing in the
hospitality industry, I can address all aspects of the marketing of your
hospitality business to help you avoid the pitfalls on the path to success. Just
get in touch and book your free first consultation today for more information.
1.4.3.6. Increase in Competition

The rate of growth in the hospitality sector was one of the key insights the
survey found. This means competition has, of course, grown. In fact, 73% of
the hospitality companies surveyed said they had increased their competition
over the past year.
Of the respondents, 55% believed that there was a loss of revenue for their
hospitality business due to increased competition. There are many reasons in
this industry for increased competition. Most hospitality businesses attribute
growth in the industry to the growing, captivating Australian food culture.
Foodies are younger and engaged in social media more often than not.
They have a larger disposable income to spend on dining out, even though
they are time-poor.
Maybe that’s why food culture has such a big impact on the hospitality
industry. In a food market, the most effective way to stand out is to embrace
social media. Local population growth and higher consumer demand are
other factors that are thought to promote a growth in competition. The
attraction of owning a hospitality business also persuades people to open a
shop.
1.4.3.7. Retaining Customers

Branch growth and increased competition could contribute to the ability of
your hospitality business to attract and retain customers. Nearly half of the
surveyed owners, managers, and staff said they were facing this challenge.
There are a number of ways to remedy this common complaint. You can
introduce promotions; sign up for food delivery services online, or pivot
somehow.
1.4.3.8. Food Wastage

Your restaurant or café may throw out food for a lot of reasons. Planning can
play a major role in preventing massive food waste, in addition to the run-of-
the-mill reasons. However, even the smallest error can throw off the whole
system. Like the one integrated into Impos point of sale (POS) solutions,
a stock management system is a great way to stop the waste and become
sustainable. It may just be the thing to stop the loss of income experienced
by more than half of hospitality owners and managers.
1.4.3.9. Hiring Talent

Finding the best staff is a problem for all employers, but for hospitality
businesses it can be particularly challenging. A challenge facing 54% of all
hospitality business owners and managers is to hire and retain staff.
Finding good hospital staff is particularly important as it has been found
that slow or bad service can attribute to loss of revenue. There are many new
ways to find employees, for example through apps and social media.
You may not always find the best staff, but you can always train them as
long as they are hard-working and willing to learn.
1.4.3.10. Cost of Operation

According to restaurateurs, café and bar owners, one of the most common
factors that hinder businesses is operating costs. Whether it’s penalty rates
and costs for employees, or tax and GST obligations.
According to hospitality companies, penalty rates are still a problem.
Seventy-one percent of hospitality respondents cited penalty rates as one of
the top three impediments to their business.
Tax and GST compliance also left 46% of respondents feeling burdened
with regulatory fees and charges. Credit card fees and Eftpos fees were also
a top issue for 48% of hospitality companies.
These keys to the overall operating cost. Slightly more than half of all
respondents said they had the challenge of balancing increased operating
costs with profit. The best way to combat rising operating costs may be to
streamline the business and seek professional advice.
1.5. IMPORTANCE OF BUDGET PLANNING IN HOS-

PITALITY INDUSTRY
Every business is set up with some capital investment and it is on this
capital that the business starts functioning and every business works with
the intention of getting this investment in return along with huge profit. The
money needs to be strategically utilized with future plans in mind. This is
where budgeting comes.
Budgeting means ‘planning.’ Budgeting is very important for a growing
business like the hospitality industry. Budgeting is a business plan as well
as an instrument to control unnecessary expenses. Only through proper
financial budgeting a business enterprise can move to the top. Budgeting
is very important to make meaningful decisions in the company regarding

the future, calculating the costs and risks involved. Coltman, Michael has
rightly said that, “One way to look ahead is to prepare budgets or forecast.”
Few other experts say that, “The use of budgetary control is one of the key
detective controls in many hotel businesses.” Money is often referred as the
income of the business and on the other hand budgets provide a guideline for
any expenditure and increase the shareholders wealth and owners interest in
terms of providing a standard service for the business to stand creditable.
A clear budgeting is necessary in order to obtain the desired target
required by the enterprise owner. When a budget is prepared the management
will be able to analyze and compare their current financial state with that of
the actual values.
1.5.1. Why Budgeting Is Important in Hospitality Industry?

The hospitality industry has seen tremendous growth in the past few
decades. Hence, budgetary practices in the hospitality industry have gained
great significance. Many studies and researches are being conducted in the
hospitality industry to understand the need for budgeting and importance of
budgeting in this sector. The results declare that the financial forecasts and
budgets help management to have control on hotel operating expenses. It
helps in strategic planning of the available financial resources to measure
the actual results.
In general, hospitality services are considered to be short-term paid
services. This is the general assumption of common man because in earlier
days a lodge meant a small room with a bed, a small cupboard, a fan and
a washroom. To get some additional facilities like telephone, television,
air conditioner, and refreshments, customers need to pay extra money. But
today hospitality industry has become more luxurious and expensive. Apart
from the basic accommodation facilities, hotels conduct events, banqueting,
and conference services. All these facilities involve more cost. Each service
provided by a hotel has a set price.
In order to have control on this pricing, budgeting is necessary. It is also
used by the hospitality industry as a benchmark to measure their financial
performance. Budgetary control plans have now become a vital part in the
accounting department of the hospitality industry.
The hotel industry alone is seeing a huge growth in the 21st century. This
industry includes restaurants, bars, and fast food shops, catering services,
etc. The UK hotel market was valued at £14billion in 2006, which is an
increase by 28.9% since year 2002. In order to sustain this growth, budgeting
is indispensable. Budgeting gives clarity in accomplishing the future goals
and helps management to plan ahead (Figure 1.31).
Figure 1.31: Budgetary control.

Source: https://www.slideshare.net/BISWAJITorJEET/responsibility-ac-
counting-with-special-reference-to-standard-costing-and-budgetary-con-
trol.
The hospitality industry needs a detailed planning when it comes to

budgeting. From every minute transaction to daily transactions, everything
must be monitored since all these activities have direct impact on the long-
term objectives of the business. There are many kinds of budgeting that are
used in the hospitality business. Operating budget, Departmental budget,
Capital budget, fixed budget, Master budget, Flexible budget are some of
the budget types that are used in the hospitality industries and each of these
types have several sub-types under them. Budgeting in a hospitality industry
is a crucial process and how it is done is explained in the next section.
1.5.2. Process Involved in Budgeting

Every industry prepares annual budgets to help the management operate
the business in a more efficient way. Managing the expenses with utmost
care is one of the secrets to success for any enterprise. Let us understand
the process of budgeting in the hospitality industry by taking the example of
budgeting in a hotel.
A hotel has many departments. The process of budgeting in a hotel starts
with creating a departmental budget. The reason why a departmental budget
is prepared initially is because it provides the overall cost related to many
departments of the hotel. For example, without knowing the cost incurring
to departments like housekeeping, room service, reception, valet, repairs,
and maintenance, a house profit cannot be estimated. Also without having
the exact figures of departmental revenue and expense, cash budget cannot
be prepared which gives the overall cost of the hotel. Next to sales budget,
departmental budget is the most difficult to prepare and it involves a lot of
time and manpower.
Preparing a departmental budget can be explained in four steps as
follows:
• Step 1: Department managers are assigned the duty of gathering
information such as cost, revenue, and expenditure.
• Step 2: Carefully analyze the past trend and arrive at an estimation
of the revenue generated by the revenue centers like Banqueting,
Restaurant, Front Office (reception), Brassiere, room service, and
business center.
• Step 3: From the estimated revenue worked on, deduct any
expenditures related to the department.
• Step 4: Collate everything into a single report after finalizing the
entire information with the department managers.
Now the department manager will decide whether this budget is feasible
for the said period. The managers of every department create their own
budget. The departmental managers prepare budget in the month of July
based on previous data and they also take the projected expenses like salary
and wages, any fixed or variable labor cost and calculate the required profit.
The managers will then calculate whether the budget prepared can be worked
out practically. They will also take the help of finance manager. Once this
procedure is completed, the finance manager will share the draft budget to
the top level finance management for approval. Once this is approved by the
Department of Finance, this budget will then be combined in the main Hotel
budget and a final copy of the master budget will be sent to the regional
office of the firm for approval by the Area Director of Finance.
Next to the department budget, cash budget needs to be prepared.
Preparation of cash budget will help the management to get an insight of
their cash inflows and outflows and will also enable them plan any debt or
expenditure ahead. Nowadays, most of the company’s are adopting a cash
budget.
Sales budget is the most difficult budget in any hotels. Prior to conclude
any figure in the sales budget a forecast should be done.
Before the final budget is passed, a forecast is done in many hotel
industries. Any last minute adjusting can be done through forecasting. Many
companies do forecasting on a monthly basis, prior to the beginning of the
month. “Moving average” and “multiple regressions” are the two most
commonly used forecasting methods and this activity is generally carried
out by the finance department of hotel-management companies. “A more
accurate forecasting of room occupancy rates would facilitate strategic
planning and enhance the decision-making procedures of hotel management
companies” (Figure 1.32).
Figure 1.32: Steps in budgeting.

Source: https://bbamantra.com/budget-budgeting-budgetary-control/.
Let us take the example of the budget preparation in Marriott hotel. At

Marriott hotel, the officers and members of the top-level finance management
are responsible for the completion of the yearly budget. They start to prepare
budget during the middle of the year for the upcoming next year. The Marriott
hotel uses ‘participative budgeting method’ (Figure 1.33).
Figure 1.33: Participatory budgeting method.

Source: https://medium.com/@RockTheVote/what-is-participatory-budget-
ing-an-explainer-b592aceac713.
In this method, employees of various levels of the organization are

allowed to participate in preparing the budget, even though the final decision
will be made by the top management. By incorporating this method,
the Marriott hotel gives the employees an opportunity to take part in an
important activity of the company and giving them ownership to prepare
their own budget document and also motivates them to achieve the set target.
Participative budgeting method is a budgeting system in which all budget
holders are given the opportunity to participate in setting their own budgets.
1.5.3. Issues and Challenges in Budgeting

Budgeting is considered as a traditional practice that is followed by almost
all the organizations year on year. Budgets are said to be a commitment and
making this commitment does not allow the company to do anything different
than following the same principles to work as per the budget plan. As said in
Malmi, 2001, budgeting is an ‘old system of control’ and according to Burns

and Yazdifar, 2001, it is a ‘traditional management accounting technique.’
Although budgeting is considered essential by many, some are of the opinion
that the entire budgeting process has some drawbacks.
In budgeting, a plan for the future is made by mere prediction of possible
growth of the business. Also, when a budget is prepared, the company’s
financial information is disclosed. This puts the company at risk as this can
be used to the company’s disadvantage by the competitors. Some also point
out that when the budget shows any surplus funds, there is a chance that new
expenditures can be created to spend these surplus funds.
Budgeting often faces criticism from many angles. Budgeting tradition
is said to create cold war between departments inside an organization which
is not healthy. Budgeting is also seen as a way in which the top management
proves its authority as they are the people who allocate funds to the
departments (Figure 1.34).
Figure 1.34: Disadvantages of budgeting.

Source: https://slideplayer.com/slide/5054183/.
A common challenge found in budgeting is that managers may

overestimate or underestimate the budget and doing any is not good.
Sometimes unrealistic budgets are prepared without consultation with
the departmental managers which leads to unachievable targets. Senior
management executives may ignore the executives under them and prepare
the budget and there are also scenarios where managers in the lower level
may not understand the budgeting concept and so does not show any
enthusiasm in contributing to the budget. Lack of communication is also
seen as a major challenge.
Proper time management and planning is also very important and when
this fails, the whole purpose fails. Apart from all these issues, there are also
some external issues that affect the budget. Any changes in the government
rules and regulations, for example, changes in the taxation, will affect
the budget. Also, any natural disasters or unfortunate tragic events could
significantly affect the budget for any fiscal year.
REFERENCES
1. http://chm.edu.vn/en/overview-of-hospitality-industry/ (Accessed on
13 July 2019).
2. http://www.jgypk.hu/tamop15e/tananyag_html/Rekreacio_I_angol/
ii4_recreational_tourism_the_recreation_of_tourists.html (Accessed
on 13 July 2019).
3. http://www.naukrihub.com/india/hospitality/industry-overview-3.html
(Accessed on 13 July 2019).
4. http://www.vault.com/industries-professions/industries/hospitality.
aspx (Accessed on 13 July 2019).
5. https://careers.stateuniversity.com/pages/503/Looking-Into-
Hospitality-Recreation.html (Accessed on 13 July 2019).
6. https://en.wikipedia.org/wiki/Hospitality_industry (Accessed on 13
July 2019).
7. https://goricastanisic.wordpress.com/2013/11/20/organisational-
behaviour-in-hospitality-industry/ (Accessed on 13 July 2019).
8. https://graduatedegrees.online.njit.edu/blog/importance-of-
organizational-behavior-in-the-workplace/ (Accessed on 13 July
2019).
9. https://hospitalityinsights.ehl.edu/the-origins-of-the-hospitality-
industry-and-what-lies-ahead (Accessed on 13 July 2019).
10. https://impos.com.au/blog/hospitality-issues-2017/ (Accessed on 13
July 2019). (Accessed on 13 July 2019).
11. https://list25.com/25-most-popular-recreational-activities-for-first-
time-participants/ (Accessed on 13 July 2019).
12. https://marketingpeach.com/the-five-most-common-reasons-
hospitality-businesses-fail/ (Accessed on 13 July 2019).
13. https://rashidfaridi.com/2017/03/17/leisure-and-recreation-are-vital-
to-tourism-industry/ (Accessed on 13 July 2019).
14. https://smallbusiness.chron.com/budgets-business-operations-
hotels-4930.html (Accessed on 13 July 2019).
15. https://smallbusiness.chron.com/management-theories-practices-
hospitality-industry-41708.html (Accessed on 13 July 2019).
16. https://smallbusiness.chron.com/role-human-resources-department-
hospitality-organization-71891.html (Accessed on 13 July 2019).
17. https://study.com/academy/lesson/hospitality-industry-definition-
overview.html (Accessed on 13 July 2019).

18. https://study.com/academy/lesson/sectors-services-of-the-hospitality-
industry.html (Accessed on 13 July 2019).
19. https://www.besthospitalitydegrees.com/faq/what-exactly-is-the-
hospitality-industry/ (Accessed on 13 July 2019).
20. https://www.bngkolkata.com/web/human-resources-department/
21. https://www.globalizationpartners.com/2015/07/14/global-travel-and-
tourism-industry/ (Accessed on 13 July 2019).
22. https://www.hospitalitynet.org/opinion/4045105.html (Accessed on 13
July 2019).
23. https://www.hospitalitynet.org/opinion/4082318.html (Accessed on 13
July 2019).
24. https://www.pearson.com/us/higher-education/program/Berger-
Organizational-Behavior-for-the-Hospitality-Industry/PGM263665.
html (Accessed on 13 July 2019).
25. https://www.researchgate.net/publication/271515668_Operational_
budgeting_in_hospitality (Accessed on 13 July 2019).
26. https://www.soegjobs.com/2016/09/07/different-sectors-hospitality-
industry/ (Accessed on 13 July 2019).
27. https://www.statista.com/topics/962/global-tourism/ (Accessed on 13
July 2019).
28. https://www.talenthive.co.uk/blog/different-sectors-hospitality-
industry (Accessed on 13 July 2019).
29. https://www.ukessays.com/dissertation/examples/leisure-
management/hotel-industry-marriott.php (Accessed on 13 July 2019).
30. https://www.ukessays.com/essays/tourism/4-sectors-of-the-
hospitality-industry-tourism-essay.php (Accessed on 13 July 2019).
31. https://www.ukessays.com/essays/tourism/importance-of-hrm-in-
hospitality-industry-tourism-essay.php (Accessed on 13 July 2019).
32. https://www.ukessays.com/essays/tourism/importance-of-human-
resources-in-the-hospitaliy-industry-tourism-essay.php (Accessed on
13 July 2019).
33. https://yourbusiness.azcentral.com/management-theories-practices-
hospitality-industry-29012.html (Accessed on 13 July 2019).
34. https://yourbusiness.azcentral.com/role-human-resource-department-
hospitality-organization-8084.html (Accessed on 13 July 2019).
2
Definition and Overview of
Purchasing and Costing in
Hospitality Sector
“A well-trained procurement organization can add major dollars to the organization

through cost savings.”
—EverythingSupplyChain.com
CONTENTS
2.1. Definition And Overview Of Purchasing ........................................... 56

2.2. Definition And Overview Of Costing ................................................ 68
2.3. Why Purchasing And Costing Are Essential In Hospitality Industry? ... 79
2.4. Purchasing And Costing – Changing Trends....................................... 83
References ............................................................................................... 85
Hospitality industry is a huge industry and it takes lot of efforts to make

this industry run with ease. There are so many departments inside every
hospitality industry which takes care of each and every aspect of the
business. This chapter focuses on two such departments – Purchasing and
Costing. In this chapter, we are going to learn in detail the concept of
purchasing and costing and how it helps in the functioning of the hospitality
business. We will also look at the various ways by which purchasing and
costing help in the cost reduction of the hospitality businesses.
2.1. DEFINITION AND OVERVIEW OF PURCHASING

We all know that the hospitality industry is a huge industry with various sub-
sectors and it is growing at a rapid speed. Similar to many other industries,
even the hospitality industry has its own requirements to maintain its standard
and also to satisfy its customers; this is where purchasing comes into play.
The requirements of the hospitality industry vary and so purchasing job
becomes very important. The procurement department is the key for the
hospitality industry to function.
The terms purchasing and procurement may sound similar but they
are not the same. Even the industry professionals often get confused with
both these terms. Purchasing means ordering of goods and services once
the vendors and the requirements are set by the procurement department.
Purchasing job is common across all the sectors of the hospitality industry
such as resorts, hotels, spas, bars, theme parks, transportation offices, cruise
lines, airlines, etc. Identifying sources for raw materials, negotiating contract
with vendors, finalizing on payment terms are all fundamental jobs of the
procurement department.
2.1.1. Definition of Purchasing
It is very important that the purchase of all essential items must be done
in a timely manner and also at a reasonable cost (Figure 2.1). Purchasing
involves two main steps:
• Searching; and
• Selection.
Definition and Overview of Purchasing and Costing in Hospitality Sector 57
Figure 2.1: Definition of purchasing.

Source: https://www.slideshare.net/Murmac60/fb-purchasing.
In the hospitality industry, purchasing has a very important place because

it not only supplies the essential goods to the organization but by supplying
quality goods and services, it creates value to the organization. In today’s
competitive world, where traditional hotels are suppressed by newcomers
like AirBnb and similar service providers, purchasing becomes difficult as
they need to work on reduced cost with no compromise on quality standards.
Purchasing involves certain steps. The need of the organization must
be analyzed first. After receiving the purchase requisitions from all the
internal departments of the company, a qualified supplier/vendor needs
to be found out to make purchase. Request for proposal document (RPF)
needs to be prepared and send to qualified suppliers. Once the proposals are
responded, select a supplier after careful examination and make a contract.
After finalizing the contract, purchase order (PO) needs to be issued to the
supplier authorizing the purchase. Contracts that have a longer duration
need to be monitored until completion (Figure 2.2).
Figure 2.2: Purchasing – process flow.

Source: http://hospitalitynu.blogspot.com/2012/08/purchase-control-in-ho-
tels.html.
The goods must be selected in a way that the value and quality of the
company’s products are maintained. The flow of purchase must be balanced
with the flow of sales. The products manufactured with the purchased goods
must strengthen the organization’s competitive position.
There are different methods of purchasing and the establishment must
select the method which is economically feasible to them as well as efficient.
Some methods of purchasing are listed in Figure 2.3.
 Periodic Purchasing
 Contract Purchasing
 Purchasing by Daily Quotation Sheet
 Purchasing by Cash and Carrying
Figure 2.3: Different methods of purchasing.
2.1.2. Purchasing Department

For big industries such as hospitality sectors, the raw materials and goods
are required in a large quantity that too on a recurring basis. So, there should
be some dedicated personnel to keep track of every activity involved in
purchasing. This is why big enterprises and organizations such as hotels,
resorts, etc., have purchasing department to look after all activities involving
purchase.
The Purchasing department is responsible for the procurement of entire

supplies required for the firm. Until 1960, the only job of the purchasing
department was placing orders and the role was seen as a clerical position.
But as years passed by, the hospitality industry grew at a rapid speed which
created more demand for goods and so purchasing became a crucial business
function. Purchasing department became vital as a separate function and
was also referred to as ‘supply chain management (SCM).’ A Purchasing
department can be managed by one or more employees in order to ensure
that all goods, supplies, and inventory needed for the organization to operate
are ordered and kept in stock, as well as control inventory levels and costs
associated with purchasing the items.
Every purchasing department will have a purchasing manager who is
responsible for the entire operations. There is a general assumption that the
work of a purchasing manager is easy but it is not so. The manager of the
purchasing department must know all the products and should also know
from where he should get them. The purchasing manager must be efficient
in choosing the alternate products if they actually required ones are not
available (Figure 2.4).
Figure 2.4: A purchasing manager.

Source: https://www.youtube.com/watch?v=aTWQnBhfS7s.
The Purchasing manager must have great negotiating skills and

relationship management techniques to be successful in his job. The role
of a purchasing manager differs in different organizations. As far as the
hospitality industry is concerned, purchasing managers contribute a lot to
the success of the industry at every level. Most of the purchasing managers
use the Beggar’s Technique but only the managers who are intelligent and
wise do a cost analysis and cost breakdown negotiation technique. The
Purchasing Manager is responsible for carrying out various duties out of
which few are stated in Figure 2.5.
• The Purchasing Manager or officer must ensure the continuity of

supplies by purchasing all goods from time to time.
• Must have great purchasing and operational skills.
• The Purchasing Manager is totally responsible for finding out
cheaper, quality sources of supplies as well as alternative products,
if needed.
Figure 2.5: Duties of the purchasing manager.

Many times there are last minute requirements and the manager’s
capability is tested at those times. No cost analysis or cost calculations
can be done for such last-minute requirements; to tackle such situations
purchasing managers must use annual contracts, fixed rates and standing
orders for products which are normally used. Let’s discuss more about this
in the next section.
2.1.3. Challenges Faced by the Purchasing Department

The Purchasing department of each hospitality sector such as resort,
cruise lines, movie theatres, hotels, entertainment places, etc., faces many
challenges. Sometimes they do not receive the correct input from the other
departments. Many a times, the input received will not be clear. They may
also experience problem with the suppliers as there are more chances that
the supplier’s may withdraw their service if there occurs any rift in their
relationship.
Let us see some of the common problems faced by the purchasing
department and the ways to handle them.
2.1.3.1. Ineffective Planning

The hospitality industry is an ever-growing industry; still there are particular
seasons when there is hike in customers. For example, the number of tourists
or people spending time on entertainment and in hotels is more during school
vacation times. This means that there is more demand for goods during that
time. So the biggest mistake that most of the purchasing departments in the
hospitality industry does is that they spend more money and buy more goods
than what is required in order to overcome the risk of running out without
supplies which may affect customer service. This is one scenario.
Another scenario is that when the prices of goods goes down, there is a
general tendency to buy and stock up more supplies without even realizing
that those may not be required or whether there will be problems with storage
or if it is related to trends, it may go out of fashion very soon. Adversely,
huge amount is wasted in the process of saving money (Figure 2.6).
Figure 2.6: Lack of planning.

Source: https://www.slideshare.net/SayedElHoushy/lack-of-planning-by-
sayed-el-houshy-hamada-hassan.
These are some of the common mistakes that occur when there is no
proper planning. While the purchasing department shows eagerness in
obtaining products for the best prices, they should also analyze the fact
that when and how the organization will use these goods and services. The
Purchasing manager must draw out an intelligent strategy for real-time
restocking and renewals.
There are many software solutions that are available which helps the
organizations in better spending for purchasing goods. These software
solutions will provide key insights about the periodical trends of customer
demands, availability of products, and cash flow. The Purchasing department
can make use of these tools to take proper decisions that are cost-effective
and satisfy the business needs in a timely manner and also by saving more
money to the organization without any loss.
2.1.3.2. Giving Importance to Money than Values

Every organization runs on a particular budget that is planned on an annual
basis and this is the same with the hospitality industry also. Although
the products and the services that the customers expect can be purchased
from lots of places and from different dealers/vendors, often most of the
purchasing department goes in search of cheap prices disregarding quality
because of the stress that they have on budget management (Figure 2.7).
Figure 2.7: Business giving importance to money.

Source: https://startups.co.uk/how-to-make-profit-by-pricing-your-prod-
ucts-and-services-correctly/.
Buying goods for low prices may look successful initially but this success
is short-lived; the real and long-term success lies in purchasing goods that
have lasting value and that satisfies the customers. Having an e-purchasing
software as part of the procurement process, it’s easy to track and fulfill
customer needs and expectations while still getting the best possible price
on the highest quality goods available, especially if the organization is also

focusing on building vendor relationships that can generate new opportunities
for savings and long-term value.
2.1.3.3. Sourcing of Goods

The main function of the purchasing department is to source goods and
then purchases them. In well-established hospitality organizations, the
purchasing department often works together with the production house to
source materials and to determine the cost of the finished product. It is indeed
a great challenge to find out the correct item at the right price. Sometimes
the purchasing department uses third-party agents to source suppliers and
sometimes they deal directly with the manufacturer (Figure 2.8).
Figure 2.8: Sourcing.

Source: http://www.tendersinfo.com/blogs/what-is-the-difference-between-
procurement-purchasing-and-sourcing/.
2.1.3.4. Bidding Mode of Purchase

There are different methods by which the purchasing department chooses
a supplier. When goods are required in bulk quantities, the purchasing
department often chose competitive bidding method to select a supplier.
When a purchasing department chooses this method, the entire responsibility
of conducting the bidding rests with the purchasing department only. The
bidding process involves various steps. First, a public notice needs to be

issued on conducting the bidding process; next detailed instructions on the
procedure is shared; verify the companies and accept the ones that are on
the list of approved bidders; handle bid security money; read all the bids
received publicly; give recommendation to the organization on which bid
to accept. This is a big procedure and the purchasing department can gain
the company’s trust if such processes are carried out efficiently without any
hassles (Figure 2.9).
Figure 2.9: Bidding process.

Source: http://www.doe.virginia.gov/support/nutrition/resources/farm-to-
school-local-procurement.pdf.
2.1.3.5. Monitoring Suppliers

In addition to analyzing the requirement of each department, finding
supplies, negotiating with vendors and purchasing the essential goods, the
purchasing department is also responsible for managing and monitoring
the performance of the supplier. For example, the purchasing department
must monitor the time of delivery, quality of supplies, cost of supplies and
the performance of the suppliers. Large enterprises involve in transporting
supplies to its branches in other countries also. This means that the purchasing
department must supervise the working conditions under which the goods
are transported. When the suppliers meet the targets and perform well, the
purchasing department recommends the company to certify the supplier.
A supplier gets certified by a large organization only through detailed
inspection. Most of the purchasing departments look for suppliers who are
certified by well-established firms (Figure 2.10).
Figure 2.10: Managing relationships with suppliers.

Source: http://www.free-management-ebooks.com/faqpm/budget-09.htm.
2.1.3.6. Controlling Costs

In an article published in 2010 on hotel purchasing specialist site Food
Buyers Network, John Schalow advices hoteliers that in order to get the
best price, purchasing departments need to ensure suppliers themselves get
a lower cost from distributors and manufacturers. Having control on costs
is also a big challenge that is faced by the purchasing department (Figure
2.11).
Figure 2.11: Ways to control cost.

Source: https://www.slideshare.net/varmaisha8/purchase-cost-reduction.
Cost on purchase can be reduced by increasing the delivery size, making

payments on time, doing online purchases at times, and also by ensuring that
the suppliers are quoting their best prices.
2.1.3.7. Legal Controls

It will not be sufficient if the purchasing department has the knowledge
about purchasing goods alone. They must also be aware of the different
legal laws that comes along with the job. While doing purchase with a third-
party vendor, private hospitality institutions often follow contract laws. This
may be bigger for the government institutions as they may have to adhere
to state and federal laws regulating the purchase. For example, as per the
federal law, for all nutritional purchases for children that exceeds $100,000,
a bidding process is required. Texas state law requires a bidding process for
any purchase over $25,000 and also it is considered a state criminal offense
to avoid using competitive purchasing when it is required (Figure 2.12).
Figure 2.12: Purchasing laws of Texas.

Source: https://www.uttyler.edu/finserv/files/PurchasingProceduresManual.
pdf.
The purchasing departments must know and comply with all such legal
laws in their respective states and countries. Failure to do so will end up in
trouble and may also lead to license cancellation.
2.1.3.8. Internal and External Relationship Management

Maintaining strong relationship with the vendors and suppliers is very
important in a hospitality business. When the relationship is strong, the
organization can get benefited in terms of discounts, special deals, reasonable
pricing or even exclusive contracts that can create not just savings, but
powerful value in support of the company’s short and long-term goals
(Figure 2.13).
Figure 2.13: Vendor relationship.

Source: https://www.invoicera.com/blog/top-10-challenges-faced-in-buyer-
supplier-relationship-management/.
Even inside the organization, maintaining a smooth relationship helps

the purchasing department to understand other departments in a better
way. A healthy and productive relationship can be maintained by using
eProcurement system. This system makes it easier to collect and leverage
data for mutually beneficial relationships across your entire supply chain.
Strategic partnership makes it easy to keep customers happy while generating
value through excellent goods, services, and customer support.
2.1.3.9. Absence of eProcurement System

Procurement system is a centralized system in a business environment which
helps in the purchase of goods and services. Even the most experienced
purchasing managers will find it difficult to arrange and track all purchases
without a proper system. A smart and intelligent purchase manager will
implement an e-purchase software package that will suit the needs of their
business. Failing to do so will end up in creating duplicate POs or losing
the POs maverick spending on everything from office supplies to critical
services, and missed opportunities to form strategic partnerships with
vendors for greater cost savings. Having an eProcurement system will help
in reducing the operating costs of the hospitality business. There are also
many other uses of having an eProcurement system that are given in Figure
2.14.
 Transparency in all transactions

 Recording of delivery time in system helps in reducing extra time taken
for delivery by the vendors
 Relationships with vendors can be strengthened
 eProcurement acts as a self-service for the purchasing activity
 In eProcurement method, the purchase is automatically documented and
can be tracked easily
Figure 2.14: Benefits of using eProcurement system.

Purchasing is an important function in the hospitality industry but
this doesn’t mean that the process needs to be complex. Overcoming the
challenges in purchasing becomes easy if the right approach is followed
and right software or tools are used. With proper strategy planning, trusted
vendors and strong customer focus, the purchasing department will be able
to contribute to the ultimate success of the hospitality business.
2.2. DEFINITION AND OVERVIEW OF COSTING

Cost is incurred on almost anything that we do. There is no business without
costing and purchase. Costing is referred to as the estimate of all the costs
that is involved in a business or a project.
The elements of the business can be anything. It can be the customers,

employees, products, processes, subsidiaries, distribution channels,
companies, etc., Costing is basically the ascertainment of cost whether for
a specified thing or activity and this ascertainment can be done by using
various accounting and costing principles, methods, and techniques. A
business can be said to be working in a blind state, if it does not have detailed
cost information. There are different types of costs such as incurred costs,
historical ones or the future estimated costs.
2.2.1. Why Costing Is Done in a Business?

The cost information system is very important for every organization as it
helps in the decision-making process. Although there are many systems in an
organization such as quality control, production control and stocks control,
cost information system is the most sought out one because it monitors the
results of all the other systems. In a business environment, costing is done
mainly for two purposes. One is to report internally and the other is to report
externally.
2.2.1.1. Internal Reporting

With the cost information report shared internally, the business management
learns about the cost incurred to different operations and works on refining
the operations to increase the profit. With the help of this report and further
analysis, the management can work on the product prices (Figure 2.15).
Figure 2.15: Costing for internal reporting purposes.

Source: https://www.wallstreetmojo.com/cost-accounting/.
2.2.1.2. External Reporting

Costing is used in various accounting frameworks. The cost allocated to
the inventory and other products are recorded in the balance sheet and
this balance sheet is referred to by external parties to know a company’s
performance.
Costing is mostly used to assign cost to products. This is done with the
help of job costing which requires assigning individual costs to production
jobs. Another way to assign cost to products is by using process costing,
in which costs are aggregated and charged to a large number of uniform
products, such as the ones found on a production line. Apart from job
costing and process costing, another efficient method is to use standard
costing wherein the costs of products are first estimated and then assigned to
products which are followed by variance analysis to determine the difference
between actual and standard costs.
There are also other different types of costs such as variable costs and
fixed costs. Variable costs differ depending on the type of activity. For
example, the cost of materials differs based on the number of units produced.
Such types of cost are called variable costs.
Fixed costs are the costs that remain the same irrespective of the type
of activity. This type of costing is also called the absorption costing. Few
examples of fixed costs are insurance, rent, and property taxes (Figure 2.16).
Figure 2.16: Fixed costs and variable costs.

Source: https://diffzi.com/fixed-cost-vs-variable-cost/.
There are different types of cost involved in hospitality industry. Out

of the many costs, food cost is an important cost that is widely used in the
hospitality industry. Let us take the example of food cost and learn more
about it to understand the concept of costing.
2.2.1.3. What Is a Food Cost?

Anyone opening a restaurant, a hotel, a food or beverage outlet sells food. So,
they incur cost for the production of food. The cost that was used to prepare
the food against for what it was sold gives the food cost. It is from this food
cost, the profitability of a restaurant or a hotel is determined (Figure 2.17).
Figure 2.17: Definition of food cost.

Source: https://www.slideshare.net/bhavinsp/food-cost.
Most of the food and beverage industries expect their food cost to be at
or below 30%. Only if the food cost is around this percentage, it means that
the business is making profit. The food costs should not come above 35%
because if it comes above 35%, it means that the business is losing money.
2.2.1.4. Why Food Cost Needs to Be Checked?

The food cost must be checked on a regular basis in order to understand the
trend of sales and product fluctuations. Food cost can tremendously vary
depending on the market conditions. Menus needs to be checked constantly
to know which items are selling and has demand and which are not. Since the
economic inflation has the potential to change the way a customer spends,
the sales of each item needs to be monitored to know whether the business
is running profitable or not.
Knowing the food cost is the important key for making profit in an
organization. Only if the business knows whether the items in the menu are
generating profit, there is use in selling it. For example, let us take a starter
on the menu in a restaurant. We already saw that all food and beverage
industries must have their food cost at 30%. So, in order to find whether
the starter meets the food cost goal, we need to find out the cost incurred to
produce it. Let’s say, this starter costs $1.00 to make, which means it needs
to be sold out for at least $4.50 in order to meet the food cost of 30%. Food
cost will cover everything in a business, right from the payroll to the rent
of the building. So, it is imperative that all menu items meet that threshold.
2.2.1.5. How to Calculate the Food Cost and What Factors Need
to Be Considered?
Food cost is nothing but the total cost of the food net of existing inventory. In
a general scenario, beverage costs are calculated separately but sometimes
these are combined.
Below is the formula to calculate the food cost:
To put it in a simpler way, food cost is just the net food purchases divided
by the restaurant’s net sales. The result value when multiplied by 100 gives
the food cost percentage (Figure 2.18).
Figure 2.18: Food cost percentage.

Source: https://www.signs.com/blog/controlling-food-costs-in-a-restau-
rant/.
There are many tools available in the market that is used to calculate the
food costs. These tools help in monitoring the food cost before the situation
worsens.
Many factors need to be considered when calculating the food cost as
it can impact the food cost percentage. Few important factors are listed in
Figure 2.19.
 Stock take must be done either at the beginning of the day or at

the end of the day because stock taking cannot be done during
business hours as it may give an incorrect count.
 Incorrect stock count will influence the food cost percentage.
 Wastage of food affects the food cost percentage.
 If the stocks are being robbed or if the sales price is too low, the
food cost percentage will definitely take a hit.
 Incorrect sizing of meals and incorrect purchases also influences
the food cost percentage.
 If two same items are bought with different prices, then the most
recent price must be used.
Figure 2.19: Factors to check before calculating food cost.
2.2.1.6. What Are the Benefits of Food Costing?

The main benefit of food costing is that it creates awareness among the
employees as well as alerts the management that costing is mandatory and
cost controls are very important.
It is due to food costing that the cost of items in the menu is affordable by
the customers. When looking for food cost, the business owner will research
for the market price for the items that he has on his menu and he will also
check the competitor’s price for the same items. He then adjusts his price so
that customers can get the same items in his hotel at a much affordable price.
While analyzing the food costing, there is another important element
that needs to be checked which is the ingredient of the food items. The
cost of the ingredient charged by the food company must be compared and
this will have impact in the change of recipe or change in the quantity of
ingredient used. Food costing is very beneficial because it motivates the
business owner to track the cost outputs on a daily basis.
Food Costing gives awareness on what is put on the menu and what
results does it generate. Basically, every food and beverage industry owner
takes control of the food cost as it brings ultimate success to them. There
is no other cost as big as food cost when it comes to a restaurant’s cost

structure. This is the main reason why ‘food cost’ and ‘labor cost’ are said
to be the ‘prime costs’ in the hospitality industry. It is on these costs that
the hotels or restaurants have utmost control. Most of the restaurants aim to
have a prime cost in-between the range of 60–65%.
2.2.1.7. How Can Food Cost Be Controlled?

Let it be a big restaurant or a small hotel, food cost can be controlled by
following certain basic principles as mentioned in Figure 2.20.
 Regularly monitor the cost of food items that is put on the menu and
see that it is correct
 Monitor the total expenditure of food at regular intervals
 Avoid food pilferage and wastage
 Employees must be educated on the food cost so that they are fully
aware of what they are doing
 Work on ways to minimize cost and improve quality
 The cost estimates must be shared with the managers to include in
budgeting process
 Prices of different goods must be evaluated before purchase
 Teamwork helps in making precise decisions on cost control
Figure 2.20: Principles to be followed to control cost.

According to a Green Restaurant Association analysis, “a single
restaurant in the U.S. can produce approximately 25,000–75,000 pounds of
food waste in a year depending on the size of the establishment.” Wasting
food equals wasting money. When food waste is reduced, this can turn as
benefit for operators since they may have financial gain and it also increases
the efficiency of workers in the kitchen. Moreover, people like to dine at a
hotel or restaurant where the food wastage is minimum.
In a survey conducted across the U.S, nearly half of them agreed that
they would spend more for meals at restaurants and food service locations
that are taking steps to limit food waste. Restaurant and hotel owners must
take this survey seriously because nearly 49% of Americans spend their
money in restaurants. Hence it would be wise to take steps to reduce food
waste in order to attract customers as well as reduce their bottom line. In
order to control food cost, a restaurant must always check the quantity of
inventory they have and how it is being used.
Let us see in detail some ways by which a low food cost can be achieved:
2.2.1.8. Planning
Hotels and restaurants can maintain a low food cost if they strategically plan
their activities well in advance. Avoiding food waste is very important to
reduce cost. This can be done by ordering the required quantity of products
for food services. When the quantity of product available is the right amount,
then there is less chance for wastage. The management must monitor the
amount of money that is being spent for each recipe so that they can have
track of whether the finances are spent in a proper and useful way (Figure
2.21).
Figure 2.21: Food wastage in hotels.

Source: http://www.savefoodcutwaste.com/food-waste/food-wastage-in-sin-
gapore/.
2.2.1.9. Change Recipe If Required

Some special menu items incur more cost to prepare than the other items.
Many hotels and restaurants have such costly dishes in order to attract
customers. But during economic downtimes, to sustain providing these

special dishes, hotels increase the price of the dish because they spend more
than usual to buy products required to prepare those dishes especially if it is
non-vegetarian items. This obviously increases the food cost (Figure 2.22).
Figure 2.22: Change recipe according to the budget.

Source: https://www.webstaurantstore.com/article/213/how-to-reduce-
food-costs.html.
What hotels can do is that, instead of spending more to buy meat or

any other ingredient for the special dish, they can work on changing the
recipe to avoid spending much on the produce. Hotels can opt for altering
the menu and recipe’s according to the local seasonal produce so that they
need not worry about importing expensive fruits or vegetables from other
countries or states. This benefits both the business and the customers. Hotels
and restaurants need not worry about food cost and increase prices and at the
same time, customers need not worry about the rising prices.
2.2.1.10. Have Proper Tracking Mechanism

Any business can run successfully only if it is supervised regularly. Every
hotel, restaurant or any other food industry must always monitor the
inventory in their kitchen if they have to run their business efficiently. They
must be aware of the quantity of raw material available in the kitchen, which
raw materials are not in the inventory, whether the workers can produce
meals with the available inventory etc., If these vital points are not checked,
it means that the business is losing money. In order to avoid such situations,
the management must often take stock of the inventory. When the staffs
know what is available and what is not, they would be able to plan and work
in a better way (Figure 2.23).
Figure 2.23: Track the inventory.

Source: https://www.webstaurantstore.com/article/213/how-to-reduce-
food-costs.html.
2.2.1.11. Grow Own Produce

Today it has become a trend that hotels and every food serving establishments
grow their own gardens. They are actually very proud of it because what
they serve their customers comes out from their gardens on a daily basis.
This even gives them an added advantage in terms of customer attraction
and satisfaction as the customers are rest assured of the product quality
(Figure 2.24).
Figure 2.24: A chef picking up an ingredient from the hotel’s garden.

Source: https://www.indiatoday.in/magazine/supplement/story/20160606-
travel-trend-dipak-haksar-chief-executive-itc-hotels-and-welcomho-
tels-733578-2016-05-27.
The staffs maintain the garden by fertilizing them and we all know that
the left-over foods and the skin of certain fruits and vegetables act as a good
fertilizer for growing nutrition-rich foods. When the hotels grow their own
garden and get produce from them, the excess money that they spent on
outside shops can be avoided and by this food cost can be reduced.
2.2.1.12. Practice “Root to Stem” Technique

The ‘root to stem’ cooking technique is gaining momentum these days.
People are choosing ‘green’ over colored spicy foods. The increase in the
cost of foods and the changing lifestyle of people has helped ‘root to stem’
technique to gain popularity. Hotels are looking for different ways to reduce
their food cost and this technique is considered to be the most efficient one
(Figure 2.25).
Figure 2.25: Vegetables that form part of ‘root to stem’ cooking technique.
Source: http://thetaste.ie/wp/chefs-across-ireland-zero-food-waste/.
We discussed about how costing works in the food industry. Costing is

common to the entire hospitality sector. For example, in Travel and Tourism
industry, costing includes everything right from air travel, cost for local
transportation, accommodation, and other sight-seeing activities. Hence,
costing is significant for every industry.
2.3. WHY PURCHASING AND COSTING ARE ESSEN-

TIAL IN HOSPITALITY INDUSTRY?
Purchasing and Costing, both have been recognized as having an impact
in the success of a business. In many hospitality services, purchasing
department play an important role in reducing the expenses and this has
paved way to cost-saving techniques. Since Purchasing effects both sales
and cost, it is becoming an important function of the firm, finding, and
developing suppliers and bringing in expertise that is highly valued by the
organization. Whatever income a hospitality industry earns as revenue from
sales, 50% of that goes into purchasing. Compared to all other categories,
most of the money is spent only on purchase of materials or services because
it is the base for any organization to run.
The Purchasing department works with outside vendors to improve and
standardize the buying procedures and reduce costs; this department also
looks for buying alternate materials and to transport goods from different
locations in order to reduce the cost. The Purchasing department works
with the internal customers also to improve process and reduce cost. The
main objective of the purchasing job is to reduce the costs. The cost impacts
are easily understood because cost reduction is typically considered a
“purchasing job.” Cost can be saved not only in purchasing materials but
also in purchase of services like marketing, advertisement, logistics, legal
matters, etc., ‘Cost improvement’ is one of the main skill of any Purchasing
professionals. Costing helps the management in planning and control. Being
aware of costing and cost control measures helps the organization to survive.
A hotel business can see profit if they can lessen their procurement costs.
The continuous availability of products and services helps the business to run
without any obstacles. And if the available products and services are of the
best quality and are obtained for a less price, then that is what every business
looks for. Today, the existing businesses have become very complicated
due to many changes in the industry sector. With trade and commerce are
choosing their right paths, costing is becoming more important.
Cost data is useful for a hospitality business in many ways. Let us see
some of the main uses:
2.3.1. Calculating Sales Price

In general, a sales price is set by knowing cost and then adding a certain
percentage to it. When the cost of making a product is not known, then,
how can the selling price be set? The managers must compare the sales
price against product costs to understand whether they are making enough
revenue.
2.3.2. Helps Knowing the Assets

A balance sheet report provides the cost values for many assets. Only when
the costs of the inventories and certain assets are clearly known, the balance
sheet report can be understood.
2.3.3. To Calculate Gross Margin

The profit from a business shows that the business is running successfully.
This profit figure depends on the gross margin figure you get when you
subtract your cost of goods sold (COGS) expense from your sales revenue.
Gross margin (also called gross profit) is the first profit line in the income
statement. If gross margin is wrong, bottom-line net income is wrong. The

COGS expense depends on having correct product costs.
2.3.4. To Succeed Legally

Knowing the cost does not only help in setting up the marginal profit but to
run the business smoothly without receiving any lawsuit. In many countries
and states, there are legal laws that forbid the business owners from selling at
a price lower than the actual cost other than some exceptions. If the business
sells for lower prices just for the sake of driving out its competitors, then that
business can be sued under federal law. Only if the business knows well and
works on the cost, they will be able to substantiate the reason for the lowest
prices and that they are not selling for some illegitimate purpose.
2.3.5. To Hold or Sell a Product

Sometimes companies sell their intermediate products or process it further
from their end. We can take dairy industry as an example. The dairy industry
has many options. They could sell raw milk; else they can process the milk
into some pasteurized dairy products; make butter or ice cream or some
cheese products. The owner of the dairy farm can choose between what
needs to be done by using a costing technique called relevant cost analysis.
He will be able to analyze which form would be the most profitable one.
2.3.6. For Knowing Company’s Performance

The costing technique helps managers to evaluate performance across
companies. For example, the manager of a small enterprise can look at the
big competitors for a rough estimate and by examining it, they can come to
a conclusion as to how many units of product the company sold and at what
cost. Having this information at hand, they can then compare these details
with their own company.
2.3.7. For Decision Making

Knowing costs helps business to make important decisions. No one will
take important decisions in business without knowing the cost value. In
a business, there will arise many situations where the management has to
choose between many options. Choosing the best option largely depends
upon the cost factors. One significant thing that every business must keep
in mind while taking such important decisions is that, they should make
sure that they are using the right costs. Even for decision making by the
management, not all costs are required. There are certain costs that are
relevant; but how do we identify the relevant costs?
2.3.8. Opportunity Costs

Any cash inflows that will be forfeited as a result of the decision are relevant
costs. Opportunity costs generally refers to the cost that one has to give
up for the purpose of obtaining something else. It is actually the potential
benefit that the business gives up in choosing an alternative option.
2.3.9. Future Costs

Future cash expenses that are projected as a result of the decision are relevant
cost.
In a business environment, knowing the cost to make a product is useful
information. But most small-business owners do not understand this and
often sought out costing techniques only when they land in some trouble.
If these techniques are known initially itself, then it would have been very
easy for them to set a normal sales price. A company can sell its products at
a lower cost than its competitors but if it sells the products much less than
the cost of it, then it means that the business will run in loss and the business
will not survive for long (Figure 2.26).
Figure 2.26: Costing helps in decision-making.

Source: https://www.slideshare.net/ShubhamBoni1/marginal-costing-as-a-
tool-for-decision-making.
Costing is used to decide whether a hotel or restaurant can take special

orders at fewer prices. In many hospitality industries, fixed costs of
production such as rent and management salaries are already covered by
normal production. So, these companies have the window to accept a lower
price than normal in order to win a special order. Costing techniques allow
you to determine how long you can go and still come out with a profit.
2.4. PURCHASING AND COSTING – CHANGING

TRENDS
Every industry is undergoing many changes and so are the operating and
managing systems in these industries. Hospitality sector is one among the
many industry sectors that is undergoing constant changes in order to stay
active in the market and attract customers. Under the hospitality umbrella,
the hotel industry is said to have gone through some major changes. The
hotel industry has adapted many new measures in the areas of Purchasing
and Costing.
Purchasing and Costing are two very important areas in the hospitality
industry, especially in the food and beverage industry. Many of the
establishments have adapted latest technologies to stay in the competition.
The new technological methodologies and applications have helped in
taking up purchasing and costing to the next level. Instead of trying to resist
the major ripples created by technology, they’ve found the best ways to
harness the technology that’s available (Figure 2.27).
Figure 2.27: A sample purchasing software.

Source: https://bellwethercorp.com/free-purchase-order-software-medium-
large-business/.
The Purchasing Software is helping a lot of professionals in the food

industry. The Purchasing Managers have actually become stress-free with
the coming of this software. Since these software’s and applications are
not very much dependent on IT support, it can be used by anyone with
basic purchasing knowledge and these tools have made life easy for staffs
working in these departments. The selection of right software can help in
optimizing procurement activities. Very importantly, the cloud functionality
of purchasing software means that data is easy to access, completely secure
and backed up at all times.
The fluctuation in economy has also caused considerable number
of changes in the hospitality industry – more so in the Purchasing and
Costing departments. The improvement in the U.S economy has helped in
the growth of many industries. The most benefited of all industries is the
hospitality industry. Since the living standards of people improved, increase
in employment, salary, and decline in fuel prices made people to spend
more on hospitality services such as travel and tourism, hotels, restaurants,
entertainment, etc.,
As the year’s passes, the economic condition is becoming more and more
favorable and it is more likely to bring growth to hospitality businesses. As
the hospitality business progress, everything associated with it is likely to
change. The new regulations passed by the Department of Labor have direct
impact on the overtime labor expenses for the hospitality industry. According
to Hotel News Now, the new rules will increase the number of individuals
on hotel staffs who are eligible for overtime pay. This will increase the labor
costs for hotel owners, and might necessitate a reorganization that involves
hiring new workers to spread out hours over a wider group of workers. These
measures would cut down on overtime expenses, but might also decrease the
number of hours some hourly workers are able to work each week.
Changes in the cost or cost structure are guaranteed. Tom Corcoran, Co-
founder, and Chairman of the board of FelCor Lodging Trust have said in his
statement that, changes in the marketing and distribution costs are the most
significant ones that the hospitality industry is experiencing. Tom Corcoran
also mentions that, “The delivery cost for getting customers into hotels was
changed significantly by the business model, which was primarily based on
brand and travel agents that were being paid at 10% to the OTAs.”
REFERENCES
1. http://basiccollegeaccounting.com/2006/07/costing-and-reasons-for-
its-importance/ (Accessed on 13 July 2019).
2. http://blog.menumax.com/?p=3256 (Accessed on 13 July 2019).
3. http://blog.mobilemini.com/construction/6-trends-that-are-changing-
the-hospitality-industry/ (Accessed on 13 July 2019).
4. http://www.businessdictionary.com/definition/purchasing.html
5. http://www.hotelierindia.com/procurement-is-the-backbone-of-a-
hotel/ (Accessed on 13 July 2019).
6. http://www.informit.com/articles/article.
aspx?p=2165644&seqNum=3 (Accessed on 13 July 2019).
7. https://bellwethercorp.com/what-procurement-can-learn-from-the-
hotel-industry/ (Accessed on 13 July 2019).
8. https://en.wikipedia.org/wiki/Purchasing_management (Accessed on
13 July 2019).
9. https://sipmm.edu.sg/importance-of-effective-procurement-practices-
for-successful-hotel-operations/ (Accessed on 13 July 2019).
10. https://smallbusiness.chron.com/importance-costing-managerial-
decision-making-51739.html (Accessed on 13 July 2019).
11. https://smallbusiness.chron.com/roles-purchasing-department-2270.
12. https://www.accountingtools.com/articles/what-is-costing.html
13. https://www.accountingtools.com/articles/what-is-purchasing.html
14. https://www.bngkolkata.com/web/food-cost/ (Accessed on 13 July
2019).
15. https://www.bocaterry.com/hospitality/the-role-of-procurement-in-
hospitality.html (Accessed on 13 July 2019).
16. https://www.collinsdictionary.com/dictionary/english/costing
17. https://www.dummies.com/business/accounting/are-costs-really-that-
important/ (Accessed on 13 July 2019).
18. https://www.emeraldinsight.com/doi/abs/10.1108/WHATT-04-2016-
0019?fullSc=1&journalCode=whatt (Accessed on 13 July 2019).

19. https://www.gourmetmarketing.net/costing-pricing-food-regular-
menus-catering-services-special-events/ (Accessed on 13 July 2019).
20. https://www.hotelmanagement.net/own/how-hotel-industry-has-
changed-over-past-20-years (Accessed on 13 July 2019).
21. https://www.hotelschool.co.za/basic-principles-costing-food-
restaurants/ (Accessed on 13 July 2019).
22. https://www.purchasecontrol.com/blog/problems-in-hospitality-
procurement/ (Accessed on 13 July 2019).
23. https://www.quantzig.com/content/media-and-entertainment-pricing-
analytics (Accessed on 13 July 2019).
24. https://www.rasmussentaxgroup.com/what-is-simple-food-costing-
and-why-is-it-important/ (Accessed on 13 July 2019).
25. https://www.researchgate.net/publication/227487376_The_
importance_of_the_cost_information_in_making_decisions
26. https://www.signs.com/blog/controlling-food-costs-in-a-restaurant/
27. https://yourbusiness.azcentral.com/importance-costing-managerial-
decision-making-17281.html (Accessed on 13 July 2019).
3
Functions and Key Areas of
Purchasing in the
Hospitality Industry
“Purchasing new equipment simply isn’t in your average fire department’s budget. Cut-
ting this budget amount means a few fire departments will be able to obtain new equip-
ment.”
—Jackie Vaughn
CONTENTS
3.1. Common Functions Of The Purchasing Department .......................... 88

3.2. Purchasing In Food And Beverage Sector .......................................... 91
3.3. How Purchasing Works In Accommodation Sector? ........................ 102
3.4. Significance Of Purchasing In Travel And Tourism Sector ................ 104
3.5. Need For Responsible Procurement In Hospitality Industry ............. 109
References ............................................................................................. 127
We learned the definition and some key concepts of the Purchasing

department in the previous chapter. In this chapter, we are going to learn
more about the functioning of the purchasing department in the hospitality
industry. The hospitality industry is one of the largest industries in the
world, and there are different sectors in the hospitality industry. This
chapter focuses on the key functions of the purchasing department in the
different sectors of the hospitality industry.
3.1. COMMON FUNCTIONS OF THE PURCHASING

DEPARTMENT
A purchasing department, also known as procurement or purchasing
department, supports operations by serving as the primary purchaser of goods
and services in a private sector company, government agency, educational
institution, or other types of organization. Purchasing departments help
maintain organizations ‘financial health by providing goods and services that
meet operational needs while delivering the highest value. They establish
procurement policies and procedures to ensure that their organizations
operate in the marketplace with integrity. By monitoring supply chains and
relieving department heads of tedious tasks such as negotiating contracts
with vendors, purchasing departments keep operations moving smoothly.
The role played in an organization by a purchase department depends on
the size of the organization. Technological advances and outsourcing have
negatively affected and will continue to affect the purchasing profession’s
job outlook. By providing the goods and services they need in a timely
manner, the purchasing department serves the needs of internal customers.
The buying staff also serve the financial well-being of the organization by
searching for and buying goods and services offering the lowest prices and
best value.
A purchasing department needs to understand the complexities of the

operation it supports and the markets that deliver goods or services to achieve
its goals. Today, a purchasing officer’s duties and responsibilities extend far
beyond the procurement of office furniture and supplies to include complex
network technology equipment, workspace acquisition, and international
travel needs.
Functions and Key Areas of Purchasing in the Hospitality Industry 89
As part of everyday operations, most major companies and even some gov-
ernment organizations have a purchase or procurement department. These
departments provide a service that is the backbone of many industrial orga-
nizations such as manufacturing, retail, military, and other. Many individu-
als are unaware of what the purchasing department does, why it exists or
what purposes it serves, even some who work for these companies. To better
understand what the purchasing department’s role is, consider some of its
functions.
Let us see some of the main functions of the purchasing department:
3.1.1. Purchasing Raw Materials

The purchasing department ensures that there is always enough product on
the shelves or in the warehouses in a retail environment to keep the customers
happy and the store well stocked. One of the purchasing department’s
roles is to provide all the materials needed for the company or government
organization’s daily production or operation.
Maintaining inventory ordering at a reasonable level is particularly
important with a small business; investing large amounts of capital in excess
stock could lead to storage problems and a shortage of capital for other
expenses such as advertising or research and development. This may include
raw materials such as iron, steel, aluminum or plastics for a manufacturing
company, but it may also include tools, machinery, trucks for delivery or
even the office supplies needed for the secretaries and sales team.
Purchasing also oversees all of the vendors that supply a company with
the items it needs to operate properly.
3.1.2. Getting the Best Price from Vendors

In order to maximize profitability, a purchasing department is also charged
with continually evaluating whether it receives these materials at the best
possible price. This can be challenging for a small business that can buy in
smaller quantities than a larger vendor and can therefore not receive the same
type of discounts on bulk. To find the best vendors at the most reasonable
prices for the particular size orders of the company, a purchasing department
in a small business needs to shop around.
Staff in the purchasing department can communicate with alternative
vendors, negotiate better pricing for bulk orders or explore the possibility of
purchasing cheaper materials from alternative sources as part of their daily
business.
3.1.3. Comply With Business Regulations

The purchasing department must ensure that it follows the appropriate
protocols for purchase and budget approval before making a purchase and
must ensure that all items are purchased in accordance with the organization’s
overall purchasing policy. The purchasing department must also ensure that
all company policies are complied with. For example, individual employees
can communicate with the purchasing department in a small business about
buying needs for things like office supplies or computers.
3.1.4. Maintaining Proper Accounts and Files

Purchasing ensures timely delivery of materials from vendors, generates,
and tracks purchase orders (POs) and works alongside the receiving
department and the accounts payable department to ensure full receipt
and payment of promised deliveries. This means working closely with the
accounting department in a small business to ensure that sufficient capital
is available to purchase the items purchased and those cash flows smoothly
and all payments are made on time. Purchasing Department handle all the
paperwork involved in the purchase and delivery of supplies and materials.
Other general functions of the purchase department are listed as follows:
• Procurement of shops by indigenous and foreign sources as
required in accordance with the applicable rules.
• Checking of requisitions/purchase indents.
• Supplier selection for inquiry issue.
• Issue inquiries/tenders and receive quotations.
• Analysis of quotations and offers, etc., and comparative statement
preparation (quotation charts).
• Consultation with the indenter for selection and approval of
quotations and with Accounts Officer for pre-audit.
• Contract negotiation.
• Checking legal conditions of contracts.
• Issue of POs.
• Follow-up of delivery POs in due time.
• Verification and passage of supplier bills to ensure that payments
are made promptly.
• Maintenance of records of purchase.
• Progressive expenditure statement maintenance, subhead wise.

• Maintenance of records/data for vendor performance.
• Insurance survey arrangement as and when necessary.
• Foreign consignment clearance.
• Keeping informed of the progress of their indents in different
departments/divisions in the event of delay in obtaining supplies.
• To serve as an information center on the knowledge of the
materials, i.e., their prices, supply source, specification, and other
related issues.
• Developing reliable and alternative supply sources.
3.1.5. Functions of Purchasing Manager

A purchasing manager oversees the employees of the procurement
department and works closely with executives of organizations such as the
chief operating officer, office manager and chief financial officer to plan and
oversee budgets.
Buyers, buying officers and buying agents work under the purchasing
manager’s supervision. A purchasing officer’s duties and responsibilities
may vary depending on the organization’s size and priorities. For example,
purchasing agent duties for a pharmaceutical company could focus on
procurement of chemicals used in the manufacture of specific drugs. A
mortgage broker purchasing agent could handle the provision of goods and
services ranging from copy paper to rentals for automobiles.
In order to understand their needs and the role their purchases play in
the organization, a purchasing manager must maintain close communication
with department heads. For instance, an online retailer purchasing manager
must have a working knowledge of the role network server’s play in the
operation of the company.
3.2. PURCHASING IN FOOD AND BEVERAGE SEC-

TOR
It is not immediately apparent the role of procurement in a hotel operation.
Procurement costs, however, are a core part of a hotel business ‘profitability
performance. Sustainable availability of products and services for both
revenue stream generation and internal consumption keeps the business
running like a well-oiled machine. In addition, this availability for the
least cost at the best quality is what businesses are striving for. Costs of
procurement for an operating and opening hotel are different. Before we look
at that, however, it is important to understand what actually procurement is
and what costs are involved in it.
The purchasing department is included in this front-of – the-house
section as it performs a largely managerial function, although it is actually
a back-of-the-house operation. The buying manager’s acumen and the
purchasing department’s efficiency can make a hotel profitable.
The purchasing department’s duties include interviewing salespeople,
placing orders for goods required by all hotel departments, keeping records of
all purchases and payments, drawing up and signing contracts and contracts
for the purchase of all goods, comparing the price and quality of all bids
received, receiving, and checking the quality and quantity of goods received
on request, checking receipt, and shipping invoices against accounts payable
and forwarding such information to the accounting department, suggesting
changes in the use of certain goods where costs can be saved or quality
improved, and suggesting new products.
In some hotels, housekeeping, and chef department heads do their
own sales representative interviewing, placing orders, checking, and other
purchasing functions. This will largely depend on the size of the hotel. The
systems may differ accordingly.
The purchasing agent or manager is the head of this department. This
person oversees the purchasing department’s functions and interviews,
teaches, disciplines, and discharges employees. Promoting this position is
usually from the purchasing department’s staff positions. Sometimes a hotel
may employ someone who has had significant buying experience in other
hotels or other businesses as a purchasing agent.
Buyers are an integral part of the management team of a hotel and are
responsible for many aspects that affect the smooth running of daily hotel
operations. To find suitable ingredients and supplies at a good price, food
service operations rely heavily on the expertise of qualified and competent
purchasing managers.
Leading Purchasing Managers are responsible for purchasing the best
quality food operating ingredients, equipment, goods, and services at the
most competitive prices to sustain and enhance the profits of the company.
They are also responsible for overseeing and managing all aspects of supply
chain management (SCM), including negotiating the best business deals and
ensuring that sustainability, risk management and ethical issues are addressed
appropriately and with integrity. There is sometimes a lot of travel to source

products (local or abroad). Some see this as a great opportunity; others
may see it as a stressful part of their work. Furthermore, many Purchasing
Managers are offered free gifts to entice them to purchase a certain product,
and this can be interpreted as bribery that has legal implications. To accept
something as a gift is to sample something very different. Purchasing
managers must therefore be impartial and able to say no to tempting offers
and ensure that their job stresses are properly managed.
3.2.1. Skills Required for the Purchasing Official in Hotels

The food service industry is fast-running and unbelievably competitive. The
job carries a great deal of responsibility and includes contributing to an F&B
sector’s overall profit/loss, maintaining standards of excellence by sourcing
quality ingredients, correctly managing stock and implementing legal and
integrity-driven buying best practices.
For employment here, a high school education is generally required and
training courses for college or hotels are preferred. While in the purchasing
department there are jobs for beginners such as clerks, secretaries, and
office assistants, opportunities for better jobs and promotions depend on
experience, ability, and training. Selling and estimating are other fields in
which experience can be gained.
Experience in buying work, merchandising, and related fields give you a
great background to buying work. Sometimes specialization is also required
in some particular phase of purchase such as the purchase of canned goods,
office supplies, food, liquor, or linens. In some hotels, staff from other
departments is considered in the purchasing department for advancement to
jobs. Promotion will largely depend on the individual, their education and
experience, and opening responsibility.
Purchasing checkers handle invoice control, check incoming invoices
for error checks, check invoices against department purchase records and
POs, and check the quality and quantity of all received goods. They notify
the vendor’s purchasing agent of compliance with all POs and contract
terms.
For this job role, a solid hospitality qualification that includes Purchasing
Management is essential as well as a wealth of work experience in the
foodservice industry. This will ensure success in the role of the job, coupled
with excellent communication skills, analytical skills, financial acumen and
business awareness. Purchasing managers must also be able to negotiate
well, network, and connect with suppliers and professionals in the industry
and make decisions under pressure.
3.2.2. Working Nature of Purchasing Department in Hotels

Most employees in the purchasing department work 8 hours a day, 5 or 6
days a week. Office assistance will generally be on duty at 9:00 A.M. At
5:00 p.m., checkers or other assistants involved in incoming shipments may
work staggered or late to meet these shipments.
The purchasing process is an essential part of any operation of food
service. All competent cooks should be able to purchase the appropriate
ingredients at the right time and at the best price, in accurate amounts.
Due to the highly specialized purchasing work, most hotels try to train
staff for this work and keep them as long as possible as they are not easily
replaced. This is skilled work and, in general, ability is equal to the length
of time and experience spent in this work. While buying agents have been
promoted to managerial positions, buying is generally regarded as a field in
itself.
Every kitchen operation has different purchasing procedures. But there
is one rule that should always be followed: ‘Buy only as much as it is
anticipated will be needed until the next delivery’.
This will ensure that food remains fresh and generates a high turnover in
inventory. All foods are deteriorating in time, some faster than others. It is
the purchaser’s job to ensure that only those quantities are purchased that is
to be used immediately or in the near future.
In most kitchens, the chef and sub-chefs make purchases and orders,
although this may be assigned to purchasing departments in larger hotels.
Most kitchens will have a list of suppliers, contacts, delivery dates and
schedules, and par stock-level order sheets to make the purchase easier. It
may also be necessary to determine the supplies required for that function
alone for a special function or event, such as a banquet.
Let us now look upon some of the important things followed in the
purchasing department of food and beverage industry:
3.2.3. Way of Sourcing

Delivery sources vary greatly from location to location. Large cities have
more suppliers than small towns and isolated communities. Buyers should
contact available suppliers such as wholesalers, local producers and packers,
retailers, cooperative associations, and importers of food products. The

person responsible for buying will, in most cases, contact several suppliers
to obtain the necessary foods. In order to meet all food-related kitchen needs,
some wholesalers diversify their product lines.
Food products are obtained from different supply sources. A packing
house provides meat and meat products, for example, while a food wholesaler
provides dry goods. Once a business has been established with a supplier, all
transactions should be well documented and be kept on file readily.
The person who is in charge of purchasing food products must be aware
of two major food categories:
• perishables; and
• non-perishables.
3.2.3.1. Perishables
Perishables are often purchased in order to ensure freshness. Frozen foods,
such as vegetables, fish, and meat products, have a longer lifespan and are
less likely to be ordered and stored in a freezer. Perishable foods include
fruit, vegetables, fresh fish and shellfish, fresh meats, poultry, and dairy
products (Figure 3.1).
Figure 3.1: Perishable food items.

Source: https://conservaciondealimentos.com/en/food-purchase/perish-
able-food/#.XNhwJI4zbIU.
3.2.3.2. Non-Perishables
Non-perishable items include dry items such as olives, pickles, and other
condiments, flour, cereals, and miscellaneous items. On a weekly or monthly
basis, these can be ordered.
Keep in mind that it’s not a reason to buy it in quantities bigger than
you need just because something doesn’t go bad. Each item in your stock
is equal to a dollar amount you could save or spend on something else.
Consider that a parchment paper case of 1000 sheets may cost $250. If you
have a case and a half in your inventory, but use only a few sheets a day,
that’s a lot of money in your storeroom (Figure 3.2).
Figure 3.2: Non-perishable food items.

Source: https://balanceblog.bistromd.com/health/healthy-eating/15-non-
perishable-healthy-foods-to-stay-on-track/.
3.2.3.3. Purchasing by Contract

Some restaurants and hotels will have contracts in place for the purchase of
all products or for certain items, especially those belonging to chains. This
may mean that the property can only buy from a particular supplier, but it
will negotiate set pricing in return for the duration of the contract. This has
advantages and inconveniences.
On the positive side, the contract price remains stable and as there are no
price fluctuations, the task of managing food costs becomes more consistent.
On the negative side, the purchase of contracts takes away the opportunity
to compare prices among suppliers and take advantage of specials that can
be offered.
3.2.3.4. Factors That Affect Prices of Food Products

There are many factors due to which the price of food products fluctuates
every time. Few factors are:
• Weather: Severe weather can have an enormous impact on food
costs. Drought, flooding, and unseasonable frost have all affected
the world’s major producing areas in recent years, causing prices
to rise for many items.
• Transportation: If the cost of fuel or transportation increases,
the cost of food that needs to be marketed will also increase.
• Commodity Price: A number of foods, such as meats and grains,
are traded on the commodity market. These prices fluctuate as
buyers who like the stock market, buy, and sell large volumes of
these products.
• Seasonality: When food is in season, the local food supply
provides more of it, bringing down prices. In addition, foods are
usually of higher quality in season and have longer shelf life than
those that are out of season and need to be transported to the
market for long distances.
The Purchasing person must always ask the following questions before
purchasing any food item:
• When should the item be used?
• Which supplier will have the best price and quality?
• Where an item is purchased, the price and quality of the available
supplies should be determined. It is advisable to obtain prices
from at least three sources when ordering supplies, then to buy
from the supplier who quotes the best price for comparable
quality.
• When is the item being delivered?
• Delivery may take hours or days, depending on the distance
between the food service establishment and the supplier.
• Remember, if you do not know when your order will be delivered,
it is extremely difficult to maintain food quality and consistency.
• Menu planning and running inventory are therefore two of the

most important aspects of buying procedures.
3.2.3.5. Specifications for Purchase

Certain specifications are followed while ordering food products in hotels
and restaurants.
• Meat, seafood, poultry, processed fruits and vegetables, and fresh
fruits and vegetables can be ordered under different specifications.
For example,
• By grade, cut, weight/thickness, fat limitation, age, whether fresh
or frozen, and type of packaging, meats can be ordered.
• Seafood can be ordered by type (e.g., fine fish/shellfish), species,
market shape, condition, grade, place of origin, whether fresh or
frozen, count, size, and packaging.
• Poultry can be ordered by type, grade, class (e.g., broiler, fryer),
style (e.g., breasts, wings), size, whether fresh or frozen, and
packaging.
• It is possible to order processed fruits and vegetables by grade
(sometimes), variety, size, and type of packaging, drained weight,
count per case, medium of packaging and whether canned or
frozen.
• It is possible to order fresh fruits and vegetables by grade
(sometimes), variety, size, weight per container, growing area
and number per container.
3.2.3.6. Purchasing Specifications (Table 3.1)
Table 3.1: Purchasing Specifications Kept in Hotel Kitchens
Beef Grade Weight, Size, and Cut Specifications

Prime rib Grade AA 7 kg, fully trimmed
6 kg, bone out, fully trimmed, max. 15
New York strip Grade AAA
cm width, min. 5 cm depth
Tenderloin Grade AAA 3 kg, fully trimmed to silverside
Roast sirloin Grade A 7 kg, boneless butt
Short loins Grade AAA 6 kg, fully trimmed, 5 cm from eye
Pork Grade Weight, Size, and Cut Specifications

Pork leg Fresh—Canada #1 6 kg, oven ready, lean
Pork loin Fresh—Canada #1 5–6 kg, trimmed, lean
Ham 6–8 kg, fully cooked, lean, bone in
Poultry Grade Weight, Size, and Cut Specifications
Chicken—Frying Fancy, Eviscerated 1.5 kg, always fresh
Turkey Fancy, Eviscerated 9–13 kg
Lamb Grade Weight, Size, and Cut Specifications
Legs Fresh—Canada #1
Lamb loin 3–5 kg, bone in
2–3 kg, trimmed with all fat removed
Seafood Grade Weight, Size, and Cut Specifications
Shrimp Jumbo 24–30/kg, fresh
Oysters Canada #1 35/L
Source: https://opentextbc.ca/basickitchenandfoodservicemanagement/
chapter/purchasing/.
3.2.3.7. Portion Control

To calculate the quantities of food items to be ordered for any size banquet, a
portion control chart must be consulted first. Most establishments will have
a portion control chart similar to the one shown in Table 3.2.
Table 3.2: Portion Control Chart
Food Item Menu Item Portion Size

Shrimp Shrimp cocktail 80 g (2.82 oz.)
Lemon Shrimp cocktail 1 wedge (6/lemon)
Cocktail sauce Shrimp cocktail 60 mL (2.11 oz.)
Head lettuce Tossed salad 1/4 head
Tomato Tossed salad 1/2 each
Dressing Tossed salad 60 mL (2.11 oz.)
Prime rib, raw, trimmed ready Prime rib 500 g (17.6 oz.)
Potato Baked potato 1 each (100 count)

Green beans Green beans 80 g (2.82 oz.)
Carrots Carrots 80 g (2.82 oz.)
Strawberries Fresh strawberries 100 g (3.52 oz.)
Whipping cream Berries and cream 60 mL (2.11 oz.)
500 g (17.6 oz.) for 75
Coffee Coffee
people
Coffee cream Coffee 60 mL (2.11 oz.)
Source – https://opentextbc.ca/basickitchenandfoodservicemanagement/
The above chart indicates the portions to be used per person for any
given menu item.
One use for a portion control chart is to estimate the quantity of major
ingredients and supplies needed to produce a predicted number of menu
servings. An example for this is shown below:
For example: You need to prepare shrimp cocktails and prime rib for a
100-person banquet. Using the portion control chart in the above Table 3.2,
you can quickly determine what amounts of major ingredients (Table 3.3).
Table 3.3: Calculating Purchase Amounts
Required Servings Amount to Order

100 x 80 g shrimp 8000 g or 8 kg (17.6 lbs.) shrimp
100 x 1 wedge of lemon 100 wedges = 17 lemons (6 wedges per lemon)
100 x 1/4 head of lettuce 25 heads lettuce
100 x 500 g prime rib raw oven
50 kg (110 lbs.) prime rib
ready
3.2.3.8. Purchase Order (PO) Chart Using Par Levels

The primary purpose of using a buying standard is to ensure that adequate
quantities of all food are available to meet daily requirements. Food
inventory must become a daily routine in order to establish and maintain
these standards. It will help in this regard if you have set par levels (the
amount you should have on hand to get through to the next order).
Three things must be made clear:
• Amount required (par level);
• Amount on hand; and
• Amount to order.
To find the amount to order, subtract the amount on hand from the
amount required. In some cases, you may have to order a minimum amount
based on the package size, so will need to round your quantity up (such as
the whole tub of garlic and full cases of mushrooms, apples, and lettuce in
Table 3.4).
Table 3.4: Purchase Order Chart
Amount Re-
Amount on Amount to Actual Or-
Meats quired (Par
Hand Order der
Level)
• Corned
10 kg 2 kg 8 kg 8 kg
beef
• Ribs of
20 kg 5 kg 15 kg 15 kg
beef
• Ground
10 kg – 10 kg 10 kg
beef
• Veal
5 kg 500 g 4.5 kg 4.5 kg
liver
• Pork loin 10 kg 3 kg 7 kg 7 kg
Amount
Fish Required
Hand Order der
(Par Level)
• Sole
25 kg 5 kg 20 kg 20 kg
fillet
Amount Re-
Vegeta- Amount on Amount to Actual Or-
quired (Par
bles Hand Order der
Level)
• Garlic,
2 kg tub 250 g 1.750 kg 2 kg tub
peeled
• ush-
5 kg case 500 g 4.5 kg 5 kg case
rooms
2 cases (24/
• Lettuce 12 (1/2 case) 1 1/2 cases 2 cases
case)
Amount Re-
Fruits quired (Par
Hand Order der
Level)
• Apples 2 cases 1/2 case 1 1/2 cases 2 cases
• Straw-
10 kg – 10 kg
berries
• Oranges 1 case 2 cases – –
Integrating these par levels into regular ordering sheets or the ordering
system will make it very easy to manage inventory coming in. More and
more suppliers are moving to online ordering systems that offer you current
prices, case sizes, and often the history of your purchase when you place an
order. Online ordering can often be more convenient because during regular
office hours, the person placing the order does not have to call an order desk.
3.3. HOW PURCHASING WORKS IN ACCOMMODA-

TION SECTOR?
It is found that accommodation facilities are an important aspect of the
tourism product. The location factors are found to be important at the very
beginning for the management of hotel services. These hotels are essential
to be easily accessible to the sites or beaches or shops of the tourist. The
hotel staff should be trustworthy, well-trained, and technology-friendly.
Hotel guests should be able to take advantage of facilities such as
quality bedrooms, conference halls, bars, shopping arcade, swimming pool,
transport arrangements, first aid facilities, etc. Personal attention becomes
significant while developing the product, the quality of services that includes
efficiency. Hotels of various grades and categories need to be developed to
accommodate tourists from all segments. It is also found that restaurants
and cafeterias are creators of images. User accessibility and comfort is a
key factor in satisfying experience. The site should be free of all industrial
hazards. Implementing a strategic supply and equipment sourcing initiative

into the purchasing process of a hotel allows hotel purchasing managers to
expand their budget while building strategic, long-term relationships with
suppliers that ensure consistent quality and availability of OS&E products
and services needed to run daily hotel operations.
Standard functions are handled by different hotel departments within
the lodging industry. The hotel’s organizational structure helps logically and
effectively organizes activities and tasks. With a focus on supplier alliances,
hotel purchasing groups will be able to expand beyond a tactical role in
procuring hospitality supplies to acting as strategic members of a hotel’s
organization.
Tourist organizations cannot think in favor of an optimal product strategy

if tourists are not easily accessible to classified and unclassified hotels of
various grades or stars. Unplanned development of the housing sector can
hinder the tour’s quality vacation experience.
Let us see how the accommodation sector works in an organized way
and the role of purchasing in it.
Have you ever checked into a hotel and encountered issues you needed to
address? You may have had a really good experience in the hotel and would
like to thank the staff involved. Hotels operate within a general structure
that helps to organize the property, keep everything running smoothly, and
make sure you have the best possible experience as your special guest.
For example, Hilton Properties California manages their procurement and
inventory using software application called Birch Street.
Review the different groups below, including the executive management
group, the functional groups, and the administrative groups, to gain a greater
understanding of how hotels are organized to serve you.
3.3.1. Executive Management

The executive management group acts as a property leadership and includes
the general manager and one or more assistant managers in the case of larger
hotels. A hotel’s functional groups deal with issues directly related to guests.
These teams have to handle customer requests, issues, and services.
3.3.2. Housekeeping
Housekeeping is an area that has a major impact on guest satisfaction at
any hotel. If a guest finds their room dirty or poorly looked after, they may
not stay at the property and may not be able to return in the future. While
most guests won’t get in touch with the person who cleans their room, their
ultimate satisfaction with their stay at a property will depend largely on
how well the room has been cleaned and maintained. Housekeepers should
understand their important role in a hotel and endeavor to provide excellent
service to everyone.
3.4. SIGNIFICANCE OF PURCHASING IN TRAVEL

AND TOURISM SECTOR
Tourism refers to the temporary, short-term movement of people to
destinations outside their normal place of residence and work and their
activities during their stay in these destinations. Tourism is an industry
with multiple segments. It is an industry where on-the-spot products form
invisible exports are consumed. It is also a highly complex fragmented
industry due to the price-sensitive nature of demand and intangibility, ability
to perish and inseparability.
Tourism operates through business-to-business relationships like all
other supply chains, and SCM can be applied to deliver sustainability
performance enhancements alongside financial performance by working to
improve each supplier’s business operations in the supply chain. The main
differences between tourism supply chains and those of other sectors are
that tourists travel to the product and the product they buy has a particularly
high service component, that is, a higher proportion of people are involved
in the immediate production of the holiday experience.
3.4.1. Supply Chain Management (SCM)

SCM is the process by which the supply chain operations are planned,
implemented, and controlled as efficiently as possible. SCM extends from
point of origin to point of consumption through all movement and storage of
raw materials, work-in-process inventory, and finished goods.
SCM in tourism will start with product planning, identifying the various
sectors to be included in the entire tourism product and also, in each product
sector, raw material management, raw material inventory and service
delivery.
SCM is aimed at eliminating waste in the chain and improving customer
service. Removing waste such as waiting time, inventory, and manufacturing
of unrequested products leads to lower costs. Improved customer service
through interconnected processes leads to preferred suppliers and greater
turnover. All of this results in higher productivity (more revenue/fewer
costs). In tourism, delivering quality service with minimal gaps or reduced
gaps plays a very important role.
Short product life cycles, increased competition, and increased customer
expectations forced many leading companies to move from physical logistics
management to more advanced SCM. Therefore, in many cases, efficient
SCM is the only way to further reduce costs and lead times.
Tourism supply chains involve many components–not just
accommodation, transportation, and excursions, but also bars and restaurants,
handicrafts, food production, waste disposal, and the infrastructure that
supports destination tourism. These are all part of the holiday product that
tourists expect when they buy holidays, quality, depends on performance at
all links in the supply chain for tourism.
The SCM approach also facilitates improvements to customer service in
addition to cost reduction. It allows inventory, transport systems and entire
distribution networks to be managed so that organizations can meet or even
exceed the expectations of their customers.
Almost everything in tourism has a purchasing function embedded in it.
3.4.1.1. Buying Decisions

Services can be delivered directly or outsourced/Co-Sourced as Thomas Cook
does in providing tourism services with a reputable name. By outsourcing
its back-office activities, Thomas Cook implemented a strategic sourcing
arrangement with Accenture. Through this model, in just 16 months, they
have been able to improve operations and reduce their costs by US$ 243.72
million.
3.4.1.2. Manufacturing
In tourism, the component of manufacturing is limited to certain sectors
such as food and craft, memento, gifts, etc. Services are processed in tourism
at each stage. For example, various services such as visa and immigration
processing, waiting time, etc. are processed in the transport sector at
the airport to provide maximum satisfaction for travelers. The service is
processed at the destination by providing tourists with a safe environment
and security.
3.4.1.3. Managing Capacity

Tourism products are subjected to demand instability. For example, during
Oman’s Muscat festival, demand exceeds supply in many tourism sectors,
such as hotels and airlines. By increasing capacity by introducing additional
special flights at special rates, airlines meet this excessive demand.
3.4.2. Tour Operators

Tour Operators also take up the role of purchasing in tourism industry
and execute it. A tour operator packages all or most of an offered trip’s
components and then sells them to the traveler. You can also sell these
packages through retail outlets or travel agencies (CATO, 2014; Goeldner
and Ritchie, 2003). Tour operators work closely with hotels, transportation
providers and attractions to purchase and package large volumes of each
component at a better rate than would be possible for the traveler to purchase
individually. Generally speaking, tour operators sell to the leisure market.
Tour operators buy separate transport, accommodation, and other
services. Combining all the elements in a tour package that they sell to
consumers directly or indirectly. Tour operators sometimes classified as
travel suppliers and travel wholesalers work in a variety of areas buy in
bulk and thus secure significant discounts from travel suppliers or travel
wholesalers that cannot match the customer’s direct purchase.
Tour operators classified as travel suppliers or travel wholesalers
purchase services and break bulk purchase, for example, in large quantities
to sell to different travel agencies in smaller quantities. Tour Operators
Assemble and present to the customer a tour package.
Nature of tour operation – A tour operator’s success depends on his

ability to purchase his product in bulk at a much lower price compared to
direct customer purchases such packaging gives customers’ value for money.
3.4.3. Travel Agencies

Travel Agencies also involves in purchasing as part of their role in tourism
industry. The functions of a modern travel agency have widened much
after the introduction of air travel. The most important functions of a travel
agency are described below:
3.4.3.1. Purchasing and Selling Information

A retail travel agency provides the general public with the necessary travel
information. The tourists intending to come to the travel agent’s office
and seek information about their proposed visit. The travel agent should
be a highly skilled man and should provide up-to-date and concrete travel
information. He must have great communication skills and the art of capturing
potential customers should be thorough. Foreign language knowledge is a
desirable qualification for travel agency workers.
3.4.3.2. Liaise With Service Providers

A travel agent should maintain constant contact with various service
providers such as transportation companies, hotel managers and surface
transportation providers such as motor vehicles from airport to hotel and
sightseeing, etc.
3.4.3.3. Preparing Itineraries

A tourist trip involves preparing various types of itineraries. With their
respective advantages and disadvantages, there are different means of
transport. A travel agent recommends choosing the most convenient course
for the potential tourist.
3.4.3.4. Purchasing and Selling of Tickets

It is a very important function of a travel agent to sell tickets to tourists
for various modes of transport such as air, rail, and sea. Ticketing is not an
easy job because there is a very complex range of international airfares.
Computerized Reservation System (CRS) has revolutionized the air and
train ticket reservation system as well as a hotel room.
3.4.3.5. Buying of Insurance

An important function of a travel agent is providing some important travel-
related services like selling insurance for tourists for personal accident risks,
any baggage loss and even trip cancellation insurance.
3.4.3.6. Purchasing Foreign Currencies

A travel agent’s important function is to provide foreign currency to an in-
tended foreign tourist. India’s government allows US$ 10,000 Indian trav-
elers to travel abroad. On behalf of its intended travelers, the travel agent
will arrange for the purchase of foreign exchange. This facility will save the
intended tourists a lot of time and harassment.
3.4.3.7. Planning Tours

It is the task of planning and hosting tours, both for inclusive programs and
to meet individual requirements that the contracts and arrangements have
been entered into. This job is very interesting and challenging at the same
time. This job requires a lot of initiative and drive. The job requires travel to
the places to be included in the itineraries.
For a meticulously minded person, this is essentially a job and requires
considerable training and ability. Many agencies that cooperate with
airlines and other transportation companies take the opportunity to arrange
educational tours for such employees in the countries they deal with. Many
agencies have individuals who are authorities in specific countries and many
will issue separate programs dealing with territories in addition to a general
program.
It may also be possible to prepare separate programs for holiday offers
based on specific forms of transport, e.g., air, rail, road or sea. In order to
cover different seasons of the year, programs must also be issued.
Advertising is an important part of the program. Having spent
considerable time and money on preparing everything related to the issue
of a program, advertising must feature significantly in a travel agency’s
activities, and more so if the agency is a large one. Under the management of
an advertising expert, most large travel agencies have their own advertising
departments.
In the 1960s, the idea of buying a travel package, accommodation,
and possibly some ancillary services like entertainment was established in
Western Europe. By 1970, tour operation had become a comprehensive part
of tourism. Their growth has been spectacular. In doing so, it succeeded

in reducing the actual travel price abroad; it brought holidays abroad to a
market segment not reached by conventional methods of taking a vacation.
The original demand for inclusive arrangements came from the
convenience of purchasing a single product for travel. Today, tour operation
is the dominant feature of the holiday market in most countries that are
tourism generators.
An inclusive tour is a package of transportation and accommodation
and maybe some other services that are sold at a single all-inclusive price
as a single holiday. The popular term ‘package holiday’ is more accurate in
describing the nature of a tour than the term ‘inclusive tour.’
3.5. NEED FOR RESPONSIBLE PROCUREMENT IN

HOSPITALITY INDUSTRY
Competition is fierce than ever in the travel and hospitality industry.
Customers are becoming increasingly difficult to please with prices, reviews,
and options available at a mere touch. In the meantime, industry leaders
have to walk the tight rope consistently to maintain price competitiveness
and brand experience. Increasing costs of labor and materials and a volatile
demand scenario are not making the job easier.
Any company that cannot manage its costs will simply not thrive in
this pressure cooker environment. So it’s no wonder that more and more
procurement professionals are in the spotlight. But awareness has risen with
expectations (Figure 3.3).
Figure 3.3: Responsible procurement.

Source: http://www.socialresponsibility.manchester.ac.uk/news/octo-
ber-2016/responsible-procurement-supplier-exhibition-/.
You are in a great position to contribute positively to the success of

your organization as a purchasing leader. But sometimes you’re buying team
members’ skill levels can hold you back:
• Your cost savings are lower than they could be.
• Your internal customers have a negative perception of the
purchasing department.
• You find yourself being dragged into many problems that buyers
should be able to solve on their own.
Purchasing decisions can have significant environmental and social
impacts, especially for the tourism and hospitality sectors, which are often
under pressure to import large quantities of goods from distant countries,
including food, to meet the demands of guests.
The good news is that, without making disruptive organizational
changes, buying performance can improve. Your buying team can put in
place best practices and save more money than ever before. With internal
customers, management, and suppliers, your team can gain unprecedented
credibility. And, independently, your buyers can succeed, freeing you to be
a true leader.
Hospitality procurement managers should consider lifetime costs when
deciding what to buy, whether to buy food for their restaurants, guestroom
furniture, spa amenities, or outsourcing laundry services. This will also help
to influence the behavior of suppliers and even consumers (link to Peninsula
Hotels Spotlight).
3.5.1. What Is Meant by Responsible Procurement?

Looking beyond traditional price, quality, functionality, and availability
parameters, it involves choosing products and services that have less or
less impact on human health, the environment, and society compared to
competing items that serve the same purpose.
Responsible procurement (also known as sustainable/green procurement,
environmentally preferable purchasing (EPP) or sustainable/responsible
purchasing) is a process that takes into consideration environmental, social,
and ethical considerations when making a purchasing decision.
Life-cycle costing is one of the principles of responsible procurement. It
is a technique that determines the total cost of buying a product or service,
ranging from “cradle to grave,” by asking questions about each stage of its
life cycle.
Responsible procurement considers the following:

• Whether a purchase is necessary at all;
• What products are made of;
• Under what conditions they have been made;
• How far they have traveled;
• Their packaging components;
• How they will be used; and
• How they will be disposed of.
3.5.2. Basic Principles of Responsible Procurement
3.5.2.1. Quality
Opt for the highest quality that you can afford, whether for furniture,
uniforms or appliances; have them repaired or serviced when needed—it’s
generally more cost-effective than replacement and reduces material and
waste use.
3.5.2.2. Avoid Hazardous Materials

Avoid toxic substance-containing products. Opt for non-harmful alternatives,
including non-toxic, water-based, hypoallergenic, and biodegradable
products for cleaning, zero VOC paints, and chemical-free amenities (Figure
3.4).
Figure 3.4: Hazardous chemicals used for cleaning purposes.

Source: https://www.gsmsds.com/avoiding-common-workplace-chemical-
hazards/.
3.5.2.3. Use Natural and Organic Products

Choose certified organic food and drink products and cotton where possible
(Figure 3.5).
Figure 3.5: Organic vegetables.

Source: https://www.fastbusinessplans.com/sample-business-plans/organ-
ic-farm-business-plan.html.
3.5.2.4. Using Energy Efficiently

Choose “green” lighting, heating, and air conditioning, which may initially
cost more but will generate long-term savings due to lower operating costs.
3.5.2.5. Use Fairtrade Products

These certified items, including tea, coffee, and chocolate, promote
sustainable development by ensuring poorer producers around the world
get a fair price for their products, allowing them to trade their way out of
poverty.
3.5.2.6. Use Recycled or Recyclable Products

Purchase products made from recycled or recycled materials (100% recycled
content carpet) and/or products that can be recycled or reused at the end of
their working life (upcycling) (Figure 3.6).
Figure 3.6: Image of a bottle cycler.

Source: https://www.tomra.com/en/collection/reverse-vending/reverse-
vending-news/2017/tomra-acquires-bottlecycler.
3.5.2.7. Avoid Disposable Products

Unless they are biodegradable or recyclable, they add an alternative with a
useful lifespan to landfill accumulation.
3.5.2.8. Club All Costs Associated With Purchase

To assess the full environmental and social impact of a purchased product or
service, consider its cost throughout its life cycle, from “cradle” to “grave,”
from extraction of raw materials to manufacturing, distribution, use, repair,
and maintenance, and disposal or recycling. This is called the costing of the
life cycle (LCC).
As part of your responsible procurement policy, ask suppliers about the
associated impacts at each stage of the life cycle. Working out the cradle-to-
grave costs, or LCC, will help you assess whether lower ongoing efficiency
savings over its lifespan can offset the initial higher cost of a product or
service. LCC can be applied to everything from light bulbs to more complex
purchases in the hospitality industry, such as outsourcing services for
housekeeping.
The LCC approach can be implemented in a number of ways in the
procurement process. For example, you can calculate the savings from
purchasing a particular product or service on water and energy use or waste
disposal. This is what the Dover Downs Hotel and Casino in Delaware,
USA did when, at an initial outlay of US$ 11,500, they purchased 450
new water-efficient showerheads in 2009. They calculated that the new
showerheads, operating at 1.5 gallons per minute (compared to 2.5 million
GPM for the original showerheads), saved nearly $14,000 in water and
saved about $11,600 in energy in the first year. Thanks to the energy-efficient
showerheads, the hotel now saves $25,600 annually.
Software or online tools are also readily available to help you determine
life-cycle costs, including a calculator offered by the energy-efficiency
program of the EU Energy Star and a tool developed by the Swedish
Environmental Management Council.
3.5.2.9. Eco-labels and Certifications Schemes

An easy way to provide sustainable products and services is to choose those
with an eco-label or an environmental, social or ethical scheme certified by
a third party (Figure 3.7).
Figure 3.7: Ecolabel.

Source: https://www.biobasedconsultancy.com/en/about-biobased/certifica-
tion-and-ecolabels.
There are hundreds of eco-labels and certification schemes around the

world, some focusing only on one environmental aspect, such as energy
efficiency (e.g., energy saving trust) or sustainable wood harvesting (Forest
Stewardship Council), natural resource or habitat protection (Rainforest
Alliance) or ethical impact (Fairtrade), while others consider the life-cycle
impacts of a product or service.
The International Organization for Standardization (ISO) describes three
types of environmental labeling with only ISO Type I labels certifying that
a product or service meets strict life-cycle assessment standards; such labels
include, among others, the Nordic Environmental Label, the EU Ecolabel,
the Hong Kong Eco-Label and Good Environmental Choice Australia.
Online databases such as the Big Room Ecolabel Index help you identify
relevant standards from food and drink, building materials and cleaning
products to appliances, paper or toiletries for specific products or services.
There are fewer recognized certification standards for social issues, but the
most popular include fair trade, health, and safety standards such as OHSAS
18001 and BS8800, and international labor standards, see the International
Labor Organization.
3.5.2.10. Know the Consequences

Choose products (cleaning products, vehicles) or services (laundry,
outsourcing of staff) that are widely known to have a high environmental or
social impact as a starting point. For example, ensure that any staff agencies
you use meet legislative requirements, including paying the minimum wage
to employees and granting statutory sick pay and vacation entitlements.
3.5.2.11. Collect Detailed Information

Is it easy to find the information you need to set criteria for this product
or service, and will it be easy to express to a supplier what you technically
want? You can refer to the criteria of a reputable certification scheme for
assistance with technical specifications.
3.5.2.12. Choose Green Alternatives

Are there on the market alternative sustainable products (energy-efficient
TVs, water-saving washing machines) or services (eco carpet cleaning), will
they meet your sustainability requirements and can they be justified if there
are additional costs? (Figure 3.8)
Figure 3.8: Choosing eco-cleaning in hotels.

Source: http://ecocleaning-nyc.com/en/commercial/hotel-carpet-cleaning-
service.
3.5.2.13. Training to Staff

Training to give staff the knowledge and understanding of sustainability
matters is key to embedding responsible procurement across the hotel.
3.5.2.14. Supplier Improvement

Consider accepting suppliers with poor current sustainability performance if
they are committed to embarking on systematic, collaborative improvement
processes. The goal is long-term mutual success.
3.5.2.15. Gradual Implementation

Think of responsible procurement as incremental and set your resource
priorities—do not be over-ambitious. Start by working with a small group
of sustainable products and services—such as recycled paper, non-toxic
cleaners, energy-efficient light bulbs and fish—where the environmental
and social impacts are well known and sustainable alternatives are readily
available. Remember to communicate it to as many people as possible,
including your staff, suppliers, and other stakeholders, once you’ve created
your policy to help raise awareness of your goals, gain support, and keep up
momentum. “Responsible procurement is an extremely complex process,
especially in the hospitality sector, where you deal with so many different
suppliers offering so many different products and services,” explains Evadne
Giannini, head of Hospitality Green LLC, a New York-based consulting
firm specializing in environmental and operational services. “For hoteliers,
it poses a steep learning curve, which is why small, progressive steps should
be taken.
One of the first things I recommend for hotels on the first step towards
sustainability is to make their paper stream greener. They should also
constantly ask if first they need a purchase—do they need those individual
butters that bottled water, or those Styrofoam cups. Any waste in the balance
sheet is a net loss.
In general, look for evidence that the product or service you procure is
genuinely “responsible.”
3.5.3. Benefits of Responsible Procurement

A hotel with a responsible procurement policy can enjoy significant
commercial, environmental, and social benefits:
3.5.3.1. Reputation
The selection from responsible suppliers of sustainable goods and services
will enhance the company’s reputation, increase customer loyalty and attract
new clients. A supplier association with poor environmental, social, and
ethical records may pose a significant reputational risk to a business. For
example, in 1996, after the company was publicly accused of doing business
with overseas suppliers employing child labor, Nike suffered harmful
boycotts by consumers. Nike announced significant measures at supplier
factories in 1998 to improve working conditions.
3.5.3.2. Save Cost

When viewing items throughout their entire life span, products that are
more expensive may initially result in savings when assessed throughout
their lifecycle. Potential cost savings in procurement can be achieved by
reducing consumption, longer pay-back periods or by buying more efficient
and sustainable products.
3.5.3.3. Tax and Credit Benefit

Businesses can use government financial incentives to invest energy-saving
equipment. Many municipalities in Japan offer subsidies for purchases of
energy-efficient appliances, including low-interest financing, while the
US state of Pennsylvania offers energy-efficient equipment grants to small
businesses that significantly improve the energy efficiency of a company.
The Carbon Trust’s Enhanced Capital Allowances scheme in the United
Kingdom allows businesses to claim 100% first-year capital allowances on
qualifying energy-efficient equipment investments, from boilers to lighting

and cooling systems.
3.5.3.4. Supports Innovation

It can encourage suppliers to invest in developing products, technologies,
and processes that are sustainable. Ecolab has worked closely with its
Marriott customer to develop a low-temperature water washing system, the
Aquanomic Washing System, which reduces water and energy consumption
by up to 40% (Figure 3.9).
Figure 3.9: Aquanomic washing system.

Source: https://www.bestwesternsupply.com/docs/green/EcoLabAquanom-
icProgram_2012.pdf.
3.5.3.5. More Capital

Institutional investors and lenders increasingly look to the performance
of a company in terms of social, environmental, and governance. Hotels
conducting responsible procurement are more likely to benefit from easier
capital access.
3.5.3.6. Develop Staff Engagement

By demonstrating genuine commitment to environmental and social issues,
responsible procurement can contribute to attracting and retaining hotel
staff and creating more highly motivated and productive staff. In Managing
Business Ethics (2004), Linda Trevino and Katherine Nelson showed
that they can achieve better work attitudes, higher productivity and lower
turnover rates when companies meet the expectations of their employees
about corporate social responsibility (CSR) (Figure 3.10).
Figure 3.10: Engage employees.

Source: https://www.mckinsey.com/business-functions/strategy-and-corpo-
rate-finance/our-insights/beyond-corporate-social-responsibility-integrat-
ed-external-engagement.
3.5.3.7. Social Benefits

Making decisions beyond traditional economic parameters is a way to
incorporate adequate safeguards and controls in order to avoid abuses and
inadvertent infringements on key social issues such as labor and human rights
and health and safety. Hotels can also support local job creation and other
economic opportunities and build a strong relationship with the community
by requiring more local goods and services (Figure 3.11).
Figure 3.11: Job creation for locals.

Source: http://socialprocurementaustralasia.com/.
3.5.3.8. Environmental Benefits

With key customers demanding improvements in sustainability, suppliers
can be encouraged to make their production processes and products more
environmentally friendly in terms of sourcing “green” raw materials,
using less packaging, designing products to be more energy-efficient and
consuming less water, etc. To achieve this, hotels should work to engage
suppliers so that they know your goals and understand them (Figure 3.12).
Figure 3.12: Responsible procurement saves environment.

Source: https://www.onyx-hospitality.com/social-responsibility/responsi-
ble-procurement.aspx.
3.5.4. Implementing Responsible Procurement Policy
3.5.4.1. Create a Responsible Procurement Policy

You will need an easily understood simple, clear policy statement from
employees and suppliers that explains your vision and goals. Make sure
your overall sustainability goals are supported.
For example, the UK’s The Beardmore Hotel and Conference Center’s
sustainable purchasing policy (www.thebeardmore.com/about-us/social-
responsibility/sustainable-purchasing-policy) lists its criteria when
considering a potential supplier, ranging from the form of delivery and
packaging to the energy and water consumption initiatives of a supplier and
its recycling policy at the end of the life of a product.
3.5.4.2. Implementing Policy

Make a list of all the products and services your hotel buys from outside the
establishment—from agency staff to detergents, electricity to appliances,
furniture to office equipment—and prioritize the areas you could buy more
sustainably. Your main CSR commitments could be used as your guide: if
your hotel is trying to reduce CO2 emissions, target those procurements
that can help you achieve these goals (such as energy-efficient appliances,
renewable energy).
Identify the individuals and resources responsible for implementing
your policy. For everything from updating standards to providing support
material to coordinating supplier and staff training and evaluating supplier
performance over time, you will need to assign responsibilities.
Invite key suppliers, staff, and a broad stakeholder base—maybe
local authorities responsible for waste disposal—to take part in the policy
and planning phases. It will improve the applicability, legitimacy, and
effectiveness of your policy.
Translate your responsible procurement expectations into a clear set of
guidelines or a Supplier Code of Conduct, setting your minimum expectations
with a requirement that suppliers confirm compliance with them. For
example, the Vendor Code of Conduct of Intercontinental Hotels Group
(www.ihgplc.com/index.asp?pageid=733#conduct) covers the expectations
of the group of its suppliers on everything from labor and human rights to
environmental protection and the conduct of subcontractors and suppliers
of their suppliers. Explain the policy and what you intend to do with your
suppliers face to face and arrange briefing sessions and workshops. Set
measurable goals for yourself. As part of its responsible procurement policy,
India’s ITC Hotels sets its property targets to ensure that 75% of each of its
hotels’ purchases of “continuous consumables” (products with low cost per
unit that are regularly used and replaced, including paper, toner cartridges,
folders, and batteries) should contain the following: at least 10% post-
consumer and/or 20% post-consumer products.
Integrate your criteria for sustainability into your procurement
and contracting procedures. Contract clauses may be used to include
environmental or social considerations, such as the requirement for goods to
be delivered outside peak traffic times or for suppliers to take back packaging
that comes with the product.
3.5.4.3. Selecting Right Products and Services

Be clear in your Request for Proposal (RFP) or tender with suppliers
about the information you require about their goods and services. Before
shortlisting interested suppliers, you can choose to use a pre-qualification
questionnaire (PPQ) to check the credentials of your suppliers (Figure 3.13).
Figure 3.13: Selecting right products and services.

Source: https://www.quickcompany.in/articles/how-to-choose-right-class-
for-your-trademark.
These questions must be checked every time:

• What are the impacts of the product or service that you are
planning to buy at the different stages of its life cycle?
• Does the supplier have their own environmental or social goals
and criteria, such as becoming an Ethical Trading Initiative
signatory? Does it set its suppliers/subcontractors environmental

and social criteria?
• Are they environmentally and socially compliant?
• Does the supplier use a certified environmental management
system (EMS) such as ISO 14001 to assess and monitor its impact
on the environment and maintain compliance with law?
Collect both qualitative data (simple yes/no questionnaires, for example)
and quantitative data (such as waste generation, energy consumption, etc.).
Then you can evaluate your collected information and determine which of
the suppliers performs well in relation to your standards.
3.5.4.4. Points to Check With Raw Materials

• Does any of the raw materials involve sensitive environmental
issues? If so, have adequate measures been taken to minimize
environmental issues?
• When they are extracted, do they damage the local environment?
Does extraction require a high input of energy?
• Are long distances involved in the transport of raw materials or
inefficient methods involved in the transport of materials? (e.g.,
road or air versus train) Is there any recycled or post-consumer
waste in the product?
• Were there any exploitative practices involving workers such as
child labor or poor rights/security?
3.5.4.5. Points to Check-in Manufacturing

• Is there an environmental policy and program in place for the
manufacturer? Is high energy input involved in the manufacturing
process?
• Is the equipment currently in use, energy-efficient? Have efforts
been made to reduce it if waste is produced?
• If liquid effluent generation is involved, does the supplier work
to reduce this?
• Are solvents, glues, chemicals, varnishes, paints or other finishes
(e.g., chromium) used toxic or contaminate the air?
3.5.4.6. During Production, Are Any Heavy Metals Released?

• If refrigerants are used (e.g., CFCs, HCFCs, HCs), are they the
least harmful to the environment?
• Is waste or waste recovered for process reuse or recycling?
• Are there any exploitative practices involving workers such as
child labor or poor rights/security?
• Does the manufacturer offset production carbon emissions?
• Does the product have an eco-label or other guarantee that it has
been produced responsibly?
• Points to Check-in Transport and Delivery
• Is the product going to have to travel long distances to the hotel
from the manufacturer/supplier?
• Is over this distance the most efficient mode of transport being
used?
• Are there any hazards during transportation?
• Have there been any efforts to minimize packaging?
• Will the supplier re-use/recycle used packaging?
3.5.4.7. Check the Use

• Does the product have a good rating for energy efficiency? Is
water consumption minimized? Does it have a negative impact
on the quality of indoor air?
• Will replacement parts have a long distance to travel? Will it
provide long service before it needs to be replaced?
• Is the product at the end of its useful life posing a threat to the
environment?
• Is there any special safe disposal requirements that you doubt can
be adequately met?
• Can you reuse all of the material or some of the components,
most of them?
• Can you recycle the material or some of the components, most
of them?
• Can the product be returned for recycling or reuse to the supplier?
3.5.4.8. Helping Suppliers

Agree with suppliers to help you evaluate suppliers with realistic targets or
key performance indicators (KPIs). Assess the progress of suppliers with
regard to goals and inform them as to whether expectations are being fulfilled.
Clear and structured non-compliance action plans should be in place;
use “probation periods” to allow time for suppliers to address issues and
implement action plans. Peninsula Hotels visits its key suppliers on a regular
basis to ensure compliance with its code of conduct and that procedures
work in reality, as well as using face-to-face meetings to communicate with
its supplier’s relevant social and environmental concerns.
Through workshops and/or forums on key issues such as water and waste
management or energy efficiency, or through face-to-face meetings, engage
with underperforming suppliers to help them improve their sustainability
performance. If done well, product, service, and process innovations can
benefit both partners.
Recognize sustainability improvements from suppliers to maintain
momentum and support for your program. For example, introduce supplier
recognition and reward programs; make your favorite choice when
contracting the best performers; offer them long-term contracts; organize
special events to showcase your best-performing suppliers.
3.5.4.9. Monitoring Progress

You should monitor the performance of your suppliers against the various
agreed indicators, including KPIs, supplier claims paper evidence, third-
party verification, or through an external audit. Meet with suppliers
on a regular basis to assess progress and anticipate potential issues, and
encourage and communicate feedback to and from suppliers. Finally, report
on your responsible procurement policy’s progress. If you do this publicly
through a sustainability report or through your annual report, remember to
first communicate the outcome to your suppliers.
For many in the hospitality industry, selling food and drink locally is now
an established strategy and the practice will continue to expand into other
procurement areas. Local sourcing benefits are many, including lowering
transportation costs, supporting the local economy, building a strong
community relationship, and increasing delivery certainty and predictability.
Owing to its opening in the Peruvian city of Cuzco in summer 2012,
Orient-Express ‘Palacio Nazarenas supplies almost everything in Peru, from
its linens to ceramics and artwork. The hotel works with a community of
local weavers to produce their textiles and rugs, a local woodcarver produces
pieces of furniture, and two of Peru’s top fashion designers create uniforms
for the staff.
As the recycling industry is finding ways to turn waste into new
products more and more, the choice of quality items made from recycled
and/or reclaimed content will increase. Responsible procurement managers
will increasingly look to the recycling industry as a supplier of alternative
“green” products, whether they are recycled aggregates for construction,
crockery, and glasses made from recycled materials or salvaged timber
furniture. For example, carpets are made with up to 100% recycled content
at Starwood Hotels and Resorts Element hotels and wall art is mounted on
bases made from reused car tires.
The sharp rise in crude oil, natural gas, electricity, and heating oil
prices will continue to compel procurement managers to look for energy-
efficient products. Concerns about water shortages will also focus the
attention of hoteliers on finding suppliers committed to using less water in
the manufacturing process and products that save water, from showerheads
and taps to dishwasher.
REFERENCES
1. http://www.shareyouressays.com/knowledge/6-most-important-
functions-of-modern-travel-agency/111155 (Accessed on 13 July
2019).
2. https://careertrend.com/list-6496926-duties-purchase-department-.
3. https://opentextbc.ca/basickitchenandfoodservicemanagement/
chapter/purchasing/ (Accessed on 13 July 2019).
4. https://opentextbc.ca/introtourism/chapter/chapter-7-travel-services/
5. https://slideplayer.com/slide/5851645/ (Accessed on 13 July 2019).
6. https://smallbusiness.chron.com/functions-purchasing-department-
organization-158.html (Accessed on 13 July 2019).
7. https://study.com/academy/lesson/organizational-structure-in-the-
hotel-lodging-industry.html (Accessed on 13 July 2019).
8. https://www.gep.com/industries/travel-hospitality (Accessed on 13
July 2019).
9. https://www.greenhotelier.org/our-themes/responsible-procurement/
10. https://www.hospitalitycrossing.com/article/900019191/Purchasing-
Department-of-the-Hotel-Industry/ (Accessed on 13 July 2019).
11. https://www.hotelexecutive.com/business_review/3628/role-of-
procurement-in-a-hotel-operation (Accessed on 13 July 2019).
12. https://www.hotelschool.co/blog/the-role-of-the-purchasing-manager-
in-food-service-operations/ (Accessed on 13 July 2019).
13. https://www.nextlevelpurchasing.com/procurement-training/
purchasing-teams (Accessed on 13 July 2019).
14. https://www.sourceoneinc.com/industries/sample-industries-served/
restaurants-hotels-and-hospitality/ (Accessed on 13 July 2019).
15. https://www.ukessays.com/essays/business/supply-chain-in-tourism-
services.php (Accessed on 13 July 2019).
16. https://www.vskills.in/certification/tutorial/purchase-management/
functions-and-responsibilities-of-purchase-department/ (Accessed on
13 July 2019).
4
Specification, Objectives,
and Evaluation of
Purchasing
“When we purchase something, we are enriching other people.”

― Sunday Adelaja
CONTENTS
4.1. Purchasing ...................................................................................... 130

4.2. Purchase Specification .................................................................... 131
4.3. Purchasing – Objectives.................................................................. 140
4.4. Purchasing – Evaluation .................................................................. 146
4.5. Conclusion ..................................................................................... 153
References ............................................................................................. 154
The chapter gives a definition of purchasing, throws light on ‘purchase’

specification, how to develop the purchase specifications and the important
features it comprises of. Writing a purchase specification with clarity
and precision is important. The objectives of a robust purchasing and
the other lean objectives of the purchasing departments are highlighted.
The importance of the ‘evaluation’ of the purchasing and the technical
concepts of how the evaluation can be performed is the final topic, which
is discussed at the rear end of this chapter.
4.1. PURCHASING
Purchasing in layman terms means obtaining the goods or services, raw
materials and the resources from the suppliers. According to Alford and
Beatty, “Purchasing is the procuring of materials, supplies, machines,
tools, and services required for equipment, maintenance, and operation of
a manufacturing plant.” Purchasing in the ancient world initiated from the
Barter system where people exchanged their goods and services to acquire
what they wanted.
One of the unique terms of purchasing is Scientific Purchasing. Scientific
Purchasing and Recruitment are similar and different. While recruitment
means acquiring the right people for the right job at the right time, scientific
purchasing is the technic of purchasing goods or services at the right quality,
quantity, price, time, and source.
Westing, Fine, and Zenz in their book purchasing management; materials
in motion says “Purchasing is a managerial activity that goes beyond the
simple act of buying. It includes research and development for the proper
selection of materials and sources, follow-up to ensure timely delivery;
inspection to ensure both quantity and quality; to control traffic, receiving,
storekeeping, and accounting operations related to purchases.”
Purchasing is a subset of Procurement; however, it is erroneously used
synonymous in some businesses. Procurement is where choosing vendors,
setting up of payment terms, contracts to be negotiated, and the actual
purchasing of the goods or services happened. Purchasing is the process
where the payment for the goods, ordering, and receiving of the goods or
services happen. This can also involve ushering the suppliers to receive the
expected goods as soon as possible (Figure 4.1).
Specification, Objectives, and Evaluation of Purchasing 131
Figure 4.1: Purchasing.

Source – http://www.supplycs.com/procurement-v-purchasing/.
Purchasing can be considered as a reactive approach whereby, when a

service or goods ceases to exist, the ordering, payment, and receiving of goods
takes place. The focus is more on the item’s cost and is more transactional
focused in nature. Market exploration to find the appropriate goods at the
affordable cost, desired quality and the desired time is purchasing.
4.2. PURCHASE SPECIFICATION

A precise and evidently vital document which provides information on
all the essential requirements of all the raw materials, goods, and services
being purchased may be termed as Purchase Specification. One of the most
important features of Purchasing is Purchase Specification. It is one of the
most important documents and serves as the basis of the underpinning for a
contract to be created. Purchase Specification is also the document on which
the offers are based upon.
Purchase specifications give us a picture of what the organization or the
company intends to purchase for themselves. Vendors use these Purchase
Specifications to prepare the bid which will help them stock up on the goods
or the services requested. When various bids are received from the various
vendors, it will be then evaluated by the respective Purchasing department
using the Purchase Specification to understand the conformity of the bids
to the listed requirements. Based on the vendor who matches most of the
specified requirements, they get contracted for the purchase.
Purchase specification is the key documents which serve as the foundation
stone to build the contract. This written Purchase specification is also the
checklist or the legal document which can be used to check the goods or
the services when it is delivered or if there is a deviation to the listed, this
helps to set it right. When there is a dispute if the delivered is against the
requirement and the supplier doesn’t agree to amend the requested good
or services, this Purchase specification is the document used in the legal
proceedings.
4.2.1. Purpose of Purchase Specification

i. Purchase Specifications communicates the purchaser’s require-
ments to the possible sellers.
ii. The materials and the manufacturer’s goods or services can eas-
ily be identified.
iii. In case of a good’s purchase, the purchase specification will give
a clear picture on how the installation, testing, and handover
should be done.
iv. It serves as a guideline on which the suppliers must work on.
v. Purchase Specifications helps the buyer to evaluate the many
offers which the evaluation committee receives.
vi. Classification within the purchase specification helps to deliver
the asset and in running the asset as per the initial requirements.
vii. Project Risks can be minimized since the purchase specifica-
tions include the details of the requisites in the contractual docu-
ment with the drawings.
viii. Time-saving by being clear and concise, containing all the nec-
essary information makes every party of the contract, the buyer,
seller, and the project teams to make it work at the estimated
turnaround time.
ix. Purchase specifications are used to support the project cost-
ings as well whereby the materials, products, performance, and
workmanship can be monitored.
x. This Purchase Specification should be a living document which
should be used from the construction to the quality checking
phase of the same (Figure 4.2).
Figure 4.2: Purpose.

Source – https://www.managers.org.uk/insights/news/2019/april/how-to-
define-your-business-purpose.
4.2.2. Important Features of a Purchase Specification

• Scope of the Project – One of the first requisite of the Purchase
Specification is to explain the depth of the project, work or the
extent to which the project would extrapolate itself. This would
include the functionality, the details of the organization and the
most important materials that are delivered.
• Key Assumptions: This would be zero to nil in a well-defined
project specification.
• Responsibilities of the Seller or the Supplier: Purchase Speci-
fication in detail describes the breakdown of every activity and
tasks the seller or the supplier should perform, to produce or
develop the said goods, services, and complete the respective
project or work. The completion criteria of each task or activity
must be objectively stated to avoid ambiguity during action. The
activities or tasks and the completion criteria are most signifi-
cant features of a Purchase Specification if this is used for time
and materials purchasing.
• Responsibilities of the Buyer or the Purchaser: This section
of the Purchase Specification would list down the activities the
buyer or the purchaser had to be performing to facilitate the sell-
er or the supplier to fulfill the said seller activities. On the dart
information of the requirement or just to have a bird’s view on
the overall approvals and reviewing of the project or the good
during the design to implementation stage are other important
activities of the buyer or the purchaser.

• Data Privacy and Confidentiality: Most of the confidentiality
clauses that are to be included in the Purchase Specification are
previously discussed by the parties in discussion and ensured
that every part of the clause is addressed. Purchase specifica-
tion will also straighten up the confidentiality needs that would
arise during the goods or the services development phase. These
unique or additional requirements on the confidentiality of the
product developed are taken care of.
• Deliverables: These mentioned in the Purchase Specification
are those that has been agreed to be developed by the seller or
the supplier and gets handed over the buyer or the purchaser. In
case the deliverables are intangible tasks which comprise of up-
per-level tasks, background information, objectives, and other
subtasks associated with it.
• Guidelines for the Deliverable Materials: Purchase Specifica-
tion also includes the guidelines for the deliverable materials.
This consists of the description of every material.
• The purpose of the materials with the matter specifica-
tion, i.e., the size, volume, and the texture needed.
• Deliverable Materials: These indicate those that are to be de-
livered to the buyer along with the deliverables. These deliver-
able materials are those that the buyer might need in future and
chooses to use them in future without any agreement or contract
which would bind the buyer and the seller afterward. This would
also, therefore, prevent the supplier or the seller from using the
deliverable material with other clients or customers. These also
get featured in the purchase specification.
• Buyer Deliverable: The purchase specification also provides
details of the deliverables or products or project insights which
the buyer agrees to give to the seller or the supplier to develop
the project or the good.
• Acceptance Criteria: In a purchase specification, this may be
defined as the elaborate, objective, and the measurable condi-
tions which must be met by the seller or the supplier for the
buyer or the purchaser to accept the project or the deliverables
and close the loop of performance.
• Test Criterion: The goods or the services or the projects which
are about to be delivered undergoes a series of tests to check the
level of acceptance. This is made as part of the purchase crite-

rion to make things easy during the implementation phase.
• Completion Criteria: In most of the purchase specifications,
completion criteria are simultaneously used to describe the ob-
jective criteria that are supposed to be met to attain overall com-
pleteness of the project.
• Loaned Materials and Equipment’s: All the materials and the
equipment’s that are loaned or rented for the project’s purposes
or to produce the interested good that has to be received from the
buyer by the supplier during the implementation and the time
limit by which these loaned items has to be given back to the
buyer.
• Schedule: The schedule which features in the Purchase Speci-
fication includes the project time frame from the beginning to
the completion. Major milestones and important checkpoints are
also mentioned in the schedule. Schedule can help assess the
performance or the completion status of each phase of the proj-
ect or the product formation.
• Fee and Payment Schedule: All the fees and the payment for
each of the product or the services utilized during the purchas-
ing phase or the implementation phase. For those fixed price
agreements where the price and the payment terms are already
drawn, the schedule on the frequency of the payment and the
tentative payment dates are put up in the Purchase Specifica-
tion. Other details of the fees schedule will comprise are the
one-time expenses, recurring charges and other miscellaneous
usage charges.
• Project Change Control Clause: During the project, if there
are any amendments or changes or necessary alterations needed
on the listed, then this clause gives you the procedure as to how
you can make the changes intended.
• Procedure of Delivery Acceptance: When the intended prod-
uct or services are delivered, the procedure to review and accept
the delivered goods or services is also charted in the Purchase
specification. Mention of the ways to resolve objections which
arise while reviewing the goods or services.
• Escalation Protocol: Purchase specification also mentions de-
tails of the formal steps to be taken to when there are conflicts or
disputes that arise during the implementation phase.
• Security Requirements: In case there are highly sensitive or

confidential materials, goods or services that are being delivered
then the mention of physical, electronic, and the cyber security
features in the purchase specification.
• Facilities Usage and Travel: If the purchase needs the sup-
plier’s crew to work at the buyer’s or the client location, then
the necessities for the supplier’s crew also take a place on the
Purchase specification. It also captures the reimbursement pro-
cedures for the travel expenses and the guidelines for the sup-
plier’s crew on the buyer’s location.
• Training for the Buyer/Purchaser: Purchase specification
makes sure it draws a training plan for the buyer or the purchaser
so that adequate training is provided to ensure the buyer attains
maximum benefit.
• Documentation: In the purchase specification there is a men-
tion of all the operating manuals, user guides, the technical and
business processes supporting guidelines which need to be pro-
vided to the buyer at the time of delivering the goods or services.
• Maintenance Activities: If the intended goods or services re-
quires any other troubleshooting techniques, the hours of sup-
port, the kinds of troubleshooting which the supplier might be
able to help the team with has to be put up in the purchase speci-
fication ahead of time so that it can communicate the intended to
the concerned parties.
• Terms of Risk Management: Purchase specification also must
include the terms of risk management in dealing with a specific
supplier or the specific purchase risks.
4.2.3. Developing the Purchase Specification

While developing the purchase specification, there are some key pointers
which we need to be aware of. We need to probe the requisitioner with
the technical expertise to uncover the actual requirement and their need.
Short “Active Voice” sentences should be the way of writing the purchase
specifications. This is because concise and fewer words make the purchase
requisitions adequate. In active voice sentences, action described by the verb
is done by the subject while in the passive voice sentences it is vice versa.
In the purchase specifications the person or the individual performing the
action can be omitted. (The phrase which ends with “By the.” gets omitted).
E.g., In the sentence “Supplier shall deliver the Product to the Buyer.”
It is clearly emphasized that the supplier who is the subject of the sentence
must perform the task and deliver – which is the verb of the sentence. While
active sentences provide the clarity of the sentences and the intonation,
passive sentences can be long and confusing. Responsibility of the respective
parties is slightly de-emphasized in case of passive sentences. In the passive
sentence, “The goods shall be dispatched by the Seller to the Buyer on
May 14, 2019 “subject is the product and the verb is being delivered, not
emphasizing the roles of the Seller here. While writing contracts we must be
aware that the responsibilities are defined appropriately to avoid vagueness.
One vital conscious check we need to perform while drawing the
contracts that we avoid the usage of dangling modifiers. Dangling modifiers
usually alters the meaning of the phrase or the word used. It is advised
that usage of introductory language which would provide the background
information and would provide a fronting for the sentence which would
describe the actual responsibilities.
For example, in the sentence “Invoices received before the end of the
month will be paid by the fifteenth of the next month” doesn’t give us the
outright view of who the responsible person is. While the sentence, “For
Supplier invoices received by the end of the month, Buyer shall make
payments by the fifteenth of the next month” makes it clear that the buyer is
responsible for the payment once the payment terms are met.
Defined terms must be used so that the purchase specification is clear and
concise. Every purchase specification begins with reviewing the purchase
agreement for the definitions section where the defined terms are spelled out.
The team can make sure the defined terms are honed for the needed at the
agreement stage itself. Most well-written agreements use the conventions
which are from the listed defined terms. If you don’t have the term of your
choice in the definitions section, you can create terms of your choice as
below, e.g., Pricing, and discounted list from the world market-2018,
would be modified as a defined term – “Price List” mentioning in braces
(hereafter “Price List”). Now, this term gets used in the places where the
phrase, “Pricing and discounted list from the world market-2018” appears,
the defined term “Price List” would be synonymously used (Figure 4.3).
Figure 4.3: Developing purchasing specifications.

Source – https://www.sproutlogix.com/blogs/top-competencies-for-your-
employees/.
Acronym Usage can be regulated in the Purchase Specification based

on defining them previously in the definitions section or when the acronym
is first used. “Standard of Commitment “which best goes with each
commitment should be written. If the acronym is a well-known industrial
term and features in a popular document, then the reference to the document
is made. For example, “as defined in TERMS 2019” or “as defined in
JESD471 Symbol and Label for Electrostatic Sensitive Devices published
by the Joint Electron Device Engineering Council (JEDEC).”
The right “standard of commitment” for each commitment is essential
for a robust purchase specification. For statements which are referred to
the Purchase specification must be incorporated with the rightful reference.
Every commitment should be constructed giving due reference to the
language whereby it addresses the Why, What, Which, When, and How of
the purchase. If any risks are identified, then the language for such statement
in the purchase specification should be well thought out and written. Tool
of the performance management must also be written accurately. Some of
the most commonly used statements of commitment starters are as follows:
• Intend to do something;
• Agree to agree in the future;

• The party can make a commitment that they may do something;
• Agree to agree in the future with both parties acting in good faith;
• Agree to act in “good faith;”
• Agree to do what is “commercially reasonable;”
• Agree to do what is “reasonable;”
• Agree to do it with “best efforts;”
• Make a conditional commitment (If X happens then we will do
Y);
• Make an absolute commitment (“shall, will, must”);
• Make a material representation;
• Make a warranty.
When there are Time Commitments involved, the language used in the
purchase specification should ensure the time mentioned is very clear. The
days mentioned should be calendar days. A lead time of thirty days could
be different from thirty calendar days or thirty business days which would
exclude the weekends and include only the working days. While mentioning
the hours of working, citing five hours of working could be ambiguous,
instead a mention of if it is five business hours or five consecutive working
hours to ensure the necessity is clearly mentioned, e.g., If on a Friday you
say that you’ve to get it at 3:00 and if the supplier works between 8:00 AM
and 5:00 PM, then the order, ideally spells to be delivered at 11:00AM of
Monday, whereas the buyer expected the order at 3:00 PM Friday.
If any of the words on the purchase specification has a double meaning,
then it is advised to eliminate that word. Commitments which says bi-
monthly can provide two meanings, either twice monthly or one in two
months. To avoid this vague understanding that is getting delivered, the
commitments should be exact. Instead of the word bi-monthly, the specific
dates can be mentioned, e.g., 1st of every month or 30th of every month.
Some of the words which may indicate that the supplier is not stressing
on the commitment are aid, assist, attempt, contribute, endeavor, facilitate,
help, support, try, etc. The lowest level of commitment one can obtain is the
most reasonable commercial efforts from their supplier.
Managing any incorporation of other documents or articles is also
imminent so that the credibility of the purchase specification document
stands at par. The referred documents must either be a part of the agreement
or be made a part of the purchase specification or the agreement as such.

Whenever a reference is made in the body of the purchase specification, then
it is stated at the very same place and at the end of the documents where the
attachments or exhibits are updated.
E.g., Design is set forth in Attachment A, entitled “Designs and drawings
list,” three (3) pages, dated October 5, 2014, has been incorporated by
referring as (Purchase Specification of Motor Balls and bearings, agreement).
4.2.4. Including Attachments and Exhibits into Purchase Speci-

fications
If you incorporate many other documents into your purchase specification,
then, all the same, must be mentioned in the attachments and exhibits part of
the document and an order must be put up for these documents according to
their precedence within the purchase specification.
Some of the tools of the performance management include controls to
have a perfect finish on the purchase specification. These controls are a way
of managing the behavior and performance. It is serves as a tool to mitigate
any kind of impact on the cost or risks involved in the purchase. Some of
the control provisions are about the controls on the changes to the products
or services, processes, restrictions on the work assignments, subcontracts of
work, etc.
Purchase specifications also give you ways to include the financial ways
to manage the performance. The major pointers in this regard are about the
remedies which one might have to put up in the event of any breach. The cost
of these remedies that must be borne by the supplier if any of the specific
obligation is not met. Another control that must be emphasized is about the
non-allowance of payment if the work done is behind schedule
A well-written purchase specification where the structure of the terms
is arrived perfectly to derive at the deserved performance would provide
the supplier the perfect incentive to perform the job. Another unique aspect
of managing performance is expressing conditions. Hence a purchase
specification should avoid qualifying language that would reduce the
commitment and make it firm. The content of the purchase specifications
will mostly depend on the nature and the complexity of the requirement.
4.3. PURCHASING – OBJECTIVES

Purchasing is one of the most important functions which embody the entire
procurement function in a focus to attain a standardized product at the

market compatibility range keeping in to account the variety and value of the
materials and to reduce the investments. This purchasing process has all the
other functions of the organization interlinked from the initial point where
the need is felt until the receipt and approval of the purchased products. This
is now one of the integral parts of the organizations.
The five significant objectives of the purchasing team are to purchase
the intended product at:
• Right quality;
• Right quantity;
• Right price;
• Right time; and
• Right source.
4.3.1. Right Quality – Purchasing

Considering the right quality of the product to be purchased. Some of the
requisition entitles you to bring to the purchase the highest-grade material
to facilitate the organization, in other cases, a medium quality material
can do the job as this could be just a constituent of the entire materials
required for the production. Whatever be the requisite, the desired technical
features of the product along with the cost and other factors are primary
factors which drive the purchasing. Purchasing team’s take the assistance
of the engineering- production team’s or the other functional teams who
have raised the requisition to assess the credibility of the raw material or the
product which is bought. The problem of standardization stands is outcome
of the topmost objective, which would be choosing of the right quality.
4.3.2. Right Quantity – Purchasing

Another major objective of purchasing is to obtain the inventories at the right
quantity. Every production unit or the any other goods or services acquired
should keep into consideration the exact requirement. Surplus of products
purchased would result in huge inventories and finance drain.
If the purchase is less and there is a shortfall of the inventory, then this
might result in the loss of production and the machinery in an idle mode.
Material control and other inventory control mechanisms can be employed
to arrive at the exact quantity of products that might be required for the
successful production. Management policies will draw out the right quantity
of the various materials that might be required at different stages of the

production, thereby providing a control on the inventories.
Therefore, this serves to also curb the conflicting situations which may
arise due to the excess inventories or the lack of inventories during situation
of crisis. This high and low can be addressed and reconciled with the help
of a robust management policy revolving around the objective of the right
quantity of the product that is required to be purchased. The policy also
indirectly emphasizes the purchase responsibility of the department. Hence,
purchasing the right quantity is an indispensable criteria and objective of the
entire purchasing process which would sequentially assist in the production
of the material or the purchase of the appropriate goods or hiring of the best
services for the organization.
4.3.3. Right Time – Purchasing

Time is one of the most important intangible assets of an organization. Time
plays a very vital role in purchasing and can be described as the radar which
runs the entire business. Even though time is an irreversible asset and needs
to be wisely utilized to get your business going, purchasing the materials
at the right time involves a lot of energy and a great deal of planning.
Production forecasting team, the sales team, and the market situations drive
the right time when the products must be purchased. Therefore, this has
taken the prime place in the objectives of the purchasing.
4.3.4. Right Source – Purchasing

Another most important objective of purchasing lies when the requirement
is set and determining the right source from where these materials can be
brought to the production region. The most suitable sources must be listed
on to procure the goods desired. One of the prime criteria to choose a vendor
is to understand the reliability and credibility of the vendor. The closer the
proximity of the vendor, the easier the accessibility to the buyer to obtain
the product.
One more criterion would be to assess if the supplier or the vendor gives
good cooperation to obtain the goods at the expected quality and the time.
At the finalization time, analysis of if the purchase of the goods from the
vendor or the distributor, which one would be profitable, and the goodwill
of the supplier or vendor should be carefully evaluated.
The above five objectives are the most used generic objectives of the
purchasing function. There are other objectives for the whole purchasing
and procurement team which is prepared within consultation with the senior
management of the organization or in line with the organization’s policies
and culture as structured by the top management of the organization. Some
of the other objectives of the purchasing team can be listed as of below:
i. The cost of all the materials, the other supplies, and the other
machineries or the equipment’s should be at a bare minimum.
This is one of the primary objectives whereby the production
will be increased, and therefore, the revenue is increased.
ii. The production always remains seamless. The uninterrupted
supply of the raw materials, the supplies, tools and equipment’s
and the service, maintenance of the equipment to enable the pro-
duction is imminent.
iii. The asset turnover should be increased. Another major target for
the purchasing team is to ensure the investments on the fixed as-
sets are standardized, and the stock of the inventories are mini-
mized and are in consensus with the volume of the sales. The
turnover of the assets is, therefore essential for the enhancement
of the profitability of the organization.
iv. Developing alternative sources of supplying. Every time a pur-
chasing is about to happen, the team should focus on building
up a list of alternate sources who can be categorized under the
preference of their goodwill, quality of the material, the quan-
tity, the time, etc. This will, therefore, increase the bargaining
power of the organization. The cost of the materials will come
down and at the time of inventory shortage, the other vendors
can come to help.
v. Establishing good relationship with the vendors. One of the fa-
vorable reputations an organization can build in the market and
business relationship are to build good rapport amongst the sup-
pliers. This relationship with the suppliers is important as it is
beneficial in situations where the terms of the initial purchasing
need alteration. Any kind of change that includes preferential al-
location of the materials at various positions. Foreseeing short-
ages and talking to the vendor to ensure the supply is ready. The
rapport with the vendors also helps to bring about the payment
delays in case of liquidity crisis and the newly developed sub-
stitutes.
vi. Book Keeping and Management Reporting. Purchasing depart-
ment is also provided the objective of efficient book mainte-
nance, record keeping, and management reporting. Every con-

tract or the purchase made has a record of the negotiation, the
contractual agreement, the billing processes, and the procedures.
vii. Training and Developing Purchasing Personnel. Purchasing de-
partment usually requires personnel who are well versed in a
varied skill from accounting to negotiating. The organization
should ensure the team is well equipped by upskilling them in
all aspects of the purchasing department in consensus with the
learning and development teams. This will also help in proper
succession planning and an engaged workforce who will strive
to bring their aspirations into existence.
viii. Interlinking the Other Departments. Purchasing department
also targets to have a good integration with the various other
teams within the organization so that they can carry out the BAU
(Business as Usual) in a smooth manner. Production Department
gives the figures of the available raw materials and the other
inventories, the material specification which needs to be pur-
chased, material flow in the production and the suggestions of
the various other items that need to be bought.
ix. The engineering departments provide the specification on the
tools and equipment’s or the services that need to be hired to
maintain the already set machineries, tools, and equipment’s.
Finance departments and the Purchasing departments go hand
in hand in all the processes of procuring a goods or services for
the organization. Finance team often provides data on the work-
ing capital available and the amount needed for the purchase,
gives insight into tapping the discounts, providing a detailed
schedule of the need of the hour so the planning can be done
appropriately. Finally, the Human resources department and the
purchasing department help in manning the people across the
purchasing department and helps in maintaining the vendor re-
lationships between the organization and the vendor/supplier.
They also help in coordinating the succession planning and the
training and development function about which we discussed in
the earlier objective. Thus, the purchasing team aims to provide
for the rest of the team’s by catering to their needs at the right
time possible.
x. To pursue innovation – Another important objective of the pur-
chasing team is to ensure the organization can access the most
innovative product of the time, which would thereby provide an

edge to the organization in terms of the price and the quality of
the product of the organization. The purchasing team, therefore,
has the prime responsibility in finding sources that will provide
the innovative services and the products needed for the organi-
zation.
xi. To use technology as leverage – Purchasing department also has
the objective to ensure they have a robust ERP system to address
all your supply chain problems. They play a vital role in selec-
tion and implementation of the ERP systems and other inventory
control systems to improve the efficiency of the supply chain
management (SCM).
xii. Issuing purchase orders (POs) – The purchasing department
based on the company policy and the other negotiated terms and
conditions issues the PO for the perusal of the rest of the depart-
ments.
xiii. Handling Escalations and Crisis – Purchasing departments is
also responsible to support the commercial and procurement is-
sues which would thereby help in effective business decision
making. This would eventually help to provide effective resolu-
tion of the issues, disputes, and the customer complaints if any.
xiv. To adhere to the Compliance – Every organization and the in-
dustry or the domain of the organization has varied tough regu-
latory compliance environments. Purchasing team is therefore
given the goal of adhering to the said standards by tracking and
rigorous process flow, purchasing processes that are strongly
guided and properly segmented to not process any orders that
are against the said regulations.
xv. To reduce the risk and ensure secured supply – Purchasing teams
are responsible in observing and finding out the goods and ser-
vices which are indispensable for the organization are charted.
Purchasing team always aims to take proper steps to secure their
supply chains. Purchasing teams are also at the odds to share
and manage risks with the supplier thereby managing the sup-
ply chain efficiently. Most of the risks are best managed by the
suppliers themselves. The other way to manage risks would be
to diversify the suppliers. The take away of this objective is to
enunciate the fact that if the risks are higher, and then it can re-
sult in the lower prices or vice versa.
xvi. To ensure there is no duplication and avoid waste. Purchasing

department also has the objective to avoid duplication of pur-
chases or issuance of POs. They are at par to manage the waste
induced basis incorrect or duplicate purchasing. Restricting
obsolescence is the full-fledged focus of the purchasing depart-
ment round the year.
The objectives of the purchasing department most often help the entire
team to get a sight of the team’s higher vision and the mission. Being the
powerhouse or the center of the entire SCM, the purchasing department
understands their importance and the targets or the goals to which they
will have to work towards to thereby bringing a healthy culture within the
organization.
Most of the purchasing decisions affect the profitability of the
organization and the business growth it brings in. This could have a direct
impact at the strategic level. And every strategy would be a success when
the purchasing management objectives are created in line with the goals
of organization. When the strategic objectives drive the purchase decisions
within an organization, then the business yields better results and revenues.
4.4. PURCHASING – EVALUATION

Evaluation of the purchasing is one of the most important activities taken
up by the purchasing team. Efficient management and the continual
improvement of the purchasing function are guided by measuring the
purchasing performance of the organization. The effectiveness of the
organization’s purchasing strategies and the strategies around the important
decision-making process of the organization are all based on the feedback
which is generated out of the purchasing evaluation.
While the purchasing department and the SCM are increasingly
becoming more important as it has the potential to strategically influence the
financial outcomes and also the operational efficiency of the organization.
Some of the advantages of following a systematic approach to purchasing
evaluation are as follows:
i. One of the most significant benefits of doing a perfect purchas-
ing evaluation is to make better decisions based on the occur-
rences of the variances, work on a new process improvisation to
avoid further recurrences.
ii. Communication between the teams can be increased based on
the analysis of invoices and making robust revised payment
terms and enhances the rapport between the purchasing team

and the other administration teams.
iii. Evaluations also brings out more visibility to the comparison
on the regular reporting, the actual one and the planned, which
would eventually help the buyer to understand if their require-
ment is met hundred percent.
iv. Motivational levels of the personnel involved in the entire pur-
chasing process get enhanced. An evaluation paves way for bet-
ter goal setting and enhanced programs to address the learning
needs of the purchasing department.
v. The evaluation gives a 360-degree view on everything associ-
ated to the purchasing, from the categorization of the vendor,
ranking the vendor on the various criteria set, the availability
of alternate sources, the goodwill of the vendor, selecting of the
vendor, the PO release, the good or services evaluation once it is
given to the buyer, i.e., the organization. Hence, every loophole
within the processes can be found and addressed to arrest future
mishaps and then take the processes in a stride of better perfor-
mance thereby better revenue.
4.4.1. Evaluation Criteria and Methodology

At the time when the purchase agreement is being drawn out with the
purchase specifications clearly charted out, the condition for participation,
the evaluation criteria and the method by which the purchase is going to be
evaluated is listed off. One good practice of the purchasing department is to
ensure that the conditions for participation, the criteria for evaluation, the
methodology and the rest of the parties involved in the evaluation are noted.
The term condition for participation is the minimum mandatory
requirements and conditions the potential suppliers is supposed to meet for
their contract submission to be selected for further consideration. The entire
assessment for the condition for participation is a direct response as to if
it either has “met” or “not met” the requirements made on our purchase
specification. This is the first stage of evaluation of the submissions made
by the suppliers.
If a supplier doesn’t conform to the conditions of the participation, then
the supplier will be eliminated from further consideration process. Therefore,
it is one of the most important feats to put the conditions for participation
in a precise format. The mandatory requirements for the product needed
and the documents that are needed from the supplier are all mentioned in
the conditions for participation to avoid unexpected surprises at the time of
assessment.
Some of the most important constituents of the condition for
participation will include matters such as solvency and financial viability,
the mandatory insurances, policies of the organization and the licenses
needed, accreditations, other regulations or registrations and the other basic
post and pre-registration requirements.
Evaluation Criteria is defined as the standards that are used to assess or
critic if the submission made by the supplier can meet the requirements as
listed by the organization. A robust mechanism is set to make a comparison
of all the offers that has been made, to assess the credibility of the different
offers and their relative worth. The evaluation criteria will address all those
that are listed as below:
i. How compliant are the contractual terms and conditions?
ii. How good are the sophistication of the goods or services that
must be technically met?
iii. How efficient are the supplier that he will be able to address,
the capability of the bidder to fulfill the said requirements, the
technical competence, the management competence financial
stability, relevant skills, availability of the experienced person?
iv. How much time the entire product or the service can survive?
v. How much of the risks and the constraints accompany the offer
which is being provided by the organization?
All the information which is needed from the supplier for the evaluation
of the offer submitted has to be collected from the vendor before handed. If
an Offer/Tender form are available this is circulated amongst the suppliers
and collected to obtain the maximum information needed. This would also
enable the information received from all the suppliers to be consistent.
There are several measurements that the organizations can use while the
purchase performance is being assessed. Some of them are as follows.
4.4.2. Purchase Efficiency

Purchase efficiency in layman terms can mean the administrative costs of
the organization. This measures as to how well the organization’s purchasing
departments has performed their duties efficiently with the budget that got
allocated for the team. Purchase efficiency has nothing to do with the number
of items or goods the organization has procured for the organization. As
mentioned earlier, if the purchasing team was able to handle the functions of
their team within the allocated budget then the efficiency of the purchasing
team has exceeded the expectations. If in case the purchasing team has
overutilized the available budget and are running short on funds, then the
purchasing function is ideally not efficient.
4.4.3. Purchase Effectiveness

The price of an item, goods or services cannot necessarily be a good
measurement of the purchasing team’s performance. Since the price of
the item may fluctuate due to the market conditions, the availability and
the pressure of the demand for the goods or services. Since the purchasing
department has no control over the price of the goods, it is wise to assess the
effectiveness of the team reviewing the inventory turnover ratios.
This ratio gives you a picture of the number of times a good, product,
inventory or the services is used during a period. The ratio therefore gives
you the measure of the liquidity of the inventory. It is found that this can
almost never be one of the effective ways of measuring the purchasing
effectiveness of the seasonal requirements. This could be attributed to the
already stocked which could make the measurements inaccurate.
4.4.4. Purchasing Functionality

Another way to measure the purchasing performance is by assessing the
functional requirements of the entire purchasing function as such. The major
activity of the purchasing team is to ensure the correct item is procured for
the appropriate teams at the right time and at the lowest possible cost. In this
measurement, the only those factors that involve the time and the cost. This
doesn’t not factor the measurements that are associated with the stability of
the supplier, the discounts being offered by the supplier, the material quality
issues, etc.
4.4.5. Other Performance Measures and Implications

The purchasing performance has many other measurements which could
lead to measure the performance. Every organization can choose and decide
what these measurements mean for them and those that are relevant to them.
These can include the measurements of:
i. Cost Saving when the periodically purchased item is brought at
a cost that is lower than the previous purchase, thereby enabling
a cost saving. This can happen when a new supplier is found, an-
other cheaper substitute is found for the earlier existing product,
a newer vendor who has provided the same product at a reason-
able cost, the cost of transportation of the product to the loca-
tion of preference has reduced, or the purchasing department has
gone on a round of negotiation with the vendor and agreed on
new terms whereby the cost reduction and thereby savings has
occurred.
ii. Quality Enhancement can happen again by onboarding a new
vendor who offers a better quality at a better price or renegotiat-
ing with the existing vendor to avail the product with improved
quality. The identifier of a better-quality product or good or ser-
vices availed is when there is less or no wastage.
iii. Improvements in Purchasing department as such will also result
in better performance of the purchasing team. The reason behind
this could be automation, introduction of new ERP systems, en-
hanced vendor management and pay on receipt processes.
4.4.6. Evaluation Methodology Development

The development of an evaluation methodology should help you choose the
best of the offers which would give the purchasing team, the worth for the
money invested on it which can be obtained by addressing
i. Those offers that passed through conditions for participation
(mandatory requirements) – a “yes/no” or “met/not met” re-
sponse.
ii. An affordable level of conformity against those non-mandatory
compliance factors which can be accounted through the terms
and conditions.
iii. The level of desirable non-cost or agreeable qualitative criteria
is met.
iv. The cost to be bought goods, product or the services availed
throughout its lifetime within the organization.
v. The risk associated with selecting one offer as against the other
quotations submitted.
There are three different purchasing evaluation methodologies which
we would be describing below:
• Least cost methodology;
• Numerical scoring methodology; and
• Weighted scoring methodology.
1. Least Cost Methodology: As per the least cost methodology

the selection of the offer is based on the quotation with the low-
est price which would meet all the requirements of the organiza-
tion is chosen. The Least Cost methodology is mostly used for
simple and low-cost purchases.
2. Numerical Scoring Methodology: This numerical scoring
methodology is mostly used for measuring and evaluating com-
plex purchases whereby all the non-cost, qualitative, desirable
evaluation criteria are of immense importance. After the first
level of screening of the offers that are submitted by the differ-
ent vendors using the conditions for participation, each of the
qualitative, i.e., non-cost evaluation criteria is provided a nu-
merical rating.
This numerical rating provided for the qualitative evaluation criteria also
has dependency on the supplier’s level of compliance. The cost involved is
not categorized as a separate criterion, but it is used as a part of the value
for money assessment. The list of the scores is all then totaled; a value for
money assessment is prepared. It is prepared by comparing the total costs,
whole life costs, and the associated risks.
e.g., of a typical scoring system is given in Table 4.1.
Table 4.1: Example of a Scoring System
Score Description Full Description
10 Exceptional Full achievement of the requirements specified in the

RFQ/RFT for that criterion. Demonstrated strengths,
no errors, weaknesses or omissions.
8 to <10 Superior Sound achievement of the requirements specified in
the RFQ/RFT for that criterion. Some minor errors,
risks, weaknesses or omissions, which may be ac-
ceptable as offered.
6 to <8 Good Reasonable achievement of the requirements speci-
fied in the RFQ/RFT for that criterion. Some errors,
risks, weaknesses or omissions, which can be cor-
rected/overcome with minimum effort.
4 to <6 Adequate Satisfactory achievement of the requirements speci-
fied in the RFQ/RFT for that criterion. Some errors,
risks, weaknesses or omissions, which are possible
to correct/overcome and make acceptable.
2 to <4 Inadequate Minimal achievement of the requirements specified

in the RFQ/RFT for that criterion. Several errors,
risks, weaknesses or omissions, which are possible,
but difficult to correct/overcome and make accept-
able.
>0 to <2 Poor to defi- No achievement of the requirements specified in the
cient RFQ/RFT for that criterion. Existence of numerous
errors, risks, weaknesses or omissions, which are
very difficult to correct/overcome and make accept-
able.
0 Unacceptable Totally deficient and non-compliant for that crite-
rion.
Source-https://www.purchasing.tas.gov.au/buying-for-government/goods-
and-services/purchasing-goods-and-or-services-$250000-and-over/plan-
ning-the-purchase/evaluation-criteria-and-methodology.
3. Weighted Scoring Methodology: When the evaluation criteria
are of differing importance then such kind of evaluation pur-
chases can make use of the weighted scoring methodology. Once
the conditions for participation screening are completed, each of
the evaluation criterions is allocated with a percentage. At the
end of the allocation, the total percentage should be adding up
to hundred. The request documentation should make sure that
the percentage allocation is included. When the allocation of the
percentage is done, extra care should be taken to map relevant
criterion with the appropriate percentage to avoid ambiguity.
During the evaluation process, those qualitative criteria are all allocated
a particular score. Taking the earlier methodology as guidance, those offers
that meet all the requirements for participation are scored. The scores are then
weighted by multiplying the weighting factor by the score. The weighted
scores are now summed up which would then allow the comparisons
between two offers.
4.4.7. Establishing Key Performance Indicators (KPIs)

Key performance indicators (KPIs) are usually looking for factors, metrics
that reveal work towards attaining a goal of preference. An organization
should find out the stakeholders’ objectives which ideally should be in
line with the organization’s strategies and objectives. Analysis of the data
is necessary whereby the organization is required to find interlinking
connections between the means and ends. After the analytical stage, different
measures are developed, executed, and in due course refined. Keeping the
process simple helps in many ways as numerous steps and complexities
prevent measures to be easy. Every KPI which is decided to be part of the
evaluation should be relevant to the organization and easy to use. Some
of the common key area measures that are commonly used in evaluating
performance are cost saving, vendor quality, delivery metrics and price
effectiveness.
4.5. CONCLUSION
Purchasing is a vast topic and a well-defined end to end of purchasing cycle
helps the organization to have a better turn around and better revenues.
Purchase specifications give clarity to the product and the evaluation
measure help to bring about an atmosphere where clean products or services
are availed by the organization for their perusal.
The ultimate objective of the purchasing departments is therefore to
procure the right product from the right source at the right quality.
REFERENCES
1. http://www.knowledgiate.com/5-main-objectives-of-purchasing-
function/ (Accessed on 13 July 2019).
2. http://www.yourarticlelibrary.com/material-management/purchasing-
its-meaning-definition-importance-and-objectives-material-
management/27936 (Accessed on 13 July 2019).
3. https://opentextbc.ca/basickitchenandfoodservicemanagement/
chapter/purchasing/ (Accessed on 13 July 2019).
4. https://opentextbc.ca/foodsafety/chapter/storage-temperatures-and-
procedures/ (Accessed on 13 July 2019).
5. https://smallbusiness.chron.com/objectives-purchasing-management-
strategies-level-79550.html (Accessed on 13 July 2019).
6. https://www.academyoflearning.ab.ca/four-purchasing-tips-
hospitality-management/ (Accessed on 13 July 2019).
7. https://www.bdc.ca/en/articles-tools/operations/purchasing/pages/
purchasing-department-objectives.aspx (Accessed on 13 July 2019).
8. https://www.bngkolkata.com/web/store-and-purchase/ (Accessed on
13 July 2019).
9. https://www.hospitalitycrossing.com/article/900019191/Purchasing-
Department-of-the-Hotel-Industry/ (Accessed on 13 July 2019).
10. h t t p s : / / w w w. p u r c h a s i n g c r o s s i n g . c o m / a r t i c l e / 9 0 0 0 1 8 6 4 3 /
PURCHASING-IN-THE-HOSPITALITY-INDUSTRY/ (Accessed on
13 July 2019).
11. https://www.purchasing-procurement-center.com/purchasing-cycle.
5
Importance of Costing in
the Hospitality Industry
“Accounting is the language of business.”

—Warren Buffett
CONTENTS
5.1. Objectives Of Costing In The Hospitality Industry ........................... 156

5.2. Basic Principles Of Costing In The Hospitality Industry ................... 162
5.3. Different Types Of Costing In The Hospitality Sector ....................... 166
5.4. What Is Activity-Based Costing In The Hospitality Industry?............. 177
5.5. Benefits Of Costing And Control ..................................................... 181
References ............................................................................................. 184
Costing is very important for the success of any organization. Costing

method differs from organization to organization. Only if there are
proper costing techniques, the organization can grow. There are so many
other benefits that costing offers for the business, for management, for
employees and also for the customers. Costing is actually the basis for
everything. Costing acts as a main element that decides the profit factor of
a business. For a large industry such as hospitality industry, costing works
in various ways. This chapter focuses more on the importance of costing
in the hospitality sector. We will also learn about the different types of
costing practiced in the industry and the main benefits of them. Special
focus is given on activity-based costing.
5.1. OBJECTIVES OF COSTING IN THE HOSPITAL-

ITY INDUSTRY
Costing is very important for every business. The hospitality industry needs
huge amount of goods and a large variety of services, and so, costing becomes
very essential to this industry. There are various reasons why costing plays
an important role in the business operations. In this section, we are going
to discuss the main objectives of costing and why it is so important for the
hospitality industry.
Using Costing mechanism helps in understanding the cost of each

product, job, process, each unit, etc., it also helps the management in
analyzing the exact cost and have clarity in finding the difference between
what the original cost is and what is the estimated cost. With Costing in
picture, the management can be well assured of its profit and loss status, and
thus the management will be able to take any important decisions concerning
the business.
Costing provides profit and loss reports to the firm on periodic
intervals and this is very useful for monitoring purpose. The costing system
comprises of many processes, controls, reports which are designed to
report to the management about costs, revenues, and profits. Costing covers
almost everything in an organization such as different facilities, customers,
products, processes, services, departments, sales, research, and development,
etc., Since costing provides information on each and every element of an
Importance of Costing in the Hospitality Industry 157
organization as mentioned above, it helps in creating control over the costs

incurred by each of these units.
In the following subsections, let us look into detail about some of the
main objectives of costing.
5.1.1. To Determine Cost

The most important and primary objective of costing is to determine the
cost of each object both by process and by way of its operation. There are
two ways of doing it. One is through Post Costing and the other method is
through continuous costing (Figure 5.1).
Figure 5.1: Determining cost.

Source: https://enyotalearning.com/blog/factors-determine-elearning-
costs/.
• Post Costing: Post Costing is noted to be accurate as it analyzes
the actual information as given in the financial books and is very
useful in the case of “Cost plus Contracts,” where price is to be
determined finally on the basis of actual cost.
• Continuous Costing: The cost of making the same thing many
times the same way. It is an average of the units per the cost of the
whole process. It is different than specific order costing.
5.1.2. To Have Cost Control

To have control on costs is one of the important objectives of costing. Cost
Control means having control on the various expenses incurred by the
company. These costs are recorded and reported on a continuous basis. The
main objective of cost control is to analyze income and expenditure. By

having effective control on raw materials, products which are in work-in-
progress status, and finished goods, costing helps in minimizing the capital
tied up in these stocks. Cost control is very useful in the food and beverage
industry. The pricing for menu items is determined based on the food cost
control options. Not only for items in menu but cost control also helps in
fixing prices for banquets and functions (Figure 5.2).
Figure 5.2: Definition of cost control.

Source: https://www.slideshare.net/shritheja/cost-control-and-reduction.
Food cost control also helps in prevention of wastage and thus helps
in achieving the goal of the organization. Only when proper controls are in
place, a lot of misses, inefficiency in achieving targets, etc., can be prevented.
In order to be effective in preventing waste inefficiencies, a system of
food cost control must cover the whole field of catering operation right
from the purchase of foodstuff to the sale of a prepared meal. By means of
implementing cost control for materials and labor, costing helps in revealing
the sources of economy.
5.1.3. Helps in Fixing the Selling Price

Costing plays an important role in fixation of selling price. Only when the
costs of raw materials and the cost for production are known, the selling
price of products can be fixed by calculating the marginal profit. Costing
guides the management to estimate price for quotations and tenders. Costing
serves as a guide for fixing price for services also (Figure 5.3).
Figure 5.3: Fixing selling price.

Source: https://www.toonpool.com/cartoons/PRICE_251159.
5.1.4. Helps in Reducing Cost

Only when the basic cost of all activities is known, the business will be in
a position to analyze whether the business is spending more or less. If it
seems that the business is spending more, then, the management can work
further to reduce the cost. Cost reduction implies the actual and permanent
reduction in the cost of production without compromising on the quality and
the suitability of its desired use. Regulations on spending can be initiated
only when the cost of operation is known (Figure 5.4).
Figure 5.4: Costing helps reduce cost.

Source: https://www.digitaldealer.com/cost-reduction-approach-tactical-
strategic/.
5.1.5. Helps in Decision-Making

What makes the role of management important is the way it makes decision
and the option or the method that the management chooses as part of
decision making. In order to select between two or more alternatives, the
management has to have valid data to substantiate its decision by means of
comparison. A meaningful and valid comparison is possible only with the
help of costing information. Costing data helps the management in taking
calculative risks such as which new products to launch or which of the labor
activities can be replaced by machines (Figure 5.5).
Figure 5.5: Costing helps in providing data for decision making.

Source: http://nashbs.com/budgeting-costing-decision-making/budgeting-
costing-for-decision-making-2/.
5.1.6. Helps Management in General

The process of costing helps in analyzing each and every activity happening
in the business. Since costing reports are shared with the management
periodically, the management gets to know about the inefficiency of the
workers, improper usage or wastage of raw materials, equipments, tools,
etc., Costing also helps in identifying all the major gaps in the organization.
Costing mechanism ensures maximum utilization of the resources of the
organization by making sure that no machines are left idle, the workers get
incentives for their performance, proper utilization of by-products and so

forth.
Costing also advice the management on future expansion policies
and future projects that can be taken up. It also helps in evaluating the
performance of different departments. Costing helps in the preparation of
budgets; guides the management in implementing incentive bonus plans
based on productivity and cost savings.
The reports shared by a costing system are purely for the internal use of
the management and are not subject to the reporting requirements of any of
the accounting frameworks, such as GAAP or IFRS. So, the management can
decide the type of information that they wish to see, the type of information
that can be ignored and how the report can be shared for its consumption. Few
examples of reports created by costing include budget reports, sales reports,
and expense trend reports, reports for stores, customers, and products. Most
of the time, these reports are accompanied with extra information assembled
by the accounting department, which provide details regarding how certain
costs were incurred and who authorized them.
5.1.7. To Determine Profit and Loss

Profit or Loss of any activity in a business can be determined by comparing
the initial cost used to make it with the revenue generated out of it. The
purpose under this step is to determine costing profit or loss of any activity
on an objective basis. Apart from determining the probability of profits,
costing can go a step further and advise management as to how these profits
can be maximized.
Let us look into some of the other objectives of costing in hospitality
industry given in Figure 5.6.
 Costing provides specialized services of cost audit in order

to prevent the errors and frauds and to facilitate prompt and
reliable information to management.
 Since, costing procedure is carried on in every department,
costing in a way helps organize the internal audit system.
 One of the objectives of costing is to organize cost reduction
programs with the help of different departmental managers.
 The main objective of costing is to create an effective
information system in place so that each and every section of
the management will get the costing information at the right
time so that they can carry out their responsibilities at ease.
Figure 5.6: Objectives of costing in hospitality industry.
5.2. BASIC PRINCIPLES OF COSTING IN THE HOSPI-

TALITY INDUSTRY
It is a well-known fact that Costing is very essential for a business. Costing
provides the needed information for the management to run its operations
effectively. Costing shows the business where its revenues are being spent.
We discussed in detail the different objectives of costing in the above section.
Costing, which is considered to be such an important aspect of business
works on certain basic principles.
Let us look deep into some of the basic principles under which the
costing methodology works:
5.2.1. Costing With Cause and Effect

If there is cost assigned, then, there must be certainly a cause behind it and
it must have its effect. Cause-effect relationship should be established for
each item of cost. Each and every cost is closely related to its cause. The cost
figure is always analyzed and allocated based on the causal relationship.
5.2.2. Every Costs Stands Separately

There are different types of costs and all the costs cannot be mingled with
one another. For example, there might be some costs in the past, which might
not have been recovered during that time and these unrecovered costs must
not be recovered from the future costs because it will have impact on other
reports and future business predictions. So, a basic principle that costing
follows is that, unrecovered costs from the past must not be recovered from
future costs. The common principle is that the cost of any period must be met
or cleared during that period itself. In fact, it is wrong to carry over the cost
of past period to future because there will be unnecessary overburdening of
future costs. The only exception to this is the advertisement costs as they are
treated as deferred revenue expense and so can be charged during the period
of benefit.
5.2.3. Only Incurred Costs Must Be Charged

Costing should work on the basic principle that, cost must include only
those costs which have been actually incurred. Let us understand this with
an example – for example, unit cost should not be charged with selling cost
while it is still in factory. The costs that are related to production and service
are only considered and charged to respective cost centers.
5.2.4. Costing Calculation to Follow Double Entry Principle

Costing data is very useful for business for various reasons and so the data
calculated must be accurate. In order to avoid any error in calculation, it is
advised that the cost ledgers and cost control accounts must follow double
entry principles. Following double entry principle will ensure the correctness
of cost sheets and cost statements which are prepared for cost ascertainment
and cost control.
The common rule in financial accounting is that the cost ledgers and cost
control accounts always follow double-entry principle. Costing certainly
uses a lot of cost-sheets and cost statements in order to determine the cost
and to place control and so, it is very ideal that costing uses double-entry
principle.
5.2.5. Neglect Unwanted Costs

Costing does not only mean taking each and every cost incurred in the
organization. It depends upon the type of costing report that is requested. In
general, for calculating unit cost, the basic principle followed is that, the costs
incurred for other abnormal activities such as theft and negligence must not
be taken into consideration. If suppose, these costs are considered then, the
final cost figures arrived will definitely mislead the management in taking
incorrect decisions. There is something called the abnormal costs and these
costs must not be taken into consideration. For example, the costs incurred
to meet the loss by theft, fire, riot or accident is called an abnormal cost
because these do not occur normally. These costs have nothing to do with the
production and so cannot be included in the production cost. Including these
costs will only mislead the management in taking inappropriate decisions.
All financial expenses that have no relationship with costing are considered
as abnormal costs and are not charged to costing.
The main purpose of breaking down costs and categorizing them into
different buckets is to understand which costs deliver benefits and which
don’t. All costs that do not contribute to the effective working of the
company can be eliminated. For example, overhead costs can be cut down
by eliminating unnecessary travel. Reducing direct-product costs is also
very important because there are many products or features that are of high
cost but does not add any value to the customers or the business. Such direct
costs must be looked upon and removed.
5.2.6. Costing Principle Leading to Performance Objectives

In any business or in any organization if the underlying principles are set
right, then it becomes easy to achieve the objectives. This is very true when
it comes to costing as costing data is the key behind cost cutting, cutting
capital budgets, staff layouts and product and facilities rationalization. So,
the costing process must be made a discipline that has clear and organized
expectations.
Similarly, there are potential cost trade-offs between traditional
procurement cost-saving processes and manufacturing need for process
stability and variation reduction. This is especially true in the food and
beverage industry where product integrity and consistency are the lifelines of
business success. For effective cost management, performance expectation
and objectives must be aligned so as not to offset one areas accomplishment
by increasing costs in another.
5.2.7. Works with the Principle of Identifying All Costs

Costing works under the principle of finding out all the costs no matter for
what purpose it is used or who uses it. Out of all the costs collected, the
management can use whichever is necessary to create a budget, or whichever
is needed to control the expenses. Only when all the costs are identified, the
management will come to know whether the work has been completed on
budget or not.
5.2.8. Cost Savings

Another principle with which costing works is that it helps in creating
additional savings by comparing the pricing with the competitors or its own
historical data. If suppose, shipping a particular product is going to cost
a business way more, then they can think of alternate ways of shipping it
and this will help in saving money. Similarly, the costs of each and every
activity can be compared with similar previous works and if the prices are
high, steps can be taken to reduce it. Using cost accounting to keep track
of the past costs and estimate future costs lets the management to control
current costs and avoid spending more than justified on particular items.
This proves as a great method to save money.
5.2.9. Cost Accounting Principles

There are many principles under which cost accounting works. In general,
cost accounting principles designate costs either as direct costs or as overhead
costs. Direct costs in a business mean the costs that need not be incurred if
the activity is not carried out whereas, overhead costs are the fixed costs
that need to be paid whether an activity is completed or not. Examples of
direct costs are labor cost, cost of materials used in the production, cost
of employees working on a project, etc., Examples of overhead costs are
costs related to human resource, general management and other company
facilities.
Cost accounting principles also help in knowing whether the cost is
justified cost or not. For example, if under direct labor there is a cost item
for cutting and painting a steel sheet for use in the company’s products, the
management can verify whether the cost is reasonable or whether purchasing
a pre-cut, pre-painted piece of steel might be more cost-effective. If the
overhead costs are too high, the management can look at individual items to
see where the bulk of the high costs are being generated.
Although Costing works on some basic principles, the important principle
is that, it is the management that designs and decides the cost structure. Every
action that has an impact on cost such as production, delivery, customer
service – all of these decisions is taken by the management. It is a true fact
that, more than what a hospitality industry does, it is how well they do it,
determines the cost. Costing and managing the cost must be supported by
the management for the organization to survive.
5.3. DIFFERENT TYPES OF COSTING IN THE HOSPI-

TALITY SECTOR
Cost, in simple terms, is the money spent for a purchase, or for any other
business activity. Although costing is common for all industries, different
industries practice different methods of costing for their products based on
the nature of their business and type of output required.
There are different types of cost associated with costing and we are
going to learn about them in detail in this section.
5.3.1. Fixed Cost

We have already discussed a little about fixed costs in the earlier sections
and chapters. Fixed costs are the standard costs that do not change even if
there are changes in the output of the product or even if there is no output.
Fixed cost must not be misunderstood to be static; it can vary after a specific
timeframe or when there is a huge change in the sales volume (Figure 5.7).
Figure 5.7: Fixed cost.

Source: http://www.businessdictionary.com/definition/fixed-cost.html.
Few examples of fixed costs are tax percentages, rents, lease payment,
interest payments, employee salaries, insurance premiums, fixed AMC costs
(Annual Maintenance Cost) or fixed security services cost, subscription
fees of newspapers and magazines, etc., These costs can sometimes vary
when the business expands which means when the demand and expenditure
increases, the fixed costs also changes accordingly.
5.3.2. Direct Cost

Direct costs are generally termed as ‘Prime Costs.’ These are costs that af-
fect the production directly. So, direct costs are said to be similar to variable
costs. For example, the costs required for manufacturing of goods or the cost
of labor that is required to produce the finished goods comes under direct
cost. It is easy to track to which product the money is spent in a direct cost
(Figure 5.8).
Figure 5.8: Direct cost.

Source: https://www.slideshare.net/MHaNiFChAChAR/project-cost-man-
agement-48906694.
5.3.3. Indirect Cost

Indirect costs are often referred to as ‘Overhead Cost.’ Indirect costs are
costs that are resulting from the use of energy and fixed capital and indirect
costs are seldom compared to fixed costs. Indirect costs cannot be traced
back to any one particular product, department or unit. It is the expense
incurred commonly to all the activities. Indirect costs are normally unrelated
to a product or service (Figure 5.9).
Figure 5.9: Examples of indirect costs.

Source: https://www.patriotsoftware.com/accounting/training/blog/what-is-
an-indirect-cost/.
5.3.4. Variable Cost

Variable Cost is just the opposite of fixed cost. Variable cost fluctuates
depending upon the quantity of output as the cost of materials may increase
or decrease. Variable cost increases if the production volume increases and
variable cost decreases if the production volume decreases. In hotel industry,
variable cost definitely changes according to customer’s turnaround and
business volume. As the occupancy of guests in the hotel decreases, the
variable cost also decreases (Figure 5.10).
Figure 5.10: Variable costs.

Source: https://www.slideshare.net/tutor2u/a2-micro-fixed-and-variable-
costs.
Examples of variable costs are cost incurred for hotel room facilities,
flower or bouquet arrangements, supplies of house cleaning, food, beverages,
decoration cost, stationary cost used in reception or front desk, laundry, water
supply, telephone, transportation, entertainment, administration, marketing,
etc.
5.3.5. Mixed Cost

There are certain costs that cannot be bucketed under fixed or variable costs.
Such costs are referred to as mixed cost as they contain elements of fixed
and variable costs. The cost of supervision and cost of inspection are few
examples of mixed cost (Figure 5.11).
Figure 5.11: Mixed costs.

5.3.6. Opportunity Cost

These are costs that are used to for activities that are predetermined and
cannot be left. For example, the cost of benefit and profits comes under
opportunity cost. In simple terms, opportunity cost is the cost of something
that occurs for benefiting purpose leaving another option. It is an alternative
given up when a decision is made. The opportunity cost is never shown
in the financial statement of any company; rather, they are used to future
planning by the management (Figure 5.12).
Figure 5.12: Opportunity costs.

Source: http://www.businessdictionary.com/definition/opportunity-cost.
html.
For example, when a company decides to buy a new piece of
manufacturing equipment rather than lease it. The opportunity cost would
be the difference between the cost of the cash outlay for the equipment and
the improved productivity versus how much money could have been saved
had the money been used to pay down debt. Another example is when the
capital is used for one investment rather than another.
5.3.7. Incremental Cost

Incremental Cost is also referred to as ‘Differential Cost’ because it is the
extra cost that is spent for manufacturing additional products which was
not planned earlier. Incremental cost shows the difference between two
alternatives (Figure 5.13).
Figure 5.13: Incremental cost example.

Source: http://unastronomy.com/marginal-cost-example.
5.3.8. Imputed Cost

Imputed costs are costs that are actually not spent but they are associated
with internal transactions. There are many works in an organization that gets
transferred from one department to another and when this transfer happens,
a transfer pricing is calculated for budgetary purposes. Although there is
no actual purchase or sale of goods and materials, the receiving department
may be charged with imputed costs for the work it has received. When a
company rents itself a building that it could have rented to an outside party,
the rent may be considered an imputed cost (Figure 5.14).
Figure 5.14: Imputed costs.

5.3.9. Out-of-Pocket Cost

Out-of-Pocket Cost is costs that uses the current resources, usually cash
(Figure 5.15).
Figure 5.15: Out-of-pocket cost meaning with example.

Source: https://www.slideshare.net/ranasingh0820/classification-of-
cost-5766802.
5.3.10. Sunk Cost

Sunk cost is the cost that is already incurred and which cannot be recovered.
Generally, the financial managers consider the sunk cost and out-of-pocket
cost into account to decide whether to increase the production or not. Sunk
costs are the past costs that were already incurred by the organization and so
these costs don’t add much value in making management decisions. Hence,
these costs are generally omitted from the business decisions as there will
not be any impact in the decision because of the sunk cost. Since these costs
are already committed by the organization, they can neither be avoided nor
recovered (Figure 5.16).
Figure 5.16: Sunk cost.

Source: https://marketbusinessnews.com/financial-glossary/sunk-costs-def-
inition-meaning/.
5.3.11. Product Cost

Product cost is something similar to direct cost. Product costs are directly
linked with output and are used to value inventory. In a firm where the cost
accounting system is followed, all the manufacturing costs inclusive of fixed
and variable cost becomes product cost (Figure 5.17).
Figure 5.17: Product cost.

Source: https://efinancemanagement.com/costing-terms/product-costing.
5.3.12. Period Cost

Period costs are basically charged as the expenses to the current period.
Under direct costing, period costs are not viewed as costs of the products
being manufactured, so they are not associated with valuing inventories
(Figure 5.18).
Figure 5.18: Period cost.

Source: https://www.slideshare.net/EKTAPANTOLA/product-cost-and-peri-
od-cost-75610587.
5.3.13. Total Cost

The sum of fixed, variable, and semi-variable costs constitutes the total cost.
In economic terms, total cost means the sum of all the costs incurred by a
firm in delivering a certain ouput.
5.3.14. Controllable Cost

Identifying the controllable cost is very useful in budgeting process. As
the name suggests, controllable costs are something that the officials in an
organization such as managers or supervisors have control over; they will
have the power either to increase or decrease the cost. For example, the
payroll cost and the ordering cost of supplies are controllable (Figure 5.19).
Figure 5.19: Controllable costs.

Source: https://www.mheducation.ca/college/larson9/olc/olc/graphics/
larson9fa_s/ch24/slideshows/sld058.htm.
5.3.15. Operating Cost

Operating Cost in general refers to the expenses incurred for the daily
operations in a business. They cannot be pointed out as the cost of one single
product and it can either be a variable cost or fixed cost. A perfect example
for operating cost is the cost of utilities (Figure 5.20).
Figure 5.20: Operating cost.

Source: https://www.slideshare.net/dbhabuk/operating-cost-analysis-of-
steel-sector.
5.3.16. Standard Costing

When the costs are predetermined on certain standards in a given set of
operating conditions, it is called standard costing (Figure 5.21).
Figure 5.21: Standard costing.

Source: https://www.slideshare.net/GDRCSTR1/standard-cost-
ing-63163513.
5.3.17. Marginal Costing

Marginal Costing does not include the fixed cost; it takes only variable cost
into consideration such as direct expenses, direct labor, and direct materials
(Figure 5.22).
Figure 5.22: Marginal cost.

5.3.18. Absorption Costing

Absorption costing is a technique used to absorb the fixed and variable costs
to production (Figure 5.23).
Figure 5.23: Absorption costing.

Source: https://www.slideshare.net/tallan420/absorption-cost-
ing-15557539.
5.3.19. Historical Costing

Historical Costing method looks for actual costs and not predetermined
standard costs. Actual costs can be found only after the cost is incurred and
many organizations adopt this method of costing (Figure 5.24).
Figure 5.24: Historical costing.

Source: https://www.slideshare.net/skillssoft/method-of-costing.
There may be different types of cost and costing techniques, but the
ultimate purpose of all these procedures is to determine the cost of inventory.
As the industries expand and adapt lot of new procedures, costing becomes
more important in order for the management to take proper decisions.
To reduce all these types of cost will be one of the main initiatives of any
business. Although methods of costing and accounting was mainly developed
for manufacturing industry, slowly every industry started adapting these
especially, hospitality industries and it has benefited the industry a lot. All
the costs that we discussed above have different relationship with the output
and allow a company to evaluate its performance.
5.4. WHAT IS ACTIVITY-BASED COSTING IN THE

HOSPITALITY INDUSTRY?
Activity-Based Costing method is one of the most commonly used costing
methods in the industry today. This method is based on the criteria that for
each and every activity, there is a cost associated with it and every output
is related to certain activities. This method is used to know the total cost of
activities necessary to make a product. Before we proceed further, let us
understand what activity-based costing means.
Prior to assigning costs, this method finds out the relationship between
costs, activities, and products and cost is assigned based on this relationship.
Best example for this is a waitress, because a waitress earns certain specified
amount based on the hour worked. If suppose, the waitress serves some 10
tables, each table will be coasted, according to the fraction of the hour spent
waiting on it.
Not every cost is easy to be assigned. Some indirect costs such as
management costs are sometimes difficult to assign to a product. The activity-
based costing method is mostly used by the manufacturing industries as the
cost analyzed by this method is very accurate because the costs are classified
during its production process.
By activities, we mean any task, event or work such as setting up of
machines for production, designing, marketing or selling the finished
products. An activity here also denotes a transaction. There are two ways
by which activities are measured – one is by counting the number of times
an activity has occurred and the other is the duration, i.e., how long does an
activity takes to complete.
The activity-based costing system classifies activities into five categories
as mentioned in Figure 5.25.
 Batch-Level Activity
 Unit-Level Activity
 Customer-Level Activity
 Organization-Sustaining Activity
 Product-Level Activity
Figure 5.25: Activity-based costing system classification.

Activity-based Costing helps in understanding the costs in a better way
compared to all other types of costing and so this method is very popular.
This costing system is used in target costing, product costing, product line
profitability analysis, customer profitability analysis, and service pricing.
5.4.1. Steps Followed in Activity-Based Costing

We learned that activity-based costing means assigning costs to activities.
So, in this section, let us study in detail how this process works.
5.4.1.1. How Does Activity-Based Costing Works?

• Activity-based costing system is a bit complicated.
• To understand the mechanism of activity-based costing, one
must first understand the process in which costs are assigned to
activities. For this, first we need to identify and understand the
activities that are essential to create a product.
• Once the activities are identified, then, they must be grouped under
its own cost pool. Cost pool is nothing but a group of individual
costs associated with an activity. Then, the total overhead of each
cost pool must be determined.
• There is something called the cost drivers which controls the
changes in costs. For example, number of hours, units, parts,
etc., are called cost drivers. So, the next step is to assign these
cost drivers to each cost pool. For example, purchasing costs are
driven by the number of parts purchased.
The total overhead in each cost pool must be divided by the total cost
drivers to get the cost driver rate. The last step is to calculate the number
of hours, units, and parts used by each activity and multiply it by the cost
driver rate.
5.4.2. Applying Activity-Based Costing System

Activity-based Costing methods seems more suitable for small businesses
for making overhead decisions and pricing products. Since by this method,
cost of each activity that goes into creating a full product is known, this
method is very beneficial in many businesses.
With the help of activity-based costing system, decisions can be made
on which activities are necessary for production and which can be omitted.
If the management feels that certain activities cost more than they should
ideally be, then either some other methods can be sought out or the complete
step can be eliminated.
The Activity-based Costing method also helps in setting the prices for
products with a profit margin. With the help of activity-based costing method,
the management can assign costs to each activity in the production process,
allowing the management to more accurately set a price that accounts for
how much it costs them to create a product.
5.4.3. Benefits of Activity-Based Costing System

The activity-based costing benefits the costing system in three ways.
• The first benefit is that instead of accumulating all the costs in
one company-wide pool, it pools costs by activity. This is done by
expanding the number of cost pools that can be used to assemble
overhead costs;
• Secondly, costs are allocated based on activities that generate
cost rather than on volume measures such as machine hours; and
• The third benefit is that it changes the nature of several indirect
costs. It transfers the overhead costs from high-volume products
to low-volume products, raising the unit cost of low-volume
products. To say in other words, activity-based costing is a method
to allocate indirect, overhead costs to products or departments
that generate these costs in the production process.
Although, the activity-based costing method has several steps and is a
bit complicated, this is the most accurate method of assigning indirect costs
because there are not many methods than can accurately find out how much
electricity is used by one department over another department.
From the management point of view, assigning the indirect costs is very
important, especially when it comes to downsizing or outsourcing. If the
profitable departments are assigned too much indirect costs, then they may
appear unprofitable on paper. Based on this evaluation, the management can
discontinue the operations and close a profitable branch. What happens if the
profitable branch is closed? The existing branches will be unprofitable ones.
The company or the organization will not be able to cover its fixed costs as the
only profitable branch was shut down. The same applies to outsourcing also.
With the inaccurate valuation, the management may estimate outsourcing to
be a cheaper option but it might turn out that outsourcing might actually be
more expensive.
Some businesses use the cost of goods sold (COGS) to determine how
much it costs to create a product. But, COGS focuses on direct costs and
does not include indirect expenses like overhead. There are even some other
businesses that allocate the overhead expense equally to all products. But
since some products use more overhead expenses than others, the cost of
making each product is inaccurate under this method.
Activity-based costing method solves this problem. This method
considers both the direct and overhead costs of creating each product. When
both direct and overhead expenses are assigned to each product, prices can
be set more accurately. And, the activity-based costing process shows you
which overhead costs you might be able to cut back on.
For example, you make soap. Soap A requires more overhead, like
testing, than Soap B. Using activity-based costing, you assign the right
overhead costs to the appropriate products. That way, your overhead is
higher for Soap A than B.
5.5. BENEFITS OF COSTING AND CONTROL

Every business works with the intention to succeed and to expand its
operations. So, how can a business achieve success? Success can be achieved
only by making profit. Every business can achieve profit only if sets proper
cost control measures. If proper cost controls are in place, the company or
the organization will be able to increase its profit level and use its profit
share to take business to next level.
Let us see some of the benefits of costing and control:
5.5.1. More Opportunities

A business will receive ample opportunities if it has effective cost controls
in place. Having proper cost control measures helps in lowering the costs
thereby leaving additional funds to acquire new business or any other useful
purposes.
5.5.2. Purchase New Equipments

With proper cost controls in place, profit in business is guaranteed. With
the profit, the management can buy new and updated equipments and there
won’t be much maintenance required for new equipments. Money spent on
repairing old machines will get reduced. For example, a company can buy
new computers or new software that can save time.
5.5.3. Gives Proper Focus and Improves Morale

If proper cost control measures are in place, employees will be clear on
their job and where they have to concentrate more. It will also help them
in eliminating waste. This creates a new culture for all employees in the
company. When employees are focused on cost controls, and they see the
results of their efforts in their paychecks, morale is improved, and they enjoy
coming to work. Employee turnover goes down.
5.5.4. Get Skilled Employees

When a business earns more profit, the management can decide upon
increasing the wage for employees and can pay more salary for new hires.
Such firms attract highly talented and skilled employees.
5.5.5. Helps in Budgeting

Budgets show the overall cost of company’s operations and Cost Control
forms the basis for creating budgets. Cost control measures show the real
path to making profit.
5.5.6. Helps in Maintaining Accurate Data

Without accurate data, cost cannot be determined. Setting up cost controls
forces bookkeepers and accountants to put out the most precise information.
5.5.7. Improves Focus on Marketing and Advertising

When proper cost controls are in place, more profit is gained and this
additional fund gained can be used for improving the business. These funds
can be used for conducting sales campaigns, advertising products to attract
customers, etc.
5.5.8. Increase Competitiveness

A company can stay in business only if maintains a higher position that
gives it a competitive advantage. This means more investment in better
capital equipment, and increased productivity from employees.
5.5.9. Helps Clear Debt and Increase Credit Rating

Increase in profit due to proper control measures helps the firm to pay debt.
A lower debt load reduces the ratio of debt to equity. A lower debt-to-equity
ratio improves the financial strength of the firm and increases its credit
rating.
5.5.10. Monitor Performance

Cost controls are an essential component for every small business. Every
business should start the year with a profit plan, and everyone needs to
understand their role in achieving that profit objective. Cost controls are
the mechanisms that an owner can use to monitor the performance of the
business and improve its operations.
REFERENCES
1. http://hospitalityntourism.blogspot.com/2012/10/food-cost-control-
question-answers.html (Accessed on 13 July 2019).
2. http://www.loscostos.info/cost-accounting/cost-systems.html
3. http://www.preservearticles.com/2012051932672/5-important-
fundamental-principles-of-costing.html (Accessed on 13 July 2019).
4. http://www.yourarticlelibrary.com/cost-accounting/cost-accounting-
meaning-objectives-principles-and-objections/55218 (Accessed on 13
July 2019).
5. https://businessjargons.com/cost-accounting.html (Accessed on 13
July 2019).
6. https://hmhub.me/objectives-advantages-cost-control/ (Accessed on
13 July 2019).
7. https://setupmyhotel.com/train-my-hotel-staff/front-office-
training/187-fixed-cost-and-variable-cost-in-hotels.html (Accessed on
13 July 2019).
8. https://smallbusiness.chron.com/advantages-cost-control-22591.html
9. https://smallbusiness.chron.com/cost-accounting-practices-service-
industry-42794.html (Accessed on 13 July 2019).
10. https://smallbusiness.chron.com/principles-cost-accounting-76706.
11. https://thelawdictionary.org/continuous-operation-costing/ (Accessed
on 13 July 2019).
12. https://www.accountingtools.com/articles/what-is-a-costing-system.
13. https://www.edupristine.com/blog/costing-methods (Accessed on 13
July 2019).
14. https://www.inc.com/encyclopedia/costs.html (Accessed on 13 July
2019).
15. https://www.investopedia.com/ask/answers/041415/what-are-
different-types-costs-cost-accounting.asp (Accessed on 13 July 2019).
16. https://www.investopedia.com/terms/a/abc.asp (Accessed on 13 July
2019).
17. https://www.myaccountingcourse.com/accounting-dictionary/activity-
based-costing (Accessed on 13 July 2019).

18. https://www.naturalproductsinsider.com/business-resources/seven-
principles-effective-cost-management (Accessed on 13 July 2019).
19. https://www.patriotsoftware.com/accounting/training/blog/activity-
based-costing-small-business/ (Accessed on 13 July 2019).
20. https://www.quora.com/What-are-the-objectives-of-cost-accounting
21. https://www.slideshare.net/Dyasha/basic-costing-principles (Accessed
on 13 July 2019).
22. https://zenodo.org/record/1132030#.XLmorOgzbIU (Accessed on 13
July 2019).
6
Cost Evaluation and
Control
“Beware of little expenses. A small leak will sink a great ship.”

—Benjamin Franklin
CONTENTS
6.1. Cost Control And Budgeting............................................................ 188

6.2. Inventory Cost Control .................................................................... 191
6.3. Food And Beverage Cost Control .................................................... 198
6.4. Labor Cost Control.......................................................................... 210
References ............................................................................................. 222
We saw what costing meant and the importance of costing in the

hospitality industry in the previous chapters. In this chapter, we are going
to move a step forward and understand the real use of costing. This chapter
highlights the significance of cost evaluation and cost control. Without
knowing the cost incurred, the management will not be able to reduce or
control it. Analyzing the cost incurred for each of the business activity is
called cost evaluation. Along with cost evaluation, we will also look at the
different cost control measures and where these cost control measures can
be applied.
6.1. COST CONTROL AND BUDGETING

The use of budget and budgetary control is now a vital part of accounting
for the hospitality industry and should then be used as a benchmark for mea-
suring their performance and setting their financial goal. “The process of
budgeting is often used not only to plan for the future, but also to set targets
and increase individual performance.” Adams, Debra. In the 21st century,
hotel business alone is continually growing. “In 2006, the UK hotel market
was valued at £ 14bn, an increase since 2002 of 28.9%.”
Hotels and other accommodations, restaurants, fast food retail, bar,
and catering is part of this industry. To maintain or perform as a successful
key player in this competitive market, any hotel industry needs to adopt
budgeting; hence, this will help the management plan ahead for their future
goal.
“Hoteliers use budgeting and forecasting as a standard for strategic

planning and financial control to measure actual operating results. Financial
forecasts and budgets can enhance management control over hotel operating
expenses and help determine the property’s profitability.
Budgetary practices in the hotel industry have become a significantly
studied area of business research and activity in recent years, the tourism
industry’s enormous boom. Previous budgeting practice research was
undertaken by Schmidgall and Ninemeier (1987 and 1989) in the United
States,” Collier and Gregory (1995) discussed management accounting
practices of six (6) organizations including budgeting.’ “In particular, the
early and limited accounts of management accounting within the hotel
Cost Evaluation and Control 189
industry paved the way for increased efforts by few hospitality educators to
undertake research into budgetary practices within the industry (Schimidgall
et al., 1996).” Nowadays, research work on management accounting and
practice are growing, unlike any other research field.
Your budget for restaurants defines your financial limits, while the
financial forecast of your restaurant determines what you can do within
those limits. While you can’t control costs at all times, a budget provides
you with the framework for the financial decisions you can control.
For example, what is done from minute to minute, hour to hour, and
day to day will have a direct impact on long-term plans. On the other hand,
in any short-term activity controlling will directly influence any long-term
goal. Therefore, long-term goal or objective short-term goal support needs.
Gareth Owen (1998) has explained budgetary process in hotel business
by drawing a budgetary cycle.
• Environmental influences audit;
• Internal resources audit;
• Actual result;
• Master budget;
• Departmental budget;
• Strategic plan;
• Annual business plan;
• Long term strategic gap;
• Short term operational gap.
There are several types of budgets used in the establishment of hospitality.
Capital budget, operating budget, master budget, departmental budget, fixed
budget, flexible budget, for example. There are many other types of budgets
in each of these different types.
6.1.1. Cutting Costs

When searching for ways to save money, no restaurant expense is
untouchable. It all depends on the restaurant and the cost reduction effects.
Reducing hours, going dark on slow days, closing restaurant parts or scaling
back operations can cut down on fixed costs. Restaurant managers can
compensate for slow seasonal periods by reducing hours, reducing staff or
reducing wages until sales improve.
Strategies for reducing even fixed costs include:

• Use humidifiers and dehumidifiers to make the interior more
comfortable with less energy rather than relying on the HVAC
system. Renegotiating contracts and prices with suppliers,
landlords, and consultants.
• Training staff to multitask.
• Staying on top of utility charges and changing providers to
generate savings.
• Monitoring when clock-in and clock-out workers after each shift.
• Reviewing food costs and reducing menus to include only the
most profitable items.
• Using facilities after hours to generate alternative revenue with
strategies such as holding cooking classes, private parties or
renting kitchens to caterers.
• Paying cash for items instead of paying interest.
• Determining and reducing banking charges by maintaining
certain minimum balances.
• Taking advantage of free technologies to replace paid services
• Cutting laundry expenses by doing laundry in-house
• Negotiating lower payments on leased equipment
6.1.2. Reducing Variable Costs

Restaurant managers can reduce variable costs by using POS systems to
identify waste and theft, keep inventories tighter, reduce kitchen errors and
reduce food costs through multiple strategies. For instance, it is a bad idea
to mix high-cost and low-cost ingredients in any recipe.
Some ways to reduce variable costs are mentioned below:
6.1.3. Monitoring Costs

Costs change rapidly, so managers need to regularly review costs to identify
areas for cost reduction. Because of price increases, previously profitable
menu items can quickly become less profitable, so regular menu items
costing is essential. Restaurant profits are often diminished by waste and
theft and remain undetected. Software and POS systems help managers to
stay on spot and adjust when necessary.
6.1.4. Being Careful on Spending

Restaurants waste money by giving more than they ask for to customers—
especially condiments to go. Try to pack bulk condiments on your own, ask
customers how many packages they want, or provide extras on request only.
6.1.5. Make Use of Free Marketing

To promote specials and reduce advertising costs, try using restaurant loyalty
programs, social media forums, and free blogs. Encourage customers to use
word-of-mouth to promote the restaurant to earn rewards. Analyze current
advertising to find out what works best and cut down on budget ineffective
advertising.
6.1.6. Retrain Periodically

Long-term staff become careless or forget about their training. Monitor
the performance of employees by scheduling reviews, requiring remedial
training when necessary and teaching new cost-cutting techniques to
employees.
6.1.7. Avoid Overstaffing

Managers can avoid over-staffing and reduce labor costs as profits increase.
Labor costs are one of the highest expenses of a restaurant, and adding
additional people does not always eliminate problems or make service
go smoother. Cross-training the most efficient people, while maintaining
quality standards, allows managers to schedule fewer workers.
Instituting and reviewing a year-round annual budget allows managers
to determine when costs are unsustainable. Quick action can reduce losses,
reinforce operations and keep restaurants in business when competitors
close. Nothing evolves as fast or creates as many pitfalls as the cost of
restaurants, but controlling expenses offers the best opportunity for business
success.
6.2. INVENTORY COST CONTROL

For the hospitality industry, inventory management can be difficult due to
the somewhat intangible nature of their product or the difficulty associated
with tracking it and storage. But don’t fall into the trap of thinking it can
simply be forgotten as it will cost you thousands of income a year.
When we think about inventory management, the hospitality sector

can sometimes be overlooked. What is their product on offer after all?
Their inventory for hoteliers is hotel rooms that are rented every night; for
restaurateurs, it is food and beverages that are purchased or prepared and
that are not ended up being consumed and paid for by patrons.
Proper inventory management is a crucial factor in cost control. You first
need to know what you are spending to control the cost of food. What’s the
value of your inventory? What is Sold Goods Cost (COGS)? What about
the raw goods that makes up a menu item, such as ingredients or paper
products?
All this information is best gathered from your Point of Sale (POS)
system. To input orders and manage inventory from menu items to raw
goods, any serious restaurateur needs a POS system. Many systems also
track contact information for employees, labor costs, and shift details, so
you know who is doing what during a shift. Most importantly, however, the
correct POS will have reports and analytics that provide valuable insight
into your business. This insight will go a long way towards making issues
relating to food and drink cost control a thing of the past.
To find this information without a POS system, to get a rough estimate,
you will need to collect data from various sources such as invoices and
cash register receipts. You will understand why we urge you to consider
investing in a POS system once you go through that tedious process a few
times. Every week, it will save you hours, prevent some severe headaches,
and help you get to the next level.
Not only do you need an inventory tracking POS system, but you also
need standard stock receiving procedures. As the owner of the business,
you will not always be there whenever there is a delivery. Therefore, in
your absence, assign one or two employees to be responsible for receiving
inventory.
Have you ever considered how much inventory hotels need to keep
track of? Think about it: towels, bedding, mugs, and makers for coffee,
ice buckets, soaps, shampoos, the list goes on and on. This does not even
include the gift shop of a hotel! Hospitality industry inventory control is
incredibly important. Some studies suggest $100 million a year for hotel
theft and losses! That’s a lot of money to lose.
To prevent losses and theft, hotels use inventory management systems.
They also use these systems to know how much product they need from
different vendors to order. Hotels receive reports on vendor performance,
vendor accountability, and order management with inventory management

systems.
• Vendor Performance: These reports show hotel how quickly
orders are being received, the cost of items, accuracy of delivery,
and amount of damaged inventory received.
• Vendor Accountability: These help hotels track any errors in the
deliveries.
• Order Management: These help hotels prevent over-ordering or
having out of stock items.
All of these are very important, and using proper inventory controls
helps to deliver the most accurate reports and enable hotels to order the
correct stock amount. While the primary purpose of inventory control is to
prevent shrinking, hotels are also required to have compliance controls in
place, such as vendor compliance and accounting practices.
Let’s see where the inventory controls are to be placed in the hospitality
industry:
6.2.1. Stock Room

A very important area for maintaining inventory controls is the stock room.
This is where your towels and sheets, soaps, and beverages are stored -clean.
Whether you’re running a dive bar or an artisan microbrew pub, a five-
star hotel or a roadside clubhouse, we can agree on one thing-the only way
to keep track of the drinks you have in stock is to ensure the profitability of
your venue. How else will you know if your barmen add extra vodka to give
that cocktail an extra kick or if somebody in the storeroom got clumsy and
broke a whole beer case? After all, the drinks that are your bread and butter
may be missing in different ways.
This is, of course, no news for the diligent bar or restaurant manager
that’s why every bar known to man has some form of stocktaking, but the
methods used are usually outdated and dreaded by the staff, who don’t seem
to like working too late, counting bottles and measuring shots.
A quick word of advice: if you regularly pour liquor into measuring cups
to keep track of your stock, you’re not doing a favor on your own. Every
time they leave their original container, the drinks lose quality, which is bad
news for the hard-to-sell items you might have on your menu-like expensive
whiskey or cognac. If you want to charge $20 for a shot of something that has
degraded into cheap brown liquor, you should ask yourself. Thick liqueurs
that stick to the measuring cup walls are always a mess-with each pouring
you lose a decent amount.
Moreover, as anyone who has ever participated in inventory-related
activities knows, the results of all this measurement and counting are usually
quickly scribbled down in dim light on a piece of paper. It is unfortunate
enough that illegible handwriting causes a headache for any administration
and accounting staff to have been trusted with the important task of finding
the exact value of your actual inventory.
Fortunately, recent technological developments allow hospitality leaders
in a very innovative way to overcome such redundant obstacles. MASSEC
is the future tool when it comes to keeping track of your inventory-this
electronic system consisting of a barcode scanner and a durable, aluminum-
case scale is combined with an android app that allows you to store data on
your mobile device. Measuring the open bottle content is as easy as scanning
the barcode as simply placing the bottle on the scale and pressing the “save
button” on the application. The data will be stored in a.csv spreadsheet and
will be sent to your chosen email address. Not only does it provide accurate
insight into the exact quantities of drinks you have in stock; it also enables
you to save time and cut down on working hours.
Stock/inventory control is a very important aspect of business for all
businesses in the hospitality sector, such as restaurants and bars, and it plays
a very important role in daily operations. Optimizing stock can save an easy
$25,000 to $75,000 a year for a small business. Holding too much stock will
lead to unavailable funds for other areas of your business plus additional
storage costs, but having too little stock can lead to sales loss. You should
also be able to monitor slow moving stock as it will be a drain on resources
to hold a lot of this; this is a very big balancing act.
6.2.2. Having a Stock Management System in Place

It is not difficult to implement a stock management system, but your business
needs a plan and a program to follow. Many companies think they don’t have
the time to start or get it going and don’t finish. The bulk of the work is all
in the first two weeks to implement a system that can save tens of thousands
of dollars each year. It becomes a small part of a weekly or monthly routine
once it is implemented.
6.2.3. Stock Control and Stock Taking

Most businesses understand the term “stock-taking,” just put it is a regular
routine to count stock in your business to determine the level of stock held.
Too many companies do this once or twice a year to give their accountant an
assessment. This allows the accountant to calculate the gross profit but does
not allow the business owner to manage their stock variances, stock levels
and monitor the shrinking of stock.
There should always be a dedicated Stock Control and Recipe module in
a POS system. This will typically ensure that as every item in your business
is sold, your stock levels will decrease, as stock is purchased, your stock
levels will increase. In your point-of-sale system, a stock control system
will then provide a comprehensive stock variance report that allows you
to monitor and manage every line item in your business. Only by regularly
doing this will a company reduce stock variances and increase gross profit.
6.2.4. Guest Rooms

This is probably the first area you think about under the control of the hotel
inventory. This is not that when guests leave, they are packing linens in their
bags, but this refers to sheet or towel damage. You may need to send a TV
off for repair.
You need to label each item with a bar code, QR code, or some type of
tracking number to keep track of these items. Let’s say that your housekeeper
noticed a tear in the bedding and that it must be replaced. This bedding
is part of your stock. The inventory system of the hotel accounts for the
transfer and replacement of the damaged bedding.
6.2.5. Avoid Wastage

Waste is the items left over at the end of the day, the pile of coffee grinds
swept on the floor, the drinks or meals not properly made and returned. These
are an everyday part of business, but mostly left unmanaged and assumed to
be just part of “What we’re doing” and “It’s just how it is.” But what does it
cost the business and can be improved once it is monitored.
There are many real-life accounts showing how important it is to know
the cost of your waste. One company that implemented waste recording
before further stock control was implemented reported some worrying
trends. This company sells a small range of goods from the bakery. Every
day, they bought their goods from the same supplier and had a set order for
their bakery goods every day. The levels were historic and for two years
had not been adjusted. Throughout those years, business was consistent so
there was no real need to increase or decrease the order. It just came in
and was signed off every day. A monitoring system for wastage has been
implemented. The remaining stock was recorded at the end of each day as
waste through the POS system before being thrown out. What a 5-minute
job at the end of each day showed the owner that over $200 of bakery goods
were written off every week! This has shown a cost to business of more than
$20,000 in profit over the past two years. As those goods were thrown out,
it also meant more than $50,000 of lost potential revenue.
Once the severity of the issue was recorded, a more detailed stock
management system was implemented using minimum and maximum levels
to ensure that the stock purchase matched the previous 6 weeks’ buying
history and reduced the weekly waste to less than $30 per week. This saved
the company more than $8,000 a year. Not a bad return every day for a
couple of minutes of work.
6.2.6. Customer Satisfaction and Stock Control

More customer satisfaction can also be ensured by a stock control system. A
stock control system should be capable of recording minimum and maximum
levels or par levels that can be incorporated into a business’ purchasing
routine. While there are many aspects that increase customer satisfaction,
it is certainly one that will lead to a downward turn in customer satisfaction
not to have certain stock items.
The stock management point-of-sale system should ensure that there
is never a case of “sorry we’re out of that wine’s stock” or “sorry we’ve
run out of that fish and I should tell you now we’ve also had to remove
the shrimp from the menu.”Customers visit a company to select from the
menu’s full selection. Starting the relationship by telling them the business
isn’t organized enough to supply the items they want to order means they
start on the wrong foot. A well-implemented system of stock management
would ensure that these problems do not arise.
6.2.7. Recycle and Reuse

These terms may not sound like standard terms associated with the food
service industry; they help you control the cost of food. For instance, let’s
say the employee you left in charge of accidentally accepted stale bread
receiving inventory. Instead of throwing it out, repurpose it and make
crumbs of bread or croutons from it.
For multiple menu items, another great way to repurpose food is to use
it. By creating a simple menu that uses many of the same ingredients, the
best way to start is. An Italian restaurant, for example, repurposes marinara
sauce for multiple menu items such as pasta dishes, anything ‘parmed’
(parmigiana chicken or eggplant), and pizza sauce.
And while in the traditional sense of the definition you can’t reuse or
recycle food, and if you had some serious legal issues on your hands, you
can recycle it in the form of compost. Recycle them instead of throwing
out the half-eaten meals your customers leave behind. Keep a few compost
pails in key kitchen areas and encourage staff to put food scraps instead of
garbage into the bucket.
The less trash you’ve got, the fewer trash bags you’re going to have to
buy and you’re going to have to schedule dumpster pick-ups–which saves
you money. And there’s the environmental and nutritional benefits bonus as
well. Compost is used instead of synthetic fertilizers (chemicals), resulting
in a healthier product with less adverse environmental effects.
Not all waste is compost material, so make sure that you keep a clear list
of acceptable items posted close to the pail so that employees know what
can and cannot go in.
Accounting department often coordinates inventory control. While
some departments are carrying out inventories of their supplies for their
own benefit. Department heads or supervisors should not make major
inventories for their own departments. Better control is obtained when
staff from outside the department comes from the inventory control. For
example, Housekeeping Inventory Control Audit is done by the Department
of Accounts.
By using serial numbers marked on the manufacturer’s plate on many
pieces of equipment, inventory control for IT appliances and other equipment
can be enhanced. If the manufacturer does not have such serial numbers of
markings, then you should consider implementing for each department a
system with unique serial numbers. You should also follow a standard while
defining the unique serial number for tracking the inventory. Just as the first
two digits are always’ FO ‘department code, the next three digits are for’
DES’ item (Desk), the last digits are the number. Anyone who looks at the
Inventory Control Register should be able to identify by reading the unique
code what item it is. The markings should be kept for inventory purposes
and for identification when stolen items are recovered in a register within
the accounting office.
There are increasing numbers of incidents nowadays when guests take
items from hotels as collectibles! Hotels can reduce these problems by
avoiding the placement of logos or other identification that might appeal

to these so-called “collectors.” There is also some disadvantage in doing
this when the items are recovered, it becomes difficult to identify positively
whether or not these items belong to the property. Some properties solved
this problem by sewing a colored thread on linens, blankets, towels in the
corner of a hem or other suitable place. These tags will help them identify
and recover goods that have been stolen.
If you run a large hotel then it becomes really hard to manually do proper
inventory control, in this case it is always recommended to choose good
computer-based inventory control software that is available on the market.
6.3. FOOD AND BEVERAGE COST CONTROL

As anyone could probably tell you, the key to a successful restaurant is good
food, excellent service, and a great location. These factors contribute to a
high number of sales. Restaurants, however, are operating on tight margins.
Your restaurant sales must be sufficient to cover all your other expenses,
plus generate a decent profit for you. In restaurants, therefore, there is a
need for food and beverage control. Even a slight imbalance in serving food
could result in a severe drop in your margins. Therefore, to gain a reasonable
profit, you need to keep your costs in check.
First, let’s explain cost control as the ongoing practice of identifying
and reducing business expenditure as a means to boost profits. Food and
beverage operations such as cost control are often stuffed together under
one umbrella, but looking at them separately is also clever to get a clearer
picture of their real cost.
Cost control of food and drink is not a one-and-a-one job; it is an ongoing
process. In order to achieve the best results, you need to continuously
identify areas for improvement and formulate solutions that will result in net
positive results. Even some areas where you think it’s impossible to improve
and you’re just chalking it up to the cost of doing business, trust us, there’s
always more you can do; which brings us to our next point.
The above formula means that:

Increasing sales is not the only way to increase profits according to

this formula. By decreasing your costs as well, especially your food and
beverage costs, you can increase your profit margin. This is where control
of food and beverage comes into play. To understand how to control the cost
of your restaurant, you first need to know what control is the cost of food
and drink.
Control of food and beverage essentially means controlling people’s
behavior and the processes that are responsible for expenditure. Control is
a process through which a manager tries to direct, regulate, and restrain
people’s actions to achieve the desired goal.
Any business owner’s core focus is to protect your profit margins. But
the unique challenges of owning or managing a restaurant are the rate of
movement of inventory through your facility and its uncompromising shelf
life.
While clothing may go out of style and a customer commits a fashion
crime by buying it off the discount rack, with a bout of food poisoning, it
won’t commit them to the hospital. High food costs will destroy your profit
margin, and if you try to make up for it by serving subpar food, it will
completely destroy your business.
There are primarily four Food Service categories that need to be
controlled in a restaurant.
• Food Cost: The cost of food is the cost of preparing a dish.
The cost of food includes the plate and the cost of the period.
It includes the cost of using raw materials such as meat, milk,
vegetables, grain, spices, etc. The food cost also includes non-
alcoholic beverages.
• Beverage Cost: Beverage cost is the cost related to the alcoholic
beverages served in restaurant and bars.
• Labor Cost: Labor Cost includes the cost of maintaining the
restaurant staff. It also includes taxes incurred on employees
‘payrolls.
• Other Expenses: Other costs include all the other costs incurred
during the running of a restaurant. These may be utilities, rentals,
kitchen appliances, etc.
Let us analyze these four more deeply:
6.3.1. Food Cost Control in Restaurants

Food Cost Control is the first step in food and beverage control. But before
you go ahead and take steps to control your food costs, you need to analyze
your actual food costs and percentage of food costs. This can be deduced
by using predefined formulas for controlling food and beverage costs. The
percentage of food costs is the portion of sales spent on food expenses. The
cost of selling food divided by total sales gives you the percentage of food
costs.
Once you know your exact food cost percentage, you can control your
restaurant’s Food Cost by following certain practices. The practices are:
6.3.2. Forecast Menu Items

Food and Beverage Control is an integral part of menu item forecasting.
Food Cost Control starts with menu prediction. The menu is predicted to
determine the demand for different menu items. Decisions on raw materials
to be ordered, labor to be supplied, time to be given, etc. are required.
Projections of menu items will reduce your food waste and save you labor
and raw materials costs. Depending on the psychology of your customer,
you need to predict your menu to make sure your menu supports your sales.
Only when you understand the requirements of a particular item should
you decide how much of a particular item should be prepared in your
restaurant. By calculating its Popularity Index, you can predict the sales of
a dish.
• Popularity Index= Total number of a specific menu item sold/
Total number of all items sold
• Predicted Number of Item Sold= Number of guests to visit your
restaurant X Popularity Index
The number of guests visiting your restaurant is usually quite easy to
predict. The footfall depends on several factors, such as quality of your
service, competition in your area, season, etc., to be taken into account.
You can predict the trend of footfall over a period of time. Refer to the
reports generated by your POS software that will give you a detailed insight
into your restaurant’s amount of footfall, the busiest time of the day, the
most popular dish, etc.
6.3.3. Standardized Recipes

Simply put, a standardized recipe is made up of detailed procedures for
preparing and serving each of your menu items and is integral to Food and
Beverage Control. They give the exact quantity of ingredient to be used a
set measure, declare the number of servings, set portions for each meal, and
of course the preparation method. They are critical to controlling the cost of
food and beverage as even a slight imbalance in the servings could result in
a severe drop in your margins over a period of time.
Standard Recipes also help to maintain consistency across multiple
outlets in addition to controlling food costs. Recipes can be standardized
across numerous outlets and managed efficiently by investing with a recipe
management feature in POS software.
6.3.4. Managing Inventory

The first thing restaurant owners do to get the operations going is to store the
inventory. The most important part of Food and Beverage Control, however,
is the management of the inventory. You first need to define what inventory
levels are needed in your restaurant before you go and start stockpiling your
inventory.
You need to have a clear understanding of how much stock of items
in your restaurant kitchen would be needed and how long those items
would last. This comes from predicting the menu and managing yields. You
determine how much of a dish will be required when you predict your menu.
You estimate how much raw material will be needed to avoid wastage when
you manage yield per dish. Both of them will work together to control your
food and drink costs by determining exactly how much inventory is needed.
Before purchasing, you must consider the storage capacity of your
inventory and shelf life as well as the perishability of each item. This article
will tell you more about your restaurant’s inventory management.
6.3.5. Purchasing
Much care must be taken while buying inventory items or may escalate the
cost of your food. You need a list of all the items you need to buy and how
many you need to buy. You should also order enough to keep a steady supply
to keep you from running out of an item. Inventory management software in
such cases is extremely useful. For each item in the inventory, you can mark
levels and set reminders in the POS software that will alert you when the
items run low, giving you plenty of time to order more. It is also advisable
to order items in a’ Purchase Group.’ Buying Groups give you an edge over
the supplier due to the increased number of buyers and so you can negotiate
better for the price.
When purchasing Stock Items, you must also adhere to the product
specifications. Product specifications consist primarily of product name,
price unit, standard grade, weight/size, packaging desired, container size,
etc.
Another key factor to buy while keeping food and beverage cost control
in mind is the yield of the product. The yield of the product essentially gives
the quantity of the ordered item that can be used to prepare the dish, i.e.,
the Edible Portion. You also need to consider the item’s waste percentage.
Few items can be used entirely while cooking; during chopping, trimming,
and cooking, a significant portion is often lost. Luckily, this loss can be
calculated and ordered accordingly.
The first business order is to measure and track what is being thrown
out. How much food is wasted because of mistakes in cooking, preparation
waste or spillage? Full-service restaurants in the U.S. account for $14 billion
in food waste – that’s a significant amount of waste, according to Feeding
America.
Waste percentage is given by:
Waste Percentage = Product Loss/Total Weight of the item when pur-
chased.
Monitoring waste is a group effort, so involve all of your staff. Record
the source of waste and how much of it ends up in the trash. Throughout a
shift, the audit process is an ongoing task, so we recommend doing it on
days when you are mildly busy. Not too busy to keep up with your staff, but
busy enough to get a decent sample size.
Hiring someone for the sole purpose of a food waste audit is an alternative
to conducting it on slower days. You could even have the analysis happen
during a Friday or Saturday night with a dedicated staff member when there
is likely to be more waste occurring because it is so busy. The process has
only to take place for long enough to get a general sense of what’s going on,
so it doesn’t mean hiring someone to do this full-time job.
You should start to see trends and identify areas for improvement once
you have a decent sample size. Let’s say, for example, you have a children’s
menu that serves children up to the age of 12. During the waste tracking,
process servers see a trend of significant waste from the younger segment,
kids from infants to grade school age, ordering off the kid’s menu.
You can implement a ‘tots menu ‘for the younger kids at a lower price
and portion size as a result of tracking and identifying this trend. You reduce
waste and keep those tiny customers ‘parents returning to your business.
6.3.6. Vendor Management

You must have the purchase order (PO) before you choose a vendor to supply
your kitchen with the raw ingredients. It is essential for all orders to have a
PO, no matter how trivial they are, and to maintain their records.
Once you have prepared the PO, you have to choose a vendor to supply
your restaurant kitchen with the stock. To maintain the quality and taste of
your food, it is better to buy from the same vendor. Buying at the same price
from the same vendor also helps to keep your menu’s Fixed Cost. Also, to
lower your order on credit rather than cash purchase costs. So you can order
more at a much lower price.
6.3.7. Storage
All methods of food costing and control can go in vain if the purchased
stock items are not properly stored because food items are highly perishable.
To ensure the stocked goods ‘longevity, you must follow proper stocking
practices. Separate areas should be available to store dry, cooled, and frozen
products.
Storage can be done in the following ways:
• First In First Out: The items purchased first and consumed first
in this method. The items first bought are more likely to spoil
than the items later bought. In grocery, dairy, etc., this method is
preferred and is the most popular method of storage use.
• Last In First Out: The last items purchased are consumed first in
this method. The idea behind this storage is that when fresh, it is
best to consume certain items such as baked goods. Method Last
in First Out helps to maintain quality and provide high customer
service.
The best way to store your inventory items is to ensure that the items are
kept in a cool, dry, and sterile place. The items should also be appropriately
rotated.
6.3.8. Receiving
Receiving is one aspect of control over food and beverage that is often
overlooked, but just as important. The maximum in-stock discrepancy occurs
when the order is received. In receiving the order, a not so honest employee
may be tempted to steal from the inventory. It is also known that dishonest
employees often conclude an agreement with the Vendor and receive only
half of the ordered items while pocketing the entire order’s money.
You should ensure that the purchasing agent and receiving clerk are two
different individuals to reduce the possibility of theft and that the entire
purchasing and receiving process is carefully monitored. Receiving clerks
should be adequately trained to check the product’s weight, quantity, quality,
and price while collecting stock items. They should be adequately equipped
with the tools needed to weigh and measure the stock.
6.3.9. Beverage Cost Control in Restaurants

Beverage Cost Control is the second part of Food and Beverage Control. The
process of controlling the costs of Beverage is similar to the control of the
Food Cost. Keeping a check on the Beverage Costs can be more tedious as
over pouring, and spilling is quite common, resulting in costs being inflated.
There is some overlap between controlling food costs and beverage
costs, but there are also things that are just as important and relevant to the
latter.
You can track and control your beverage cost using this formula:
Cost of beverage sold/ Beverage sold = Beverage Cost percentage
6.3.10. Forecasting Beverage Sales

You have created a Beverage Sales forecast when you predict how many
guests you will serve and how much revenue they will generate in a given
future period. This will give you a clear picture of the costs you are looking
at, so you can take certain steps to ensure that there is no wastage or theft,
and the cost of drinking is controlled.
6.3.11. Standardized Drinks and Recipe Portions

A standardized drink recipe is the most important aspect of controlling
Beverage Costs. You should also have a policy of pouring to regulate the
size of the drink. Standardized portions are essential, and tools to maintain
the drink’s quality and quantity must be ensured. Train your staff to use cups
or jiggers to prevent overflow (Figure 6.1).
Figure 6.1: What is a standard drink?

Source: https://en.wikipedia.org/wiki/Standard_drink.
6.3.12. Pouring Techniques

Anyone who has seen Bar Rescue’s episode is aware of the importance of
teaching proper pour techniques to bar staff. Proper pours not only ensure
consistency of drinks, but they also keep your profit margins in check.
Whether you’re choosing the counting method or equipping liquor bottles
with measured pour spouts, find a way you and your staff can work with.
6.3.13. Using Right Glassware

You will also need the correct glassware along with learning the right pour
amounts. Beverages are made with a particular type of glass in mind. How
many beers in martini glasses do you see served? How many martinis in pint
glasses do you see served? (Figure 6.2)
Figure 6.2: Types of glassware.

Source: https://winefolly.com/tutorial/the-importance-of-a-proper-wine-
glass/.
In your establishment, the type of drinks you serve will determine the
type of glassware you need. Buy only those that fit the beverages that you
serve.
You are also the cost controller as a restaurant owner. Setting menu
prices based on margins, product cost, and many other variables and fixed
costs that we have not even started to cover is your job. Food and beverage
cost control will be a significant factor contributing to your success if you
plan to stay in business for the long haul. The sooner you control it, the
better it will be for you.
6.3.14. Labor Cost Control in Restaurants

Restaurant Industry is witnessing one of the highest rates of attrition among
all sectors, particularly at the junior level, resulting in high overall restaurant
costs. Several factors contribute to a high labor cost, making it an important
part of the total cost of the restaurant. Labor expenditure includes wages and
salaries, but it includes other labor-related costs such as employee meals,
training, uniforms, etc.
Calculate the labor cost percentage of your restaurant using this formula:
Labor Cost Percentage = Cost of labor/total sales
6.3.15. Assess and Manage Labor Productivity

While hiring staff for your restaurant, it’s important to first determine
how many staff you’re going to need. It’s not enough to employ the staff,
however, and expect everything to fall into place miraculously. To maintain
a productive workforce, you need to evaluate the productivity ratio of each
employee member.
Productivity standards represent what the output per unit of labor input
should reasonably be expected to be. A productivity standard is simply
the expectation of each employee’s productivity ratio by management.
Establishing standards of productivity for each employee is an essential task
of management and the first step in controlling payroll costs.
Schedule employees using productivity standards and forecasted sales
volume.
Output/Input = Productivity Ratio

For example, 60 guests/4 servers = 15 guests per server
6.3.16. Enhance Employee Productivity

Follow these steps to enhance the employee productivity in your restaurant.
• Employee Selection: In controlling costs, selecting the right
employees plays a vital role. Creating a clear job description and
hiring criteria for each role and sorting applications based on that
role. Before getting anyone on board, conduct detailed interviews
and background checks.
• Training and Supervision: A trained worker is a productive
worker. Make sure he/she has been thoroughly trained before a
new employee joins the team. If the need arises, do not hesitate to
take on-the-job training and even retraining. Wherever possible,
monitor the tasks or assign your manager to oversee the process.
• Scheduling: Proper scheduling ensures the right number of
employees is available to do the work required. If for a particular
time, too many employees are scheduled, the productivity
ratios will decrease. If too few employees are scheduled, the
level of customer service may suffer or the tasks required may
not be completed on time or as they should be. The efficiency
of scheduling can often be improved by using the split-shift,
a technique used to match individual work shifts with client

demand peaks and valleys.
6.3.17. Other Expenses Control

Besides the Food, Beverage, and Labor, some other expenses add up to
the total cost of the Restaurant. These may seem trivial, but for Food and
Beverage Control, you need to pay just as much attention to them. These
can be classified as Controllable and Uncontrollable, as well as Fixed and
Variable Costs. Rent is an uncontrollable, fixed cost, for example, while
repair and maintenance are variable costs.
Food and beverage control is an integral part of restaurant operations
and the Food and Beverage Cost Control, Labor Cost Control and Other
Cost points mentioned above. Keep track of all the expenses and do the
things you need to control to see how your entire restaurant operation is
flourishing.
The heart and soul of any successful restaurant are excellent food,
friendly service, and a great atmosphere. But success, and more importantly
sustainability, depends largely on profitability. In the restaurant industry,
labor, and inventory costs can eat up to 50–75% of your total sales, so it is
imperative that you keep these two figures under close control and scrutiny.
We will discuss the latter, inventory cost.
6.3.18. The Cost of Doing Business

If you’re a restaurant owner, manager, or both, you’re well aware that some
loss and waste in the food service industry is inevitable. Dishes are spilled
or not made to the satisfaction of the customer and are therefore thrown
into the trash. Inventory is contaminated by accident or expires before the
expected expiry date. During their shift, employees unknowingly eat away
from their profits with grab-and-go menu items like French fries or fruit.
If you don’t keep a firm grasp of the operation, all these seemingly small
things can take a big chunk out of your bottom line. There are still ways to
minimize your risk to have a more positive effect on your bottom line, even
for some of these unavoidable expenses. For example, to help minimize
spillage issues in the kitchen and elsewhere in the establishment and to
enforce a slip-resistant shoe policy for each employee for safety. Everyone,
including managers, wears non-slip shoes from hostesses to busses, no
exceptions!
The flooring in your establishment is another factor to consider when

it comes to spillage. Select a material that has a low-slip risk factor like
quarry tile or vinyl textile if you are remodeling. Recall using slip-resistant
mats behind the bar and in the kitchen as a quick way to get some traction if
you’re not rebuilding.
In your walk-in cooler or freezer, you can also use slip-resistant mats
as a way to avoid food containers sliding out of place and contaminating
the other products around it. You will also want to ensure that your staff is
trained in methods of preventing cross-contamination when it comes to food
storage, equipment, and personal hygiene.
And how many staff members do you have that always eat their way
through their shift, talking about employees? It’s almost impossible not to
indulge in a quick taste of something you can quickly grab when you work
around food all day. Here is a piece of bread or a frieze from France. It may
seem like an innocent thing, but it may soon add up to a significant expense,
as well as possible violations of health code that can become an even more
substantial issue.
The best way to fight the syndrome of eat-as-I-work is to feed your staff
before their shift starts. For example, if the shift from the front of the house
dinner staff starts at 4 pm, have them report for a meal and pre-show an hour
earlier.
They are less likely to eat on the clock with a full stomach, be fuelled
adequately for the coming shift, and have the energy to do their job at a high
level. It’s also a great way to bring together staff around the table and increase
morale. While you have them in one room together, it’s a great opportunity
for duty managers to conduct a pre-show and talk about daily specials with
the staff, a significant change to a menu item, a large reservation booked
for tonight, or anything else that’s important to know before they start their
shift.
There are steps you can take to help minimize your risk in this
department, even for some of these inevitable expenses like spillage or five-
finger discounts. As for unhappy customers who send back their food and
require a complete restoration of the dish or ask you to compensate them for
the cost of the menu item, you simply have to accept that these situations are
the very real cost of doing business. You can’t always make everyone happy.
But that doesn’t mean you’re not doing anything. These situations create
food and labor waste that should at least be accounted for and tracked as it
reduces your profit margins. Keep track of the chef who prepared the dish
and see if you are beginning to notice a trend of meals being sent back when
he or she is in the helm.
6.4. LABOR COST CONTROL
Control of labor costs is an ongoing challenge faced by all restaurants.

Employee retention is necessary in a highly competitive marketplace to
maintain a professional level of customer service. You will also have a positive
impact on labor costs by maintaining appropriate levels of staff. Coming
from a company with more than half a million users and an industry-leading
customer satisfaction rate of 99%, planning your employees accurately will
result in a more efficient business.
Human resource structure is at the heart of the hospitality industry, and
labor cost accounts for most restaurant business expenses. The percentage
of restaurant labor costs to sales is 22–40% on average and can be nearly
as high as 75% in some cases! This coupled with this industry’s capital-
intensive nature makes running a restaurant a very expensive business. This
also makes it necessary in order to maintain profit margins for restaurants
and cafes to control their labor costs. Learn more about the cost of controlling
restaurants here.
The average hourly compensation for a staff member in the hospitality
industry increased by 3.6% in 2016, according to the Bureau of Labor
Statistics. Labor costs in the hotel industry average about 50% of total
operating expenses. Therefore, with STR reporting a 3.2% annual revenue-
per-available-room growth rate for the year, it is understandable that U.S.
hotel owners and operators were concerned about their ability to increase
profits.
Based on the results of the 2017 edition of “Trends in the Hotel Industry”
by CBRE Hotels ‘ Americas Research, hotel management was able to
contain labor cost growth in 2016. On average, in the Trends sample, the
combined cost of wages, wages, other compensation and benefits paid to
both employees and contract/leased staff in the hotels increased by just 2.8%
over the year. Given the 3.6% increase in compensation, the 2.8% increase
in total labor costs means that hotel managers have implemented cost-saving
measures such as reducing the total hours worked at their properties or
improving the productivity of their employees.
Despite their best efforts, labor costs from 2015 to 2016 still accounted for
90% of the 1.6% increase in total operating expenses. Further investigation
reveals that the main driver of labor costs during the year was the non-benefit
component (payroll). Payroll alone accounted for 66.8% of the growth rate
of 1.6% overall operating expenses.
Deviation from your forecasting estimate creates a variance that can
increase your overall labor costs. However, an effective schedule uses
current employees and avoids unnecessary cost adjustments. HotSchedules,
Inc., maximizes the guest service level of a restaurant by making use of past
operating trends to provide insight into future employees. Our tools allow
you to create multiple schedule templates from which managers can select
for each shift based on projected hours and costs. This will result in greater
labor efficiency by effectively scheduling your staff.
The three main factors when considering restaurant labor forecasting
are:
• Cost of Employment: This consists of total costs for recruiting,
hiring, and training of staff.
• Cost of Operation: This mainly consists of payroll, overtime,
bonus wages, and related taxes.
• Environment Work Costs: Variables that take into account
absenteeism and pay scale shift changes.
The integration of HotSchedules into your labor cost strategy provides an
open portal of communication between managers and employees, leading to
increased retention of employees. Moreover, monitoring your HotSchedules
forecasts creates a fast, proven ROI by reducing scheduling time and labor
costs. Controlling your labor costs can be accomplished by setting up an
efficient schedule, and your daily business decisions should be a top priority.
While businesses in a competitive market are striving to increase revenue,
labor costs continue to rise. Increasing profit margins was the top business
challenge, according to a recent survey of U.S. businesses with hourly work-
ers, but almost half of respondents said they did not feel in control of their
profit margins. When asked, “What is your best tactics to manage profit
margins?” Most responded with the same response: controlling labor costs.
Operators often cite the use of contract/leased labor as a tactic that
can be used to overcome labor shortages and potentially control the rising
compensation costs. In 2015, in at least one of their departments, 42.7%
of the properties in the study sample reported payments made to contract/
leased employees. This number rose to 45.2% in 2016. Resort hotels reported
the highest incidence of contract/leased employee payments (67.5%),

while prolonged-stay hotels appear to have the least use of contract/leased
employees (35.7%).
Among the operating and non-distributed departments, the largest use
of contract/leased employees was made in 2016 in the food and beverage
department (33.7% of hotels), followed by rooms (33.3%) and administrative
and general departments (17.5%). In the food and beverage and room
departments, the greatest increase in the use of contract/leased employees
was observed. Conversely, it appears that in the other operated departments,
information, and telecommunications and maintenance, the use of contract/
leased labor has declined.
Overall, the incidence of service fees increased from 17.7% of the 2015
sample to 18.1% in 2016. Resort hotels are the type of property most likely
to pay their employees a service charge (62.9%). The distribution of service
charges in the food and beverage department (39.7%) was most frequently
observed as expected, followed by the room department (4.6%).
The main goal of labor control is to attain the optimal level of staff
without compromising service. So, what can businesses do to gain control
over their profit margins by cutting labor costs? The following are some
practices followed in restaurants to cut down the restaurant labor costs.
6.4.1. Maintain Attrition Rate

According to a study, India’s hospitality sector has the highest attrition in
the country and worldwide as well. Costs associated with attrition include
recruitment and training of new workers, not to mention the lost working
hours and efficiency. The driving factors behind this phenomenon are heavy
competition, long working hours and foraying for growth opportunities
elsewhere. One of the main reasons behind the towering restaurant labor
costs is the high attrition rate.
Providing better opportunities for growth, offering incentives and
introducing loyalty programs for employees and improving work culture
can go a long way in controlling attrition rates. Also known to be very
useful in employee retention is a clear employee welfare policy and team
building exercises. This article will tell you how to stay happy and keep your
restaurant staff from leaving.
Losing an employee costs far more than hiring and retaining great
employees, so take the time to invest in keeping your employees happy.
You can check out our recent article on increasing employee engagement
for great business results if you need some tips to get started. As millennials
and Gen Zs become the largest segment of the hourly workforce, and this
group ranks “training and development” as their No. 1 reason for staying
with a job, be sure to offer proper onboarding, ongoing training, and
opportunities for advancement. Change your business perception and roles
to a career path instead of a short-term stint. Restaurants, for example, can
provide opportunities for career advancement, such as cooking training and
sommelier certification.
6.4.2. Invest in Recruiting

Recruitment investment goes much further than money and funds. The
process needs time and effort to be invested. Focus on your needs and
examine job profiles accordingly. Look for the best fit, rather than filling
the vacancy hastily.
Remember that a wrong person would only add to the attrition and
additional recruitment and training costs for the wrong job. The cost of
hiring is approximately 25% of the average employee salary, according to
conservative estimates by industry experts! Misfits can be dangerous to the
restaurant’s reputation and have long-term effects on the business.
6.4.3. Provide Good Pay

The salary structure based on the Commission can work wonders on the
angle of cost control and also acts as an excellent motivator for employees.
It is therefore advisable to have a composite compensatory package for the
staff that includes an incentive structure based on fixed and commission/
performance. If you have any pension or retirement plans, then turn them
into programs for profit-sharing. A full commission-based compensatory
structure can be used to appoint the temporary or part-time workforce.
You can regularly review the perquisites and wage levels and eliminate
the costs that put you above the average industry. This step should only be
taken after an open discussion with staff that would be affected by this step
otherwise it could result in a high turnover of employees.
Evaluating your company’s salaries, wages, and benefits on a regular
basis can help you find multiple cost reduction opportunities. First, check
each of your roles using tools such as Glassdoor or PayScale to see if you
pay employees above their average market value. Then, scale down future
hires to better match the market and current hires, and create new programs
that replace automatic pay raises with revenue-driving performance-based
merit increases. Consider switching sales roles to a pay-only commission

structure, as many employees like the flexibility and income potential it
offers. In addition, changing a few roles from full-time to contract or part-
time (less than 30 hours per week) can allow your employees to expand
their experience in other businesses while saving you for full-time workers
on mandated healthcare coverage. But for these recommendations, a word
of advice: be careful to ensure that your employees are properly classified to
prevent lawsuits. You can also reach a health insurance broker by selecting
higher deductibles to obtain lower cost bids for coverage or reduce the cost
of health insurance.
6.4.4. Recruit Part-Time Employees

In general, part-time hires charge a lower hourly rate than permanent
employees. Also, the statutory benefits entitlement of permanent staff is
a much greater financial commitment. That’s why it makes a lot of sense
to engage part-time employees. A restaurant can discharge unqualified and
general tasks into such temporary workforce, thereby reducing the burden
on professional and permanent personnel.
Indeed, some days of the year are busier than the other relatively slow
days. To cater for your restaurant’s regular footfall, hiring seasonal workers
is a good idea. You can hire them on a contractual basis for a few months,
and if they turn out to be invaluable to your business, they also offer them
permanent employment.
6.4.5. Employee Cross-Training

Cross-training staff is another best practice to increase the skill set of your
employees while doing more with fewer people per shift (i.e., saving on
labor costs). It also gives the added benefit of empowering your employees
to train their skills to the rest of your staff, rather than paying for an external
trainer. And, if an employee quits unexpectedly, you have plenty of duplicated
training employees, so you’re not going to have to spend recruiting money
to replace the role.
Cross-training ensures that multiple tasks and roles are handled by one
employee. This not only ensures you have a workforce that can multi-task,
but also leads to an increase in the employee’s professional skills. Employees
usually warmly welcome the latter. It can also take care of unexpected and
sudden restaurant vacancies. Cross-training enhances efficiency, develops
empathy, and provides organizational-level team building opportunities.
6.4.6. Supervise
The restaurant business is very dynamic and is largely affected by seasonality
and opportunities. Review your customer footfalls on weekends, holidays,
and festive seasons and schedule your full-time staff, hire part-time assistance
and plan your food budget accordingly. This will help you control the cost
of your payroll, minimize kitchen waste and run your restaurant during the
peak season at its best capacity.
Restaurant and retail industries are all too well aware of this challenge.
Either your business schedules too many employees during hours that do not
generate enough sales, or you do not schedule enough employees to support
client traffic spikes. Both situations can hurt your business as the former
kills your profit margins and the latter hurts the experience of the customer
(i.e., future sales).
There is employee scheduling software available that can provide labor
forecasting where you can integrate your POS historical sales data or enter
your own parameters (such as employee availability, PTO, overtime stress
profiles, training, and shift costs) to forecast up to the minute the right amount
of work required (and functional). These tools create the most optimized
schedule that fulfills your profit objectives.
6.4.7. Invest in Automation and Design

Technology replaces human labor in the restaurant business,’ would be
a great statement to make, if restaurant technology had not grown in the
last few years. Although not entirely, technology has so much automated
restaurant operations that it now requires little human effort and labor. The
need for human interference has been greatly reduced by features such as
automatic billing, online ordering, and table reservation.
Even tools such as the kitchen display system (KDS) that automatically
accept the order from the POS eliminated the need to print the kitchen order
ticket (KOT) and then take the order to the kitchen manually. Technology
has reduced human effort dramatically and thus also helps to reduce labor
costs in restaurants.
The good design of the restaurant is not just about an attractive façade,
but also about facilitating workflow in its four walls. A well-designed
kitchen and restaurant can provide ample arm and leg room for restaurant
staff without creating bottlenecks from order to delivery in the workflow.

Familiarize the employees with their work floor and use the equipment to
train them well. Such simple workouts boost productivity and also lead to
efficient use of equipment.
6.4.8. Reduce Overtime and Other Extra Payments

All businesses know that overtime (over 40 hours a week) can add up
quickly as it is time and a half of the regular hourly pay of an employee.
Moreover, according to a recent SHRM article, U.S. wages are forecast
to grow annually by an average of 3.2%. This means that if your hourly
employee earns $10 today, you will have to pay $11.71 in five years, an
increase of 17%. It’s a $2,600 annualized increase for one employee who
works 30 hours a week just to stay competitive in wage.
You can consider using more of your part-time employees or hiring
temporary workers to help reduce wage and overtime costs. There are also
stress profile tools that can notify managers when the 40-hour overtime
benchmark is reached by employees so managers can structure schedules
without overtime. A final note is that, unless a bill passes, you cannot
exchange overtime for paid vacation time.
Time theft is a hidden cost of labor in which employees charge their
employer for the time they have not actually worked. This doesn’t necessarily
mean that your employees are stealing from your company because it can
be inadvertently, such as late starting, early finishing, long breaks, rounding
hours, and punching buddy (clocking in or out for a colleague who isn’t
there). An American Employers Society study estimates that 20% of every
dollar a U.S. company earns is lost to employee time theft.
Using a simple time and attendance app will accurately track working
time when your employees clock in and out (including breaks) and include
geo-tracking and facial photodetection settings to eliminate early clock-ins
and buddy punching. Then these timelines are instantly synchronized with
your payroll provider to save time and costs in administration.
6.4.9. Earn Tax Credits for Hiring New Employees

The work opportunity tax credit (WOTC) is a federal tax credit available
to companies that hire employees from eligible groups with certain barriers
to employment, and the number of employees submitted is not limited.
This tax credit enables individuals to become self-sufficient taxpayers from
economic dependency. The maximum tax credit ranges from $1,200 to
$9,600 for participating businesses, depending on the employee hired, how

many hours they work and how much they are paid.
Eligible employees include unemployed veterans, recipients of
temporary assistance for needy families, recipients of food stamps,
designated community residents, referred individuals for vocational
rehabilitation, ex-felons, recipients of additional security income, summer
youth employees living in empowerment zones, and qualified recipients of
long-term unemployment.
And remember, it is tax deductible to benefit employee programs such as
dependent care and education assistance as well as to contribute to qualified
retirement plans for employees.
At the moment, labor costs are a high-profile issue in the hospitality
industry, especially in view of the movement to raise the minimum wage.
That apart from that, it has always been important to manage labor costs
efficiently with profitability in mind. It’s one of the highest expenditures for
restaurant and hotel organizations, typically representing 20–25% of total
costs-and that doesn’t even include management salary costs.
This can add up to a significant amount in an industry that operates on
notoriously narrow margins.
It is necessary to strike a balance between labor costs and how that
expense affects the quality of products and services. It is not always the
answer to pay fewer people, especially if it affects the customer experience.
6.4.10. Connect the Dots with Data

The key to striking the balance between manageable costs and high standards
of service is increased visibility of comparable business data across all
locations. Specifically, this balance is linked to what the data reveals about
employees and their performance, and how this information informs (or
should inform) corporate-level work planning as well as local-level weekly
staff scheduling. The best way to unlock this is to have the right tools to help
regional managers and individual operators quickly interpret incoming data
so that they can immediately act on it.
Labor data, for example, can tell operators and technology leadership
within the organization who are actually their best people through cloud-
based reporting in real time and on an ongoing basis. The data can do this by
revealing the average size of the check as it matches each server, which is a
reflection of how well they can upsell. It can reveal how many or how few
refunds have been processed, reflecting their effectiveness and accuracy.

Information such as this collected through cloud-based POS, reportable
through integrated back office tools, and accessible at any time on a mobile
device is invaluable to gain important insights into the measurable value
added by employees.
From there, the data helps operational decision-makers to know where
and in whom to invest their labor costs. It helps to determine where a
workforce’s strengths and weaknesses lie across all locations, and how best
to optimize it to real-time very closely. In this, to streamline and optimize a
team’s effectiveness, it is the data that is the primary driver. At the end of the
day, that means getting the best results from an investment.
6.4.11. Increase Training Programs Using Business Data

Business data managed in the cloud remains the source of truth when it
comes to labor costs for hospitality as applied to the training of a workforce.
The data also reveals how training can improve the way employees serve the
business and guests, in addition to gathering information that reveals who the
best people are. In this, corporate-defined and locally managed development
of company training programs benefits from increased visibility on what
is actually happening in locations, and how these activities can be more
efficiently executed.
Figure 6.3: On the job training program.

Source: https://blog.lambdasolutions.net/on-the-job-training-program-in-
crease-employee-productivity.
For example, let’s say the data reveals that the bar is a major revenue
center for continued growth in multiple locations, but only a small number
of staff has the training to serve guests there. This provides an opportunity to
cross-train the most promising staff members (decided by the data!) to ensure
that they can take on that role as seamlessly as possible when necessary.
The same applies to popular menu items that require special attention and
preparation skills (Figure 6.3).
Creating a training program at the corporate level using labor data
analysis as a guide increases service quality without necessarily expanding
the number of people at hand at each location to cover the average shift.
That saves money for businesses. It also increases job satisfaction, which in
turn reduces the costs associated with frequent turnover of employees.
6.4.12. Find the Scheduling Sweet Spot

Continuing to strike a balance when it comes to labor costs and maintaining
a high-quality service life or dying as well as planning the weekly schedule.
It is not always easy to find the sweet spot across multiple locations.
Adjusting the right number of people to the corresponding traffic forecasts
for customers is just a fraction of the exercise with many more moving parts
to consider. The key to finding out how these parts move together to keep
the operating engine running smoothly requires a high level of business
intelligence that is accessible and current.
Finding the scheduling sweet spot is about matching the right people to
the right time as revealed by accurate reporting beyond traffic corresponding
to days of the week that can be forecast anecdotally (and often is!). Once
again, a great starting point is what POS data and reporting tools tell
management as well as individual operators about transactional activity and
who was shifting during peaks in sales.
When it comes to deciding who and how many should be on shift during
major events or holidays, or when a new promotion goes live, these patterns
in the data help to make the choice quite clear to everyone from the corporate
level downwards.
6.4.13. Give Employees Visibility and Ownership

It is a rightly sought-after goal for any hospitality brand to have committed
and empowered staffs who strives to do their best possible work. To achieve
this goal, it is vital to express a strong connection between performance
and results as expressed in the data. It enhances labor’s value against rising
costs, an important facet of ROI (Figure 6.4).
Figure 6.4: Give employees ownership.

Source: https://www.shrm.org/resourcesandtools/hr-topics/employee-rela-
tions/pages/top-employee-relations-stories-2017-.aspx.
Most people want to do their best to wait for staff at anything they do
from location managers. Nobody in the machine wants to feel like a cog.
An important means of extending a sense of connection and ownership to
them is to regularly show employees where they can improve and who does
the best job based on real business data. It gives them an interest in the
company’s success. By extension, as employees, it is also the best way to get
the most out of them, which makes the organization’s expense of employing
them more meaningful and valuable.
As labor costs rise, it makes sense to be able to attach more value to
that expense by investing in the best performers. Collecting and reporting
real business data like this, kept in the cloud and accessible while moving
through mobile devices, can serve the brand, individual operators, and
ultimately employees as well.
The best way to optimize labor costs is to invest in technology from top
to bottom that allows operators to do so. This is the prime basis for success
when brands invest in the right tools to measure incoming data. When data is
visible across multiple districts or stores, best practices can be shared more
easily. If one store manages their work consistently to the standard of the
company while others struggle, it can also be leveraged to apply for mutual
success in the other locations.
REFERENCES
1. https://restaurantsuccess.touchbistro.com/touchbistro-blog/restaurant-
accounting-101-budgeting-and-forecasting (Accessed on 13 July
2019).
2. https://setupmyhotel.com/train-my-hotel-staff/securityandloss/170-
invcontl.html (Accessed on 13 July 2019).
3. https://study.com/academy/lesson/inventory-control-in-the-
hospitality-industry.html (Accessed on 13 July 2019).
4. https://www.foodnewsfeed.com/fsr/vendor-bylines/5-ways-reduce-
labor-costs (Accessed on 13 July 2019).
5. https://www.gourmetmarketing.net/controlling-expenses-restaurants/
6. https://www.hotelmanagement.net/operate/how-increases-
compensation-labor-costs-are-leading-to-cost-savings (Accessed on
13 July 2019).
7. https://www.hotschedules.com/blog/labor-cost-control-for-the-
restaurant-industry/ (Accessed on 13 July 2019).
8. https://www.linkedin.com/pulse/20140618092716-38413165-
hospitality-industry-stock-and-inventory-control/ (Accessed on 13
July 2019).
9. https://www.linkedin.com/pulse/importance-inventory-management-
hospitality-industry-jaka-zeme/ (Accessed on 13 July 2019).
10. https://www.posist.com/restaurant-times/editors-pick/7-lesser-
known-ways-to-reduce-labour-costs-in-the-restaurant-business.html
11. https://www.posist.com/restaurant-times/resources/beginners-guide-
food-beverage-control-restaurants.html (Accessed on 13 July 2019).
12. https://www.shopkeep.com/blog/food-and-beverage-cost-control
13. https://www.thecaterer.com/articles/300749/food-and-beverage-
control-systems (Accessed on 13 July 2019).
14. https://www.ukessays.com/dissertation/examples/leisure-
management/hotel-industry-marriott.php (Accessed on 13 July 2019).
15. https://www.unleashedsoftware.com/blog/inventory-management-
hospitality-industry (Accessed on 13 July 2019).
16. https://www.vivonet.com/blog/how-to-manage-labor-costs-
hospitality-4-strategies (Accessed on 13 July 2019).
7
Standard Procedure and
Policies Followed for
Purchasing and Costing
“Almost all quality improvement comes via simplification of design, manufacturing,

layout, processes, and procedures.”
—Tom Peters
CONTENTS
7.1. Policies Followed For Purchasing .................................................... 224

7.2. Costing Policies Followed In Hospitality Industry ............................ 231
7.3. Different Procedures Followed For Purchasing ................................ 231
7.4. Different Procedures Followed For Costing ..................................... 241
References ............................................................................................. 248
We all know that Purchasing and Costing are a must for every industry.
In a hospitality industry, there are different sectors, different departments,
and various ways of working. Purchasing and costing applies to all of
these sectors. But the method in which every industry uses purchasing and
costing techniques are different. There are certain policies and procedures
that are followed in the purchasing and costing process. This chapter talks
exclusively about that. This chapter will throw more light on the various
policies and procedures that is practiced across all industries when it
comes to purchasing and costing.
7.1. POLICIES FOLLOWED FOR PURCHASING

Purchasing in general means buying of goods and services. Different
businesses need different kinds of goods to run their business. The purchasing
process may be a simple task or a complex one depending upon how the
business has grown. Every business has some standard ways of purchasing.
The purchasing process may differ from one organization to another based
on certain policies. Every industry or rather, every organization follows
certain policies for purchasing goods and services.
In this section, we are going to learn deeply about the different purchasing
policies followed by various organizations.
7.1.1. What Does Purchasing Policy Refer To?

Purchasing Policy generally refers to a set of rules that every organization
follows in their requisition process. These policies normally form part of
every company’s operation handbook. The reason why most companies
create purchasing policies is to improve the quality of goods and services
that they acquire from vendors.
In order to define a policy, the policy makers first set the rule for the
policy and also set the start and end date for that rule. This is how a policy
creation works: – A policy owner creates the policy; he then selects the
Catalog policy rule type and then adds a catalog policy rule to the policy; let’s
say, for example, a catalog policy rule specifies that the Adventure catalog
must be used for internal procurement. Once this policy is implemented, the
employees of the organization will start seeing the Adventure catalog for
creating requisitions. Purchasing policies will normally explain the purpose
of the policy, limitations of employees, duties assigned on them and on the
purchasing department and any other specific procedures or processes. Most
Standard Procedure and Policies Followed for Purchasing and Costing 225
of the purchasing policies will have information on how to place a purchase

order (PO) for buying goods and services. Creation of purchasing policies
are considered useful for the procurement managers as it helps them to apply
their procurement strategy by creating a policy structure that is aligned with
the organization’s strategic purchasing requirements.
Every organization, be it big or small, their only intention will be to
supply quality goods and services to their customers and to remain at the top
position. To achieve this, they need to accomplish five things that are given
in Figure 7.1.
 buy quality items

 in the right quantity
 at the right time
 for the lowest pricing
 from the best vendor
Figure 7.1: Business goals.

When a new business is started, the purchasing process doesn’t seem
tough. As the organization is small, the deciding authority will mostly be the
owner and so it is he, who decides the purchasing option including the place
and the vendor. Since the purchasing process is easy at the beginning, most
of the companies do not think about the need to create a formal purchasing
policy for their firm.
But as the business grows, the purchasing job becomes more complex.
The owner of the firm will not have time to involve in such activities as
he will move into a supervisory and managing role. So, normally this
purchasing job will be delegated to other officials or a separate team will
be formed to handle this. The duties and job in an organization cannot
depend upon a single staff. There are possibilities of person moving away;
moved out person may not transfer the purchasing knowledge properly to
the newcomer, or there are also chances that the person in charge may do
some mistakes.
There is a general assumption that the only work of purchasing
department is to place orders; but, it is not so, there is more to it. Purchasing
starts with collection of orders, checking their credibility and accuracy,
choosing the appropriate vendor, fix a reasonable purchase price, inspect
the received goods, reconciling the invoice and arranging the payment to
the vendor by sending it to the accounts department. So, there are so many
activities that has to be taught and delegated to someone, so that the process
runs smoothly. Creating a policy for purchasing before delegation is the
ideal way to ensure optimal spend management and cost control.
The management of every company must master the art of obtaining
products and services from vendors. The purchasing process usually starts
with demand arising from the company side. When the demand arises, a
requisition is raised which has all the specifications of the requirements.
A RFP (Request for Proposal) or a RFQ (Request for Quotation) is then
raised. In response to this, the suppliers start sending the quotations which
are reviewed by the management before one best vendor is finalized and
given the PO. The manager of the Purchasing department must be efficient
enough to negotiate the deals with the vendors or to arrange for a bidding
process which will allow vendors to compete with each other to make a
contract with the company.
Before we move further into understanding more about the purchase
policies, let us understand some of the terms used in purchasing goods
and their meaning along with the purchasing procedure. The purchasing
cycle goes through various steps as said above. The management follows
certain policies for completing the purchasing procedure. Let us see how the
management handles this process in a step-by-step procedure.
7.1.2. Step-by-Step Purchasing Procedure
7.1.2.1. Identifying the Exact Need

The Company must be aware that they are in need of goods – it can be a new
item or one that needs to be re-ordered. The Company must have certain
policies or standards to identify the right product. If they have ordered the
same goods in the past, then they can follow the same but if it is something
new then, they must know the exact specification to order. Having some
point of reference helps in such situations.
7.1.2.2. The System of Ordering

The ordering system means the process that a purchase manager uses to
request goods, order them, receive them and finally pay for the orders. We
can say that the ordering system is in the right phase, if a good relationship is
maintained with the suppliers, a steady cash flow is maintained, if it assists
the inventory and if it increases the overall profitability.
7.1.2.3. Finding Out and Finalizing Suppliers

Once the exact specification of the goods required is identified, the purchase
manager needs to find out the best vendor. Of course, every reputed company
will have their own list of vendors. Other small companies must do their
own search to get vendor list. The best prices offered by suppliers will be
compared. Investigation about the vendor will be carried out and the terms
of the product will be discussed. This will depend on whether the company
needs commodities (readily available products) or specialized materials.
Usually the business will look into three suppliers before it makes a final
decision.
Any goods or services required for the firm has to be bought from outside
vendors. So, the main step is to look for possible vendors and evaluate them.
There are many ways to do this. Vendors or suppliers can be chosen online,
through any referrals, through any industry associations or through direct
search. Once the vendors are located, it is highly important to evaluate them
because it may be a short-term or it may stretch to a long-time relationship
based on their value and morale.
Figure 7.2 gives some key points that are generally checked to evaluate
vendors or suppliers:
• The number of years they have been in business and

how is their business stability.
• Whether they have the technical expertise for
arrangement and delivery of goods.
• What is their pricing and whether they are willing to
negotiate?
• What is the delivery timeline?
• Whether the shipment will be carried out effectively
and without any damage to goods?
• Responsibility and ownership until goods are handed
over to the respective parties.
• Will service be provided after delivery in case if
required?
• Their delivery history with similar orders.
Figure 7.2: Checklist to evaluate vendors.

The points mentioned above helps the purchasing department to identify

the best vendor. All these points mentioned above must also be a part of the
purchasing policy and must be referred to often, so that the standards are
met.
7.1.2.4. Purchase Order (PO)

By now, we know that the first step in a purchase is to receive purchase
request from the internal departments. Once the request is received, the
purchasing manager has to choose a vendor. After the vendor and the price
are finalized, the purchasing manager needs to send a PO to the finalized
vendor.
PO is just a formal request sent to the vendor requesting him to send
the materials or goods according to the terms and pricing agreed upon in
any established contract. These are used by the buyers to get materials from
the sellers. PO will have all the price details, specifications, and terms and
conditions of the product or service and any additional obligations.
POs also help in tracking down the orders and amount spent. If suppose,
any dispute arises with the vendors, the management can legally claim it
through POs. Even it is small order or big orders; PO is a must for any
items. POs are delivered to the vendor usually by means of fax, e-mail, and
any other electronic mediums or even personally in small enterprises. The
mode of delivery will mostly be mentioned in the POs. The recipient of the
PO will acknowledge the receipt and both the parties will retain a copy of
the receipt. The vendors or suppliers are expected to promptly adhere to the
timelines as agreed for delivery. The common issues faced with vendors
and management, in general, are not sticking to the delivery time, and not
releasing payment on time even after the works get completed.
7.1.2.5. Examine the Delivered Items and Approve Invoice for

Payment
When the products ordered are delivered, it becomes the responsibility of
the management to check the goods for any damage. Accept the goods if
there is no damage. The vendor will send an invoice requesting the payment.
It is to be noted that the details in the invoice should match with that in the
PO. If there are any discrepancies, it must be sorted out before payment is
made. Payments are usually made to vendors in the form of cash, cheque,
credit letters, bank transfers, or other types of electronic transfers.
7.1.2.6. Record the Purchase

The copy of the PO needs to be filed and stored properly as it may be required
during company audits and to calculate tax. The recorded PO copies can be
referred for future purchases as well.
A company may have different purchasing policies based on the legal
laws of the geographies in which they are functioning. Each branch must
adopt the policy designed for its location.
7.1.3. Different Types of Purchasing Policies Used in Industries

All the industries have their own policies and procedures to be used in
purchasing goods for their anticipated needs. Let us look at some of the
Purchasing policies that are followed in various industries.
7.1.3.1. Concentrated Buying Policy

If the number of vendors/suppliers is very few, from where the company has
to buy, then such buying policy is called concentrated buying policy. This
type of policy has the following benefits:
When the suppliers are limited, the buyer can be best assured of the
services, delivery, and reasonable price and of course special treatment.
When there are few suppliers and they are offered with bulk orders, it
benefits the buyer in getting goods at lower prices and with many discounts.
Bulk purchasing also helps in reduced transportation and handling charges.
Reduction in the cost of contractual function efforts in searching sources
of suppliers and maintaining contacts with them is possible.
Although the Concentrated Buying Policy has these many benefits, there
are also some risks associated with it. It is always risky to depend upon one
vendor because if the vendor fails, then the impact it has on the business is
huge. Also since there are only few vendors, the choice to pick up goods is
also limited.
7.1.3.2. Conservative Buying Policy

The Conservative Buying Policy is used when there are lots of materials
available in the market. This policy allows making purchases purely on the
basis of current needs of the organization. Since the order is based on the
current needs, there will not be any bulk order but many frequent small orders
and so there will not be any discount as in Concentrated Buying Policy. But
the risk factor in this policy is minimum. Even if there is a change in the
price in the future, it will not be of much impact to the buyer. The placing of
small and frequent orders involves locking up of lesser capital at a time and
the cost of warehousing and insurance will also be lower.
The Conservative Buying Policy is also called the hand-to-mouth buying
policy and this policy is quite unsuitable for a growing business or when the
present supplies are inadequate to satisfy the normal demand. The buyers
following this policy have to enter the market frequently and buy fresh every
time spending huge amount of money. Since the buyer purchases frequently,
this policy involves more receipts, payments, repeated inspection, repeating
checking, etc., which increases office expenses and purchasing cost. This
will reduce the profit margin of buyers. Hand-to-mouth buying creates a
constant danger of getting out-of-stock.
7.1.3.3. Diversified Buying Policy

As the name suggests, under this policy, the purchases are made from various
sources rather than depending on one source of supply. So, the policy is also
referred to as ‘Scattered buying policy.’ This policy has various benefits.
Few of them are mentioned below:
• Since there are various sources to buy, the buying plan is flexible,
and it gives more number of choices to the buyer.
• As the sources are varied, the risk is reduced because all the
sources cannot fail at the same time.
• More number of vendors means healthy competition among
them, which will provide better terms of sales and lower prices.
Although there are these many benefits, this policy has few disadvantages
also such as absence of special privileges, lack of better services, higher
transport and handling costs, etc.
7.1.3.4. Reciprocal Buying Policy

Reciprocal buying generally means, “If you buy from me, I buy from you.”
This concept has a good morale and provides help and support to every
business. This policy helps in building connections between buyers and
vendors. A perfect example for Reciprocal buying policy ‘a sugar factory
agrees to buy sugarcane from a farmers’ cooperative society, provided the
society also agrees to buy sugar from the sugar factory.’ This policy has the
capacity to increase sales and simplify the purchasing process. However,
since the business is done as a return favor, the supplier choice is reduced.
And also, whatever the rate is, the goods have to be purchased. Sometimes,
it pushes both the vendor and the buyer to do business in unfavorable terms.
The general opinion is that, the reciprocal buying policy must be limited and
must not be used widely.
7.2. COSTING POLICIES FOLLOWED IN HOSPITAL-

ITY INDUSTRY
The Costing Policies are the tools that every organization uses to understand
and improve their costing process. When costing policies are in place, then
the funds or the budget can be used in an effective manner. Costing policies
in an organization will be designed in a way that it can track and collect all
the cost information and this cost information is used by the management in
taking well-informed decisions. Costing policy also helps the organization
in choosing the right method of providing services.
7.3. DIFFERENT PROCEDURES FOLLOWED FOR

PURCHASING
Purchasing is a recurring process in every organization. Any hospitality
business can run smoothly only if the materials required for its functioning
is purchased before-hand without any delay. The job of purchasing may
be tedious for most of the companies; but, there are various procedures to
simplify it. The popular forms which are used in the purchasing procedure
are:
• Purchase requisition;
• Purchase order;
• Purchase contract form;
• Follow-up form;
• Receiving slip;
• Inspection report;
• Test certificate;
• Rejection form etc.
All these forms are available online today (Figure 7.3).
Figure 7.3: Different purchasing forms.

Purchasing is a step-by-step procedure and each step must be dealt with
utmost care in order to complete the purchasing activity smoothly. The
common steps of purchasing followed by many organizations are listed in
Figure 7.4.
• Identification of need
• Look for supplier
• Select the supplier
• Issue purchase order
• Follow up if delayed
• Delivery of goods
• Inspection of goods
• Invoice payment
• Invoice filing
• Maintain relationship with vendor
Figure 7.4: Common steps for purchasing.
7.3.1. Identification of Need

The Purchasing procedure begins with identification of needs from
different departments. Until the need is identified, purchasing process does
not begin. It can be any department from inside the organization. It can
be the stores department, cooking department, house-keeping department,
manufacturing department, etc., or it can be any person from a customer

service representative to a CEO who identifies the need. It doesn’t matter
from which department the request comes or who raises the request, but
all the requests are registered with the purchasing department using the
Purchase Requisition Form. Once the need is agreed upon by the purchasing
authority in the organization, they will then narrow down the options by
specifying what the product or service must offer. The details of the product
must be filled in the Purchase Requisition Form. This requisition form can
be received from the authorized person in the purchase department or it can
be collected online. Most companies will have the soft copy of the Purchase
Requisition Form in their company’s website that the employees can make
use of. This is also called as Purchase indent.
The three common types of purchase requisitions available in the market
are:
• Standard purchase requisition;
• Traveling purchase requisition; and
• Bills of materials.
7.3.2. Standard Purchase Requisition

The Standard Purchase Requisition Form will have details such as
specification of materials, quality, quantity, suggested supplier, etc. There
are also procedures on who can fill out the purchase requisition form and
who has the authority to approve the expenditure and sign it.
If the purchase requisition forms are directly sent to the purchase
department by the required section, then a list of the authorized signatories
should be made available to the purchase department. The extent of the
authority of each signatory should also be specified in the document. For
example, the management may authorize the supervisor to sign the requisition
which is up to USD 300 and above this limit; it must be countersigned by the
higher authorities such as Unit Manager.
The stores department makes the requisition for those items which
have reached to the re-order level. Currently, when the request is generated
through in-house network the Purchase department must automatically
initiate action for procurement. Suitable Software is available for the entire
Materials Management functions. This is used for all actions required to
undertake the steps given below:
7.3.3. Traveling Purchase Requisition

Travelling Purchase Requisition form is used by stores for requesting
materials and standard parts. It is in the format of a card for a simple item,
and is used for many requisitions, when the stock level drops to or below
the reorder point.
7.3.4. Bill of Materials

A bill of materials is a comprehensive list of all items which are required
in completing one specific order. This type is used in industries, where
production is based on the specifications as requested by the customers.
It is prepared at the time of engineer drawing the product. Generally, the
low-value sundries and items of common use are purchased for stock,
while costlier and special items are purchased according to the production
programs.
The purchases of machines and equipment and such capital expenditure
items are treated in different manner. The organization determines which
product or service is required. Normally, the corporate level executives are
the authorized signatories to such demands. Such purchases are approved by
the Board of Directors. The reference of the approval is made on requisition
and a copy of the requisition is sent to secretary for the purpose of overall
planning and budgeting.
7.3.5. Look for Supplier

Only after receiving the Purchase Requisition Form, the purchase officer
can initiate the purchase process. It is on the basis of purchase requisition
that orders are placed for materials. Once the need is identified and the
requisition form is received, the job of the purchasing department is to
choose the right vendor. When selecting the supplier, the following points
needs to be considered and should be answered by the vendors for selection.
• Price quoted for goods;
• Any discount;
• Payment terms;
• Time of delivery;
• Mode of delivery;
• Supplier’s past performance;
• Goodwill of the supplier in the market.
The Purchasing Manager gets in touch with various suppliers. He must

know the various sources of supply of raw materials. The selection of
right sources of supply gives maximum benefits to the organization. The
quotations are requested from different vendors for purchasing specific
items. If the organization is large, the purchasing department usually writes
a formal RFP, and then send it to their preferred suppliers. At times, this
request is made publicly so that any vendor who is interested can send a
proposal. For smaller purchases, this could be as simple as looking at the
price on a website.
After receiving all the quotations, every terms and condition provided
by vendors are compared and analyzed. The factors to be considered include
price, quantity, quality, time of delivery, terms of payment, trade discount
and reputation of suppliers. After looking at various factors a final decision
is taken about the supplier of goods.
Sometimes, the purchase department will call for tenders. There are
different types of tender that the purchasing department can opt for. Few
types are mentioned below:
• Single Tender: In this type, the tender is called for from only one
vendor.
• Restricted Tender: Under this type, few vendors are initially
selected based on their previous experience with them and their
goodwill and then, tenders are invited from them.
• Open Tender: Open tender means the tender is open to all.
Advertisement is given in newspapers and journals and tenders
are invited from all the vendors.
It is the wish of the purchasing department to invite local tender, regional
tender, and global tender.
7.3.6. Select the Supplier

Selecting the suppliers is the important part in purchasing. If the company
already has an established relationship with the vendor, then, it is a plus.
Suppliers must be reputable, financially stable and if they’ll be around for
future requirements. The reputation of the vendor is very important as it
comes first and finance is looked after that. Supplier is selected based on
evaluation. The proposals from vendors and prices are evaluated to determine
who is offering the best price and the best quality. If tender notification
has been sent, then, all the tenders received are opened on a specified date
and time. The particulars of received tenders are collected together and
tabulated. This helps the purchase department to select right suppliers with
most favorable terms and conditions (Figure 7.5).
Figure 7.5: Choosing the right supplier.

Source: https://thesisexamples.blogspot.com/2017/02/supplier-selection-
criteria-in-public.html.
7.3.7. Issue Purchase Order (PO)

Now that the right vendor is selected, the purchasing department can go
ahead and prepare PO and sent it to the vendor. A PO is the commitment that
a buyer makes to pay for goods ordered. Similarly, it is the seller’s authority
to charge the buyer for supplies made. PO serves as a legal contract. It
authorizes the vendor to dispatch goods specified in it. The PO is always
signed and authorized by the purchasing manager. A PO will contain the
price and quantity details along with mode of delivery and payment terms
(Figure 7.6).
Figure 7.6: Sample purchase order.

Source: https://www.purchasecontrol.com/wp-content/uploads/2018/05/po-
process-example-purchase-order.jpg
In general, most companies take six copies of PO. One copy is sent to
the vendor/ supplier which is mandatory. One copy is sent to the department
that made the purchase request, the third copy is sent to the Accounts
Department, fourth copy is sent to the Finance Department, fifth copy is
sent to the Stores Department and finally, the last copy is retained by the
Purchase Department to track the delivery and for record purpose.
7.3.8. Follow-Up If Delayed

The date by which the goods have to be delivered is always mentioned in the
PO for the benefit of both the parties. This helps in goods being delivered
at the right time so that there is no interruption in the flow of materials. If
the goods are not delivered on time as mentioned in the PO, the buyer can
remind the vendor of the delivery. This can be done by sending an e-mail
or an oral follow-up can also be done. A follow-up of PO is necessary to
receive stocks in time.
7.3.9. Delivery of Goods

Sometimes the goods will be received as per agreed timelines without any
delay and sometimes the goods are received after continuous follow-ups.
Once the goods are received, the purchasing department will prepare a
statement of the goods received. They indicate the identification mark for
each type of materials separately and also check the quantity and quality of
materials (Figure 7.7).
Figure 7.7: Delivering goods in a truck.

Source: https://www1.nyc.gov/html/dot/html/motorist/offhoursdelivery.sht-
ml.
7.3.10. Inspection of Goods

Once the goods are received, the buyer compares the materials with the PO
and the delivery note issued by the supplier. In big organizations, this work
is carried out by the purchase department whereas in small concerns this
work is done by the storekeeper. If all the materials matches, it is well and
good but if in case, the materials are received are not as per the specification
of the PO and delivery note, the materials may be rejected. Following the
rejection, an inspection report is prepared in a specified form and the same
is sent to the supplier for proper execution of an order. Sometimes, the
materials may also be rejected due to inferior quality. If the materials are
rejected, proper reasons for such rejection should be clearly specified in the
rejection report. This is the procedure that is normally followed for large
purchases (Figure 7.8).
Figure 7.8: An officer inspecting goods.

Source: http://mailsandpackages.blogspot.com/2013/07/pre-shipment-in-
spection-to-conduct.html.
No such formal procedures are followed for smaller purchases. For

example, if the company has ordered for some small things and if the
product arrived is damaged, then the company may decide not to buy from
that supplier again, without ever informing the supplier of a problem.
7.3.11. Invoice Payment

Once the vendor delivers the goods, he also submits an invoice for receiving
payment from the buyer. The Purchasing Manager or whoever is in-charge
of purchase has to check the invoices. If the materials are received in good
condition as per the specification of the PO, the delivery note may be issued
by the seller. Terms and prices are checked against the PO. The quantity,
quality, price, terms, etc. are compared with those given in PO (Figure 7.9).
Figure 7.9: Invoice paid receipt.

Source: https://bizxpert.com/invoice-payment-terms-5-top-tips/.
If the invoice is found to be true in all aspects, then, the authorized
officials will approve the invoice and will send the same to the accounts
department and finance department for releasing payment. The invoice may
be impressed with the rubber stamp as Bill Passed for Payment.
7.3.12. Invoice Filing

Once the payment is released, one copy of the invoice can be handed over to
the supplier and another copy needs to be retained with the buyer for filing
purpose. These invoice copies may be required for audit purpose (Figure
7.10).
Figure 7.10: Filing of invoices.

Source: https://www.post.at/en/privat-recht-auf-rechnung-ablagetipps.php.
7.3.13. Maintain Relationship with Vendor

Purchasing in business always follow a formal procedure. All formal
procedures like comparing suppliers, comparing goods, comparing prices
will all be carried out before making a purchase. In this section, we learned
about various steps practiced by business for purchasing. Some companies
may spend more time in a particular step and some companies may eliminate
few steps altogether (Figure 7.11).
Figure 7.11: Healthy relation with vendor.

Source: https://www.invoicera.com/blog/top-10-challenges-faced-in-buyer-
supplier-relationship-management/.
7.4. DIFFERENT PROCEDURES FOLLOWED FOR

COSTING
As Costing is essential for every business, different industries practice
different costing methods to establish cost of their product? Although the
basic principle of costing remains the same for every business, different
industries follow different procedures according to the nature of their
business.
Some of the methods used in costing are listed in Figure 7.12.
 Job Costing
 Unit Costing
 Batch Costing
 Contract Costing
 Operating Costing
 Process Costing
 Uniform Costing
 Multiple Costing
 Farm Costing
 Departmental Costing
Figure 7.12: Methods of costing.
7.4.1. Job Costing

In this costing method, each work is looked into separately according to its
own specifications and costs are determined for each work. The cost unit
under this method is very small. Since each job can be identified separately,
it becomes necessary to analyze the cost based on each job. A job card is also
prepared for each job for cost accumulation. This type of costing is used in
car repair, in decoration, painting, in building repair, etc., as each work is
very different and has different scope.
7.4.2. Unit Costing

Unit costing method is used for products that can be expressed in identical
quantitative units. This method can be applied for products that are
manufactured by continuous manufacturing activity. Mining, brick making,
manufacturing of cement, flourmills, manufacturing of dairy products, etc.,
are all examples of Unit Costing. In this method, costs are ascertained for
convenient units of output. Hence this method is also known as “single
output costing” method. The cost accounts are maintained in the form of
cost sheets prepared for a definite period. The cost per unit is determined by
dividing the total expenditure incurred during a given period by the number
of units produced during that period. The number of units produced to get
unit or single output cost divides the total production cost (Figure 7.13).
Figure 7.13: Unit costing.

Source: http://onlineaccountreading.blogspot.com/2014/11/unit-or-output-
costing.html.
7.4.3. Batch Costing

Batch costing method is used in companies where units produced in a batch
are uniform in nature and design. A batch represents a group of small orders.
In order to apply this costing method, each batch is treated as an individual
job or separate unit. The cost per unit is determined by dividing the cost of
the batch by the number of units produced in a batch. Batch costing method
is an extension of job costing.
In batch costing method, since the cost of single unit cannot be found
out, a group of products are taken into account for calculation (Figure 7.14).
Figure 7.14: Batch costing.

Source: https://www.slideshare.net/dheeraj07021994/dheeru-cma.
7.4.4. Contract Costing

Under contract costing method, each contract is considered as a separate
unit for costing. Contract costing is also called as terminal costing. This
method is performed for big jobs involving heavy expenditure, long periods
of time, and often different work sites. Contract costing methods can be
used in all types of construction works. In this type, a separate account is
maintained for each individual contract (Figure 7.15).
Figure 7.15: Contract costing.

Source: https://www.slideshare.net/SBM910/contract-costing-72395575.
7.4.5. Operating Costing

Operating Costing is also known as service costing. In this type of costing,
every single service is considered as a separate unit. This method of costing
is used to determine the cost of service-oriented units such as buses, railways,
nursing homes, etc., In the case of a nursing home, a unit is treated as the
cost of a bed per day, while, for busses, operating cost for a kilometer is
treated as a unit.
This method is best suited for companies that render services than
manufactured goods. This method is used where production is not possible
without service. Expenses are incurred to generate and render service to the
production process (Figure 7.16).
Figure 7.16: Nature of operating costing.

Source: https://www.slideshare.net/mhoque71/operating-costing-presenta-
tion-38637679.
7.4.6. Process Costing

Process Costing method is used for products that go through a number of
processes. Each process can either result in finished goods or provide raw
materials for the next process and so must be evaluated separately. Ideally,
the output of one process becomes the input for the other process. In such
companies, process costing is used to determine the cost at each stage of
production because finished goods are obtained at the end of each process.
This method is best suited for companies where the production is continuous,
and different products are produced simultaneously with or without by-
products. Here too, a separate account is opened for each process to which
all expenditure incurred thereon is charged.
Since this costing is applied on products that are manufactured in a continuous
process, this method is also known as continuous costing method. Also,
the cost per unit is calculated by averaging the expenditure incurred on the
process during a certain period, and it is also known as average costing.
Overall, process costing system can be applied under the certain conditions
given in Figure 7.17.
i. Continuous Production
ii. Complete standardization of products and processes
iii. Loss of identity of individual items
Figure 7.17: Conditions to use process costing.

7.4.7. Uniform Costing

Uniform Costing method is a system wherein many firms in the same industry
use the same method of costing using the standard accounting practices and
principles that has been agreed earlier. This helps to fix the price of the
product and to compare the product pricing between companies. Through
comparisons, this costing method helps in eliminating any inefficiencies. It
is not a unique method but an adoption of identical costing principles and
procedures by several units of the same industry or several undertakings by
mutual agreement (Figure 7.18).
Figure 7.18: Uniform costing.

Source: https://www.slideshare.net/faltufocat/introduction-to-cost-account-
ing-31997253.
7.4.8. Multiple Costing

Multiple costing is also termed as composite costing. This type of costing is
used in places where the output comprises of many components, and costs
need to be ascertained for each component, as well as with the finished
product. It is called composite or multiple costing because different methods
of costing are required for different components. One or more methods of
costing are applied on the same product. Sometimes, it becomes difficult to
use either job costing or process costing. In such situations, more than one
method of costing is used (Figure 7.19).
For example, to determine the cost of each component, process costing
may be used. To ascertain the cost of the final product batch costing may be
applied.
Figure 7.19: Multiple costing.

Source: https://www.slideshare.net/teenashivnani13/meaning-amp-cost-
sheet.
7.4.9. Farm Costing

Farm Costing is applied in farming activities to improve the farming
practices so that; the cost of production can be reduced. By doing this,
the profit on each farming activity can be controlled in a better way by
the management. Manufacturing in an industry is different from farm
production. In manufacturing, everything is standard, whereas it is not so
in farm production. Hence, a separate type of costing is required for farm
production and that type is called farm costing.
7.4.10. Departmental Costing

Departmental Costing is applied if a company wishes to determine the cost
of each department individually. The application of departmental costing
requires uniform performance of all the departments. A departmental rate
per unit of output is fixed. If any job or product or unit passing through such
a department, the rate is added with passing product or unit.
Batch Costing, job costing and contract costing are all categorized under
Specific Order Costing because all the work under this is authorized by a
specific order or contract. Although there are so many methods of costing
available, the basic principle under which all these methods works are the
same, i.e., collecting, and analyzing the expenses based on the elements of
cost and determine the cost for various cost center and cost unit.
REFERENCES
1. http://www.accountingnotes.net/cost-accounting/costing-system/top-
6-types-of-costing-systems-cost-accounting/10166 (Accessed on 13
July 2019).
2. http://www.businessdictionary.com/article/572/the-10-steps-of-the-
procurement-cycle/ (Accessed on 13 July 2019).
3. h t t p : / / w w w. b v m . g o v. z a / b v m w e b / i m a g e s / B u d g e t s /
Approved20152016/Costing%20Policy.pdf (Accessed on 13 July
2019).
4. http://www.yourarticlelibrary.com/cost-accounting/methods-and-
techniques-of-costing/55231 (Accessed on 13 July 2019).
5. http://www.yourarticlelibrary.com/purchase-management/top-7-
procedures-for-purchasing-materials/53170 (Accessed on 13 July
2019).
6. https://accountlearning.com/4-important-types-purchasing-policies-
adopted-industries/ (Accessed on 13 July 2019).
7. https://accountlearning.com/general-purchase-procedure-company/
8. https://accountlearning.com/various-methods-and-types-of-costing/
9. https://bizfluent.com/facts-7242069-purchasing-policy-definition.html
10. https://docs.microsoft.com/en-us/dynamics365/unified-operations/
supply-chain/procurement/purchase-policies (Accessed on 13 July
2019).
11. https://en.wikipedia.org/wiki/Purchasing_process (Accessed on 13
July 2019).
12. https://smallbusiness.chron.com/8-steps-business-organizations-
purchasing-process-2267.html (Accessed on 13 July 2019).
13. https://toughnickel.com/business/Methods-of-Costing (Accessed on
13 July 2019).
14. https://www.citeman.com/7142-steps-of-purchasing-procedure.html
15. https://www.purchasecontrol.com/blog/procurement-policy-sample/
INDEX
A Costing data 160, 163

Cross-training staff 214
Activity-Based Costing method 177 Customer attraction 77
Actual responsibilities 137 Customer service 105, 233
Archeological tourism 21
D
B
Decision-making process 146
Beverage Cost Control 204, 208 Deliverable Materials 134
Business environment 67, 69, 82
Business management 39, 69 E
Business research 188 Electronic transfers 228
C Energy efficiency 115, 117, 124,
125
Competitive market 188, 211 Energy-efficient products 126
Complex network technology equip- Energy-saving equipment 117
ment 88 Environmental aspect 115
Computerized Reservation System Environmentally preferable pur-
(CRS) 107 chasing (EPP) 110
Conservative Buying Policy 229, Environmental management system
230 (EMS) 123
Contractual function 229 Equipment sourcing initiative 103
Cordial relationship 26 Executive management 103
Corporate social responsibility
(CSR) 119 F
Cost information 231 Finance Department 237
Cost information system 68, 69
Finance management 47, 49 125, 152

Financial resources 45 Kitchen display system (KDS) 215
Food and Beverage Control 200, Kitchen order ticket (KOT) 215
201, 204, 208
L
Food Cost Control 200
Food inventory 100 Leadership 217
Food management 16 Life-cycle assessment 115
G M
Global economy 21 Managerial activity 130
Marketing 42
H
Materials Management function 233
Hospitality business 4, 6, 26, 27, 28, Modern marketing channel 42
32, 33, 36, 37, 40, 42, 43, 44,
N
46, 231
Hospitality business progress 84 Natural resource 115
Hospitality Industry 1, 2, 5, 40, 45
Hospitality organization 39 O
Hospitality services 79, 84 Operating Costing 242, 244
I Organizational behavior 32, 37, 38,
39, 40
Identical quantitative 242
Internal consumption 91 P
International Organization for Point of Sale (POS) 192
Standardization (ISO) 115 Pre-qualification questionnaire
International visitor spending 20 (PPQ) 122
Inventory management 191, 192, Process Costing method 245
193, 201 Procurement system 67
Inventory management system 192, Production volume 168
193 Purchase order (PO) 225
J Purchase specification 131, 134,
135, 136, 138
Joint Electron Device Engineering Purchasing management 130, 146
Council (JEDEC) 138 Purchasing procedure 226, 231
Purchasing Software 84
K
Q
Key performance indicators (KPIs)
Qualifying energy-efficient equip-
ment 118
Index 251
Quality organizational behavior 37 59, 92

Systematic approach 146
R
T
Raw materials 130, 131, 143, 144
Reactive approach 131 Technological methodologies 83
Recognize sustainability 125 Tourism industry 6, 7, 11, 18, 19,
Relationship management tech- 20, 26
niques 60 Transport arrangements 102
Request for proposal document Travelling Purchase Requisition
(RPF) 57 234
Request for Proposal (RFP) 122
U
Responsible procurement 109, 110,
111, 113, 116, 117, 118, 120, Uniform Costing method 246
121, 122, 125, 126
Responsible procurement policy V
113, 117, 122, 125 Volatile demand scenario 109
Retaining employees 30
W
S
Work opportunity tax credit (WOTC)
Senior management 143 216
Strategic planning 45, 48
Supply chain management (SCM)

Purchasing and Costing For The Hospitality Industry

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Purchasing and Costing For The Hospitality Industry

Uploaded by

Copyright:

Available Formats

PURCHASING AND COSTING FOR

THE HOSPITALITY INDUSTRY

Maria Rellie B. Kalacas

e-book Edition 2020

© 2020 Society Publishing

Maria Rellie B. Kalacas is an Assistant Professor III in the College of Industrial

Chapter 1 Introduction to Hospitality Industry.......................................................... 1

Chapter 2 Definition And Overview Of Purchasing And Costing In

Chapter 3 Functions And Key Areas Of Purchasing In The

Chapter 4 Specification, Objectives, And Evaluation of Purchasing ...................... 129

Chapter 5 Importance Of Costing In The Hospitality Industry .............................. 155

Chapter 6 Cost Evaluation and Control.................................................................. 187

Chapter 7 Standard Procedure And Policies Followed For

Index ..................................................................................................... 249

Figure 1.1. Hospitality industry – definition

Table 3.1. Purchasing specifications kept in hotel kitchens

COGS cost of goods sold

“A satisfied customer is the best business strategy of all.”

1.1. What Is Hospitality Industry?............................................................... 2

Hospitality industry is a billion-dollar industry and it is also a service-

1.1. WHAT IS HOSPITALITY INDUSTRY?

Figure 1.1: Hospitality industry – definition.

Figure 1.2: Image of the old VanDemark Tavern in Junius.

Figure 1.3: Hospitality industry, meaning.

The hospitality industry is not a single industry. It is a group of businesses

in the world. The hospitality industry focuses mainly on customers. The

1.1.1. Principles of Hospitality Industry

Figure 1.4: Customer satisfaction – main principle of hospitality industry.

1.1.2. Global Presence

Figure 1.5: International tourist arrivals, 1950–2030.

1.2. DIFFERENT SECTORS UNDER HOSPITALITY IN-

Figure 1.6: Different sectors of the hospitality industry.

Figure 1.7: The hospitality industry – full picture.

Figure 1.8: Types of accommodation.

Customer service is very important in accommodation services. When

Figure 1.9: Important types of accommodation.

Figure 1.10: Image of lodges.

Figure 1.11: Earth Resort in Wayanad, India.

Figure 1.12: Emerald Suites.

1.2.2. Food and Beverage

Figure 1.13: Sectors of the food-service industry.

Let us discuss more about the sub-divisions of food service industry.

1.2.2.1. Quick-Serve Centers/Fast food Centers

Figure 1.14: A Fast Food Center in Portland, Oregon.

Figure 1.15: Image of a themed restaurant.

Due to the owing popularity of these restaurants, many professionals of

1.2.2.3. Catering Services

Figure 1.16: Food catering services.

Food management is very important in the food and beverage industry.

1.2.2.4. Trends in Hotel Industry

Due to an excessive supply of hotel rooms, the hotel industry is facing

employees, Wyndham Hotels announced in April 2005 that it would

1.2.3. Travel and Tourism

Figure 1.17: What is travel and tourism?

hospitality industry because their contribution to the travel and tourism

Figure 1.18: Modes of transport.

Travel and tourism encourages people to travel because whenever people

1.2.4. Hospitality and Recreation

tourism associations that attract tourists to out-of-the-way locations. Another

Figure 1.19: Recreational events for tourists.

Some of the recreation spots and activities in a hospitality industry:

1.2.4.1. Employment Outlook

1.2.4.2. Recreational Activities