Chapter 4:

Strategic Sourcing

STRATEGIC SOURCING
Strategic sourcing can be defined as a collective and organized approach to
supply chain management that defines the way information is gathered and used so
that an organization can leverage its consolidated purchasing power to find the best
possible values in the marketplace.
We cannot build up the significance of operating in a collaborative manner.
Several decades have witnessed a major transformation in the profession of supply
chain, from the purchasing agent comprehension, where staying in repository was
the criterion, to emerging into a supply chain management surrounding, where
working with cross functional and cross location teams is important, to achieve
success.
Strategic sourcing is organized because of the necessity of some
methodology or process. It is collective because one of the most essential
necessities for any successful strategic sourcing attempt is of receiving operational
components, apart from the procurement, engaged in the decision-making and
assessment process.

PROCUREMENT MANAGEMENT
In a hotel operation, the role of procurement is not immediately apparent
Procurement costs, however are a key part of a hotel business's profitability
efficiency. The continuous supply of goods and services ased in revenue stream
generation as well as for internal use keeps the organization working like a well-oiled
machine. Moreover, such availability at the best quality for the least cost is what
businesses strive for Procurement costs are different for an operating and opening
hotel. However, before we look at that, it is important to understand what constitutes
procurement and what costs are involved in that.
Success in hospitality is closely tied to procurement. All the purchased and
used equipment, materials, and services have a significant effect on the guest
experience. It is important for the beds you purchase to be comfortable. It is

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important that the computers and digital resources used are accurate Vendors of
food and beverages need quality service to be rendered
All of these elements affect the opinions your guests have about your hotel,
and it mostly falls on hotel procurement teams to deliver. That means having the
right solutions available Here are some of the top software, services, and
procurement companies your team can use to better manage its purchasing process.

CENTRALIZED - DECENTRALIZED PROCUREMENT

For international hotel chains today, we are seeing more and more of a
combination of decentralized and centralized procurement operation. More often
than not, procurement is centralized for product and service materials that require
conformity and compliance to standard operation procedure. This compliance forces
chain hotels to have their certain lists of products and services to be used and
served at their group of hotels. The objective is to standardize hotel operations by
promoting the commonality of products used and services offered across the board.
Pavia and Ivanomic (2007) also explained that decentralized procurement means
property level procurement will in-charge of the planning and acquisition of hotel
supplies as the department find appropriate and best suit to the designated operation
and condition.
Hotel chains serve global travelers, are catering to guests from different
countries and parts of the world. Considering the design of beverage drink-list, in
general would set to offer standard and sometimes even wide range lists of alcoholic
and non-alcoholic beverages; spirit or distilled beverage (gin, vodka, rum, tequila,
whisky, brandy), liqueur, wine, beer, carbonated drink, juice, coffee and tea and etc.
Whether a hotel to offer great numbers of selections or limited menu items (brand
and product choice) depends on the extent to which classification of hotels (star
rating) a particular establishment is operating under.

COMMON ISSUES ABOUT PURCHASING IN HOSPITALITY

INDUSTRY
1. Blind Spots
Problem: Very few hospitality companies had visibility into their procurement
operations because purchasing data was simply not captured.

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 Solution: Since purchasing one allowed access to robust programs are
reporting 50 and data-focused insightful joining data dashboards. This meant
hotels were able to get the customized information they needed and wanted,
all without draining their resources.

2. Limited Resources, Limited Rewards

Problem: Companies needed to constantly negotiate with vendors to get the
best price, but they often didn't have the personnel for this resource-intensive
endeavor.
Solution: By combining the purchasing volume of many companies in one
collective each business benefited by receiving the best possible price. This
set-up also freed suppliers from having constant negotiations, so they had
more resources to devote to getting orders out quickly and accurately.

3. No Volume Control
Problem: When you work for a single hotel vs. a chain, the only way to get
better prices is to increase your purchasing volume by growing your business.
As 1 result, a company that's not growing gets hit with a double-whammy:
stagnant growth and static-or even higher-prices at a time when the business
can least afford it.
Solution: Hotels found that one of the advantages of a purchasing program is
that they could always add other hospitality businesses to the collective in
order to procure a higher volume at a better price-so if one (or even all) hotel
was facing setbacks, pricing needn't suffer.

4. Order Disasters
Problem: MRO orders were notorious for being imperfect and the hospitality
industry was no different. For example, missing items and unapproved, often
unwelcome substitutions occurred constantly.
Solution: When hotels joined forces in a collective, they found that
purchasing programs solved this problem by tying supplier compensation to
accurate and efficient order fulfillment. Problem solved!

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5. Communication Mishaps
Problem: Let's face it. Most suppliers didn't get into the business because
they excelled at customer service and communication. They did their best
when they could focus their energies on fulfilling orders.
Solution: Purchasing programs served as a bridge or intermediary between
vendors and customers, meaning they facilitate communication. This helped
the supplier's customers better manage inventory and expectations and kept
relationships between the suppliers and customers strong. For example,
rushing a huge, unexpected order for a customer could deplete supplies for
others. Suppliers typically did not have the bandwidth to balance orders, but
purchasing programs' built-in customer service helped to manage these
orders and ensure all were filled in a timely fashion.

6. Fear of Collaboration
Problem: At first glance, collaborating with competitors in their own industry
felt strange and even dangerous. When Avendra, the leading purchasing
program in the hospitality industry, was first formed in 2001, many hotel
executives were wary-and some flatly refused to join.
Solution: The executives who discerned the potential advantages and
overcame their fears realized tremendous savings for their hotels when they
joined. (As a note, purchasing programs are set up in a way that protects
each hotel's proprietary data with NDAs and agreements.) Now purchasing
programs are accepted and even embraced throughout the hotel industry.

7. Focusing on Weaknesses Instead of Strengths

Problem: Even though most hospitality companies realized that procurement
was not their area of expertise, a pre-purchasing program industry meant
there wasn't much in the way of choice. Hotels still had to devote time to
procurement, even though that wasn't an area that truly differentiated their
businesses.
Solution: Many hotels took the money saved through purchasing programs
and used it to better train their employees to become masters in their areas of
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 expertise (e.g., service). As a result, they were spending more time and
dollars on brand building efforts.

ASSESSING EXISTING AND NEW HOTEL SUPPLY

Since guest expectations are constantly changing, hotel markets are
competitive. An artifact of historical guest expectations is the inventory of existing
hotels, while current and potential expectations are demonstrated by the latest hotel
supply pipeline. When supply meets demand, a market achieves balance, but this
can be elusive, especially during and during economic growth. Therefore, it is
important to start with a firm understanding of hotel supply before committing to an
investment.

Market Survey
Understanding what exists is the first step in assessing a market. At the
simplest level, all hotels along the chain scale should be considered by a consumer
survey. Depending on your investment strategy, you may be able to limit the survey
to properties with more than 50 rooms and less than 500 rooms. This is where most
brands play However, you should include smaller or bigger hotels if they are
competitive within your strategy.

Your survey should include the finer details of each hotel, including:
 Number of Rooms
 Function Space Sq. Ft.
 Year Built
 Year Last Renovated
 Asset Quality
 Brand
 Management Company
 Owner/Major Partners
 Last Sale Date and Price
 Financing Information - Lender, Loan Amount, and Maturity Date

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 A comprehensive survey allows you to apply some analytical techniques that
define the market. For example, you could categorize many of these factors into
three or more broad buckets. Count the number of rooms or properties that fit into
each category to draw conclusions about over or underrepresented product.
An analytical approach allows you to quickly filter hotels in a market by
investment or operating characteristics that will fall within your investment criteria.
When you pair this data with what you know about demand coming to the market,
you'll be able to assess where there are glaring holes.

Consider Local Retail

Other aspects of the sector are to be considered in restaurants and retail. If
you are interested in full-service hotels or select service with F&B selections, such as
Courtyard or Hilton Garden Inn, expect them to be competitive. Anything that brings
the customer out of your hotel would have a major influence on your hotel's
perception. National retailers spend tremendous resources to analyze a market.
While their research targets the demand side of the equation, your market survey will
point to additional opportunities that may exist for new hotel supply.

Quality and Brands

Get on the ground and walk the major competitive hotels. TripAdvisor can
give you a sense of asset quality, but those reviews are subjective They only
represent a fraction of guests. The 95% of guests that don't use TripAdvisor or leave
reviews on OTAs may have a completely different opinion. You can only get that
from visiting the hotels yourself.
Years of construction and renovation have a huge effect on successful
placement Guest preferences are evolving and older hotels are trying to uphold new
norms. This can be as basic as the layout of a certain lobby or space A hotel
constructed in 1995 gives a somewhat different atmosphere to a building built in
2015, although it may have equivalent finishes.
Note, the quality of the structure and interiors is important, but much of this
may be overshadowed by property culture. A stunning new hotel with a poor culture
would be underperformed by a shabby hotel that any day of the week places its
guests on a pedestal.

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 In developing a hotel brand, guest profiles are the key influence. Therefore,
inside the same brand family, a brand with another definition would cater to a
particular guest Competitive brands though, cater to virtually the exact same ethnic
and psychographic profile of visitors. In this situation, a guest's judgment boils down
to loyalty and consistency
Get to know the offerings of each brand in your investment strategy. This
knowledge comes from experience and exposure. The more hotels you see the
better. Hotel brands are in the franchising business. Their primary concern is
consistently accumulating a larger share of the total revenue in a market. Therefore,
they do better with the more brands they can fit into an area. Guest experience and
increasing revenue are important complementary objectives, but brand presence is a
real consideration.

Development Stages
New hotel supply can be difficult to gauge. The announcement of a new
development does not ensure delivery. There are many steps between buying the
land and opening the door. Further, the abilities and track record of the developer
behind the project have a huge impact on the likelihood of completion.
A variety of factors influence the success of a new development, including
sponsor government, and market timing. Other factors, beyond these three, combine
to make it a challenging undertaking. Each of these factors are at play in progressing
through the following development stages:
1. Early Plan - feasibility and announcement
2. Planning - preparation of materials for government approval submission
3. Final Planning-government approvals received and preparing construction
documents
4. Construction - active building and pre-opening activities
5. Opening - product launch and ramping up operations
Your market survey should uncover where each proposed new hotel is in this
process and how long they've been sitting at that stage. A new hotel development
takes 2-3 years to open from the initial announcement Government approvals can
hold up a process, but once the developer breaks ground, you can expect to have a
competitor open its doors within 16-22 months.

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 New hotels are not directly competitive from day one, but they quickly become a
threat after working out the operational kinks. Existing hotels must examine how their
property quality and operations hold up against the new entrant. For example, an
existing property may require some renovations just to maintain a defensive position.

Investment Trends

Investment trends ebb and flow along two major currents - cyclical and
secular. All investors are very aware of the business cycle. Business and consumer
sentiment, money supply, and other factors influence business and consumer
spending. Favorable macroeconomic conditions usually result in good times, while
low sentiment and tight monetary supply end up in slower growth.
Most investors and commentators try to prognosticate about the status of "the
cycle" to time a good entry and exit point However, nobody has ever been 100%
correct on this, and they miss great opportunities by getting out too early. Secular
trends are based on social, technological, governmental, and other factors that
influence how businesses and consumers behave. This is the undercurrent that
dictates the popularity of a location or product type.
Think of a secular trend as the line between two points on a map - as the crow
flies If you could go from point A to B without taking surface roads, the journey would
be a breeze. Gravity and the natural and built environment limit our ability to do that
Therefore, we must contend with the inefficient surface streets market cycles - to get
from here to there. All the greatest investors are more focused on the secular trends
than business cycles.

SUPPLIER SELECTION

1. Identifying the Set of Business Goals and Objectives

Before you get on-board with your supplier management process, it is
important to identify the set of business goals and objectives for which
suppliers are required. Setting goals and objectives for a small business is
vitally important to determining its strategy for growth and in implementing its
organizational policies and procedures.
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 It will highlight what every department requires from third-parties so
that you can map the relevant suppliers to every need without duplicating
efforts and resources. Goal-setting is important to measuring the success a
business. Determining goals and objectives and implementing plans to
achieve them is a proactive stance on the part the business owners. For
example, start a hotel business with a mission, vision and strategy. Strategy is
based on partnership with guests, employees, relationships with suppliers and
satisfaction of interesting parties.

2. Identifying Relevant Criteria for Supplier Selection

Once you know the goals and requirements that require supplier
engagement you need to identify the supplier selection criteria to have the
maximum benefits for the requirement
While the standards for selection depend on the form of company and
the supplier needs, basic measures include pricing, quality of prior
employment, industrial acceptance, legal standing, etc. In order to select
appropriate suppliers, organizations often engage in RFQs, RFPs, and RFIs,
particularly when the specifications are critical.

3. Evaluating and Selecting Suppliers

The next step is to evaluate all potential suppliers on the basis of your
defined selection criteria. The majority of companies assess suppliers on the

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 basis of their quoted prices. It is equally necessary, however, to weigh in the
other parameters you have defined. Assess the quotations and proposals
given by the potential suppliers and ensure you are deriving maximum cost
savings opportunities. Analyze the terms and conditions to see how well the
suppliers are planning to meet the organizational requirements. At the same
time, make sure you have done a thorough, holistic analysis of the suppliers'
strengths and weakness and study how the external environment's threats
and opportunities can impact your engagement with the suppliers.

4. Negotiating and Contracting with the Selected Suppliers

Now that you have selected the right vendors, you need to carry out
the procurement process to actually get them on board. Ensure that in the
contracting process you engage all applicable parties and gain useful insights
into how the deal will ensure optimum benefit performance.
In a lot of business cases, the contracting process is executed by the
finance or procurement team with the senior executives of business units

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

5. Evaluating Supplier Performance

The supplier management process doesn't just end once you choose
the suppliers. After their selection and on boarding, you need to periodically
evaluate their performance to see how well they are fulfilling the set objectives
and requirements.
Supplier evaluation is the process to access new or existing supplier
base on their delivery, price, production, and quality of management, technical
and services A standard supplier evaluation framework shall be used in all
cases for the existing and potential suppliers. The supplier evaluation
framework can help to set up a benchmark and corrective action plan for the
existing supplier You can decide to reward supplier based on their excellence
performance and penalizing or de-listing them if the performance is not in
standard. You also can set an approved or preferred vendor list for those
potential suppliers.
Make sure you have established KPIs for measure supplier
performance. This process helps to ensure a smooth and effective practical
evaluation. This will also provide insights into areas for improvement to
maximize supplier performance. It also tells us how effective our supplier
management process is and how it can optimize it further.

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