Journal of Hospitality Application & Research, BIT Mesra, Ranchi

SUPPLY CHAIN MANAGEMENT IN

HOSPITALITY INDUSTRY : AN OVERVIEW

Mrs. H.S.Sethu
Associate Professor
Welcomgroup Graduate School of Hotel Administration
(A Unit of Manipal Academy of Higher Education)
Valley View, Manipal, Karnataka – 576 104

Objective
Discuss the scope of supply chain management in the hospitality
industry with particular reference to purchase process.

Definition of supply chain management

Institute of Supply Management defines supply management as: ‘the
identification, acquisition, access, positioning and management of resources the
organisation needs or potentially needs in the attainment of its strategic objectives.’
Definition of supply chain management: All activities associated with
the flow and transformation of goods from the raw materials stage, through
to end users, as well as the associated information inflows. This includes
material and information flows both up and down supply chain. Therefore
supply chain includes a whole horde of systems such as systems
management, operations and assembly, purchasing, production schedule,
order processing, inventory management, transportation, warehousing, and
customer service. Supply chain is essentially a series of linked activities
starting from the suppliers and ending with the customers which can be
simply put as under SOURCES ............. LOGISTICS .............
OPERATIONS
Going by the above, supply chain management includes. Upstream
functions of purchase department such as procuring the right products
from the right suppliers at the right time and maintaining good relationships
with the suppliers, Internal functions or processes used in transforming
the inputs provided by the supplier encompassing the activities such as
production, engineering, accounting etc and Down stream functions
delivery of the finished products to the end customers.

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34 JOHAR – Journal of Hospitality Application & Research Vol. 2, No. 2

Supply Chain management in the context of this paper

Supply chain management includes a whole lot of interlinked processes,
in the context of this paper; the discussion is limited to the sources
management. To reiterate, in the present context supply chain management
is the constant search for improving the way you get the materials that the
hotels need to generate the product/ service. It touches upon planning for
managing the resources which result in giving service to your customer.
This is so because According to the basic requirements of SCM the hotel
may spend up to 55% of their costs on material procurement. The main
concentration of SCM would therefore be cost reduction, improved material
delivery, shorter time cycle, quality improvement, and access to the product
and process technology. “A supplier can make or break a company, in terms
of providing products and services that either exceed their customers’
expectations or fail miserably. Reams have been written about supply
chain management, here is an attempt to focus on the issue related to hostel
industry. In this context Supply chain management is synonymous with
upstream functions of purchase management.

Background for Supply Chain management in Hospitality Industry

Joseph Acura, president of consulting firm Supply Chain Management
in Ridgewood, N.J., says the hospitality industry as a whole is starting to
awaken to the value of supply chain. “Currently, we are about two to three
years behind the manufacturing industry,” reports Acura, whose company
was spun off from Atlanta-based Intercontinental Hotels Group, where
Acura had been the chief procurement officer, and who now provides third-
party procurement services for the hotel group. “The hospitality industry
is beginning to catch up quickly, though,” he adds.
When Acura arrived as CPO for Intercontinental four years ago, the
company’s focus was on cost management and a third party firm was
conducting a major spend-analysis project. Acura took over that project,
implemented a supplier consolidation effort and created some performance
metrics for existing suppliers.

Factors affecting supply chain management in Hotel industry

Before discussing the utility of Supply chain management in the
hospitality industry, one needs to understand that the premise under which
the hospitality industry operates is much different from other industries.
The industries capital costs are high, operating costs being comparatively
Department of Hotel Management, BIT-Mesra, Ranchi-835215
 Supply chain management in hospitality industry an over view 35

lower. The hotel industry has its unique characteristics, like customer
centricity, different types of management etc. Firstly, for the hotel industry
the guest or customer is “GOD”. Many a time it becomes difficult for
extreme standardization. Customer satisfaction is of paramount importance
to the hotel industry. This affects the supply chain management negatively.
In the hospitality industry the customer related activities such as food and
beverage production and service, housekeeping, Front office management
are given utmost importance. The back office operations such as the
accounts, purchases, supplies chain management, revenue recording etc
take a back seat.
The purchase manager is always under constant pressure to meet the user
departments’ un- planned needs. The majority of the internal customers of
the purchase manager, be it the food and beverage production manager, the
front office manager or the executive housekeeper etc operate at a higher
level in the hierarchy. They have more importance in the organization because
of their direct contact with the customers. As a result the purchase manager
always tries to have huge buffer stocks, lest he should fall short of satisfying
the hotel operating/user departments. But this does not mean that quality
management processes should be totally ignored. Secondly, different types
of management systems, such as the ownership hotels, franchisees, hotels
which are run on operating contracts by chains etc. The different managements
systems have different implications on the supply chain management. This
leads to unique set of problems for differently managed properties which are
broadly discussed as under. Thirdly, the current trends in the industry show
that computerized property management systems are used but mainly for front
office management and reservation systems. The interlinking of office processes
be it hotel front office back office and purchase process is not found in most
properties. In other words all the efforts are customer oriented, a result as
lot of cost reduction which can be attained through improved upstream
functions of supply chain management is lost. Proceeding from the above
it follows that there are certain problems which can be identified which are
exclusive to the hotel industry.

Problems of hotel industry related to supply chain

Material costs: The cost of raw materials purchase is quite huge in
the hotel scenario. Majority of the consumables of the hotel are of perishable
nature. A hotel Store deals with huge quantities of the items with very less
price. Bulk of the direct material cost is invested in such items. Because
36 JOHAR – Journal of Hospitality Application & Research Vol. 2, No. 2

of the perishable nature, one cannot make use of the economies of bulk
purchase. This increases the Number of transactions and thereby the
transaction costs. The logic of mechanization or automation cannot be truly
applied because of the innumerable different Items bought for many
departments from a large numbers of suppliers. Standardization is not
possible in such situations. This results in increased transaction costs.
Material ordering costs: The individual departments normally use
manual indents and purchase requisitions independently. In many properties
the hotels do not have computerized indenting and purchase requisitions.
The consolidation of such indents and requisitions become quite time
consuming. The purchase Department is found to place individual orders
for same products, due to difficulty in consolidation Even for chain properties
where different units are located in the same city, the hotels do not take
advantage of bulk purchasing due to reasons stated above. It may be found
that hotels purchase too many units of different brands and pack sizes. This
has a negative impact on consolidation, increased supplier base, and increase
in cost. At times hotels belonging to the same group may be buying same
products from same suppliers at different prices. This also greatly increases
the cost of transportation and other direct costs Through supply chain
management there could be considerable cost reduction.
Inventory holding costs: Forecasting of material required is quite un-
heard of. Even if done, the activity becomes a mere paper tiger, The
purchase department, in the fear of not being able to give the right items
to the user departments on time, stock large quantities of materials. This
occupies a large space and there by leads to increase in costs.
EMERGENCY PURCHASES: Due to lack of planning, emergency
purchases are a matter of routine and not due to exception. The purchases
are made on the request to the user departments on the spur of the moment,
and are regularized later by making the required paper work.
Where does the Supply chain process start?
There are two possibilities for implementing the supply chain systems.
Strengthening the systems internally or through outsourcing.
The outsourcing of Supply chain management has come of age and
there are umpteen service providers, which an organization can make use
of. In this paper an attempt is made to discuss the strengthening of the
systems internally. The purchasing process in any industry involves setting
up of the purchasing objectives which could be to
Department of Hotel Management, BIT-Mesra, Ranchi-835215
 Supply chain management in hospitality industry an over view 37

• Support operating requirements

• Buy from right place, right source, right specification, right quality
and quantity and time
• Manage efficiently and effectively
• Select develop and maintain sources of supply
• Constantly Endeavour to improve relationship with suppliers
• Support organizational goals
• Develop supply strategies.
This requires commitment from the management as well as the
work force. But the resultant reduction in cost would be enormous.
There are two parallel approaches to begin the process. Tactical and
Strategic.

Tactical Methods In SCM

Commodity analysis: This involves a lot of initial ground work.
All the existing document such as indents, purchase requisitions, orders,
is analyzed. Though a lot of time and effort goes into this work, once
done, will lead to fantastic data analysis, for preparation of forecasts.
Planning and forecasting are the first steps in any managerial processes.
Developing trends based on actual date for the past three years and
preparation of forecasts in conjunction with the overall objectives is
the first requirement for supply chain management too. Analyzing the
trends will help in understanding department wise consumption pattern,
item wise consumption pattern, supplier wise commodity procurement,
commodity wise supplier lists, commodity wise rate lists, supplier wise
commodity wise rate and quantity lists, are some of the analysis which
will help in implementation of the SCM process. Many a time such
data are available, but analysis and decision making is never done based
on the same. Make ABC analysis of the products for understanding
the nature of utilization vis a vis the costs. This information is a very
powerful tool in the hands of the purchase manager and is the beginning
step in SCM. Following are the broad examples with reference to
hospitality.
• Provisions and grocery
• Capital equipment
38 JOHAR – Journal of Hospitality Application & Research Vol. 2, No. 2

• China silver and glass

• Linen and uniforms
• Cleaning supplies
• Maintenance supplies

Market research
Based on the data available after commodity analysis a market
study of availability of the specific products and the suppliers is
required. Make detailed analysis of product wise supplier lists from
the market information. Such a research will lead to identification of
newer suppliers or newer products which may be better and cheaper.
This will help identification of best suppliers for specific products
helping in lowering costs.

Determine the needs of the internal customers

Based on commodity analysis the internal customers, who are
the departmental managers, can be asked to come out with their
forecasts.

Analyzing the existing contracts

This paves the way for modification, cancellation or renewal of
contracts which may be the result after commodity analysis and
market research. Past performance of existing suppliers, their
promptness, commitment etc comes to light. This will help in
thoroughly studying the existing systems as regards, supplier
selection, costs of the products, reviewing the terms and conditions
tenders etc.

Setting standards
Based on Commodity analysis, standards are set for each department,
product supplier. Purchase policies for the properties are set keeping in
view the overall objectives of the firm.
Documentation and communications are created and contracts are
drawn up. Internal and external communication regarding the steps taken
towards improving the supply chain is made. This will lead to negotiations
between the purchase and other departments, as well the suppliers. This
will lead to cost effectiveness.
Department of Hotel Management, BIT-Mesra, Ranchi-835215
 Supply chain management in hospitality industry an over view 39

Strategic Methods In SCM

Supplier identification
Supply chain management involves taking steps to identify the right
suppliers. This is a very crucial step. The hotels have a tendency of
dealing with a huge supplier base, though this has its positives, conscious
steps should be taken to identify committed suppliers who are willing
to go by the objectives of the concern, and be involved and appreciate
and support the changes of the organizational requirements.

Supplier evaluation and selection

After careful identification the suppliers are evaluated. Their ability
to supply the right goods at the right time with right specifications has to
be studied. This is another crucial activity which the purchase process
should undertake. After negotiations and competitive biddings, contracts
are awarded.

Supplier management
Once the correct suppliers are selected, there should be a process
which will help in smooth management of the purchase process. Once
the supplier delivers the goods as per specifications, it is the responsibility
of the purchase process to see that his bills are settled, as per contract. This
is where, many a time, a property may let down the suppliers, by not paying
up promptly. Many a good supplier may be lost to the hotel, due to delay
in payment. The fault may be due to bottlenecks in any of the processes.
The purchase department may not process the documents promptly to the
finance department. The finance department may not have got all the
details it is looking for, or the signatories of the cheques may be busy. Once
in a while this may be acceptable, but if continuous delay in payment
happens, the supplier feels harassed. If the hotel is a big buyer, the supplier
may be threatened also. This spoils the relationship of the hotel with the
supplier. Therefore, this is a very crucial stage, where the supply chain
management has to be strengthened.

Supplier development and improvement

The supplier chain management must include this very crucial process.
If the supplier is made to know about importance which the hotel gives
him, he will definitely be encouraged to give very good service, which
contributes towards efficiency and cost saving.
40 JOHAR – Journal of Hospitality Application & Research Vol. 2, No. 2

Empowerment of the purchase manager

As mentioned earlier, the purchase manager in a hotel concern is given
a lower position in the organizational hierarchy. This results in improper
and inefficient supply chain management. The purchase process has a very
wide span of control if the supply chain has to be professionally managed.
It starts from identification, forecasting of the material and services needed
by the hotel the evaluation and selection of suppliers, review of
specifications, negotiations with suppliers, awarding of contracts,
recommend for release of payments, continuous monitoring and
measurement of supplier performance. The purchasing head should be
considered equal to any departmental head and given that status, if SCM
has to be smooth. In case of centrally managed purchase process as in
chain hotels, a position of Vice President purchases is ideal.

The Advantages of Supply Chain Management

• Both the supplier and the hotel benefit from a well established system
of supply chain management. The relationship between the supplier
and hotel becomes stronger because of professional management in
the form of development of proper purchasing policies. This could also
lead to concentrating on a few trusted suppliers, rather than have a
large and inefficient supplier base. Newer and more efficient suppliers
could be identified, leading to increased efficiency.
• It leads to significant reduction in costs and also helps continuous
evaluation and improvement in the buying process. It could increase
the product range or perhaps reduce it too, because of intensive
market research undertaken
• Improved management information to future requirements

Conclusion
Efficient Supply chain management helps in enormous reduction of
costs by developing and implement contracts and agreements with suppliers
of hospitality products and services, securing for the hotels competitive
prices be if for food and beverage, rooms or property operations. Through
professional Supply Chain Management every supplier is committed,
nationally negotiated contract pricing, and top-quality product and service
standards. Offering a wide selection of products and services, they provide
the best products at best time at best rates, which is the ultimate objective
in supply Chain Management.
Department of Hotel Management, BIT-Mesra, Ranchi-835215
 Supply chain management in hospitality industry an over view 41

Enclosed alongside, is the Hilton hotels experience in implementing

the Supply Chain Management and it shows that SCM goes beyond mere
improvement in internal processes. Hilton has gone a long way in developing
the system and also conducting training programmers for the use of the
other operators in the industry.

References
1. American Hotel and Lodging Association www.ahma.com
2. Reengineering a Hotel’s purchasing process by Subhankar
Bhattacharya, Abhijit Upadhya and Sandeep Dhawan @infosys.com
3. www.hilton .com

The Hilton Experience

With one eye on the changes taking place in the hospitality industry, Hilton
Hotels Corporation has launched a number of initiatives to expand its brands,
strengthen guest loyalty, decrease costs and increase profits.

In late 1999 , Hilton Hotels Corporation (HHC) embarked on a new

course that would take it into the new millennium, beginning with the
acquisition of Promus Hotel Corporation, which increased its size from
270 hotels with 90,000 rooms to nearly 1900 hotels with more than
325,000 rooms, and diversifying its portfolio to include all major segments
of the lodging industry. With that type of growth, Hilton knew it needed
to establish new structures, new foundations, new strategies and new
philosophies to identify how it could best serve the needs of all the hotels
within its portfolio of brands. By consolidating the many divisions of the
two companies, Hilton brought together the best resources and programmes
of both organisations, including people, values, suppliers and technology,
to establish a solid foundation for the future. Hilton decided to take an
aggressive, strategic approach to purchasing and supply management by
looking at end-to-end supply chain management in its function of providing
goods and services to its hotels. Hilton renamed its purchasing division,
adopting the fundamental concept of supply management from the Institute
of Supply Management, which defines supply management as: ‘the
identification, acquisition, access, positioning and management of
resources the organisation needs or potentially needs in the attainment
of its strategic objectives.’ The purchasing division’s new name, Hilton
42 JOHAR – Journal of Hospitality Application & Research Vol. 2, No. 2

Supply Management® (HSM), more accurately reflects the respon-

sibilities and deliverables of the discipline. Within the first two years
following the integration of the two companies, HSM restructured its
business model, terminated an outsource agreement with a technology
and human resources provider, migrated to a new ERP and launched a
B2B e-procurement technology. Any one of these initiatives on its own
is a huge undertaking, let alone the task of integrating them at the same
time. Today, HSM is taking supply chain management activity and is
transposing it into a competitive advantage by instituting cost management
through strategic sourcing, supplier management, and transaction process
efficiencies. A recent study called ‘The Future of Purchasing and Supply:
a Five and Ten Year Forecast’ observes that increased competition and
focus on core competencies have driven the need for strategic supplier
alliances. HSM will therefore continue to use supplier relationships as
a vehicle for enhancing overall performance. HSM is not like a traditional
purchasing department overseeing purely transaction-based purchasing,
but rather a more diverse and strategic organisation providing end-to-end
supply management solutions. HSM employs a hybrid ‘hub and spoke’
approach to supply management (centralised at the corporate level,
regionalised at the field level), to leverage both national and regional
opportunities. Where it is cost-beneficial to the hotels, HSM places
orders for hotels directly with suppliers, thus becoming the ‘merchant
of record’ and eliminating intermediary supplier costs. HSM also negotiates
‘supplier direct programmes’ where hotels do business directly with the
suppliers while realising the benefits of HSM’s contracted prices.
Leveraging the power - at the hub and beyond HSM’s contracts and
supply management team (one of four divisions in HSM, the others being
project development/project supply management, field operations and
administration) leverages the power of the entire Hilton portfolio to develop
and implement contracts and agreements with hundreds of suppliers of
hospitality products and services, securing for the hotels competitive,
nationally negotiated contract pricing, and top-quality product and service
standards. Offering a wide selection of products and services, the contracts
and supply management team is segmented into three commodity and
discipline operating modules: food and beverages, rooms, and property
operations. HSM benchmarks and identifies suppliers, products, and services
that best drive value to the hotels and ensures those suppliers are positioned
to meet the varied needs of its constituents. Every Hilton supplier must
Department of Hotel Management, BIT-Mesra, Ranchi-835215
 Supply chain management in hospitality industry an over view 43

commit to providing its products and services at contracted prices,

maintaining sufficient inventory levels, delivering products at scheduled
times, providing monthly pricing reports and many other services to help
each hotel perform at the highest levels. HSM’s supply management
programmes are designed to maximise each hotel’s profits while minimising
the ordering cycle times and inventory carrying costs.

Managing new openings and renovations

HSM’s project supply management team assists hotel owners through
every step of getting a new hotel open or completing renovations through
the use of comprehensive project packages tailored to each hotel’s needs.
The team oversees the purchasing of capital items for hotel projects
ranging from as few as ten to over 2000 guestrooms, as well as lobbies,
restaurants, meeting rooms, pools and patios, and other public spaces
for hotels. HSM works with the brand management teams and acclaimed
designers to develop décor schemes for today’s discerning travellers.
All-inclusive designer guest room packages, complete with décor
schemes, soft goods and case goods, help simplify the design process
and help owners save money, time and frustration. Project supply
management services are available to both managed and franchised
properties, and include:
• Guest room design packages
• Budget development
• Financing and leasing options
• Budget and cost reporting
• Freight consolidation
• Furniture, fixtures and equipment (FF&E) and operating supplies
and equipment (OS&E) purchases
• FF&E installations
• Expediting and logistics
• Warehousing

Reaching out - with the spokes

The HSM field operations division reaches out with its five regional
and six satellite offices to capture regional/local synergies of the hotels
within a given market or region by leveraging and consolidating the
44 JOHAR – Journal of Hospitality Application & Research Vol. 2, No. 2

purchasing volume of the participating properties. Its regional offices

are geographically aligned to best support the hotels within the specific
region. The HSM Field Operations teams negotiate supplier and
distributor programmes for each metropolitan area using a best-in-class
approach, where volume can sustain multiple commodity programme
suppliers. The local and regional programmes leverage the collective
volume of the properties within a market or region to maximise
efficiencies, drive economies of scale and reduce base product costs.
The programmes, developed using cross-discipline teams within a
geographic supply market, allow the necessary flexibility to quickly
make changes in individual markets and/or properties without affecting
the entire programme.
Key benefits for hotels participating in these programmes include:
• Reduction of the total cost of products and services
• Improved forecasting, productivity and economies of scale
• Supplier consolidation (fewer deliveries, fewer invoices, fewer
checks)

Adding value beyond cost reduction

As a centre-led purchasing and supply organisation, HSM continues
to enhance its strategic role and add greater value to Hilton beyond cost
reduction. In 2003, HSM will focus on the design and management of
value-added processes across organisational boundaries to meet the
needs of the ultimate end user - the hotel guest. As the department with
the closest ties to the supply chain, HSM is in a unique position to
capitalise on this opportunity. The interface that already exists within
the organisation’s many business units allows HSM to readily leverage
cross-functional activities. Driving these initiatives are industry trends
such as collaboration using customer and supplier relationship
management, technology as an enabler, penetration of spend and project
administration. All of these trends are interrelated and interdependent.
Collaboration enhances supply management success. When internal
departments collaborate to achieve the overall goals of an organisation,
the chances of success are considerable. Through persistence,
communication and the process of inclusion, relationships with the end
user are strengthened. Joint efforts with strategic suppliers help to
identify new opportunities and applications that add value for constituents

Department of Hotel Management, BIT-Mesra, Ranchi-835215

 Supply chain management in hospitality industry an over view 45

and enhance the value of the relationship. Technological capabilities

will continue to improve and enhance operational efficiencies and
CRM. Internal marketing of the benefits that HSM provides to its
constituents will improve penetration of spend and brand consistency,
reduce costs and add value to hotel operations. Project management
principles can be incorporated to address initiatives in finance,
technology, logistics and catalogue development and maintenance.
Unlike the traditional concept of project management in the hospitality
industry, project management in this sense is more all-encompassing,
overseeing business activities from concept to implementation and
beyond, with particular emphasis on the functions, roles and
responsibilities of the project team. To this end, knowledge, skills, tools
and techniques can be used to meet or exceed stakeholder needs and
expectations in a variety of areas, such as scope, time, cost, quality,
human resources, communications, risk and procurement management.
Project management is applicable to most business applications, not the
least of which is purchasing and supply management. HSM’s new
business model, structure, and initiatives are helping its hotels achieve
more savings every day as it continues to deliver customer-focused,
value-based supply management solutions. HSM is not limited to
sourcing or supply-side activities - all units contribute to all aspects
of Hilton’s business wherever there is the potential to create value for
the company.
Website: http://www.hilton.com