HAMA Spring 2014 Meeting
Best Practices in Procurement
May 6, 2014
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AGENDA
o
Importance of Procurement in Hotel
Management
o
Defining “Procurement”
o
Emerging Trends and Best Practices –
Transforming from Purchasing/Procurement to
Supply Chain Management
o
Summary
o
Q&A
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A 2013 STUDY BY MCKINSEY AND COMPANY REVEALED A
STRONG CORRELATION BETWEEN PURCHASING HEALTH AND
CORPORATE PERFORMANCE
Procurement followers
Better procurement
practices…
Procurement
followers
Percent
Annual
procurement
savings
3.5
Middle of the
pack
Annual
reduction of
COGS
4.9
2.7
1.9
Procurement leaders
…result in higher performance
Average survey scores
across all drivers
Scale 1-5
Procurement
leaders
Middle of the pack
0.4
3.8
2.8
Average
EBITDA
margin
20.2
0.1
-0.1
17.0
10.9
Confidence level of correlations >99%
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PROCUREMENT HAS IMPLICATIONS AND IMPACT WELL BEYOND
PURCHASE PRICE
Potential Procurement Impact on Hotel Management
•
•
•
•
Quality
o
Right products for right application
o
Consistency of product performance
o
Driving perception of value to customer
Service
o
Products and services available when needed
o
Supplier flexibility and knowledge of customer business
Cost
o
Optimal life cycle costs
o
Adequate Indemnity and Risk protection
Internal Controls
o
Establishing strong fiduciary relationship over the spend
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DEFINING “PROCUREMENT”
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DEFINING “PROCUREMENT”
Method
Purchasing
Breadth of Approach and
Practices Utilized
Depth of Contracting
•
•
Procurement
Contracts mainly with Point of
Commerce (POC) suppliers or no
contracts (i.e. transactional buys)
Agreements and contracts with
many POC suppliers, some
manufacturer deals on high
profile items (e.g. Coke/Pepsi,
Starbucks)
•
•
•
•
•
Supply Chain
Management
•
Contracts through out the supply
chain (growers, shippers,
manufacturers, POC)
•
Often three bid on high volume items
and list price on “tail”
Service, quality and price accuracy
managed by transaction
Pricing is usually negotiated discount
off list
Certain elements of service, quality
and price accuracy negotiated in
contract
Pricing mechanisms linked to
commodity (e.g formula pricing, cost
plus)
Service, quality, price accuracy
stipulated in contract and managed in
overall relationship
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SUPPLY CHAIN MANAGEMENT VS. TRANSACTIONAL
PURCHASING - PROVIDING CONTROLS
Traditional 3-bid procurement focus:
 Control deal and process by individual purchasing transaction
 Bid each purchase and verify price/quantity by 3-way match
Vendor
Selection and
Contracting
Aggregate
Purchases
Transactional
Purchasing
Ongoing Service,
Quality and Price
Management
Monitor
Compliance
Manage Supplier
Performance
Supply chain management approach:
 Drive lowest cost by bringing scale and commitment to supplier
 Manage property-level compliance through spend reporting and field support
 Manage service, quality and price performance through a longer term relationship
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Page 7
SUPPLY CHAIN MANAGEMENT
The key to Supply Chain Management is focusing on
where the cost exists and where there is leverage.
Weighted Leverage Points
30% Margin
Manufacturer
Freight
Freight
1-3% Margin
Raw Materials
Barriers To Entry
Capex
Brand
1-2% Margin
Distributor
50-60% Cost
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SUPPLY CHAIN MANAGEMENT
Approach to Cost Management in the Supply Chain
o Insert oneself at optimal point in supply chain
o Make offering compelling to each part of the supply chain
o Reduce supply chain costs, don’t focus only on profit
Supply Chain
Materials
Provider
• Go to raw
materials to
manage key cost
drivers of
manufactured
items
Manufacturer
• Drive collaborative (i.e.
with customers)
process to aggregate
• Determine real
alternatives
(more=leverage)
• Sell ability to take cost
out of their business
Distributor
Properties
• Tight definition of
service levels
• Cost-plus: definition
of cost is key
• Control cost into
distributor for ~80%
of $ volume
• Clearly defined
specifications (key to
making supply chain
more efficient
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SUPPLY CHAIN MANAGEMENT
Benefits of Supply Chain
Management
Better Opportunities to:
•
•
•
•
•
Understand and strategically
manage costs
Proactively and efficiently manage
service levels
Ensure consistent product and
service quality/adherence to
specifications over geographies
and time
Provide efficient and effective
internal controls over
procurement processes
Effectively manage risk at critical
parts of the supply chain
Challenges of Supply Chain
Management
Difficult and/or expensive to acquire:
•
•
•
•
Sufficient aggregated spend to be
able to negotiate “upstream”
Required expertise in commodities
and supply chain operations
Infrastructure to provide
necessary reporting, oversight,
QA, and property assistance
Tools and resources to provide
efficient and effective supplier
management and auditing
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ENHANCING PROCUREMENT BY UTILIZING PARTNERS
CONTRACTING ENHANCEMENT
MANAGEMENT
INFRASTRUCTURE
PARTNER
Point of
Commerce
Manufacturing
Supply
Chain-Wide
Internal
Compliance
Suppliers
FLEXIBILITY
/ ABILITY TO
CUSTOMIZE
OVERALL VALUE ADD
Property
Specific
Portfolio
wide
E-Commerce
Providers
Group Purchasing
Organizations (GPO’s)
Property-Level
Consultants
Supply Chain Service
Providers
Strong contribution
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Little to no contribution
SUMMARY
•
Procurement is important to property profitability and guest
experience
• “Best Practices” procurement provides significant value – but can
be difficult to achieve
•
Companies utilize different procurement partners to complement
their internal procurement efforts
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QUESTIONS AND ANSWERS
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