Purchase, Save, Repeat
Procurement professionals share their core strategies for reducing supply-chain expenses
By Pradeep Suvarna
As globally travel expands at healthy rates, and hotels are feeling the pressure to maximise rates whilst growing revenue. One of the strongest weapons in their arsenal is procurement contracts they have with their vendors, which they can use to their advantage to buy the best products at the most viable prices. In fact, the role of a procurement team has gained such significance that the management has come to view it as a value center rather than a cost center.
We speak to Arvind Mathur, regional director, strategic sourcing, South Asia of Carlson Rezidor, Saurabh Gaur, procurement and purchase manager of Fairmont Jaipur, Manish Jha, purchase manager of Pullman and Novotel New Delhi Aerocity and Bernad Fernandes, procurement manager of Sofitel Mumbai BKC on the purchasing policies they adopt to maintain profitability.
How do you get high-quality products and services at the lowest price for the longest term from suppliers?
Arvind Mathur: A combination of consistent best practises, with a process-based assessment and proven performance record with long-term trust relationship is ideally the key to success in any organised buyer-supplier relationship. Wherever the possibility exists, it is recommended that the prices are fixed for agreed periods by way of contracts, standing order or open orders.
Bernad Fernandes: It is necessary to understand that procurement costs are a core part of the profitability performance in the hospitality business. The sustained availability of products and services used in a hotel keeps the business running like a well-oiled machine. Moreover, such availability at the best quality for the least cost is what businesses strive for to maintain profitability.
We believe in establishing good business relationship with the supplier, which in turn reduces our direct operating cost through long term agreements. Managing the four factors, i.e. quality, service, cost and delivery, goes a long way in ensuring that the right products are procured at the right price.
Manish Jha: We have been able to maintain sourcing of superior quality products at a reasonable cost, ensuring that both cost and quality aspects meet our specifications. Considering the nature of supplies, we have categorised the requirements and further locked the pricing with suppliers for different tenures. This has helped us in bringing the operational costs down and other supply chain issues to necessary levels. By opting for long-term contracts based on a supplier’s performance and the nature of our requirements, it has proven to be a win-win situation for both us and our supply partners. Based on the supplier’s performance we keep extending the contracts, post cost analysis and reviews at our end.
Saurabh Gaur: There is no algorithm to experience, and with long standing experience in the industry, we have learned many valuable lessons in operating efficiently without compromising on the guest experience. One of the things we have learnt is how to keep the prices in check over a long period of time. We conduct exhaustive research in the form of market surveys, attend purchase seminars, check for quality and price, etc. Cluster/corporate contracts play a crucial role in this. In today’s highly fragmented and competitive marketplace, the customer is king, and supplying companies therefore happily extend their support to loyal customers.
As a rule, at Fairmont Jaipur, we believe in building relationship with vendors because they are our business partners at the end of the day. Secondly, we control costs by issuing an annual contract through a tender process and give a fair chance to all vendors to give us their best price. We evaluate the quality with the right price. This annual contracting helps us in retaining the best quality within the budgeted cost.
Does the management team get actively involved in the procurement division from a strategic point of view?
Arvind Mathur: There has been a paradigm shift in most management teams now. Procurement is now considered as a part of operations than a back-of-the-house function. Due to this, the pain points are evident to the operations only if explained and identified lucidly. Most of the time, they understand and are ready to adjust and change to the market reality.
Saurabh Gaur: Every product used in the hotel reflects the brand in some way or the other. To ensure that everything is in line with what the Fairmont brand stands for, and to warrant the overall brand values of AccorHotels are met, we ensure the involvement of all the departments in the hotel. It should certainly be a practice followed by all hotels to maintain consistency in the brand, since attention to detail is of utmost importance in the hospitality industry.
At Fairmont Jaipur, each and every department head is involved in various stages of procurement to ensure the quality of products. Also, in case of introduction of a new product or replacement of any existing product, the management team is also involved. All of us work as one big and cohesive team with a common goal to ensure guest satisfaction. The expertise of such a diverse group helps us in understanding the market conditions, and enables us in getting a right replacement in the organisation.
Bernad Fernandes: Yes, at Sofitel Mumbai BKC, we ensure that the department heads are involved in the procurement process. This practice that should certainly be followed by all hotels as it helps the procurement team in understanding the exact needs, demands and specifications of each department and also reduces duplication of effort, thereby saving man-hours along with a significant saving in the operating revenue.
Manish Jha: Yes! The management team plays an active role while making procurement decisions based on the recommendations from related stakeholders. Management teams get involved in the early stages of the procurement process, ensuring that the buying decision is correct in all aspects making sure of right returns (expected and planned) against the expenses made. We apprise the management team of the pain points, if not identified while being part of the process and, they have been supportive in assisting the procurement team. I strongly feel that in any organization, as a key stakeholder, the management team needs to play an important role in making buying decisions and, also should be informed regularly about the operational challenges in the function so that they can exercise their authority to help alleviate the issue.
Has the management started viewing the procurement team as a value center than the cost center?
Arvind Mathur: I would say that now procurement is being almost considered as a profit centre, with defined goals of annual savings built into the KPAs, which result in straight contribution to the bottom line.
Bernad Fernandes: Yes, absolutely! The management views the procurement team as the value centre rather than the cost centre. This healthy development is due to the in-depth analysis and data management done by the procurement teams, which in turn allows them to leverage better agreement with suppliers that impact the bottom line.
Saurabh Gaur: Absolutely! As the guests are evolving and are being more vocal and specific in their demands, the procurement teams are considered to be value contributors and are also considered as backbone for every department to function properly, especially areas which deal in guest operations.
Maintaining a consistent brand identity is important, especially for a luxury property. Our guests and patrons come with specific expectations and we, in the procurement team ensure that their demands are met and that they feel welcomed.
Manish Jha: In the present scenario, the management team does understand the value of the procurement team as they are one of the key stakeholders in the area of managing a balance between expenses and revenue. Over a period of time, across industries, mindset about the procurement team has changed. Nowadays, the procurement team plays a vital role in making strategic decisions compared to earlier times when the function was more clerical than strategic. Procurement teams now are not just working for sourcing of goods and services, but also contribute as strategic facilitators helping the management team in making best procurement decisions.
How do you map service level agreements with vendors to warrant lower TCO?
Arvind Mathur: The endeavour is to incorporate wherever possible in the initial stage of any negotiation terms and conditions, a percentage of cost of anticipated critical spares, or freeze the cost of extended warranties. You can also finalise the AMC cost for a mutually agreed extended period covering the maximum life of the machine. Care is also taken to incorporate penalties for non-delivery of services where in machine down time is critical to operations.
It is best to create an SLA that realistically manages to respond to the machine/process downtime and enables the actual users to eliminate drop in the departmental efficiency and get the required support to get back to normal level of operation. Secondly, incorporate actual user-driven time lines and criticality of the function to build the SLA terms and condition. Thirdly, manage the SLA performance with periodic reviews, and if need be, build in penalties, which will deter the service provider to drop the ball frequently.
How do you work with various departments, like the finance and technology teams, to incorporate innovations and save cost?
Arvind Mathur: The primary interaction with finance team is the historical data which is constantly analysed, where in trends can be identified for course correction. A spend map should be created in co-ordination with finance and IT teams that provides the basis for identifying opportunities and risks, the foundation for cost reduction initiatives and improving the value received from suppliers.
Analysing the spend and regularly updating that map, will give invaluable insights which include knowing what the total spend is, who is spending and on what, which vendors supply multiple business units, which business units buy the same or similar goods and services and what portion of your spend is with the core suppliers (e.g., top 10) and the total number of one–off and small value transactions suppliers. The key is to ensure all data and information repositories are captured and that rules are in place to establish cost categories and ‘buckets’. Once this data is analysed, it can be utilised to assist with decision making to negotiate better resulting in cost savings.
Bernad Fernandes: A SLA is typically the level of service you expect from a vendor, laying out the metrics by which service is measured, as well as remedies or penalties should agreed-on service levels not be achieved. It is a critical component of any vendor contract. This ensures that the vendor understands the service contract properly and our expectations from them. Not only does this help streamline our service agreement but also helps us in negotiating the total cost of ownership.
Manish Jha: SLAs with vendors are measured against the services rendered and are periodically reviewed to ensure lower TCO. The process of mapping the SLAs to ensure lowering the TCO starts from the inception of the requirement. Prior to award of the agreement certain key points such as intent of service, ownership and responsibility of the service, expectations, evaluation process, etc, are worked out while making decision for award of the agreement. Post award, the performance is reviewed in all aspects ensuring that the vendors are meeting the required expectation levels of services defined at the time of award of agreement. We always ensure that vendors employed are in sync with our idea of performance standards and guest services, this helps in enhancing the level of understanding in vendors making them responsible enough to keep the service levels high and reduces our TCO to a level indemnifying us in various aspects of services.
What new systems and methodologies have you started in your hotel to enhance processes like vendor-managed inventory, cyclic buying, etc?
Arvind Mathur: The objectives of vendor managed inventory (VMI) is collaborative in nature, the buyer and seller can identify common objectives, which permit to build up a better collaboration between the partners to reach the main objectives i.e. tensing the different flows, speeding up the supply chain and reducing the bullwhip effect. This is a classic case of large organisations, but in case of individual Hotel’s this is not very practical. VMI has to introduce information sharing and common decision-making processes.
Bernad Fernandes: At present, at Sofitel Mumbai BKC, we are in the process of implementing VMI. This is a new model of inventory management in the hotel industry where the supplier maintains the stock in a hotel as per the standards prescribed by the procurement team. It will allow for better co-ordination of materials, more fluid flow of information among suppliers, manufacturers, contractors and procurement teams. It will also help us in maintain a high efficiency supply chain.
Manish Jha: We are one of the leaders in opting for cost savings in terms of inventory management in the industry. Most of our suppliers for regular requirements manage inventory of products we procure in their stores and ensure timely supply of materials. Because of vendor managed inventory, we save cost of storage and do not have to block funds for the raw materials, also we opt for JIT (just in time) process for procurement, which is managed efficiently by a dedicated team. Seldom do we get into a situation where the stocks are not available with suppliers and we have to opt for another source. We are also working towards collaborating with organisations working on E-commerce platforms with turnkey one stop solution for all requirements of the hotel. This is going to be a trend setter not just for hospitality industry but for across the industries.
Saurabh Gaur: We have started using WIN HMS software in the hotel, which helps us in complete inventory management. The software helps the team with regards to timely notifications of expiring products, maintaining accurate stocks of all products and timely pre-ordering of products as per the future requirement. This helps us in complete management of all our sub-departments such as store, receiving and purchasing.
What are your top 3 successful strategies for the business?
Arvind Mathur: The core purchasing strategies are Supplier Optimisation where you choose an optimum mix of vendors who can provide the best prices and terms. This process usually means that the less able suppliers who cannot provide a quality service at the terms and prices required are discarded. This is by far the most common of the various purchasing strategies. The second is global sourcing and third is vendor development. In the last, specific category of vendors are identified and developed to work hand-in-hand with the hotels. Time is spent in developing processes that assist these vendors. There may also be the situation where a hotel is dependent upon just one supplier for their products. If this supplier is unable to perform to the required standards, the purchaser may assist the vendor in improving their service or implement processes to improve their procurement cycle.
Bernad Fernandes: My top three successful strategies for business would be ensuring quality management is essential for any procurement team as it has an impact on the overall guest experience flexibility is essential for the procurement teams, various departments in the hotels and the suppliers as there are times when fulfilment of certain tasks takes time or cannot be fulfilled. Ensuring we identify the target customer by identifying the competitors and analysing the competitive set is also important.
Saurabh Gaur: My top three successful strategies for business would be maintaining a healthy relationship with internal and external guests both vendors and employees. Procurement from local vendors and procuring locally made products is not only authentic to the place where the hotel is situated but also helps the hotel teams in creating an experience for the guests based on the city they are in. Contracting with the important vendors is necessary as it helps in reducing procurement costs and helps in inventory management as well.
Manish Jha: For me, it has been marketing effectively, avoiding unnecessary expenses, and investing on our relationship with the vendor as the key strategies for the business.