Purchasing, Selection & Procurement: A Hospitality Guide PDF

2 CHAPTER 1 The Concepts of Selection and Procurement INTRODUCTION AND PURCHASING, SELECTION, AND PROCUREMENT DEFINITIONS T here is not a single job in the hospitality industry that does not involve purchasing in one way or another. A flight attendant must keep careful inventories of bottled water a...

2 CHAPTER 1 The Concepts of Selection and Procurement INTRODUCTION AND PURCHASING, SELECTION, AND PROCUREMENT DEFINITIONS T here is not a single job in the hospitality industry that does not involve purchasing in one way or another. A flight attendant must keep careful inventories of bottled water and soft drinks to know how much to request for restocking. The manager of a hotel must be able to find the best price for sheets and pillows in a reasonable quantity for her size of operation. An accountant for a hotel chain must know enough about the company’s purchasing agreements to take advantage of discounts based on timely payments. An event designer must know the current price for flowers and décor so that he can make appropriate recommendations in the guest’s price range. These are just a few of hundreds of scenarios where purchasing plays a critical role in the hospitality industry. Think about it for just a moment; it is the person in charge of purchasing who spends the majority of the money made by a hospitality operation, and it is this person’s skills and knowledge that significantly assist in achieving profitability in an operation. It could easily be said that purchasing is one of the most important functions in any hospitality operation. This book has been designed for those students who expect to have careers in the hospitality industry, but we realize not everyone will specialize in hospitality purchasing. We emphasize the managerial principles of the purchasing function and intertwine the purchasing function with the other related management duties and responsibilities that the hospitality operator faces on a day‐to‐day basis. This book includes enough product information so that you can easily prepare the product specifications required to select and procure an item if necessary, but also includes information on related purchasing activities, such as bill paying, that most purchasing agents do not perform. The typical hospitality manager eventually becomes involved with many of these related activities. We also incorporate a great deal of information on technology applications related to the purchasing function that will enable a hospitality student to learn the technological aspects of procurement. Similarly, in areas where appropriate, particularly the specific product chapters, the concepts of sustainable and green practices and organic and natural products will be addressed. It is our goal that wherever your career takes you within the hospitality industry, you will be adequately prepared to interact with the selection and procurement functions of an operation. With this in mind, we begin our discussion of selection and procurement for the hospitality industry. For most people, the term purchasing means simply paying for an item or purchasing Paying for a service. For hospitality professionals, this meaning is far too restrictive because product or service. it fails to convey the complete scope of the buying function. For our use, the selection Choosing from terms selection and procurement better define the processes involved. among various alternatives. Selection can be defined as choosing from among various alternatives on a number of different levels. For example, a buyer can select from among several competing brands of chicken, various grades of chicken, particular suppliers, or fresh and processed chicken Introduction and Purchasing, Selection, and Procurement Definitions 3 products. One person, generally referred to as a buyer or purchaser, may not procurement An perform all these activities or make all these choices at one time. But they may orderly, systematic exchange between a seller be involved in most of them at some level. and a buyer. The process Procurement, as opposed to selection, can be defined as an orderly, of obtaining goods and systematic exchange between a seller and a buyer. It is the process of obtaining services, including all activities associated with goods and services, including all the activities associated with determining the determining the types of types of products needed, making purchases, receiving and storing shipments, products needed, making purchases, receiving and and administering purchase contracts. storing shipments, and Procurement activities are the nuts and bolts of the buyer’s job. Once buyers administering purchase know what is needed, they set about locating the suppliers who can best fulfill contracts. their needs. Buyers then attempt to order the correct amounts of products or services at the appropriate times and best prices, see to it that shipments are timely, and ensure that the delivered items meet company requirements. A host of related duties surrounding these activities include: being on the lookout for new items and new ideas, learning the production needs of the departments they serve, appraising the reliability of suppliers, identifying new technologies for procurement, and so on. Not all operations have full‐time buyers. Many have managers and supervisors who do the buying in addition to their other duties. To these employees, buying means more than what the term procurement by itself implies. These employees must also be aware of the relationship between purchasing and the other activities in the hospitality operation. Because there are so few full‐time purchasing agents in our field, a textbook that focuses solely on hospitality buying principles and procedures or product identification, although useful to some, would unnecessarily restrict operating managers and supervisors in hospitality. For example, it is not enough to simply know how to procure chicken. The typical operating manager must also consider what form of chicken to purchase, as well as whether or not chicken should even be on the menu. Supply Chain Management In today’s complex world, even the term procurement does not reflect the full range of activities that are involved in obtaining the products and services necessary to accommodate our hospitality guests. A much wider concept is that of supply chain management. The Council of Supply Chain Management Professionals (CSCMP) defines supply chain management in the following way: “Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities.” These may sound like big words, but in essence supply chain management means that businesses are concerned with knowing and coordinating everything starting with where the product is made or grown, to how it moves through distribution channels (discussed in Chapter 3), to how it is handled within the business, and how it is utilized by the end‐user, our hospitality guest. Supply chain supply chain management Process encompassing the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. sourcing Procurement practices aimed at finding, evaluating, and engaging suppliers of goods and services. conversion Converting supplies into finished products. 4 CHAPTER 1 The Concepts of Selection and Procurement management integrates supply and demand management within and across companies. Supply chain activities focus on product development, sourcing, production, and logistics, as well as the information systems needed to coordinate these activities. The CSCMP advocates that supply chain management is successful when the goal of getting the right product to the right customer at the lowest costs is achieved. The concept of logistics management, which is part of a company’s logistics management supply chain, involves the movement of products and services to the cusThe part of the supply chain management that tomers. The CSCMP defines logistics management as “that part of the plans, implements, and supply chain management that plans, implements and controls the efficient, controls the efficient, effective flow and storage of goods, services and related information beteffective flow and storage of goods, services, and ween point of origin and the point of consumption in order to meet cusrelated information bettomer requirements” (p. 1). From the definition, the core idea of logistics ween point of origin and the point of consumption management is to meet customers’ needs through optimizing movement in order to meet customer of products and services within the company. Some activities in logistics requirements. management include controlling the flow of goods into the operation and out to the guest, sourcing and procurement, planning and customer service at strategic, tactical, and operational levels.1 Technology Today, operating managers must also deal with technology that has revolutionized how buyers and suppliers procure products and services. This technology enables purchasing managers to complete complex procurement functions online with a few clicks. e‐commerce Refers to Transactions done electronically are commonly referred to as e‐commerce, for transactions done online. electronic commerce. B2B e‐commerce is the term used for business‐to‐business B2B e‐commerce electronic transactions, and B2C e‐commerce refers to business‐to‐consumer Online interaction between businesses. Typically e‐commerce. Amazon.com, for example, relies on B2C e‐commerce to sell its involves the sale and purproducts to consumers. B2B e‐commerce that focuses specifically on procurechase of merchandise or services. ment activities is referred to as e‐procurement, for electronic procurement. Examples of companies that make e‐procurement applications available to a wide B2C e‐commerce Online interaction between variety of industry segments include Perfect Commerce, Ariba, and Sterling businesses and consumers. Commerce (a subsidiary of IBM). Typically involves the sale These companies have successfully revolutionized the way procureand purchase of merchandise and services. ment is conducted. One major company that focuses on the development e-procurement Ordering of e‐procurement applications in the food industry is iTradeNetwork products and services from (ITN). Companies such as Aramark, Sodexo, CKE Enterprises, Subway, various purveyors online. Smash Burger, and PF Chang’s, rely on ITN’s supply chain solutions to Alternately, ordering these things from a particular streamline their selection and procurement functions.2 Avendra, one of the vendor who provides prolargest procurement services companies,3 has primarily focused on develprietary software to the oping e‐procurement applications for hotels. The company was formed by buyer, who is then allowed to enter the vendor’s ClubCorp USA, Inc., Fairmont Hotels & Resorts, Hyatt Hotels Corporation, electronic system. Marriott International, Inc., and Six Continents Hotels. Purchasing Functions in Different Types of Hospitality Operations SUSTAINABILITY AND CORPORATE SOCIAL RESPONSIBILITY N o purchasing textbook can be relevant today without including the importance of sustainability and corporate social responsibility. Whether referring to an independent restaurant that buys produce and meats from local farms or a corporation, like Marriott, whose core values and heritage statement includes “Serve our World,” hospitality companies must evaluate the effect of all their practices on the environment, people, and the global economy. We will discuss these concepts in more detail in the chapters detailing the forces that affect purchasing, supplier considerations, and purchasing specific types of products. sustainability The ability to not harm the environment or deplete natural resources. corporate social responsibility The practice of a company self-regulating the effect of their practices on the environment, people, and the global economy. PURCHASING FUNCTIONS IN DIFFERENT TYPES OF HOSPITALITY OPERATIONS T he hospitality industry includes three major segments (see Figure 1.1). The commercial hospitality first segment is commercial hospitality operations—the profit‐oriented operations Profit‐ oriented company. companies (see Figure 1.2). The second is the on‐site segment, which used noncommercial to be commonly known as institutional—those facilities that are operated on hospitality operations a break‐even basis. The third is the military segment—those operations that Another term for on‐site include troop feeding and housing, as well as the various military clubs and or military hospitality operation. military exchanges that exist within military installations. The second and third segments are collectively referred to as noncommercial hospitality operations. The following types of operations are generally considered part of the commercial segment: Hotels Table‐service (full‐service) restaurants Motels Types of Hospitality Operations Casinos Resorts Lodges Spas Quick‐service (limited‐service, casual service, or fast‐food) restaurants Snack bars Commercial Profit-Oriented Operations Noncommercial On-Site Operations Military Operations Food courts Taverns, lounges, and bars Cafeterias F I G U R E 1. 1 A major segment outline of the hospitality industry. 5 6 CHAPTER 1 The Concepts of Selection and Procurement Buffets Contract foodservice companies, which typically operate in plants, office buildings, day care facilities, assisted care facilities, senior care facilities, schools, recreation centers, hospitals, and sports centers On‐premises caterers Off‐premises caterers Vending‐machine companies Ice cream parlors and stands In‐transit foodservices (e.g., cruise ships and airlines) FIGURE 1.2 An example of a commercial hospitality operation. ©atmoomoo/Shutterstock Convenience stores with foodservices Supermarkets with foodservices Department stores and discount stores with foodservices The following types of operations are generally considered part of the noncommercial division of the hospitality industry: Employee‐feeding operations Public and parochial elementary‐ and secondary‐school foodservices College and university housing and foodservices Transportation foodservices, such as the Meals on Wheels program Hospitals Assisted living facilities Extended‐care facilities Clubs Self‐operated community centers, such as senior centers and day care centers Military installations Camps Public institutions, such as the foodservices in some government facilities Adult communities Correctional facilities Religious facilities Shelters Purchasing Functions in Different Types of Hospitality Operations In Chapter 6, we offer a detailed discussion of the purchasing functions found in the various types of hospitality operations. In this introductory chapter, however, we provide you with sufficient understanding to get you started. When we discuss traditional hospitality operations, we think first of the independent operation. In addition, those in the trade usually group the independent operations according to size: the small, medium, and large independents. The other major type of hospitality operation includes the multiunits and the franchises. franchises A business form where the owner (franchisor) allows others (franchisees) to use his or her operating procedures, name, and so forth, for a fee. The Independent Operation The small independent, such as a local Chinese restaurant or a bed and breakfast inn, is typically run by an owner–manager, who usually does all the buying for the business. He or she also oversees the other related purchasing activities, such as receiving deliveries and paying the bills. The medium‐sized independent generally involves more than one person in the purchasing function. Usually, the general manager coordinates the various activities that other management personnel perform. For instance, he or she typically coordinates the purchases of department heads, such as the dining room manager who needs china and glassware, the bartender who requires alcoholic beverages, and the chef who needs food. The general manager also oversees other related purchasing activities. The large independent, such as a hotel, implements the purchasing function in much the same way that the medium independent does, except that it may employ a full‐time buyer. This buyer purchases for the various production departments, such as housekeeping, maintenance, engineering, and foodservice. Alternately, a designated employee from each executive steward of these departments may be doing the purchasing; for example, a hotel may Oversees cleaning crews. employ an executive steward to order supplies and to supervise the sanitaTypically also has purchasing responsibilities tion crew. Often the large independent operation has a full‐time food buyer, for things such as soaps, a beverage buyer, and a buyer who purchases equipment and other nonfood chemicals, and other supplies. A purchasing vice president or an equivalent official may or may not cleaning supplies. May also control the china, glass, supervise these three buyers. The buyers are, almost certainly, supervised by a flatware inventories, and management person. single‐use (paper, plastic, In the past, small and medium‐sized businesses may have had a tough time etc.) products. competing in the same markets as larger companies. This was mainly because these smaller businesses had to pay higher prices for many of the products that they procured because they were not afforded the same discounts as large companies (we talk more about these discounts in Chapter 6). However, e‐procurement has leveled the playing field in many instances by enabling these smaller hospitality companies to procure products at more competitive prices and, therefore, to be more competitive pricewise with larger hospitality operations. Today, hospitality buyers can select and procure goods and services from suppliers and distributors all over the world. An idea addressed more completely in Chapter 6 is co‐op buying, a concept that enjoys popularity among some independent hospitality operations, particularly some foodservice operations. 7 8 CHAPTER 1 The Concepts of Selection and Procurement co‐op buying The banding together of several small operators to consolidate and enhance their buying power. referral group A type of co‐op where independent operators join together to send business to one another. For instance, Best Western is a referral group that has a central reservations system available to each member. In addition, these groups typically provide some purchasing advantages, as well as other types of support, to its members. aggregate purchasing company Another term for buying club. group purchasing organization (GPO) Another term for buying club. real estate investment trust (REIT) A legal business entity that buys, sells, and manages commercial and residential properties. portal Web access point. Presents a starting point and access to multiple sources of similar online information. e‐commerce marketplace An online application allowing buyers to locate vendors, research products and services, solicit competitive bids, and place orders electronically. commissary Similar to a central distribution center. The major difference is that at a commissary, raw foods are processed into finished products, which is not the case in a central distribution center. Could be considered a restaurant company’s personal convenience food processing plant. As the phrase implies, co‐op buying is a system whereby hospitality operations come together to achieve savings through the purchase of food and supplies in bulk. Either the operations rotate the purchasing duties among themselves, or they hire someone (or a company) to coordinate all of the purchasing for them. Another type of co‐op involves referral groups, which are independent operators joining together to send business to one another. For instance, Best Western is a lodging referral group that has a central reservations system available to each member. E‐commerce has significantly affected co‐op buying. Companies are currently aggregating purchasing processes for similar hospitality organizations throughout the country. These companies are commonly referred to as aggregate purchasing companies or group purchasing organizations (GPOs). Examples of GPOs include Entegra, Foodbuy, and Dining Alliance. GPOs do not buy or sell products. Instead, they negotiate contracts on behalf of restaurants, hotels, management companies, resorts, and real estate investment trusts (REITs). Each company enrolling in this group might receive a purchasing guide that includes the names, e‐mail addresses, websites, and telephone numbers of suppliers, along with a brief description of the programs negotiated on purchasing companies’ behalf. Buyers can then access a private e‐commerce marketplace—or portal—to conduct business with approved distributors or suppliers. As more buyers become members of the GPO, purchasing power increases and so do savings. Typically, either buyers pay a participation fee that provides access to the aggregate purchasing companies’ pricing or the GPO takes a percentage of the savings. The Multiunits and Franchises The second major category of hospitality operations in the purchasing function includes multiunit companies, franchises, and chains. These interlocking operations organize their purchasing somewhat differently from independent organizations. One usually finds, when examining a chain of hospitality operations, for example, a centrally located vice president of purchasing. Moreover, the company may maintain one or more central distribution points, such as a commissary or distribution warehouse. The managers of the company‐owned outlets receive supplies from the central distribution points under the authority of the vice president of purchasing. Often these managers may also do a minimal amount of purchasing from local or national suppliers that this vice president approves; in some cases the managers may order from approved suppliers without consulting the vice president of purchasing, or they may order everything from a commissary. In company‐owned outlets, the internal organization for buying, particularly for restaurants, stipulates that the unit manager order most products from the central commissary or approved suppliers. The unit managers may, Purchasing Functions in Different Types of Hospitality Operations 9 however, have the authority to make a few purchases on their own, such as a cleaning service or a locally produced beer. When the unit managers do this sort of purchasing, however, they nevertheless need to follow company policies and procedures. In company‐owned, large‐hotel properties, a system similar to that of the large independents generally exists while applying the broader concepts of supply chain management. That is, the vice president of purchasing at corporate headquarters may draw up some national contracts, research and buy commodity items such as coffee or shrimp in consideration of global commodity A basic, supply and demand, establish purchase specifications, and set general purchasraw food ingredient. It is considered by buyers to ing policy. He or she may also purchase the stock for the company’s central disbe the same regardless of tribution warehouses and/or central commissaries. By and large, however, vice which vendor sells it. For instance, all‐purpose flour presidents of purchasing handle overall policy, while the individual hotel units, is often considered a comalthough they do not have complete freedom, exercise a great deal of purchasing modity product, for which discretion within established limitations. any processor’s product is acceptable. The typical franchisee receives many supplies from a central commissary, but many of these non‐company‐owned units try to do some purchasing locally— central distribution center A large warehouse to maintain good relations in the community, if nothing else. However, they owned by a multiunit quickly discover that they save considerable time, money, and energy by using hospitality company that orders merchandise directly the commissary and/or central distribution center as much as possible. If no from primary sources, central commissaries and distribution centers are available, the franchisees usutakes delivery, stocks the ally order their needed stock from suppliers that the vice president of purchasmerchandise, and then delivers it to company‐ ing has prescreened and approved. Franchisees are, however, usually free to buy affiliated units in the area. from anyone as long as that supplier meets the company’s requirements. A DAY IN THE LIFE Wayne Bach, Purchasing Manager THE FOUR QUEENS HOTEL AND CASINO, LAS VEGAS, NEVADA O pened in 1966, the Four Queens Hotel and Casino is one of the classic gaming hotels on Fremont Street in downtown Las Vegas. The property has 690 rooms including 45 suites, three full‐service restaurants, two fast‐service restaurants, three cocktail lounges, 22,000 square feet of meeting and event space, and a gift shop to accompany its 32,000 square feet of casino space. Wayne Bach and Karen Ashe comprise the tag team that ensures that there are enough food, beverage, and supplies to provide superior products and services to their guests 24 hours a day. Wayne holds the title of purchasing manager. He reports directly to the controller and then to the financial director. Wayne is responsible for buying all food and beverage products so he also indirectly reports to the chef and the food and beverage directors. Wayne starts his day early; he arrives at 6:00 a.m. to his office right inside the receiving and storage warehouse. Wayne feels that being right on the floor is essential to have control over the operation and to know exactly what is happening in his department. When he arrives, the first thing he does is check e-mails for notices from the chef regarding special needs and from suppliers regarding any 10 CHAPTER 1 The Concepts of Selection and Procurement A DAY IN THE LIFE (continued) product shortages or the product bid sheets he receives an average of twice per week. Then he grabs his inventory sheet and walks through all the storage areas, refrigerators, and freezers. Because he manages the four receiving clerks, he checks to see that they are doing their jobs to keep the areas clean and the product rotated. He makes sure they check the weight and quality of all deliveries, especially fresh meat and seafood items. Twice a week he does a check to see that the par stocks on hand match the amounts that the computer shows should be available. The Four Queens does not have as sophisticated a computer system as some of the ones that will be discussed later in this book, but it does use a Stratton‐Warren inventory system. After the food products are received, an inventory control clerk enters the quantities of products and prices from the invoices into the system. Wayne spends 20–25 percent of his time placing orders. He emphasizes that it takes a lot of research to ensure that he is buying the proper products and that he is helping the chef and food and beverage director learn about new products in the marketplace or that might fulfill existing needs better. He attends many trade shows such as restaurant association shows, Catersource, the Nightclub and Bar show, and distributor shows as well as reads as many trade magazines as possible. He also arranges for brokers and vendors to provide samples and perform taste tests. Food items get bid sheets twice per week. Due to the relatively small size of the warehouse, Wayne orders produce and some dairy items daily, meat and liquor three times a week, and grocery items/ dry goods twice a week. The inventory control system is not as strict as in some of the larger properties where Wayne has worked such as the Plaza Hotel in New York. About 75 percent of the product used from inventory is issued from a requisition, but chefs and others can enter the storeroom, especially in the evening hours when the receiving clerks are not present, and still grab what they need. One of the biggest parts of the job is deciding how much and when to order. The hotel sets pars (the minimum amount that you always need to have on hand) for all products. But these pars can be greatly affected by the amount of banquet business. At the Four Queens, the chef decides how much extra food is needed to let Wayne know how much to order. With all the special events on Fremont Street such as concerts and festivals, Wayne says that for beverages, they often need to order as much as 50 percent over the pars, especially beer to satisfy all the people thirsty from the heat in Las Vegas. Another employee maintains par stocks for all the nonfood items for the hotel, such as plates, glassware, flatware, disposable items, linens, towels, and even the coffeemakers. Some of the biggest challenges are keeping enough glassware because the breakage is so high. Pillowcases are another high demand item as on a busy weekend the housekeepers may change out as many as 1,000 of them in an hour. The hotel buys many logo items that require special procedures. It has blanket purchase orders with the companies that supply items such as logo cocktail napkins and glasses. Because the price is cheaper to buy the items in large quantities but there is not enough storage space to hold that much product, it uses stockless purchasing where the supplier keeps the product in its warehouse until needed. When soliciting bids for these items every six months, the ability of the company to store the product is even more important than the price. Wayne says that the hardest part of his job is accommodating and finding products for last‐minute requests. But the best part is the job is lots of fun. “There is always something different to do and new things to learn. Know your products, know your vendors, know your menu/recipes, know your customer.” Questions and Problems A DAY IN THE LIFE (continued) Wayne is a Culinary Institute of America trained chef and worked for the Plaza Hotel in New York for 20 years prior to moving to Las Vegas. The major differences between his job at the Plaza and at the Four Queens are that the Plaza had stricter inventory controls and also had many early morning and off-hours deliveries. Key Words and Concepts Aggregate purchasing companies Business‐to‐business (B2B) e‐commerce Business‐to‐consumer (B2C) e‐commerce Central distribution center Commercial hospitality operations Commissary Commodity Conversion Co‐op buying Corporate social responsibility E‐commerce E‐commerce marketplace E‐procurement Executive steward Franchise Group purchasing organization (GPO) Logistics management Noncommercial hospitality operations Portal Procurement Purchasing Real estate investment trust (REIT) Referral group Selection Sourcing Supply chain management Sustainability Questions and Problems 1. Define the term selection. 2. Define the term procurement. 3. Define the term supply chain management. 4. Define the term logistics. 5. Explain the advantages of studying the broad view of the purchasing function. 6. What is an e‐procurement application? 7. Briefly describe the major segments of the hospitality industry. 8. Briefly differentiate among the ways in which the small and the large independents generally do their purchasing. 9. Briefly describe co‐op buying. 10. How has e‐commerce affected co‐op buying? 11 12 CHAPTER 1 The Concepts of Selection and Procurement Questions and Problems (continued) 11. Briefly describe two typical purchasing procedures found in multiunits and franchises. 12. Briefly describe how a local restaurant that is part of a large restaurant chain probably does its purchasing. 13. Name one reason why a franchise might do some local buying. 14. Describe three duties of a vice president of purchasing in a large hotel or restaurant chain. 15. Why might a small, independent hospitality operation be interested in co‐op buying? 16. Under what conditions do you think a franchise operation might be interested in co‐op buying? 17. Define the term purchasing. 18. What is a referral group? 19. Briefly describe the benefits of e‐commerce. 20. How do you think e‐commerce has changed the hospitality industry? Experiential Exercises 1. Ask a manager of a local franchise operation the five following questions. Write a report detailing your findings. Do you currently purchase items from a commissary? If so: What items are you required to purchase from the commissary? Do you have to follow specific guidelines on the other products you purchase outside of the commissary? What are the benefits of purchasing from a commissary? What are the drawbacks of purchasing from a commissary? 2. Interview a noncommercial hospitality operator. Ask him or her to describe the job and explain how the responsibilities differ from those of a commercial hospitality operator. Write a report detailing your discussion with the operator. 3. Shadow (follow around) a purchasing agent for a day. Prepare a diary of all duties and responsibilities performed by the agent. References 1. Council of Supply Chain Management Professionals (CSCMP), Logistics Management, 2010. Retrieved from http://cscmp.org/aboutcscmp/definitions.asp. See also, R. Handfield, What Is Supply Chain Management? 2011. Retrieved from http://scm.ncsu.edu/scm‐articles/article/what‐is‐supply‐chain‐management.