Hospitality Procurement – No Brain Surgery?

Various scenarios of Hospitality procurement at Middle East 

I wish to share my thoughts about how hotels and hotel groups used traditional mechanism of procurement in their function thus failed to identify the key issues that were preventing them from benefiting from the possibilities of leveraging on many of their strengths, including addressing the looming business risk associated with procurement and adding value to the bottom line.

Although my thoughts might have a wider industrial base though, being my experience is at hospitality industry, I see this subject from that prospective.

Failed efforts and strategies… what was lacking?

Ten plus years ago, at the beginnings of 2000, hotels in the Middle East especially Dubai, viewed procurement as an administrative or support function. The strategic benefits of a strong procurement function were not considered as supporting the bottom line, and only considered as an expense stream which hitting the P&L. Finance Department as a parent department usually used procurement function as a control function. They were not considered important to the bigger picture and when it came to procuring products and services. The hotels always looked in to the local market, and failed to apply category management. There was no strategic approach to choosing the market place and performing suppliers.

This approach to procurement is still dominant in hospitality industry, which is back bone of economy like Dubai. Leading industry players tried to consolidate the functions during 2005-2010 years but financial down turn shattered their efforts.

Hospitality procurement in the Middle East has been, until recently considered as a classic buying process. They rarely used tender, prequalification selection process. Most of all the CXO level Executives failed to break their comfort zone to introduce innovative procurement programs, and those who partially introduced were stumbled up on their short sight, lack of vision and failed to identify the potential of the market. They evoked tender process when CFO’s were questioned on under performance or when they identified high value procurement opportunities and considered as accomplished when the procurement cycle of goods/services ended, hence being more reactive in nature than strategic. Through this way, hotels encountered risky situation especially during the beginning of financial down turn. With regards to transparency of the function, they failed to mitigate the risk and several top brasses sacrificed their positions, unable to answer the reason for process failure.

Ray of hope…

Saga of growth
Perpendicular approach
If things were going ahead with anticipated understanding about the growth potential of the hospitality industry, the companies should have moved to:

• Building buyers consortium, so that a likeminded companies could have leverage on their buying power thus could have shared the benefit of lower prices, premium services and highest qualities.
• Data sharing platforms, standardize the product specifications thus develop a matured tender processing platform, which eventually address the process transparency issue on supplier and product selection.
• Supply base and market place sharing platform, which would have ultimately helped the same industry partners to get insight about less priced sources which in turn would have a huge impact on the P&L.

In 2000s Dubai started its immense growth as a business hub but the hospitality procurement failed to benefit from that, still they bought products from abroad via middlemen agents by paying premium prices for import and very rarely principle companies stored and distributed locally, which is considered as Dubai’s hospitality sector’s failure to utilize its status as an export hub of hospitality related goods to its neighbors too. The principle companies based in Europe and Americas still enjoyed catering the industry across the region through distributers and retailers and the hospitality industry shied away from developing strong distribution market at the principle level, which obviously had cost impact. As a result the hospitality industry experienced biased and unethical supplier and product selection process. High dependence on distributers prevented procurement officers building long terms business relations with manufactures thus again failed to leverage on their buying power. There were rarely we saw some glimpse of hope that few market players brought right suppliers to the market, though few vanished later because of their opportunistic local partners abandoned them during the worst economic period, for them it was costly to have another office out of Europe / America with highly paid staff until a new market like Saudi Arabia opens its door for business.

During this period itself hotel groups started several CSR initiative on developing local SME suppliers and thus forging ties with local community, hotel groups have focused excessively on sourcing from local suppliers. While this approach has helped them on their CSR initiative, it was not helpful for the industry to take advantage from sourcing from other competitive international sources. This caused conflict on buying policies on various leaders of the industry and failed to add value to the hospitality procurement in total.

The rapid growth in the Middle East, the billions of dollars being pumped into infrastructure development by the government, brought several hospitality masters in to the region, they identified potential of the region to grow as tourism and industrial hub, has forced the local hospitality companies (groups) to take a second look at their sourcing processes. Several of them realized the need for change in their procurement practices. They either modified or abandoned their classical buying scenario and practices. The region's hospitality procurement management is changing, but it is still too slow. Finance Department still wish to control procurement as regulated function, COX still not scientifically leveraging procurement departments’ ability.

This changes were acknowledged more recently at the 2013 ITP procurement leaders’ forum held at Dubai.

Even the Chartered Institute of Purchasing and Supply (CIPS)'s conference too recently predicted the innovative changes, which is sweeping across the hospitality sector.

Most of all hotel groups are started leveraging on new knowledge about the market and advanced procurement process and programs and trying to implement them harmoniously and beneficially into their processes.

Emergence of e-sourcing, e-tender and consolidation

Arrival of more economically resilient hotel groups, their buying parity power, the ownership of government bodies on their stock underpinned the need for scientific management especially in the area of spend under management caused them to introduce risk mitigation management plans, established accountability to the stake holders. Many of these business entities were integrated to large industrial bodies too, a reason to introduce best procurement practices like e-sourcing, e-tendering and consolidated their buying process to further leverage.

Several CEOs were awaken from policy paralyses and / or no policy states to clearly established policy driven states. It helped them to make data based, analysis based informed decisions and they started responding to government initiatives to introduce neo-economic paradigm shift, like centralized logistics, community logistics, developing and supporting special zones etc. and that added reliable suppliers to the procurement resources who added value to their supply chain.

Advanced procurement consultancy firms and teams have emerged and offered to the industry and have been known to source continuously in an effort to constantly engage with suppliers. E-sourcing firms helped to establish improved sourcing catalogs, they allowed to regulate the control of the sourcing process, which in turn kept the costs down. E-tender brought transparency which was absent for long time on high volume procurement. New standards were introduced, existing policies were strengthened.

By applying several buying scenario planning, hotels gained an understanding of the business implications of regulations and the legal obligations that may arise as a consequence. Procurement teams started consolidating their procurement needs and prepared opportunity tables to negotiate.  They started basket of goods analysis and applied several rules. The focus was on top spend, procurement profiling etc., helped in preparing alternative lists of suppliers and products. Capacity and function based teams were deployed to manage projects and new openings. Procurement practitioners were only called up on when their need was identified to procure goods / services.

Talents…

This won’t complete without mentioning how the hotels / hotel groups managed their procurement professionals over the last 10 years. Procurement professionals have been rarely involved early on in the project planning cycle. In collaboration with project leaders/managers, procurement professionals were only assigned with minor procurement activities, contrary, the consultants and the project managers were largely involved in identifying potential suppliers and buying process. Companies always forced to adopt Corporate specifications on products, as a result the procurement professionals were turned to be paper pushers / or become termed as glorified clerks, who just process the purchase orders.

Major hospitality groups started providing trainings to their procurement team members on adopting technology based procurement system. Tejari, like e-tendering system brought confidence among procurement professionals about the benefits of E-procurement solutions. But on the other hand, the dominance of fully automated procurement system caused reduced human interference in the function also created a group of mute procurement professionals, who become reactive to the business process of buying.

More tech savvy, professionally trained, procurement practitioners were placed at the helms of major brands. More web based procurement systems allowed the companies to work from remote locations which in turn allowed them to consolidate the fragmented procurement functions, which, even worsened the situation that these professionals lost touch with the entity and were transformed to be just buyers.

While E enabling was the mantra of 2007 – 2009, the financial down turn again caused severe blow to their efforts. Several industry leaders redundant their expert staff and a talent crunch in this regard slowed down the desired transition.

Rarely, some companies are addressing these issue. Again major groups still consider web based applications are kind of tool to reduce the head count. They failed to understand that these talents could be resources that can provide them valuable guidance. There are no Bodies in general to advice the stake holders about another looming business risk…

Conclusion

Hotel Groups in the Middle East are increasingly looking forward to changing their approach towards procurement and are looking at their Europe and America based large peers for inspiration. But unfortunately these large groups are still not sharing the knowledge base in fear that if they shared, the hospitality principle suppliers would lose a major share of their business pie as these Middle East based hotels would develop their own supply channels, where China plays a major role.

So, what happens if America, Europe fails to meet the industry needs? Why shouldn’t have these major groups invest in fabric mills like Italy have it?

It would be a dream come true as a positive note of change, if any of the major group diversify their business from hospitality alone to producing products required for the industry, an example How about Jumeirah branded baked cookies and croissants supplied freshly to other hotels?

At least a focus on effective procurement planning, intelligent collaboration and co-ordination with suppliers is necessary to the successful business.

A coherent approach is required to transform hospitality procurement to fully functional, technology applied, value added function and we may have to look in to following points in general.

1. Define the Scope of the Procurement Transformation - What is going to be different a year from now? The organizational structure? The supply base? Goals are aligned with senior leadership's expectations for the transformation.
2. Establish a Baseline of the People, Processes, and Technology - What percentage of your spend is under contract and how is your contract compliance?
3. Conduct a Gap Analysis and Develop a Transformation Plan - Prioritize the transformation initiatives on your plan by effort and impact.
4. Develop Key Stakeholder Relationships - Review your procurement transformation plan with key leaders to garner support and ensure organizational alignment.
5. Set Service Level Expectations - Avoid over promising at this point
6. Define Performance Metrics - Metrics are needed to assess transformation performance against goals.
7. Structure Your Organization to Support Transformation - Fully centralized procurement organizations are not the right answer for every company. Consider the geographical and Business Unit needs as well as the complexity of the goods and services being sourced.
8. Develop Standardized, Optimized, and Documented Procurement Processes.
9. Create Policies to Support Transformation
10. Continually Review and Refine - Review your original goals and progress made with key stakeholders.

 

Procurement and Risk – Use Microsoft Excel to create tools to identify and address the risks

After a long gap, I found time today to write in my blog about Procurement Risks.

So, What is risk?

The Random House Unabridged Dictionary defines risk as, “The exposure to the chance of injury or loss; a hazard or dangerous chance.”

In any procurement function there are these elements of risks; the auditors always pick them up!

Why we only realize when auditors questioning the credibility of a procurement transaction? Why we are unable to identify these risks prior to its occurrence?

The answers to these questions are either we never had a mechanism to identify and address the risks or we never had the required tools to address the risks.

I thought to finish this subject by start writing about few of the risks, and I thought I could provide a helicopter view of this subject by writing about few risks and say “That is all folks!”, but once I approached the core of this posting I realized how difficult it is to explain the depth of this subject in one post.

BTW, the procurement risks can be classified under following categories (get ready to scroll and scroll);

Strategic Risks
Process Risks
Information Risks

Supply Chain and Performance Measurement using Microsoft Excel

Supply Chain / Procurement / Purchasing Professionals – What’s up for New Year? 

As globalization accelerated in such a pace which opened vast possibilities, opportunities and challenges for procurement teams across the globe. The growths of support services are considered as key points of differentiators in the market place which forced the Procurement team to increase its competitiveness.

It is key at this stage that organization identifies and assesses their current procurement strategies and need to validate its effectiveness considering the expected future developments available in the pipeline.

So what should be the priorities for procurement departments in the New Year? I have mentioned few of them below:

• Accessibility to data and information,
• Transparency in process and compliance,
• Involvement in decision making,
• Greater efficiency in procurement and demand planning,
• Flexibility in order management,
• Empowerment as a core function

What else….?

Are you practicing I.A.M or C.A.M.?

Procurement professionals at both the beginners and Advanced levels sometimes have the difficulty in mastering the concept of I.A.M. (Individual Acquisition Model) and C.A.M. (Consolidated Acquisition Model) in procurement.

It is necessary to identify which procurement concept you are practicing in your organization in order to stream line the Procurement process thus identify the potential of cost saving. Also bigger Groups are keenly interested in using the consolidation concept and they quickly identified C.A.M. as a revenue stream.

The concept; I.A.M. is slowly disappearing from the Procurement process lay out and C.A.M. is now widely used across the Supply Chain. Well, I should agree that both concepts have its own merit and drawbacks.

Recently consolidations become a buzzword even in smaller organization, when their procurement departments were asked to reduce the landed cost of the goods which they purchased.

So what is C.A.M? In simple words Consolidated Acquisition Model is: I am going to buy a 5 Kilo of Green Apples, but the box is 6 Kilo weigh. Well, I get a better price if I buy the box, but I just don’t want risk myself by buying extra Kg, Oh ok, how about if my sister needed it, or try luck with my neighbor. If it is for my neighbor I will pocket that extra savings, if it is for my sister, still I save via reduced cost. Another version of C.A.M. is: How about buying the Green Apple with standardized description. A different version of C.A.M. is: How about buying the standardized Green Apple of two boxes for my sister and for my neighbor from one supplier. Use one box, preserve the other, or distribute in the market. Another version is: Well, per year my Green Apple consumption is 5 kg each for first six months and 4 kg each for rest of six months that is 9 boxes of apples, why cannot I buy it from the source or principle supplier, I negotiate with them on assured business. Well on a later stage I may include the requirement for a year for my sister and neighbor and of course, I will ask for better prices because I have increased the volume of business to offer for the supplier

I am drawing your attention to a bigger picture here. C.A.M. has a wider scope of practice and can be fitted in various versions, I don’t think that I can explain completely about C.A.M. in just one posting. In brief:

Supply Chain and Spend Analysis

Hello There,

This time, I thought I should give bit of my thought about how we can use excel in spend analysis.

It might have already discussed in business meetings that sourcing Strategy, Category expertise, negotiation methodology, managing supplier relation and procurement execution are all critical components of a highly effective Supply Chain Management initiative and the beginning of these all process starts with spend analysis, so it is the prime tool.

Spend Analysis should be a hot subject of discussion in any Supply Chain Organization because of the importance it has in a decision making process. Take an example of the hospitality industry; spend analysis plays a prominent role in the procurement function because of the ability a spend analysis report has in helping to understand and to clearly establish expenditure patterns throughout the organization which will eventually enable the Supply Chain practitioners to accurately identify how much ($) is being spent, on what (Goods and Services), with whom (Suppliers), by whom (Business Unit) and how (Method of purchase) on a daily basis.

Also analyzing spends supports the day to day food and beverage costing, or for a monthly menu engineering and event costing, just few of the benefits…

Defining and understanding scope of spend analysis is really become a mighty task these days because of non- availability of cleansed, standardized data.

Besides the above mentioned issue related to quality data there are few more show stoppers the analysts are identified and they are:

1.    Lack of expertise and ability among existing staff to access, organize and analyze spend data for sustainable use.

2.    Lack of consistent approach and source to get the real time spend information from a procurement system.

3.    Failure of Top Management in linking the information and insight gained from spend analysis with the strategy and objectives of their organization

Faced with above said facts, the learning from industries around the globe concludes that, the most successful spend data analysis can be done in a more effective way considering the following:

Supply Chain and Tender Evaluation

Hi There,
My second post, it is all about tender evaluation. Transparency is the backbone of procurement function. Transparency can only be assured when a supply chain professional develops competition among suppliers. Also it is critical that a Supply Chain professional need to prove the stake holders based on what criteria a supplier is selected and what thresholds prompted to award a contract to the supplier and how he / she has selected a supplier.

I am sure this can be handled with the help of high-end procurement or contracting software but again a certain amount of manual interaction and customization is required to make this happen.
Why this all hazels, when you can use Microsoft Excel to do this job. I have attached two screen shots which would give you a better idea on how it looks like and a soft copy can be obtained by sending me request for the template please.

Procurement and Sustainability

Most of us are aware of global environmental issues: subjects such as acid rain, climate change, GLOBAL WARMING, greenhousee gas emission and species extinction are often in the media. What is less well understood is the link between these global problems and our everyday actions. Many people are unaware of how they can both contribute to environmental problems and help to solve them.