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.