The Concepts of Selection and Procurement

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INTRODUCTION
There 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 laundry detergent in a reasonable quantity for her size
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 linen rentals so he can make short-notice orders
in an emergency. 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 his or her skills and knowledge that significantly assist in the profitability
of an operation. It could easily be said that purchasing is one of the most important
functions in any hospitality operation.
For most people, the term “purchasing” means simply paying for an item or service.
For hospitality professionals, this meaning is far too restrictive because it fails to convey
the complete scope of the buying function. For our use, the terms “selection” and “procurement”
better define the processes involved.
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
beef, various grades of beef, particular suppliers, or fresh and processed beef products. One
person, generally referred to as a buyer or purchaser, may not perform all these activities or
make all these choices at one time. But they may be involved in most of them at some level.
Procurement, as opposed to selection, can be defined as an orderly, systematic exchange
between a seller and a buyer. It is the process of obtaining goods and services, including
all of the activities associated with determining the types of products needed, making purchases,
receiving and storing shipments, and administering purchase contracts.
Procurement activities are the nuts and bolts of the buyer’s job. Once buyers know
what is needed, they set about locating the suppliers who can best fulfill 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 beef.
The typical operating manager must also consider what form of beef to purchase, as well
as whether or not beef should even be on the menu.
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 with a few clicks of the
mouse. Most of these functions take place over the Internet.
Transactions done electronically are commonly referred to as “e-commerce,” for
electronic commerce. “B2B e-commerce” is the term used for business-to-business electronic
transactions and “B2C e-commerce” refers to business to consumer e-commerce.
Amazon.com, for example, relies on B2C e-commerce to sell its products to consumers.
B2B e-commerce that focuses specifically on procurement activities is referred to as “eprocurement,”
for electronic procurement. Examples of companies that make e-procurement
applications available to a wide variety of industry segments include:
Perfect Commerce www.perfect.com
Sap www.sap.com/solutions
Ariba www.ariba.com
Verticalnet www.verticalnet.com
Sterling Commerce www.sterlingcommerce.com
These companies have successfully revolutionized the way procurement is conducted
by harnessing the power of the Internet. One major company that focuses on the
development of e-procurement applications in the foodservice industry is Instill
(www.instill.com). Companies such as Applebee’s, Dairy Queen, Hardee’s, KFC, Pizza
Hut, Sodexho, Subway, and Taco Bell, rely on Instill’s e-procurement applications to
streamline their selection and procurement functions.1 Avendra (www.avendra.com),
one of the largest procurement services companies,2 has primarily focused on developing
e-procurement applications for hotels. The company was formed by ClubCorp
USA, Inc., Fairmont Hotels & Resorts, Hyatt Hotels Corporation, Marriott
International, Inc., and Six Continents Hotels.
We discuss technology applications for purchasing in more detail in thread 2. To
illustrate how technology has radically changed selection and procurement in the hospitality
industry, we explore new software, hardware, and e-procurement applications
throughout this textbook. We also examine the effect and ramifications this technology
has had on operating managers who are directly involved in hospitality selection and
procurement functions.

The hospitality industry includes three major segments. The first segment is commercial
hospitality operations—the profit-oriented companies. The second is the institutional
segment—those facilities that are operated on a break-even basis. The third is the
military segment—those operations that include troop feeding and housing, as well as
the various military clubs and military exchanges that exist within military installations.
The second and third segments are collectively referred to as noncommercial hospitality
operations (see Figure 1).

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1-29-2009 19:39

FIGURE 1 A major segment outline of the hospitality industry.
The following types of operations are generally considered part of the commercial
segment:
• Hotels
• Motels
• Casinos
• Resorts
• Lodges
• Spas
• Quick-service (limited-service or
fast food) restaurants
• Table-service (full-service) restaurants
• Snack bars
• Food courts
• Taverns, lounges, and bars
• Cafeterias
• Buffets
• On-premises caterers
• Off-premises caterers
• Vending-machine companies
• Ice cream parlors and stands
• In-transit food services (e.g., cruise
ships and airlines)
• 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
• Convenience stores with food services
• Supermarkets with food services
• Department stores and discount
stores with food services
The following types of operations are generally considered part of the noncommercial
division of the hospitality industry:
• Employee-feeding operations
• Public and parochial elementaryand
secondary-school food services
• College and university dormitories
and food services
• Transportation food services, 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 food
services in some government facilities
• Adult communities
• Correctional facilities
• Religious facilities
• Shelters

In Thread 6, we offer a detailed discussion of the purchasing functions found in the
various types of hospitality operations. In this introductory thread, 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 multi-units and the franchises.
The Independent Operation
The small independent is typically run by an owner-manager who usually does all of 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 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 napery, the
bartender who requires liquor, and the chef who needs food. The general manager also
oversees other related purchasing activities.
The large independent, such as a hotel, follows the purchasing function in much the
same way 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 food service. Alternately, a designated employee from
each of these departments may be doing the purchasing: for example, a hotel may
employ an executive steward to order supplies and to supervise the sanitation crew.
Often the large independent operation has a full-time food buyer, a beverage buyer, and
a buyer who purchases equipment and other nonfood supplies. A purchasing vice president
or an equivalent official may or may not supervise these three buyers. The buyers
are, almost certainly, supervised by a management person.
In the past, small- and medium-sized businesses may have had a tough time 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 thread 7). However, e-procurement technology 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. These buyers and sellers can come together in virtual marketplaces
online (commonly referred to as “e-marketplaces”), which allow suppliers the
opportunity to sell their wares to a variety of hospitality operations. Examples of these
marketplaces include Foodservice Central (www.foodservicecentral.com[/url]) and Amphire
(www.amphire.com[/url]), which is one of the main marketplaces utilized by the Burger King
Corporation.
An idea addressed more completely in thread 6 is co-op buying, a concept that
enjoys popularity among some independent hospitality operations, particularly some
foodservice operations. 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).
These aggregate purchasing companies 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 “electronic
co-op” might receive a purchasing guide that includes the names, e-mail addresses,
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.

[ by Financial at 2009-1-29 19:32 edited ]

The second major category of hospitality operations in the purchasing function
includes multi-unit 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, however, have the authority to
make a few purchases on their own, such as a cleaning service or a locally produced beer.
But when the unit managers do this sort of purchasing, 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. That is, the vice president of purchasing at corporate headquarters
may draw up some national contracts, establish purchase specifications, and set
general purchasing policy. He or she may also purchase the stock for the company’s central
distribution warehouses and/or central commissaries. But by and large, vice presidents
of purchasing handle overall policy, while the individual hotel units, although
they do not have complete freedom, exercise a great deal of purchasing discretion within
established limitations.
The typical franchisee receives many supplies from a central commissary, but many
of these non-company-owned units try to do some purchasing locally—to maintain good
relations in the community, if nothing else. However, they quickly discover that they save
considerable time, money, and energy by using the commissary and/or central distribution
center as much as possible. If no central commissaries and distribution centers are
available, the franchisees usually order their needed stock from suppliers that the vice
president of purchasing has prescreened and approved. The franchisees are, however, usually
free to buy from anyone as long as that supplier meets the company’s requirements.

A broad view of purchasing
Aggregate purchasing companies
Business-to-business (B2B)
Business-to-consumer (B2C)
Central distribution center
Commercial hospitality operations
Commissary
Co-op buying
Electronic commerce (e-commerce)
Electronic marketplace (e-marketplace)
Electronic procurement (e-procurement)
Executive steward
Franchise
Group purchasing organization
(GPO)
Noncommercial hospitality operations
Portal
Procurement
Purchasing
Real Estate Investment Trust (REIT)
Referral groups
Selection

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