OperationsGetting Purchase on the Market: Operations Leaders Discuss Procurement Under Improved But...

Getting Purchase on the Market: Operations Leaders Discuss Procurement Under Improved But Still Challenging Conditions

While inflation is still casting a long shadow over the market, the bright side for buyers is that supply chains are more reliable than they were 12 months ago. As a result, the lead times for many orders are shrinking back to what they were pre-COVID. Evidence of this trend comes from Atrium Hospitality. “We’re finding that the disruption to the hotel industry supply chain has noticeably improved in 2023 compared to last year,” said Chief Operating Officer Chris O’Donnell. “A more normal purchasing pattern has returned for the majority of items used daily at our 80-plus hotels across the United States.”

A key word here is “majority”: supply chains for some types of products are still seeing disruption. “We’re experiencing some order delays for certain specialized items used with hotel renovations, such as mechanical and FF&E,” O’Donnell noted. Shahid Javed, executive vice president and chief procurement officer at Aimbridge Hospitality, pointed to certain types of electronic components for equipment as another example. “Some parts in that space are still challenged,” he said. “It’s linked to the chip shortages in the industry and other elements.” In addition, disruption for international supply chains persists. “The lead times on most international products run 14-18 weeks,” observed Jason LaBarge, SVP of operations at Raines, adding that “lighting and drapery are on a 20-week lead time.”

Thus, project managers must adjust to the delivery timeframes for these products. “When necessary, we will extend the planning phase for a hotel renovation project to ensure most materials are on hand before commencing capital improvements onsite,” O’Donnell explained. “This modified approach helps us to mitigate the impact of potential renovation-related supply shortages when on-property enhancements are in progress.”

While supply chain issues have been alleviated to a large extent, inflation is affecting all products, from FF&E to F&B. “Overall construction and FF&E costs have been up 4 percent to 6 percent since last year,” LaBarge said. Budgets for hotel food products are also being strained. “Food and beverage price hikes are especially felt by our numerous hotels that support certain hotel brands’ free-to-guest offerings, like complimentary breakfast,” O’Donnell reported. “In response to the rising cost of food products, we regularly review and adjust our customer pricing for some items sold through restaurant outlets and banquet services at our hotels.” He added that “inflation is affecting the cost of specific chemicals used by our hotels, for example, chlorine for swimming pools and whirlpools.”

Javed, however, does find inflation to be “settling down to a lower number than a year ago. It’s much more measurable and manageable today than 12 months ago. And that’s directly linked with the availability of supply. Our suppliers have a lot more products available, the manufacturing capacities are doing very well, and the logistics and transportation costs have come down significantly as well.”

Cost Control Approaches

While there is no silver bullet to bringing down costs to help offset the effect of inflation, there are several well-known strategies that purchasing officers can continue to rely on.

  • Seek Alternative Products or Suppliers. While brand requirements can limit the opportunity to pursue more affordable products, this route may be viable for some product areas. “By partnering with major supply chain management companies, Atrium Hospitality is able to effectively detect the appropriate hotel areas—say, certain commodity products in our numerous hotel kitchens—where alternative brand options can meet the high-quality standards of our company and the hotel brands we operate,” said O’Donnell. Aimbridge also finds ways to control costs on the F&B front, via what Javed calls “menu engineering.” The approach is very collaborative. “As products become available and prices [for food items] fluctuate, we work very closely with the Aimbridge food & beverage and culinary team, and with our chefs in hotels, to curate the menu to create what they can serve in the hotel, based on the best products available at the lowest pricing,” he said. A resourceful approach can also save money on the equipment side. “We’ve had cases where the initial view is that we have to replace the equipment, and then our engineering team looks at it and says, ‘Do we have to replace it, or can we replace certain parts?’ If we can just replace parts, we can solve the problem much quicker, because brand-new equipment may take eight to 10 months [to deliver] whereas you could get the replacement parts within a couple of months,” Javed explained. In addition to flexibility with product types, it’s generally more cost efficient to source domestic products. LaBarge advised, “The best way to cut costs is to have your procurement group shop domestically versus internationally to see where we can save on product costs and shipping and transport costs.”
  • Leverage Scale. Another common tactic is to purchase products in bulk. “We try to do multiple hotel orders simultaneously to reduce production and shipping costs,” said LaBarge. “The more we can purchase from one supplier, the better the pricing.” Alternatively, hoteliers can achieve scale by proxy, via the right partner. “To help our company effectively navigate the rise in costs and maximize purchasing volume discounts, we partner with major supply chain management companies,” O’Donnell noted.
  • Negotiate. This classic means of lowering costs has evolved over the years, Javed observed. “Twenty-five years ago, negotiation was ‘banging on the desk’ and saying, ‘Give me the cheapest price.’ And that’s what a lot of companies did at that time. But fast forward to today, it’s much more collaborative negotiation. … In some cases, you’re negotiating price. In some cases, you’re negotiating availability of products. In some cases, you’re negotiating the total cost over the lifetime of the solution.” The aim is to find an item of negotiation that the supplier is comfortable with and ultimately achieve a win-win.
  • Lease Instead of Buy. While some purchasing professionals advise against renting products for long periods, others will make exceptions for certain types of equipment or scenarios. “We’ve found that commercial printers and commercial dishwashers are more favorable to lease than to purchase. Also, commercial van leases are common for supporting hotel shuttle services,” O’Donnell said. Javed pointed to another scenario where leasing is useful: “You may be looking for a large power generation system, and the lead time for it may be 12-18 months. But, of course, you cannot have a hotel without power, so you will go lease a power unit.”
Partnering with Purchasing Agents

Another cost-control strategy is to partner with a professional buyer who brings the best strategies to the table, along with extensive supplier relationships. Both LaBarge and O’Donnell are experienced in working with purchasing agents and offer helpful criteria for hoteliers to consider in vetting agents.

“The most important criteria are flexibility, willingness to shop with multiple vendors, and understanding how shipping costs affect overall procurement costs,” said LaBarge. “We often talk to purchasing agents about choosing an alternative product that may look similar to the designer’s choice but comes at a reduced price. They must have a strong relationship with the designer, shipping companies, and brands to negotiate the best deals.”

O’Donnell advised owners and operators to investigate a procurement company’s history of “being nimble and quickly adapting to the ever-changing hotel industry landscape. Confirm a procurement contender has clear goals spanning operating practices, sustainability, use of diverse suppliers, and quality assurance. Also, assess areas such as financial track record, approach to innovation, and history of securing savings and passing along those related savings to the company contracting services.”

Takeaways from Disruption

If there is any upside to the COVID-related supply chain disruptions the industry has endured, it is the spotlight shone on the value of strategic procurement, which “really helps you in these tough times,” said Javed. And buyers’ increased resourcefulness may well be of service in the future. “This is not the last disruption we will have. Disruptions, whether they’re in a certain city, market or geographic pocket, will happen,” he added. In addition, the pandemic made the importance of reliable supply chains especially salient. “COVID brought to light the strong dependency on the global supply chain, as this was the first time where we had a disruption at a global level,” Javed observed. “I think it’s a great thing to have acquired that awareness and then deepen our supplier relationships even more with very open communication and building trust.”

Sourcing for Sustainability: Aligning Procurement With an Industry Mission

Procurement officers in today’s hospitality industry must be well connected with sustainable product suppliers, as brands across the board have objectives to fulfill in many areas of environmental stewardship. The cost-savings aspect of these initiatives is another driving factor, especially with inflation persisting. For example, “most brands have implemented LED lighting and bulk amenities in the last two years. While this creates more upfront costs, it certainly saves on long-term electricity and waste costs,” explained Jason LaBarge, SVP of operations at Raines.

Launched in Q4 of 2022, the American Hotel & Lodging Association’s Responsible Stay is a sign of the times, and management companies like Raines have been responsive to the initiative. Shahid Javed, executive vice president and chief procurement officer at Aimbridge Hospitality, represents the company on the AHLA Sustainability Committee, which “really does a great job of bringing all players across the hospitality sector in alignment [on sustainability goals],” he said. “AHLA’s Responsible Stay initiative has four key building blocks: energy conservation, water conservation, waste reduction, and sustainable sourcing. Aimbridge is very heavily involved in all four of these matters.”

AHLA’s goals in this area also align with those of Atrium Hospitality, said Chris O’Donnell, chief operating officer. “Demand for sustainable hotel operations is on the rise. We partner with a major supply chain management company in exploring sustainable product options that are aligned with the sustainability goals of our company and the hotel brands that we operate,” he related. “With the continuing expansion of sustainable solutions for the hotel industry, it’s becoming easier for hotel companies to invest in and practice sustainable hotel operations.”

Bespoke Buying: Procurement for Independent Hotels

Along with the lifestyle brands of the major chains, independent hotels often strive to be the antithesis of cookie-cutter. As such, they require products that support their signature look and feel, and buyers must be sensitive to that need. Sightline Hospitality specializes in the independent sector and understands what it takes to successfully procure for those properties.

“What makes procurement a little bit more challenging for us is that a lot of the projects that we’re working on are so unique; the FF&E and even the operating supplies are different than you would find in a typical hotel,” said President Kirk Pederson in an exclusive interview with LODGING at the 2023 NYU International Hospitality Industry Investment Conference. “For example, with your shampoos and pillows in a unique lifestyle hotel, you’re trying to create something different. You don’t want to offer the standard shampoo or lotion. With the guestroom [design], you want something more unique to that market. In certain areas, we have to find local vendors and it takes more research, which typically falls on the local team who know their backyard and what that brand really stands for.”

Thus, the right partnerships become especially critical when the sourcing task is trickier. “Some owners will try to source on their own because they want to be very involved in that process. We don’t recommend that as they don’t typically have the contacts, and they don’t save as much money as they think they do,” he said. “Our ideal process would be to hire a very skilled interior design group who can understand your vision and create it using FF&E selections that they know are readily available or can be produced at a reasonable cost somewhere. And then go hire a professional purchasing company and let them do their job.”

“Reasonable cost” is key in this time of rising prices, and a good designer can impart plenty of character to a space while respecting the budget. “Some of these projects have been very successful in creating an identity, and it’s not necessarily about spending $100,000 a room on FF&E,” said Pederson. “You can have a signature item or take a very generic item and change the look to make it unique. So, it’s really about that interior designer and what they can do with your dollars.”

George Seli
George Seli
George Seli is the editor of LODGING.