E-procurement: Purchasing power

27 July 2006
E-procurement: Purchasing power

In an industry as competitive as the hospitality sector where margins are tight, real advantages can be gained from streamlining procurement processes.

In search of efficiencies, industry-watchers are reporting a growing number of companies turning towards electronic procurement, either directly with major suppliers or via trading exchanges.

Epicor is an enterprise resource planning (ERP) and supply chain management software company that has worked with the likes of Four Seasons, Le Meridien and Hyatt International. According to Adam Prince, director of product marketing, a common approach is to use technology to centralise purchasing processes, combining spend from all locations to improve pricing and service from contracted suppliers.

While this practice is well established in the large hotel and restaurant chains, Prince says smaller chains are now embracing e-procurement technology as well.

"We're seeing significant movement towards automated internal procedures for controlling the creation and internal approval of requisitions prior to procurement," he says.

Prince says hotels typically have many departments, all of which can requisition items many times a day. In the kitchen, for example, market lists are created based on daily demand, and then supplementary lists produced through the day as they learn of additional requirements.

Transaction costs This environment creates a large number of purchase requests, often for the same items, but to be delivered on different dates or to different locations within the hotel.

Without robust systems in place this leads to a very high number of purchase orders and goods receipts, all of which are hard to control and the matching of orders, deliveries and invoices can become very complex, adding to transaction costs.

"Technology, whether from ERP, materials management or e-procurement systems, can help by automating much of this process, streamlining the purchase process to a smaller number of larger orders that can be processed more easily and at lower cost per transaction," says Prince.

These systems, he says, also add a layer of visibility over the mountain of data generated in a typical hotel or restaurant, facilitating the analysis of spend, margins, supplier quality and other management information that can help to boost profit.

But, says Stephen Minall, managing director of supply chain consultancy Moving Food, and a former purchasing director at Queens Moat Houses, hospitality companies in search of savings from economies of scale shouldn't stop at simply centralising their own procurement processes.

He says hospitality firms can learn from the joined-up thinking that exists in other sectors, such as retail, where competing brands, which otherwise would be commercial rivals, come together to consolidate their buying on "non-emotional items" such as glasswear, light bulbs, chemicals and paper. "This doesn't mean competing companies will replicate each other, because they will obviously buy the products that differentiate them separately," he says.

Full advantages
Minall feels hotel brands and restaurant groups still think about procurement in an old-fashioned way because they're reluctant to share buying information with rivals. He suggests anyone serious about gaining the full advantages of e-procurement should look at the various software systems available both within and outside the hospitality sector.

But doesn't this trend towards centralising the buying function and reducing the number of suppliers down to a handful of national suppliers fly in the face of an industry drive to source local produce? If that is your business model, yes. But Nicola Knight, marketing officer at Makella, a hospitality procurement consultancy, says technology can also help companies manage numerous local suppliers if that's their objective. Makella has worked with De Vere Hotels, for example, to bring 60-plus local grocery suppliers on to a hosted online system.

For dealing with fresh produce that needs to be ordered and delivered within a short space of time, the software has been designed to facilitate short turnarounds, says Knight. Suppliers upload negotiated prices on to the system, which intelligently compares and benchmarks the prices. The same system is used to dispatch orders once a decision has been reached on which suppliers to use.

Technology is also at the heart of another growing trend in procurement: e-auctions.

These have been around since 1998, starting in the more tech-savvy sectors such as the automotive industry, but are now being used by larger hospitality companies, according to Paul Cook, client services director at Trading Partners, Europe's largest e-auction facilitator, which has carried out work for Thistle Hotels in this area.

E-auctions work by creating a shared online reverse auction environment where suppliers compete for a specified contract. Typically, says Cook, buyers must offer a contract worth more than £500,000 to excite suppliers and persuade them to go through the process of competing for the business.

According to Cook, it usually takes about six weeks to organise an e-auction as a full bid to tender is published, a shortlist of about 10 suppliers is drawn up and suppliers are trained in how to take part in the event. At the specified time of the auction, which lasts about two hours, suppliers simply access the auction environment through a web browser where all competing suppliers can see and react to the bids electronically as they come in.

More efficient
Cook says companies can also conduct "multi-attribute auctions", where suppliers not only compete on price, but are awarded percentage points if they can offer additional requested services, such as being able to deliver on a Sunday or within a short time frame.

With up to 500 bids being lodged over the two hours of an auction, Cook says the process is far more efficient than the traditional process of large-scale commercial procurement that typically involves meeting people at trade shows, negotiating prices over the telephone and going back to suppliers with rival bids. "I used to be a procurement director and e-auctions achieve in six weeks what would have taken me eight months to organise without this technology," he says.

E-auctions, according to Cook, also bring average savings of 23% on contract prices as they create an environment where suppliers have to dig deep to find their best price.

But with e-procurement becoming increasingly popular, Knight emphasises that companies shouldn't completely rely on technology to interact with suppliers. She says the building of trusted relationships with suppliers remains an important aspect of the procurement process. "Catering is still very much a people industry and technology should never totally replace human contact. It simply offers better tools to do the job," she says.


Case study: Golden Tulip

Two years ago, as part of a drive to grow the company, Golden Tulip Hotels (UK & Ireland) implemented a centralised procurement solution across its portfolio of seven hotels made up of traditional four-star Golden Tulip hotels and the newer, three-star Tulip Inn brand.

According to IT director Gary Bacon, this approach has resulted in better control over purchasing spend and gained economies of scale across the chain.

He says: "Taking a proactive approach to standardising suppliers and improving control over the ordering process will become increasingly important as the number of Golden Tulip hotels grows."

Working with IT consultancy Touchstone Group, Golden Tulip installed Proactis procurement software, which is hosted by hosting provider Insite, to minimise the burden on internal IT resources.

Today, according to Bacon, the company is evolving from an anarchic environment with limited control over spend to one based on centralised allocation of purchase orders and automated invoice matching.

Golden Tulip is also looking to attain economy of scale by centralising orders to specific providers, rather than seven different local suppliers.

"By implementing a centralised purchasing model based on authorised suppliers Golden Tulip can regain control over this process and should recoup significant costs as a result," says Bacon.

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