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PurchasingSelection and Procurement for the Hospitality Industry
By Andrew H. Feinstein John M. Stefanelli
John Wiley & SonsISBN: 0-471-38933-1
Chapter OneTHE CONCEPTS OF SELECTION AND PROCUREMENT
* THE PURPOSE OF THIS CHAPTER
After reading this chapter, you should be able to:
* Define the terms purchasing, selection, and procurement.
* Identify commercial and noncommercial hospitality operations.
* Explain how technology and e-commerce applications are changing in the hospitality Industry.
To most hospitality students, the term "purchasing" means paying for an item or service. This conveys a far too restrictive meaning because it fails to suggest the complete scope of the buying function. Perhaps the terms "selection" and "procurement" are better.
"Selection" can be defined as choosing from among various alternatives on various levels. For example, a buyer can select from among several competing brands of beef, a specific quality of beef, a particular beef supplier, and a fresh or processed beef product. One buyer may not perform all these activities-make all these choices-at one time. But he or she will 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 thetypes of products needed, making purchases, receiving and storing shipments, and administering purchase contracts.
Most people see procurement as the nuts and bolts of the buyer's job. Once buyers know what they want, they set about locating the best suppliers that fit their needs. Buyers then attempt to order the correct amounts of products or services at the appropriate times, see to it that shipments are timely, and ensure that the delivered items meet company requirements. A host of related duties surround these activities: being on the lookout for new items and new ideas, learning the production needs of other departments, appraising the reliability of suppliers, and so on.
Few operations have full-time buyers; most have managers and supervisors who do the buying in addition to their other duties. To these employees, buying means more than the term "procurement" by itself implies. These employees must also be aware of the relationship between purchasing and other related 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. In other words, it is not enough to 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-driven procurement applications that have revolutionized how buyers and suppliers procure products and services from sausage to steak. This technology enables purchasing managers to complete complex procurement functions with a simple click of the mouse. Most of these types of functions are taking place through an electronic process of selling and procuring products or services over computer networks; this process is known as electronic commerce, or "e-commerce." We will discuss technology applications as they relate to purchasing in more detail in Chapter 2.
One of the hospitality industry's major technology companies focusing on developing business-to-business electronic commerce (B2B e-commerce) applications is Las Vegas-based PurchasePro. Over the past several years, this company has successfully revolutionized the way procurement is conducted through the development of e-commerce applications that harness the power of the Internet. E-commerce applications that focus on procurement activities are sometimes referred to as "e-procurement applications." Many hospitality businesses now use Internet- or Web-based e-procurement applications. Other major companies developing B2B e-commerce applications include CommerceOne, SAPMarkets, Ariba, VerticalNet, and Sterling Commerce.
To better explain how technology has radically changed selection and procurement in the hospitality industry, we will explore new software, hardware, and e-procurement applications throughout this textbook. We will also examine the effect and ramifications this technology has had on operating managers who are directly involved in hospitality selection and procurement functions.
* TYPES OF HOSPITALITY OPERATIONS
The hospitality industry includes three major segments. The first is the commercial segment-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 1.1).
The following types of operations are generally considered part of the commercial segment:
1. Hotels 2. Motels 3. Casinos 4. Resorts 5. Lodges 6. Spas 7. Quick-service (limited-service) restaurants 8. Table-service (full-service) restaurants 9. Snack bars 10. Food courts 11. Taverns, lounges, and bars 12. Cafeterias 13. Buffets 14. On-premise caterers 15. Off-premise caterers 16. Vending machine companies 17. Ice cream parlors and stands 18. In-transit food services (e.g., cruise ships and airlines) 19. Contract food-service companies, which typically operate in plants, office buildings, day care facilities, senior care facilities, schools, recreation centers, hospitals, and sports centers 20. Convenience stores with food services 21. Supermarkets with food services 22. 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:
1. Employee feeding operations 2. Public and parochial elementary- and secondary-school food services 3. College and university dormitories and food services 4. Transportation food services, such as the Meals on Wheels program 5. Hospitals 6. Extended-care facilities 7. Clubs 8. Self-operated community centers, such as senior centers and day care centers 9. Military installations 10. Camps 11. Public institutions, such as the food services in some government facilities 12. Adult communities 13. Correctional facilities 14. Religious facilities 15. Shelters
* MAJOR PURCHASING DISTINCTIONS IN HOSPITALITY-OPERATION TYPES
In Chapter 6, we offer a more detailed discussion of the distinctions in the purchasing function that the industry makes among the various types of hospitality operations. Here in this introductory chapter, however, we attempt only to provide you with sufficient understanding to carry you through to Chapter 6. When we discuss hospitality operations in their traditional mode, we think first of the independent operation. In addition, those in the trade usually arrange the independent operations according to size: the small, medium, and large independents. The other major type of hospitality operation includes the multiunits and the franchises, which we discuss second.
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 ashtrays, 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. Most familiar is the large independent operation that has a full-time food buyer, a beverage buyer, and an equipment and other nonfood supplies buyer. 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 is mainly because these smaller businesses have had to pay higher prices for many of the products that they procure because they are not afforded the same discounts as large companies. However, the evolution of the Internet and the introduction of e-commerce technology, e-commerce enablers or e-businesses (companies that develop e-commerce applications) have leveled the playing field by enabling these smaller companies to procure products at more competitive prices and to compete with hospitality giants like never before.
By interacting on a universal e-commerce platform-much like a global, electronic marketplace where products can be selected and procured online-buyers can select and procure quality goods and services from top-tier suppliers and distributors anywhere in the world. These e-commerce platforms are referred to as "e-marketplaces." Simultaneously, small- to medium-sized suppliers now have the opportunity to sell their products to any size hospitality operation. Companies involved in developing hospitality-related e-marketplaces include Pro-Purchasing Systems (PPS), Foodtrader.com, Foodservice.com, Restaurantpro, and Freshnex.com.
An idea addressed more completely in Chapter 6 is co-op buying, a concept that enjoys popularity among some independent hospitality operations, particularly some food services. 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 to coordinate all of the purchasing for them. For instance, some lodging properties belong to referral groups that provide, among other things, some central purchasing activities.
E-commerce has also touched co-op buying. Companies are currently aggregating purchasing processes for properties throughout the country. For example, PPS, a division of PurchasePro, enables small hotels throughout the country to come together and experience the same type of purchasing clout as a property with hundreds of locations throughout the world.
These aggregate purchasing companies do not buy or sell products. Instead, they negotiate contracts on behalf of independent hotels, management companies, resorts, and Real Estate Investment Trusts (REITs). Each hotel enrolling in this "electronic co-op" might receive a purchasing guide that includes the names, telephone numbers, and a brief description of the programs negotiated on their behalf. Hotels can then access an e-commerce marketplace-or portal-through any Internet Service Provider (ISP). Typically, each hotel pays a participation fee that provides access to the aggregate purchasing companies' pricing.
THE MULTIUNITS AND FRANCHISES
The second major category of hospitality operations in the purchasing function includes the multiunit companies and franchises. These interlocking operations organize their purchasing somewhat differently from that found in independent organizations. One usually finds, when examining a chain of hospitals, for example, a centrally located vice president of purchasing. Moreover, the company may maintain one or more central commissaries or distribution warehouses. The managers of the company-owned outlets receive supplies from the central distribution points under the authority of the vice president of purchasing. But these managers may also do a minimal amount of purchasing from local or national suppliers that this officer 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 central commissary.
In company-owned unit 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 central distribution warehouses and/or the central commissaries that the company owns. 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 franchise 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 central commissary and/or central distribution center as much as possible.
Excerpted from Purchasing by Andrew H. Feinstein John M. Stefanelli Excerpted by permission.
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