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HAMA Spring 2014 Meeting Best Practices in Procurement

May 6, 2014

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AGENDA

o Importance of Procurement in Hotel Management

o Defining “Procurement”

o Emerging Trends and Best Practices – Transforming from Purchasing/Procurement to Supply Chain Management

o Summary

o Q & A

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A 2013 STUDY BY MCKINSEY AND COMPANY REVEALED A STRONG CORRELATION BETWEEN PURCHASING HEALTH AND CORPORATE PERFORMANCE

20.23.5

2.7

1.9

Procurement leaders

Middle of the pack

Procurement followers

4.9

3.8

2.8

0.4

0.1

-0.1

17.0

10.9

Confidence level of correlations >99%

Average survey scores across all drivers Scale 1-5

PercentAnnual procurement savings

Annual reduction of COGS

Average EBITDA margin

Better procurement practices…

…result in higher performance

Procurement leaders

Middle of the packProcurement followers

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PROCUREMENT HAS IMPLICATIONS AND IMPACT WELL BEYOND PURCHASE PRICE

Potential Procurement Impact on Hotel Management

• Qualityo Right products for right application

o Consistency of product performance

o Driving perception of value to customer

• Serviceo Products and services available when needed

o Supplier flexibility and knowledge of customer business

• Costo Optimal life cycle costs

o Adequate Indemnity and Risk protection

• Internal Controlso Establishing strong fiduciary relationship over the spend

.

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DEFINING “PROCUREMENT”

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DEFINING “PROCUREMENT”

Method Depth of Contracting Breadth of Approach and Practices Utilized

Purchasing

• Contracts mainly with Point of Commerce (POC) suppliers or no contracts (i.e. transactional buys)

• Often three bid on high volume items and list price on “tail”

• Service, quality and price accuracy managed by transaction

Procurement

• Agreements and contracts with many POC suppliers, some manufacturer deals on high profile items (e.g. Coke/Pepsi, Starbucks)

• Pricing is usually negotiated discount off list

• Certain elements of service, quality and price accuracy negotiated in contract

Supply Chain Management

• Contracts through out the supply chain (growers, shippers, manufacturers, POC)

• Pricing mechanisms linked to commodity (e.g formula pricing, cost plus)

• Service, quality, price accuracy stipulated in contract and managed in overall relationship

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SUPPLY CHAIN MANAGEMENT VS. TRANSACTIONAL PURCHASING - PROVIDING CONTROLS

Ongoing Service, Quality and Price

Management

Vendor Selection and Contracting

Transactional Purchasing

Supply chain management approach:

Drive lowest cost by bringing scale and commitment to supplier

Manage property-level compliance through spend reporting and field support

Manage service, quality and price performance through a longer term relationship

Aggregate Purchases

Manage Supplier Performance

Monitor Compliance

Traditional 3-bid procurement focus: Control deal and process by individual purchasing transaction Bid each purchase and verify price/quantity by 3-way match

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The key to Supply Chain Management is focusing on where the cost exists and where there is leverage.

SUPPLY CHAIN MANAGEMENT

1-3% MarginRaw Materials

30% MarginManufacturer

Barriers To EntryCapexBrand

1-2% MarginDistributor

Weighted Leverage Points

Fre

ight

Fre

ight

50-60% Cost

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Approach to Cost Management in the Supply Chaino Insert oneself at optimal point in supply chaino Make offering compelling to each part of the supply chaino Reduce supply chain costs, don’t focus only on profit

SUPPLY CHAIN MANAGEMENT

PropertiesDistributor

• Tight definition of service levels

• Cost-plus: definition of cost is key

• Control cost into distributor for ~80% of $ volume

• Drive collaborative (i.e. with customers) process to aggregate

• Determine real alternatives (more=leverage)

• Sell ability to take cost out of their business

• Clearly defined specifications (key to making supply chain more efficient

ManufacturerMaterialsProvider

• Go to raw materials to manage key cost drivers of manufactured items

Supply Chain

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SUPPLY CHAIN MANAGEMENTBenefits of Supply Chain

ManagementChallenges of Supply Chain Management

Better Opportunities to:

• Understand and strategically manage costs

• Proactively and efficiently manage service levels

• Ensure consistent product and service quality/adherence to specifications over geographies and time

• Provide efficient and effective internal controls over procurement processes

• Effectively manage risk at critical parts of the supply chain

Difficult and/or expensive to acquire:

• Sufficient aggregated spend to be able to negotiate “upstream”

• Required expertise in commodities and supply chain operations

• Infrastructure to provide necessary reporting, oversight, QA, and property assistance

• Tools and resources to provide efficient and effective supplier management and auditing

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PARTNER

CONTRACTING ENHANCEMENTMANAGEMENT

INFRASTRUCTURE FLEXIBILITY / ABILITY

TO CUSTOMIZ

E

OVERALL VALUE ADD

Point of Commerc

e

Manufacturing

Supply Chain-Wide

Internal Complianc

eSuppliers

Property Specific

Portfolio wide

E-Commerce Providers

Group Purchasing Organizations (GPO’s)

Property-Level Consultants

Supply Chain Service Providers

ENHANCING PROCUREMENT BY UTILIZING PARTNERS

Strong contribution Little to no contribution

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SUMMARY

• Procurement is important to property profitability and guest experience

• “Best Practices” procurement provides significant value – but can be difficult to achieve

• Companies utilize different procurement partners to complement their internal procurement efforts

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QUESTIONS AND ANSWERS

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