Roll of scm in a hotel


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The paper illustrates the role of Supply Chain Management in a Hotel’s Performance. It describes how supply chain management (SCM) system can help hotels to attain a sustainable competitive advantage by improving product quality and service while reducing cost at same time. As integrity of Supply chain is essential so to get benefited by its advantages, on this account, factors affecting the integration of supply chain management are explained. In conclusion Supply Chain Management has strong effects on overall hotel performance.

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Roll of scm in a hotel

  1. 1. ROLE OF SUPPLY CHAIN MANAGEMENT IN A HOTEL Submitted to: Prof. Arindam Lahiri By: Gagan Pardeep PG12 Indus Word School of Business This paper illustrates the role of Supply Chain Management in a Hotel’sPerformance. It describes how supply chain management (SCM) system can helporganizations (hotels in this case) to attain a sustainable competitive advantage by improvingproduct quality and service while reducing cost at same time. As integrity of Supply chain isessential so to get benefited by its advantages, on this account, factors affecting theintegration of supply chain management are explained. In conclusion Supply ChainManagement has strong effects on overall hotel performance.
  2. 2. Introduction A smooth running supply chain management system can help organizations to acquirea sustainable competitive advantage. It can help organization to improve product quality andservice while reducing the cost at same time. The nature of the tourism product is perishableand must be consumed when it’s ready to be served, thus hotels have to provide servicessimultaneously with demand. Due to such nature of industry internal integration is moreimportant than external customer integration for hospitality industry. Supply chain management is closely related with the concept of best practices.Adopting supply chain management initiatives first and the most importantly requires thatcompanies should have a long-term view. They must have an extensive focus on all themediums that are deployed in the transformation process of the raw materials to end-userconsumable. Top management commitment is also essential at this point. Organizationsshould redesign how business is done at every level in and outside the organization. First step in SCM must be breakdown each and every activity which comes across thewhole supply chain. Investigate each and every function a department handles and breaking itdown to possible extend. By performing this organization will be able to evaluate andconstruct a specific supply chain, which enables a company to find and reduce if there is anyredundancies while improving reliability and flexibility of the system at the same time. The creation of a supply chain leads to a better understanding of the whole chain andthus implementation of common standards becomes easier. It is implied and obvious that incoming era of hyper-competition the basis of competition in many industries will revolvearound supply chain development. Supply chain analysis promotes reducing non-coreprocesses (waste or redundant processes) and synchronization of the supplier and logisticsnetwork. Despite the challenges that are created, developing an effective and efficient supplychain can become a core competency1 or even a distinctive competency of any company. . Supply chain practices were evolved from aerospace and automotive industrieswhere good constructed supply systems led to the concept of Lean production to grow. Theinformation and communication technology provide a backbone support to distribute andshare information real-time with all participants of supply chain and thus enables them foreffective decision making. Making changes to supply chain helps to lower costs and enables afirm to more easily compete on the basis of price. This is especially important whenproducing functional goods that are price sensitive (highly price elastic). It can also improvecustomer service levels; therefore, increasing firm’s competitiveness. Rather than business to business but supply chain to supply chain competition istoday’s trend. The system wide focus on costs is essential in order to gain a complete pictureof the forces that affect company performance. Cost savings created through working withsuppliers and distributors as supply chain partners can be reinvested into additional researchand development of whole chain. Working together to achieve cost savings allows firms totarget their resources into a specialized area of transformation. From a financial point of view, any improvement in supply chain management has apotential to reduce the costs with the help of greater operating efficiency, reduced wastegeneration, and reduced consumption of energy and other resources. SCM practices can alsolead to increased revenue and shareholder value by generating more repeat business and 1 A core competency is any function, which a firm does well at performing. Corecompetencies are the processes which are primary business activities that enable companies to obtaina more than average return from business over long term. In management discipline “corecompetencies” refers to focusing and exploring particular strengths within the company andformulate strategies which will help in increasing market share and profits. On the other hand, adistinctive competency is a function that is performed well and is unique. 2|Page
  3. 3. attracting new business from customers who value good environmental and socialperformance. A strong reputation as a company that cares about supply chain issues, coupledwith improvements to the quality of the consumer experience provided, will defiantly resultan increment in customer satisfaction and their loyalty. It will strengthen the brand value; willenhance publicity and marketing opportunities, and will ultimately lead to a better acceptanceby its target customers. Supply chain practices cannot improve their own efficiencies by themselves, becausethe efficiency can be achieved only through the interaction of various supply chain practices.For a successful supply chain application, significant efforts for improvement in all of supplychain functions within a firm should be made. First of all, the focus of supply chain practicesshould shift from functional and independent to general and integrative. This implies that theevaluation of any supply chain should be done by considering how the practice will affect theefficiency of entire supply chain processes. Thus, the successful integration of supply chaincan be possible by the proper utilization of various supply chain practices. The process of Supply chain integration should progress from the integration ofinternal logistics processes to external integration with suppliers and customers. This internalintegration can be accomplished by the automation and standardization of each internallogistics function, the introduction of new technology, and continuous performance controlunder formalized and centralized organizational structure. External integration can beachieved by information sharing and strategic linkage with suppliers and customers, and thestandardization of logistics process between firms.Hospitality Industry This industry is primarily service oriented; other product involving activities aresupportive activities of the primary. Services are considered to be most perishable items.Unlike physical products the warehousing of services is quite difficult and thus if notconsumed at the time when it is ready to consume it just perishes without no time, air planeseats which are not sold is an appropriate example.Role of SCM (Strategic Level) As the nature of industry, services can’t be stored, it become more essential to keepsupply chain at place. The criticality comes in existence when we have to manage theinventory of services. However SCM is evolved from automobile industry it is equallyapplicable and relevant to any other industry including service industries. It can be explainedby making an analogy on the bases of four basic paradigms as described below: 1. The lean Paradigm: However the concept of lean had been evolved from automobile industry2 its essence is relevant for every business. The lean paradigm has essentially focused on waste reduction as a means to increase actual value-added to fulfill customer needs and maintain profitability. So when a room, a living facility or any other service which was consumable but it was not consumed (which is waste in this case) the cost of that service would be added to other consumers, partly if not completely. For hospitality industry the concept lean is a must practicing exercise to maximize its internal efficiency. It can help consumers to an access for quality service by enabling the economic production of small quantities and enhancing cost reduction. To provide added value to the customer, the lean approach seeks ways to reduce demand variation by simplifying, optimizing and streamlining, and create capability by utilizing assets more effectively than in traditional systems, so hotels are required to do the demand estimation exercise properly by considering all demand2 Developed by Taiichi Ohno of the Toyota Motor Corporation in Japan forms the basis for theToyota Production System. 3|Page
  4. 4. deviation factors (e.g. seasonality, economic conditions of environment in which it is operation etc.).2. The Agile Paradigm: The marketplace is always volatile and demand always varies accordingly at the same time the prime objective of supply chain is to delivering the right product, in the right quantity, in the right condition, at the right time, for the right cost. Also since customer requirements are continuously changing, supply chain must be adaptable to future changes and thus respond appropriately to market requirements and changes. In context to an operations manager at a hotel the agility is important to meet the changing preferences of customer and to address the challenges offered by demand volatility. Thus the agility is essential to create the ability to respond rapidly and cost effectively to unpredictable changes in markets and increasing levels of environmental turbulence, both in terms of volume and variety in services. Some of the main agile practices in the supply chain which can be practices in a hotel context are:  To increase frequencies of new packages introductions.  Speed in improving customer service.  Use of IT to coordinate and integrate activities e.g. booking orders must be available to each department from housekeeping to kitchen handling guy and to receptionist sitting over there to welcome the coming customer. They all must be ready with the same amount of preparation.  Speed in improving responsiveness to changing market needs: by maintaining a database of its customers a hotel can easily use it by some interpretation for demand forecasting, finding out the trends, tracking its loyal customers, habits and likes of its most loyal customers so that they can be retained etc.3. The Resilient Paradigm: Resilience is referred as the ability of supply chain to cope with unexpected disturbances which might be due to any external environmental factor like change in government rules and regulations of the environment in which either supplier or hotel is operating or it might be change in the economic environment from which its customers are coming. Hotels should deploy the associated contingency plans efficiently and effectively when facing a disruption, and thus making the SC more resilient. In such scenario following strategies could be adopted:  Flexible supply base: contacts with other hotels to accommodate on commission bases. Hotels can use multiple suppliers for critical items.  Make-and-buy trade-off: supplementary and support services weather to do by own or hire some specialist in that service, both has its own pros and cons.  Strategic stock: some services can be stocked as an inventory by pre- performing related activates, so this can be done to meet the variation in demand, however most of these activities can’t be stocked for longer duration. So this is useful to meet the variation in the smaller period (e.g. day to day or weekly variations) e.g. inspection and cleaning of room before it is sold.  Economic supply incentives: responding to change in demand variation in packages.  Postponement: by showing no more capacity to accommodate.4. The Green Paradigm: As lean relentlessly focuses on reducing non-value added activities and producing just the right amount of a product as needed, an important question is whether it improves or deteriorates environmental performance. Lean (as originally documented by Womack and Jones) does not explicitly incorporate 4|Page
  5. 5. environmental performance metrics3. As lean implementation pushes manufacturing processes toward the point of lowest cost, but the more relevant question in current scenario is does it also push cost to the point of optimal environmental performance? However after realization of importance of environmental issues firms started taking interest in environmental care. The CSR and carbon credits earned are much more relevant in hospitality industry than any other, so it makes sense for them to adopt a green supply chain.Role of SCM (Operational Level) The ultimate objective of any activity in any business should be either maximization ofprofit or minimization of the cost, and same applies to supply chain management. Like anyother supply chain, supply chain, in the hotel industry also, it has three distinct cost elementsto optimize: o Cost of Transaction o Cost of Product Procurement o Cost of InventoryThese costs are the major factors that increase the cost of final product or service. Howsupply chain can affect these costs is explained in this section. 1. Cost of Transaction In Full Service hotels, many products like vegetables and fruits or some of the kitchen items have a short shelf life and require repeat purchases (Approximately one third of the products in the hotel industry belong to the low-value, high volume category). These products increase the transaction cost. Ideally, a situation like this would demand standardization and rationalization of the product portfolio, as well as automation in the supply chain process. On the contrary, hotels generally have a decentralized application environment with a moderate or low level of automation and a very high degree of non-standardization. Non-standardization has a significant impact on the cost structure of hotel supply chains; because of this even the hotels that are open to the idea want to go for standardization are unable to switch to a consolidated framework. The cost of quality control is minimal when an organization deals with a small number of suppliers. The cost of quality control goes down even further when the supplier relationships are strategic in nature. The hotel industry is characterized by large number of non-strategic suppliers, thereby increasing the cost of quality control. Individual hotels also tend to work as silos. Hence, even if there are multiple hotels of a particular chain operating in the same city, the inventory is generally not optimized among them. It is quite possible that one hotel might have excess stock while the other may be out-of stock for a particular product. Instead of transferring stocks, however, each hotel will order fresh stocks, thus initiating a longer chain of events resulting in increased transaction cost. The indenting process in many hotels is manual, or at best semi-automatic, requiring manual consolidation. For example, if the same product is required by four departments, either paper indents are created or the system does not have the facility to consolidate the requests. This is usually true for items that get indented separately by each department in a hotel. 2. Cost of Product Purchase Cost of purchase in a hotel can be up to one fourth of total sales, depending on the type of hotel. The cost of purchase in the hotel industry is substantially higher than other industries because of the following reasons:3 EPA (US environmental Protection Agency) report 2003 5|Page
  6. 6.  Hotels have a tendency to purchase too many Stock-Keeping Units (SKUs) for the same purpose. This includes alternate brands, pack sizes or substitutes. This has a direct negative impact on consolidation benefit, increase in supplier base, and a consequent increase in overall cost structure of the supply chain.  It is a very common occurrence for two hotels belonging to the same group in a city to purchase the same product at different prices from the same or alternate supplier.  The level of consolidation among hotels belonging to the same chain is often nonexistent. These units lose the benefit of bulk purchase that consolidation can provide.  In cases where a central purchasing organization monitors and releases central contracts, the adherence to the same is extremely poor. Contract leakage is a common phenomenon in hotels.  There is also a tendency to use a large supplier base but not develop a strategic relationship with any one of them. As a result, concepts like product value re- engineering, joint cost improvement initiatives, and so on, which are the prevalent modes of cost reduction in the manufacturing industry, are rarely in practice. All these factors contribute heavily towards the increase in the unit price of products in the hotel supply chain. Hotels today may be losing a significant fraction on products purchased. 3. Cost of Inventory Forecasting the material consumption based on forecasted occupancy of rooms is usually not very well managed. The lack of an interface with the sales and purchasing system is the major reason for poor forecasting. However this issue can be addressed most effectively by using IT and thus providing an interface where sales people can share the sales made on real time bases so that purchase department know how much to procure. The vendor-supplier relationship in the industry is also far from being comparative to other industries. As a result, concepts like vendor-managed inventory or just-in- time inventory that have been deployed by many industries to reduce inventory costs are generally out of context for many hotels. In addition, a large number of SKUs and lack of standardization often lead to a waste of valuable shelf space. This can add up to significant cost as most of the hotels are generally located in high value real estate areas. Engineering spares form the most significant part of physical inventory in the hotel inventory cost and as in this industry inventory turnover period for such items might be as high as two to three years and thus add on in cost. Usually these numbers are well reflected in the balance sheet of many hotels where expensive inventory like wines may have significantly high inventory.The genesis of the higher cost occurrence is the nature of hospitality industry. The traditionaloperating style of hotels can be attributed to the following two reasons: o The customer centricity of the industry o Poorly integrated application systems1. The customer centricity Hospitality industry is one of the industries which is extremely customer centric, this excessive customer centricity of the hotel industry over the years has given rise to a redundancy of products in the service line. Some of them may be outdated and may be superseded by newer products but they continue to be part of the offering by the hotel. 6|Page
  7. 7. When a product class consists of a large pool of individual products, it results in the following:  Does not allow volume discounts: It reduces the possibility of bulk purchase and consequently pushes up the cost per product unit.  Inconsistency: It becomes difficult to maintain quality and consistency of the product, because the number of products and suppliers that must be controlled are far too many.  Cost of ordering: Large number of SKUs and suppliers increase the number of overall transactions. While customer centricity is unavoidable in the service industry, it may be worthwhile to understand which products may bring true value to the customer and which do not. However customer centricity does not necessarily mean that the industry adopts ad hoc methods in the purchasing process. A customer has a unique place in the service industry and more so in the hotel industry. Unlike most industries where 90-95% customer satisfaction is an accepted norm, in the hotel industry the target is always to reach 100% customer satisfaction. This level of customer centricity usually leads to greater importance to customer facing functions and a lesser emphasis on back-end functions like purchase and IT etc. As a result, the purchase manager in a hotel is placed lower in the hierarchy and the main function of this manager is to satisfy internal customer needs. This lopsided structure invariably results in the purchase manger maintaining higher buffers in the inventory or in the supply line resulting in an increase in overall cost in supply chain. Excessive customer centricity to achieve a higher satisfaction and service level also gives rise to a larger supplier base for the hotel industry. Often, a product that has a general lead time of six days must be brought in six hours. The purchase manager has no option but to use multiple suppliers for such emergencies.2. Poorly integrated application systems A typical application landscape in the hotel industry shows that customer-facing applications and back-office applications do not interface with each other. This results in a gap between sales systems and procurement systems which consequently hampers forecasting. The lack of integration between purchasing, inventory and accounts payable systems results in multiple data entry points results in data inconsistency and redundancy, in turn pushing up transaction costs. One of the main reasons behind the poor integration among hotels of a same chain is the absence of a uniform product and supplier identity across hotels. Unlike a manufacturing organization that has complete control over the identification of products through specifications, a hotel may buy many commodities that lack global specification standards, which is again because of the nature of industry. For example, a particular quality of fish may have a different attribute association in different countries, or even in different cities within same country. Distributed technical architecture also results in very poorly developed management information systems. As a result, benchmarking of prices, products, or suppliers becomes a laborious exercise and thus making task of purchase manager more cumbersome and inefficient. The fact that almost no technology vendor in the hotel space today offers an integrated solution does not improve the situation.ConclusionIn conclusion we can say that role of supply chain is not limited to any industry rather it hasrelevance over almost all industries. It would not be exaggeration of importance of the supplychain management if one would say any firm can compete in its industry just only on the 7|Page
  8. 8. bases of how it manages its supply chain, work for betterment of it and move it towardshigher efficiency every day. In coming era of cut-throat competition the basis of competitionin many industries will revolve just around supply chain development.Industries do not operate in isolation. A research or introduction of a breakthrough innovationin one industry can change the whole scenario (e.g. introduction of internet changed thewhole operations of almost all the industries). Same is the case with hospitality industry, so itmust make optimal use of technology or any other innovation going around which can changethe rules of game. 8|Page