Especially in these volatile post-pandemic times, purchasing hotel products—from FF&E to F&B—calls for resourcefulness and foresight. Challenged by both price increases and supply chain disruptions, buyers do well to exercise all the best practices at their disposal, including flexibility in product selection when possible, closely monitoring price fluctuations, exploiting volume buys, and maintaining regular communications with suppliers.
Several of the industry’s top purchasing agents spoke with LODGING about how they are approaching the current market, including Paul McArdle, vice president of global operations, Entegra Procurement Services. Historical context is valuable, and McArdle provides background on the genesis of the supply chain issues: “We had a reduction in demand during COVID, which directly led to a lack of available labor during the recovery,” he explains. “As an example, this led to a decrease in the workforce in the packaging industry of almost a third, which directly impacted the ability to produce packaged goods. In addition, there were 500,000 fewer drivers in the U.S.” Such conditions negatively impacted the ability to deliver products across most categories now that demand has surged. However, McArdle points to encouraging signs of supply chain stabilization in certain areas, such as linens and amenities.
Meanwhile, the supply of certain F&B items has been hampered by events apart from COVID, such as avian flu, which is causing the turkey shortage. Eggs and dairy products, which are high-volume food items for hotels, are also in relatively short supply. “Russia is the largest supplier of grain for livestock. And because of sanctions and other factors, the feed for livestock is way down, and this puts more pressure on the egg and dairy supply chains,” says Sarah Davie, president, Source1, a Buyers Edge Platform company. “That impacts our hotels, who are trying to serve free breakfast, or quality breakfast in general, to their customers.” Faced with such challenges, hoteliers have little choice but to adapt their approach to the items in question. For example, they may buy more egg substitutes or liquid eggs, which have a greater yield for their customers, or simply offer smaller portions of that item, Davie notes.
The Impact of Inflation
Cost increases have been seen across all product categories, not just those relevant to construction and renovation. “We are seeing raw material costs increase in F&B, resins/pulp, and cotton, which peaked at nearly three times the cost pre-pandemic,” McArdle observes. “Then when you add to that the movement in the workforce along with the high costs of energy and fuel, these all have an impact across our wider supply chain.”
Cynthia Milow, executive vice president and COO, PMI Connect, highlights the cost rise in petroleum-based products, which affects certain carpet, fabric, and wall covering products. However, the latest design trends can obviate the need to buy as many of these products. “You’re seeing a lot more hotel rooms that have LVT flooring, and so you’re not buying as much carpet because you may only be putting in an area rug,” Milow explains. “So, there is a decrease in the amount of carpet that we’re purchasing with the implementation of that new design style.” Also, due to the surge in price for petroleum-based products, “now hoteliers can afford more natural fibers, where natural fibers used to be the costly ones,” she observes. “There is a balancing act going on between the natural fibers and the petroleum-based fibers.”
Regarding the overall impact of inflation, there may be a light at the end of the tunnel. “We do see inflation hitting headwinds with price easing that began in June,” Davie says. “Much of that price easing is happening in the food-related commodities, but we do see it starting to trickle down to non-food commodities such as lumber, cement, and steel.” The recent strengthening of the U.S. dollar may explain this positive trend. “One of my analysts pointed out that traditionally there is a strong correlation between the increasing value of the dollar and the easing of commodity pricing, and the dollar has really strengthened since May,” she adds. “Because of this macroeconomic effect, some of my analysts say that we will continue to see price decreases in certain categories of products.”
Cost Control Approaches
One way to manage cost increases is to adjust the offerings to guests when it would not greatly compromise their experience or the hotel’s brand promise. “For example, if beef is going up in price and chicken is reducing, then being able to change the menu accordingly gives you an opportunity to control costs,” says McArdle. Such flexibility helps to minimize the effects of price volatility. “While we look to lock down pricing for certain contract periods, some categories are more fluid and can change due to simple things like crop output, energy costs, and manufacturer capacity,” he explains. “Having a dynamic approach to procurement will help steer through these turbulent times.”
In the area of food service equipment, cost control can be improved by recourse to buying preowned products. “We are seeing more of an interest in preowned equipment, especially since many restaurants have closed during COVID and there can be a surplus from those closures, whether it’s tables, chairs, equipment, etc.,” says Davie. “We’re also seeing more leasing equipment from suppliers, if you can commit to buying a certain amount of volume from them. For instance, the price of coffee is quite high—about 100 percent over pre-pandemic—but a hotelier may be able to save by leasing coffee-brewing equipment from a supplier with the commitment to buying a certain amount of grounds or beans from them.”
Bulk buying itself is an increasingly common practice to help manage costs. Due to the labor shortage affecting manufacturers and suppliers, many will have to be selective on the orders they take and will naturally focus on the larger orders. “So, we batch products together to build a greater buy that is more appealing for the manufacturer,” says Davie. “You’re going to get their attention and their best pricing.”
While seeking out a less expensive brand in the given product category is a typical cost-management strategy, McArdle adds an important caveat to that approach: “There are opportunities to move to different products or suppliers, but operators should be aware of the long-term impact on the quality of service and their own brand.” Such decisions must be carefully weighed.
Negotiation and Supplier Relationships
With high demand and low supply, negotiating a reduced price isn’t always possible. However, negotiation need not concern price, but rather payment terms. “People sometimes miss that fact,” says Milow. “There has been a big shift with the vendors in changing their payment terms, because they’re feeling a little comfortable. They’re feeling like they can get heavier deposits or full payment in advance, and so on. So, we always negotiate payment terms and delivery arrangements.”
Strong supplier relationships pave the way to successful negotiations, and thus fostering those connections is especially important in the current market. “When we look at support from the supply network, we are one of the biggest customers in the lodging sector, and we pride ourselves on having the best supplier relationships in the industry to make sure that our customers always receive the best service, but even more so in these difficult times,” McArdle explains.
Admittedly, pricing and supply challenges may not put a buyer in the best frame of mind, and that can impinge on negotiations and dealings with suppliers. But negative dispositions should be avoided for the benefit of the relationship. “It’s really easy to yell and scream and carry on,” says Milow. “Does that really solve the problem? No.” As always, a level-headed conversation about each party’s needs stands the best chance of producing a “win-win.” Milow gives an example of such an interaction: “Not so much these days, but a year or two ago, I would get phone calls from suppliers saying, ‘Hey, I’ve got a four-month gap in production. Do you have anything I can fill it with?’ If you can offer bids that fit in that downtime, then everybody benefits, the client and the manufacturer.”
An open line of communication can also help iron out difficulties with supply chain disruptions, which often result from underlying issues that should be brought to light. Milow relates a scenario where that approach came into play: “We may place an order with a company for a bedroom package, and behind the scenes, the individual manufacturers have dozens of suppliers for every piece of the package. And sometimes you can get a delay in the schedule because a hinge doesn’t arrive that happens to be custom. So, the workaround is to be really nimble, creative and a good communicator with your vendor to dig into what the problem is. You may say, ‘If you can get the piece assembled, and the only thing we’re waiting for is the drawer pullup, I’ll put that in onsite. Don’t delay the shipment; send me the hardware in a separate package.’ The smart purchasing agent is a true partner with the manufacturer and works through those issues together. And they’re savvy enough to understand the questions to ask. Because if they don’t, the client suffers.”
When buyers have established communication and trust with their suppliers and combine that with the aforementioned purchasing strategies, they’ll soon find themselves on the other side of the current market challenges, and more easily delivering hoteliers products that fit the parameters of quality, quantity, price, and timeliness. The pendulum inevitably swings back.
Partnering With a Purchasing Agent: PAs Bring Decided Advantages but Must be Carefully Vetted
As is well known, purchasing agents bring hotel operators a volume-buying advantage, which can translate to better pricing and is especially helpful given the current market conditions. But ideally, PAs will also offer a suite of advisory services. Entegra Procurement Services is a case in point. “Utilizing a GPO (group purchasing organization) will allow operators to benefit from an aggregated volume in the market, and here at Entegra we are not a normal GPO but more and more an operations performance improvement company,” explains Paul McArdle, vice president of global operations. “We strive to support our hotel clients in everything that relates to operations. To this end, we provide advisory services, which means helping our clients not just get great prices but also improve their margins, design menus, design recipes, and optimize their back-of-the-house operations. We also focus on digital and data capability, which allows clients to make smart decisions that are data-based.”
Working with a variety of hoteliers undergoing the same challenges, PAs are often well positioned to advise in the areas McArdle cites. And as procurement specialists, they typically have in-depth product knowledge that enables better buying decisions. Price must be contextualized with an exact understanding of “the composition of the product you’re purchasing,” notes Cynthia Milow, executive vice president and COO, PMI Connect, “because the composition of the product dictates the cost. A very common example in the wood furniture world is the wood species versus the wood finish. So, if you want a walnut finish on a coffee table, that does not automatically mean you must have a walnut wood solid, which is a premium product. You can find a comparable grain with another wood product that you can apply a walnut finish to, and all of a sudden you’re achieving a really big savings.”
Because a PA’s knowledge, resourcefulness, and savvy can be difficult to assess in an interview, testimonials on their results are especially important when vetting a potential partner. “It’s really important to get references on the people that you deal with on all levels, and especially purchasing, because what we do can seem a little elusive,” says Milow. As far as vetting criteria, it’s vital that the PA be able to both maintain the brand’s quality level and meet the owner’s budget, which is an important balancing act, and deliver needed products in a timely fashion. Milow advises, “Especially in the luxury sector, you really want to check out your purchasing agent, because not all of them understand the differences between the various levels of brands. They may save you money, but [did their product choices uphold] what the brand wants to represent?” Thus, great references from brands in the relevant chain scale are particularly important, as they indicate the PA is sensitive to brand quality. “When we get a referral from the brand, we always treasure that because that means they trust us to deliver what they need,” Milow concludes. “It’s a huge boost to our confidence when we hear those comments, and an owner would want to hear that too.”