Hospitality Logistics: Supply Chains Made to Order

Missed delivery appointments, products held up in Customs, and short shipments are disruptions supply chain managers often contend with.

But for Royal Caribbean Cruise Lines, any one of these snafus can mean the ship has sailed—literally—without the food, beverages, and supplies critical to its guests’ experience for the next seven days.

Complicating daily management tasks for the 34-vessel cruise line operator’s 225-strong supply chain organization is the fact that essential freight must be coordinated to arrive in a foreign port to meet a tight nine-hour loading window.

If it doesn’t, the company risks jeopardizing its most important mandate: customer satisfaction.

“Ask warehouse employees what our mission is, and they will tell you it is not moving freight, it is all about the guest experience,” says Laura Luff, director of logistics and material control for Royal Caribbean.

That sentiment permeates the hospitality industry, whose bread and butter is delighting the customer.

That is why hospitality operators’ capital investments tend to focus on products, services, and systems that enhance the guest experience—and not always on back-end infrastructure that gets those goods to the ships, hotels, restaurants, and other destinations where they are consumed.

This is particularly true for small organizations: seven out of 10 of the nation’s 935,000 restaurants are single-unit operations.

And, of the 47,590 hotel properties in the United States, 58 percent offer fewer than 75 rooms, according to the National Restaurant Association and the American Hotel & Lodging Association.

Gaining Visibility and Control

Technology has further differentiated small hospitality companies that struggle to manage their supply chains with limited resources and budget from large, multi-unit chains that can afford to invest in solutions to gain visibility and control.

Many multi-unit chains have begun taking charge of the procurement process, using technology to manage sourcing back to raw materials suppliers and even buying futures on the commodity market.

Myriad business model variations exist among hotels, restaurants, resorts, casinos, and cruise ships. As a result, sourcing operations can encompass a few hundred or thousands of SKUs.

Purchasing in the hospitality industry is further complicated by the fact that many businesses face fragmented management operations—which can include franchisees and individual owner/operators—as well as managing multiple brands under one corporate umbrella.

Common industry sourcing and procurement challenges include maverick local buying, and a lack of centralized processes to ensure that purchases and deliveries meet contracted pricing, brand, and quality standards.

Proprietary distributor ordering systems and non-standardized product descriptions also lead to waste. It is not uncommon, for instance, for a chain to learn it purchases the same size ketchup bottles under multiple product descriptions.

“That lack of control, coupled with the volume of product that hospitality companies manage, causes them to lose money that should go to the bottom line,” says Pat Welch, COO of Adaco Services, Williamsville, N.Y., a software provider to the hospitality industry. “Companies lose money when they fail to take a proactive approach to procurement.”

Subway Restaurants, along with its Independent Purchasing Cooperative—a procurement group run by franchisees—was an early innovator in the movement to gain control of the sourcing process, and the trend has spread to other large enterprises.

Increasingly, hotels and restaurants employ spend management, procurement, audit/compliance, and inventory systems to gain visibility into, and control of, purchasing.

Hilton Hotels is among those hospitality companies that have transformed their approach.

“Ten years ago, we were behind the curve compared to other hospitality companies. Now, we are close to cutting-edge,” says Don Miller, regional director of supply management for Hilton.

The worldwide hotel chain manages procurement through its Beverly Hills, Calif., office, and six regional affiliate locations. The procurement group aggregates buying into national contracts for its various brands, and enables local providers where it makes sense to do so.

Hilton cuts deals directly with suppliers, then negotiates markups with the distributors that handle warehousing and delivery.

“It’s important to control the whole supply chain,” Miller says. Now, the company is tackling the integration of international procurement, brought on by its reacquisition of Hilton International in 2006.

Spend and Save

Effective spend management helps Hilton control and monitor what individual sites buy and pay, then ensures compliance. Its hotel properties access a Web-based e-procurement system to view product catalogs specific to their brand and location. T

he third-generation system manages orders and electronic approvals, as well as inventory. As supplies arrive at individual hotel locations, managers receive data from the system—ensuring that, say, sirloin contracted at $10.99 a pound isn’t charged at $11.99.

Standardizing purchases also provides large chains such as Hilton more consistent product quality and safety, notes Adaco’s Welch. Some spend management systems extend into the kitchen, ensuring that recipes parse out ingredients at the expected rate, and helping chefs modify them to ensure both flavor and economy.

The systems also place controls around previously inexact processes such as calculating liquor consumption at banquet bars.

Hospitality companies are also starting to take control of transportation spend.

“Most contracts treat transportation as a markup of the landed cost. But if the company doesn’t have access to landed cost data, how does it know it is paying the right price?” asks Jeff Smith, vice president of marketing at foodservice software developer Instill Corp., Redwood City, Calif.

Hospitality operators look to companies such as Instill to provide transportation information as part of spend management, or work with distributors to receive that information, he adds.

Others turn to third-party logistics providers to manage the movement of raw ingredients and supplies.

Pizza chain Papa John’s, for example, uses UPS Supply Chain Solutions to coordinate its inbound distribution network, delivering cheese, dough, pepperoni, and tomato sauce to its more than 3,000 stores in a timely and streamlined fashion. Its partnership with UPS SCS helps Papa John’s optimize distribution and guarantee product freshness.

Hospitality companies often embrace third-party solutions and services when growth spikes and business becomes too complex to control internally. Outsourcing also can help hospitality businesses that must comply with differing sets of brand sourcing requirements.

Finding the ROI

Enterprises employing spend management, procurement, audit/compliance, and inventory systems typically save two percent to five percent of their total spend, says Instill. While that sounds like a low number, it can have a big impact.

“When companies spend millions of dollars, cutting costs by half a cent per dollar adds up to a lot of money,” says Rupert Spies, senior lecturer, Cornell School of Hotel Administration, Ithaca, N.Y. “For companies operating with thin margins, such savings are even more important.”

Though hospitality companies are making gains by utilizing technology, the industry still lacks standard application programming interfaces to reduce the cost of integrating technology solutions, says Tina Stehle, vice president and general manager of Agilysys Hospitality Solutions, a Boca Raton, Fla.-based hospitality software provider.

New delivery models such as Software as a Service, however, help make implementation more accessible to smaller entities.

“The hospitality industry is particularly risk averse, and Web-based software solutions allow businesses to get their feet wet with technology,” Smith says.

These solutions will greatly impact technology adoption in the hospitality industry, he predicts.

The improved visibility and inventory control these tools deliver also feeds better forecasts.

“If Red Lobster or Darden Restaurants does a poor job forecasting sales, it will run out of food immediately because it buys specialized goods that aren’t always readily available,” says Spies.

Small operators generally fail to conduct proper forecasting, he says, even though today’s point-of-sale systems can produce the required data.

Pushing the Envelope

Cutting-edge hospitality chains are reaching beyond inventory control systems to spend intelligence tools, which help gather, rationalize, and analyze historic and real-time purchasing information.

Tapping the real-time inventory capabilities of these applications enables operators to closely monitor and respond to demand swings, and helps them rate distributors and manufacturers on service quality.

These tools ensure that supplies neither build up nor deplete, and next-generation applications will automate the actions required to resolve such issues.

Integrating inventory management and business intelligence applications with Web services to deliver real-time data is another increasingly common IT request from hospitality operators, Stehle adds.

Such real-time data is particularly helpful for ensuring food safety. Restaurants and hospitality businesses are exploring new ways to ensure traceability and safe handling of food from field to table.

“Restaurants today face an increased need to assure customers that they know where food comes from,” says Spies. Certification, controls, and spot checks are also common now, he adds.

Because of these issues, many hospitality chains are shifting their focus from partnering with lowest-cost suppliers to finding partners that offer the best overall supply relationship.

For some large hospitality operators, gaining control means delving even further back in the supply chain and getting involved directly with commodities.

“If a company routinely buys huge quantities of cheese or beef products, for instance, hedging can help stabilize prices,” says Spies.

Some companies go further still: New York City caterer Great Performances purchased a farm to guarantee a direct supply of seasonal fruits and vegetables.

Such innovative practices are becoming more commonplace in the industry, as chains move to adapt to a changing marketplace and keep up with customer demand.

While the hospitality industry is still considered not quite bleeding-edge when it comes to adopting the latest supply chain thinking and technologies, large enterprises are starting to close the gap.

By adopting new tools and processes, the industry is solidifying its belief that truly satisfying guests means taking a trip back to the basics—sourcing quality food, beverages, supplies, and services.

Ensuring A Moveable Feast

For Royal Caribbean Cruise Lines, the typical challenges of hospitality sourcing are complicated by the fact that its “properties” move from country to country, and sometimes out of satellite communication range.

That means multiple sets of regulations and port practices, varying product quality and pricing, and plenty of contingency planning to ensure supply continuity.

“No matter what we do, we face risk,” says Laura Luff, director of logistics and material control for Royal Caribbean. “We will source local products if necessary; we’ve even chased a vessel with a feeder ship to deliver critical supplies.”

To help avoid crises at sea, Royal Caribbean’s supply chain staff provides early input into proposed itineraries in order to schedule at least one loading port into the plan.

The company locks in buying decisions 40 days in advance, cross-docking some goods and storing others in the cruise line’s 500-SKU Miami warehouse.

Items such as linens, bedding, and souvenir goods are shipped from China and routed directly to one of the ships’ ports. Inventory must also accommodate the seasonality of the cruise business.

The supply chain group has devised many of its own sourcing systems, including one to deliver goods to ports.

Every item that moves on and off the ships must comply with stringent Homeland Security procedures. If a repairman needs to come on board with a tile cutter, for example, that equipment must be cleared through customs.

Adopting supply chain software to manage these processes on land and on board is challenging due to the ships’ unique mobile and legal status.

Royal Caribbean is currently seeking a transportation management system, for example, but any system it chooses will require significant reconfiguration.