Chapter 2:

Significance of Supply Chain Management in the

Hospitality Industry

Any company needs to know that when and when it is required to meet
orders, it will have the stock it requires. Nothing looks worse for a business than
running out of something that a customer needs, whether that be resale items or
goods that are part of delivering a service. Supply chain management is much more
important than placing orders with suppliers and there are some sectors where it is
more important than others, with hospitality being a common example. Here we look
at the value in the hospitality industry of supply chain management.
In today's changing business environment, there is an increased focus on
delivering value to the customer at the cheapest possible costs. Hence there has
been increased interest in logistics and supply chain management practices since
performance is not only determined by actions and decision, but also the
improvements on return on investment and greater profitability. Hotel companies,
both big and small, must focus on how to offer products and services while keeping
costs low. In an industry which is labor intensive many hotels are forced to make
bolder and more visible moves in costs reduction to their operations. It comes as no
surprise that much of these costs cutting efforts have been focused on payroll and
other employee associated costs, like hiring freezes, cuts in employee perks,
reduction of bonuses, and reductions in salaries.
One area of the hotel industry that is usually left out in cost cutting efforts is its
logistics and supply chain operations. Even though logistics and supply chain are
considered an operations management strategy in the hotel and other service
industries, they can use these strategies to help add value to their properties. The
supply chain is an important element within the hotel and catering industry.
A well-established logistics and supply chain management system can help
the hotel industry give individual hotel companies a sustainable competitive
advantage. The use of the right logistics and supply chain strategies helps not to
only improve the quality and service of the Hotel Company, but drive down costs. For
staff in this industry, it is crucial to build steady relationships with suppliers and work
1
with a good ordering system in order to improve the service level towards customers.
The hotel industry can benefit from the comprehensive and integrated practices of
logistics and supply chain management, by delivering a consistently reliable and
high-quality service at the best costs.

THE HOTEL CHAIN SUPPLY CHAIN

2
 A hotel chain supply chain incorporates features of both manufacturing and
service supply chains. For this reason, six characteristics of a hotel supply chain
have been identified.
 The first one is the perishability of products and services rendered and
therefore impossible to store.
 The second feature deals with the dependence of the presentation and
interpretation of the products offered to the clients so that there is a good
quality hotel and customer interaction in order to generate new demands,
since the hotel industry is a highly interactive industry.
 The third characteristic is the inherent complexity of products and services,
resulting in a higher number of suppliers.
 The fourth characteristic deals with the uncertainty of demand stemming
mainly from two reasons: high competition and external factors, such as
seasonal variations and economic performance.
 The fifth characteristic is the inseparability between service production and
the end customer
 Finally, the sixth trait involves the tradition sale of tourism service packages,
making the relationship and cooperation among tourism organizations crucial.

FACTORS AFFECTING SUPPLY CHAIN MANAGEMENT IN HOTEL

INDUSTRY
It is important to realize that the premise by which the hospitality industry
operates is somewhat different from other industries. The capital costs of industries
are high, with relatively lower operating costs. The hotel industry has distinctive
features, such as customer centricity, various styles of management, etc.
 Guest or Customers are the utmost important for the hotel industry; customer
satisfaction is of paramount importance to the hotel industry. In the hospitality
industry the customer related activities such as food and beverage production
and service, housekeeping, Front office management are given utmost
importance. The back-office operations such as the accounts, purchases,
supplies chain management, revenue recording etc. take a back seat.

3
 Different types of management systems, such as the ownership hotels,
franchisees, hotels which are run on operating contracts by chains etc. The
different managements systems have different implications on the supply
chain management.
 In the hotel industry all the efforts are customer oriented as a result lot of cost
reduction which can be attained through improved upstream functions of
supply chain management is lost. Current trends in the industry show that
computerized property management systems are used but mainly for front
office management and reservation systems.

BENEFITS OF SUPPLY CHAIN MANAGEMENT

 The supplier and the hotel profit from a well-established supply chain
management framework. Due to competent management in the context of
developing proper buying strategies, the relationship between the supplier
and the hotel is better. Rather than getting a broad and inefficient supplier
base, this may also contribute to relying on a few reliable suppliers. Newer
and more efficient suppliers could be identified, leading to increased
efficiency.
 It leads to significant reduction in costs and also helps continuous evaluation
and improvement in the buying process. It could increase the product range or
perhaps reduce it too, because of intensive market research undertaken.
 Improved management information to future requirements.

THE NEED FOR SUPPLY CHAIN MANAGEMENT

1. Need to further reduce operational cost
 Over the last century, companies have done much to reduce their operations
cost within the organization through Business Process Reengineering (BPR),
Enterprise resource planning (ERP), Total Quality Management (TQM), Total
Productive Maintenance (TPM), lean manufacturing, Just-in-Time (JIT) etc.
 But there is still scope for improvement and cost reduction in the areas of
supply side, delivery side and logistics of the company.
2. Increased outsourcing requirements

4
  Out sourcing activities of companies are on the increase. This also increases
the cost associated with procurement, distribution and logistics, offering scope
for substantial efficiency improvement and coordination beyond its production
activities.
3. Increasing transportation cost
 Transportation cost account to 5 to 30% of the operating expenses of the
company. It needs focus to reduce cost.

IMPORTANCE/OBJECTIVES OF SCM
1. Achieve strategic advantage
SCM gives competitive edge to the firm by ensuring smooth and systematic
flow of goods, information and funds. Underperformance of one link in the supply
chain can destroy strategic advantage of all in the supply chain. It can help
achieve capability to reduce product development time and offer more new
products to the customers.
SCM support ERP which integrate other functional areas for performance
improvement. It supports TQM to meet the quality and delivery needs of the
customer as well as supplies for production. It supports Customer relationship
management (CRM) which meets customer expectation and bring customer
satisfaction and delight. SCM also supports e-commerce for buying and selling,
Increasing strategic competence further.
2. Achieve Cost control/reduction
 Reduce all company costs by optimizing the cost of freight and logistics.
 Identify waste sources to avoid them in the whole supply chain.
 Ensure quality in the logistics of warehousing, transport and handling.
 Decreases Purchasing Cost - Retailers depend on supply chains to quick
deliver expensive products to avoid holding costly inventories in stores any
longer than necessary.
 Decreases Production Cost - Manufacturers depend on supply chains to
reliably deliver materials to assembly plants to avoid material shortages that
would shut down production.
 Decreases Total Supply Chain Cost - Manufacturers and retailers depend
supply chain managers to design networks that meet customer service goals

5
 the least total cost. Efficient supply chains enable a firm to be more
competitive in the market place.
3. Enhances outsourcing capability
 out sourcing generally reduces the cost of operation of a company.
 An efficient and cost effective SCM system will enable the firm to reap the
benefits of outsourcing.
4. Achieve Globalization
 helps to operate across world market.
 helps to make the product available in existing and new markets at
competitive price.
 Properly designed and executed SC make global out sourcing possible.
 SCM helps to meet global competition successfully.
5. Better Inventory management
 eliminate the necessity to stock the items in large quantities.
 Ensure availability of goods in right quantity at right price with right quality at
the right time.
 Systematic inventory management like JIT, ERP etc. can be implemented.
 Prevent Bull whip effect of inventories in the entire SC. The phenomenon of
progressively larger inventories at different stages of supply chain from
customer to backwards is called Bull whip effect. Bull whip effect increases
the SC cost.
6. Effective use of supply and logistic resources
 few dedicated suppliers
 dedicated transportation and logistics.
 participation of suppliers in quality improvement, design improvement, value
engineering and new product development through Design Collaboration.
 Competitive, participative and collaborative pricing with suppliers and logistics
providers by sharing benefits mutually.
7. Reduced lead time by design collaboration
 lead time for product improvement is less
 new product development time is shorter.
8. Achieve on time delivery

6
 ensure prompt delivery of product and services to customers on time.
9. Facilitate e-commerce
 Introduction of e-commerce and e-business gives an entirely new dimension
to buying and selling using internet which enhances operational efficiency and
customer satisfaction.
10. Boost Customer Service
 Customers expect the correct product assortment and quantity to be
delivered.
 Customers expect products to be available at the right location.
 Right Delivery Time - Customers expect products to be delivered on time.
 Right After Sale Support - Customers expect products to be serviced quickly.