Getting a Grip on the Hospitality Supply Chain

The hospitality industry is a complex beast with numerous operations and suppliers folded neatly into the customer pricing and their profitability numbers. But with dependence on the global supply chain, fluctuating costs and unpredictable availability, the neat packaging has become a little murky. And, that is before taking into account the pandemic and now the war in Ukraine and its effect.

Hospitality real estate operations are incredibly cost-sensitive and price-conscious with their physical goods. This is largely because of the inefficiencies from hotels needing to keep many disparate operations afloat in order for their guests to have a memorable experience.

For instance, in order to motivate room reservations and to command a higher nightly rate, an onsite restaurant becomes an intrinsically mandatory amenity for many properties, especially those in remote locations. This food-and-beverage (F&B) operation then requires equipment, supplies, software and staff. Now with the current staffing shortages forcing many hotels to limit hours of operation or pay overtime, it’s a miracle to break even. In this way, restaurants are often a ‘loss leader.’

Beyond F&B, next consider other common operations and the gears necessary to make them turn—group sales, catering, front desk, parking or valet, security, IT, reservations, housekeeping, engineering, marketing and accounting, as well as other resort-style features like spa, golf, activities and gift shop. Many departments mean lots of sourcing but also lots of staff, technology fees and manager salaries.

The margins after all these costs are tabulated as net operating income (NOI)—and before taxes, capital expenditure budgets and debt service coverage—can be threadbare, which primes hoteliers to think primarily in terms of cutting costs. For you, this means that a lower product price will most likely trump better quality as a budgetary necessity.

“Supply chain issues are impacting virtually every industry, including hospitality, and Marriott is working through a dynamic and quickly evolving supply chain recovery,” said Marriott International’s chief global officer, Erika Alexander, who was also one of the keynotes at MODEX 2022. (See coverage at modexshow.com under MODEX Digital Entry.)

“Through these challenges, we have stayed committed to our long-term goals,” added Alexander. “As the world’s largest hospitality company, we use our purchasing power to create value for owners and franchisees, accelerate opportunities for diverse suppliers, and drive sustainable sourcing practices to reach net-zero greenhouse gas emission no later than 2050.”

Hotel management companies are feeling the supply chain effects, as well. In the hospitality industry, a management company is hired by the property owners to run operations, with compensation by meeting certain topline revenue and NOI targets in order to generate a return for the owners and grow asset value. A management company will have “flagged” properties, which is a term that can be seen as interchangeable with ‘franchised,’ although a key difference here is that brands, like Marriott International, often don’t own the hotels with their logos on them. Instead, they may provide software, access to their customer loyalty network and brand standards to guide standard operating procedures (SOPs) and procurement decisions through brand-approved vendors. Together, the owners, the brand and the management company form a triumvirate that dictates how operations change over time or pivot in the face of sudden market forces.

Andrew Carey, who is CEO for Newport Hospitality Group—a hotel management company with over 50 flagged properties—said, “From development to operations, the hotel industry has been wrestling with ongoing supply chain issues. This logistics challenge has forced operators to plan further ahead, alter their purchasing programs and make longer term inventory investments. Like everything during COVID-19, we have had to learn to be more flexible and creative in our daily operations. While challenging, many of these lessons will make us better operators as business normalizes.”

Academia is also looking into the hospitality industry’s recovery, though more from a birds-eye view instead of a boots-on-the-ground stance. Jan Louise Jones PhD, a professor of hospitality and tourism at the Pompea College of Business at the University of New Haven, has spent the last two decades conducting research, with a focus on the importance of sustainable tourism development and management.

“As many hotels are gearing up for what is expected to be their best summer in two years, most are still challenged with supply chain issues, staff shortages and now increased prices due to gas increases,” said Jones. “We can expect some price increases in high demand areas and in some cases limited services due to these continued shortages. Some industries are offering sign-on bonuses and additional training incentives to attract workers back to the industry.”

Reading Between the Line Items

Hoteliers active within the procurement departments are well-aware of the current challenges and are working every day to resolve them by sourcing suppliers with deliverable guarantees and negotiating bulk, multiyear contracts at steady, fixed prices—both leading elements for any contracts or purchasing orders. Again, it’s all about costs and meeting predefined budgets.

Significantly, look to how many hotels have contended with the pandemic-born supply chain disruptions and staffing shortages by limiting services, either by reducing hours of operation to mitigate overtime pay and employee burnout or shuttering the doors altogether. In both cases, a closed operation is one that cannot serve guests and therefore cannot use up existing inventories, which will unavoidably squeeze reordering quantities. Suppliers that can find a way to work with hoteliers through these difficult periods with inventory planning, delivery transparency to reduce problems related to missed delivery schedules and preferential pricing will be the ones that are rewarded with more business and a lasting relationship.

Other more complex supply chain issues have also had palpable knock-on effects for hotels’ must-have goods. Namely, the chip shortage is showing no signs of abating given that demand in other industries is growing at a relentless pace and government-incentivized reshoring efforts will take years to come online. Hotels are inevitably impacted by this when it’s time to replace such mainstay items that have chips, such as smoke alarms, door locks and HVAC units. Although not a dealbreaker, if parts delays happen too frequently then it may cause a procurement officer to investigate other options.

Another must-have component that has succumbed to remarkably similar market forces is labor, specifically those in nonmanagerial roles. With the pandemic lockdowns furloughing most of these associates, many sought employment elsewhere, permanently leaving hospitality. And with the rise of remote work, hotel wages must now compete against all other customer service jobs, with companies in other industries often able to provide more stable hours and benefits.

Then consider the nice-to-haves. If a certain food ingredient is hard to source or too costly relative to what can be paid forward to the customer, rather than endure the temporary pain, an F&B operation will likely just take it off the menu. Similar tactics may also be taken for whole amenities like an outdoor pool. If labor for safety monitoring, combined with limited availability of pool treatment chemicals, cannot be attained at a reasonable price, then it may be more prudent to temporarily close the operation rather than let the increased costs dip into NOI.

Lastly, there are the one-off property improvement plans like an upgrade to meet new brand standards, adding a new operation for revenue diversification and increased nightly rates, or renovating to stay in vogue with evolving consumer tastes. Every situation demands material orders, case goods purchasing and labor scheduling. Given the broader sentiment about supply chain disruptions and increased costs of transportation, a hotel may be inclined to hold off entirely on such expenses, for now.

Industry Poised for Huge Expansion

The aforementioned obstacles may give you a picture of overt cautiousness for hotel companies, but the post-pandemic world is chiefly one that’s ripe for expansion. Fueled by the travel recovery and all the accompanying changes to guest behavior, brands are evolving to meet these new demands with new product expansions or sub-brands and new service or amenity offerings – all with intricate supply chain needs.

On a macro-level, brands are now armed with a lot more data on their customers to better refine the segmentation of these guest types. As well, hotel companies have set up omnichannel rooms distribution automation to quickly market and sell to these guest nichifications. Together, this presents a multitude of lucrative business cases as the development pipeline for new properties and the refurbishment of existing ones is set to bloom, with each brand looking to differentiate itself at every level from equipment and hard goods all the way down to embroidered hand towels.

A key word therein to unpack further is ‘automation’. Not only is this occurring on the sell side but also the service side; richer tech stack integrations are now simultaneously freeing up labor and lowering the cost of service delivery. This in turn gives hotels a newfound flexibility to explore and to upgrade brand stands, adding value to onsite experience in a myriad of ways that will inevitably require new purchasing orders and contracts.

All these rapid changes to the hotel industry should indicate for you an optimistic situation. Open dialogues with procurement officers at hotel companies to learn about the strategic directions for their brands over the next few years and how you can help them to realize that vision on a cost-efficient basis. Ultimately, it’s all about the guest experience, so if you can show how your business can alleviate a pain point in the back-of-house operations to augment customer satisfaction, then you will be rewarded kindly by your hotelier clients.

(Originally published in the June 2022 issue of MHI Solutions print magazine)

Larry Mogelonsky
Hotel Mogel Consulting Limited

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