Purchasing 6th edition

Purchasing : selection and procurement for the hospitality industry / Andrew Hale Feinstein, John M.. ■ Ultimate Value ■ The Buyer’s Place in the Channel of Distribution ■ Selecting Econ

P U R C H A S I N G

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Library of Congress Cataloging-in-Publication Data:

Feinstein, Andrew Hale.

Purchasing : selection and procurement for the hospitality industry / Andrew Hale Feinstein, John M Stefanelli — 6th ed.

p cm.

Published simultaneously in Canada.

Includes index.

ISBN 0-471-46005-2 (cloth)

1 Hospitality industry—Purchasing 2 Hospitality industry—Purchasing.

I Stefanelli, John M II Title.

TX911.3.P8F45 2005 647.95
068
7—dc22 Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

The Purpose of this Chapter ■ Introduction ■ Types of Hospitality Operations ■

Major Purchasing Distinctions in Hospitality-Operation Types ■ The Use of this Book

■ Key Words and Concepts ■ Questions and Problems ■ Experiential Exercises

The Purpose of this Chapter ■ Introduction ■ Technologies that Distributors Use

■ Technologies that Buyers Use ■ Roadblocks to Adoption of E-Procurement ■

The Future of E-Procurement ■ What Lies Ahead? ■ Key Words and Concepts ■

References ■ Questions and Problems ■ Experiential Exercises ■ The Future of Foodservice Procurement by Reid A Paul

The Purpose of this Chapter ■ Introduction ■ Distribution System for Food, Nonalcoholic Beverages, and Nonfood Supplies ■ Distribution System for Beer, Wine, and Distilled Spirits ■ Distribution System for Furniture, Fixtures, and Equipment (FFE) ■ Distribution System for Services ■ Retailers ■ What Happens Throughout the Channel of Distribution? ■ Ultimate Value ■ The Buyer’s Place in the Channel of Distribution ■ Selecting Economic Values ■ Selecting Supplier Services ■ Key Words and Concepts ■ References ■ Questions and Problems ■ Experiential Exercises

The Purpose of this Chapter ■ Introduction ■ Economic Force ■ Political Force ■

Ethical Force ■ Legal Force ■ Technological Force ■ Other Forces ■ Key Words and Concepts References Questions and Problems Experiential Exercises

5 An Overview of the Purchasing Function 97

The Purpose of this Chapter ■ Introduction ■ Purchasing Activities ■

Purchasing Objectives ■ Problems of the Buyer ■ Evaluation of the Purchasing Function ■ Technology Enhancements to the Purchasing Process ■ Key Words and Concepts ■ References ■ Questions and Problems ■ Experiential Exercises

The Purpose of this Chapter ■ Introduction ■ Planning ■ Organizing ■

Staffing ■ Training ■ Budgeting ■ Directing ■ Controlling ■ Key Words and Concepts ■ References ■ Questions and Problems ■ Experiential Exercises

The Purpose of this Chapter ■ Introduction ■ The Buyer’s Relations with the Supervisor ■ The Buyer’s Relations with Colleagues ■ The Buyer’s Relations with Hourly Employees ■ Key Words and Concepts ■ References ■ Questions and Problems ■ Experiential Exercises

The Purpose of this Chapter ■ Introduction ■ Why Have Specs? ■ Who Decides What to Include on the Specs? ■ What Information Does a Spec Include? ■ What Influences the Types of Information Included on the Spec? ■

Who Writes the Specs? ■ Potential Problems with Specs ■ The Optimal Quality

to Include on the Spec ■ Who Determines Quality? ■ Measures of Quality ■ Is the Quality Available? ■ The Buyer’s Major Role ■ The Optimal Supplier Services

to Include on the Spec ■ Key Words and Concepts ■ Questions and Problems ■

Experiential Exercises

The Purpose of this Chapter ■ Introduction ■ Optimal Inventory Level ■

Correct Order Size and Order Time: A Common Approach ■ Correct Order Size and Order Time: Another Approach ■ Correct Order Size and Order Time:

Variations of the Levinson Approach ■ Correct Order Size and Order Time:

Combination Approach ■ Appendix ■ Correct Order Size and Order Time: Other Problems with Theoretical Approaches ■ Correct Order Size and Order Time: Some Benefits of the Theoretical Approach ■ Key Words and Concepts ■ References ■

Questions and Problems ■ Experiential Exercises ■ Purchasing from the Chef’s Perspective by Jean Hertzman

Contents vii

The Purpose of this Chapter ■ Introduction ■ How AP Prices Influence Buyers ■

How AP Prices Are Determined ■ Ways to Reduce AP Price so that Overall Value Is Increased ■ Opportunity Buys ■ Key Words and Concepts ■ References ■

Questions and Problems ■ Experiential Exercise

The Purpose of this Chapter ■ Introduction ■ The Objective of Payment Policy ■

Cost of Paying Sooner Than Necessary ■ Cost of Paying Too Late ■ What Is the Best Policy? ■ The Mechanics of Bill Paying ■ Another Word about Discounts ■

Key Words and Concepts ■ Reference ■ Questions and Problems ■

Experiential Exercises

The Purpose of this Chapter ■ Introduction ■ The Initial Survey ■ Trimming the Initial List ■ The Relationship of Purchasing Policy to Supplier Selection ■ Buying Plans

■ Other Supplier Selection Criteria ■ Most Important Supplier Selection Criteria ■

Make a Choice ■ Supplier-Buyer Relations ■ Salesperson-Buyer Relations ■

Evaluating Suppliers and Salespersons ■ Getting Comfortable ■ Key Words and Concepts ■ References ■ Questions and Problems ■ Experiential Exercises

The Purpose of this Chapter ■ Introduction ■ Purchase Requisitions ■ Ordering Procedures ■ The Purchase Order ■ Change Order ■ Expediting ■

Streamlining the Ordering Procedure ■ Key Words and Concepts ■ References ■

Questions and Problems ■ Experiential Exercises

The Purpose of this Chapter ■ Introduction ■ The Objectives of Receiving ■

Essentials for Good Receiving ■ Invoice Receiving ■ Other Receiving Methods ■

Good Receiving Practices ■ Reducing Receiving Costs ■ Key Words and Concepts

■ References ■ Questions and Problems ■ Experiential Exercises

The Purpose of this Chapter ■ Introduction ■ The Objectives of Storage ■

What Is Needed to Achieve Storage Objectives? ■ Managing the Storage Facilities

■ A Value Analysis of Storage Management Procedures ■ Key Words and Concepts References Questions and Problems Experiential Exercises

16 Security in the Purchasing Function 351

The Purpose of this Chapter ■ Introduction ■ Security Problems ■ Preventing Security Problems ■ Who Checks the Checker? ■ Key Words and Concepts ■

References ■ Questions and Problems ■ Experiential Exercises

The Purpose of this Chapter ■ Introduction ■ Selection Factors ■ Purchasing Fresh Produce ■ Receiving Fresh Produce ■ Storing Fresh Produce ■ Issuing Fresh Produce ■ In-Process Inventories ■ Key Words and Concepts ■

References ■ Questions and Problems

The Purpose of this Chapter ■ Introduction ■ Management Considerations ■

Selection Factors ■ Purchasing Processed Produce and Other Grocery Items ■

Receiving Processed Produce and Other Grocery Items ■ Storing Processed Produce and Other Grocery Items ■ Issuing Processed Produce and Other Grocery Items ■

Key Words and Concepts ■ References ■ Questions and Problems

The Purpose of this Chapter ■ Introduction ■ Selection Factors ■ Purchasing Dairy Products ■ Receiving Dairy Products ■ Storing Dairy Products ■ Issuing Dairy Products ■ In-Process Inventories ■ Key Words and Concepts ■

References ■ Questions and Problems

The Purpose of this Chapter ■ Introduction ■ Selection Factors ■ Purchasing Eggs

■ Receiving Eggs ■ Storing Eggs ■ Issuing Eggs ■ In-Process Inventories ■ Key Words and Concepts ■ References ■ Questions and Problems

The Purpose of this Chapter ■ Introduction ■ Selection Factors ■ Purchasing Poultry ■ Receiving Poultry ■ Storing Poultry ■ Issuing Poultry ■ In-Process Inventories ■ Key Words and Concepts ■ Questions and Problems

The Purpose of this Chapter ■ Introduction ■ Selection Factors ■ Purchasing Fish ■ Receiving Fish ■ Storing Fish ■ Issuing Fish ■ In-Process Inventories Key Words and Concepts Questions and Problems

Contents ix

The Purpose of this Chapter ■ Introduction ■ Types of Meat Items Purchased ■

Management Considerations ■ Selection Factors ■ Purchasing Meat ■

Receiving Meat ■ Storing Meat ■ Issuing Meat ■ In-Process Inventories ■

Key Words and Concepts ■ Questions and Problems

The Purpose of this Chapter ■ Beverage Alcohols ■ Management Considerations

■ Selection Factors ■ Purchasing Beverage Alcohols ■ Receiving Beverage Alcohols ■ Storing Beverage Alcohols ■ Issuing Beverage Alcohols ■ In-Process Inventories ■ Nonalcoholic Beverages ■ Selection Factors ■ Purchasing Nonalcoholic Beverages ■ Receiving Nonalcoholic Beverages ■ Storing Nonalcoholic Beverages ■ Issuing Nonalcoholic Beverages ■ In-Process Inventories ■ Key Words and Concepts ■ Questions and Problems

The Purpose of this Chapter ■ Introduction ■ Management Considerations ■

Purchasing Nonfood Expense Items ■ Typical Nonfood Items that Hospitality Operators Use ■ Key Words and Concepts ■ Questions and Problems

The Purpose of this Chapter ■ Introduction ■ Management Considerations ■

General Procedures in Service Purchasing ■ Typical Services that Hospitality Operators Purchase ■ Another Word about Security when Buying Services ■

Key Words and Concepts ■ Questions and Problems

The Purpose of this Chapter ■ Introduction ■ Management Considerations ■

General Procedures in FFE Purchasing ■ Selection Factors ■ Financing the FFE Purchase ■ Key Words and Concepts ■ Questions and Problems ■ Equipment Purchasing in 2035? by George E Baggott

I N 1 9 7 6 , A F T E R C O N S U L T I N G W I T H Dr Tom Powers, Consulting Editorfor the Wiley Service Management Series, John Stefanelli undertook the tremen-dous task of writing a purchasing textbook that combines generally accepted pur-chasing principles and procedures with some description of the products and ser-vices the typical hospitality enterprise normally purchased Critics lauded

Purchasing: Selection and Procurement for the Hospitality Industryas an excellentinvestment and resource for hospitality managers and students who would like ahands-on approach to understanding the purchasing function

Since this first edition of the book, many hospitality educators have adoptedthis approach to purchasing instruction Many colleagues, both in education andindustry, continue to find that it is valuable for their students, most of whom willnot become purchasing agents but who will be involved with some phase of pur-

chasing throughout their careers As one colleague put it, this book is a ing book for nonpurchasing agents The book provides a comprehensive and un-derstandable view of the activity, as well as its relationship to the management of

purchas-a successful operpurchas-ation

Industrymaintains the original objectives: It includes discussions of the purchasingactivity and product information from a management perspective Each chapter hasbeen revised to include the most current concepts available and to explore new top-ics and provide more in-depth coverage of hospitality purchasing In essence, greatcare has been taken to maintain the integrity and readability of the original text whilemodernizing the discussions of purchasing techniques and practices currently beingemployed in the hospitality industry Although many of the theoretical underpin-nings of the purchasing function have not changed in decades—product distributionchannels and forces that affect the price of goods remain relatively unchanged, andspecifications and purchase orders are still required to order these goods—the use oftechnology in implementing and maintaining effective purchasing policies and pro-cedures has changed drastically To inform readers about these changes, technologyapplications in the purchasing function are now discussed throughout the majority

of the first 16 chapters that encompass purchasing principles

W H A T ’ S N E W F O R T H E S I X T H E D I T I O N

Selec-tion and Procurement for the Hospitality Industryto make the text even moreuseful Among the most significant changes are:

hospitality purchasing field,particularly in the area of technology The latesttechnology and techniques are discussed in detail This discussion is not onlyhoused in a separate chapter (Chapter 2) but also has been included in each

of the first 16 chapters

chap-ters These insights provide insider information on current and future trendsrelated to purchasing

■ Sidebarshave been included in several chapters to discuss technology panies and their applications to the purchasing function, the perspectives ofindustry experts on the future of purchasing, and new techniques for calcu-lating the amount of products to purchase

com-■ Detailed references at the end of each chapter have been increased and updated to provide readers with current materials to supplement their readings.

access to current information

photo-graphs of concepts, companies, and products relating to the purchasing function

■ Revised Questions and Problemssections provide discussion topics and ercises to increase participation Further, the first 16 chapters have several ex-periential exercises to assist readers in actively learning about the function ofpurchasing

sev-eral syllabi examples, teaching suggestions, test questions, PowerPoint slides,and term projects is available to qualified instructors through their Wiley salesrepresentative or wiley.com/college/feinstein

■ A companion Websiteprovides readers with further information on dozens

of topics affecting the purchasing function

ProMgmt certificate program The workbook contains exercises and a studyoutline for each chapter, and a practice test of 80 multiple-choice ques-tions This practice test will assist students in preparing for the certificate examination

in-structors to complement and highlight the information in the textbook andStudent Workbook

A C K N O W L E D G M E N T S

as-sistance in developing and refining this text:

Connie Cahill and Alice Heinz of The American Egg BoardDave and Doug Coon at Anderson Dairy

Mark Watkins at http://www.sheffieldplaters.com/

Ty Buel and Bill Cockroft at Mammoth Mountain Ski AreaGreg Koontz at the Foodservice Symposium

Danny Campbell at the MGM GrandRachael Buzzetti at the Nevada Beef Council(Butcher) Bob Butler at Wolf Pack MeatsJim Caldwell at Domino’s Pizza

Karyl Toms at EatecGeorge Baggott, formerly at Cres CorMichael Ferguson at Barley’s Casino and Brewing CompanyAdam Carmer at the Freakin’ Frog

Janet Westfall at the National Restaurant Association Educational FoundationPaul McGinnis at DayDots

Jean Hertzman at UNLVJudy Feliz at UNLVBarry McCool at UNLVErvine Crawford at UNLVMark Hamilton at AlohaDiane Bush of Kendall CollegeEzat Moradi of Houston Community CollegeWilliam Niemer of The Art Institutes International MinnesotaGreg Forte of Utah Valley State College

Nigar Hale, JoAnna Turtletaub, Julie Kerr, and Tzviya Siegman at John Wiley & Sons

1

T H E C O N C E P T S O F S E L E C T I O N

A N D P R O C U R E M E N TThe Purpose of this Chapter

After reading this chapter, you should be able to:

■ Define the terms “purchasing,” “selection,” and “procurement.”

■ Identify commercial and noncommercial hospitality operations.

■ Explain how technology and e-commerce applications are changing in the hospitality industry.

I N T R O D U C T I O N

or service This conveys a far too restrictive meaning because it fails to suggestthe complete scope of the buying function Perhaps the terms “selection” and “pro-curement” are better

“Selection” can be defined as choosing from among various alternatives on ious levels For example, a buyer can select from among several competing brands

var-of beef, a specific quality var-of beef, a particular beef supplier, and a fresh or processedbeef product One buyer may not perform all these activities—make all thesechoices—at one time But he or she will be involved in most of them at some level

“Procurement,” as opposed to “selection,” can be defined as an orderly, tematic exchange between a seller and a buyer It is the process of obtaining goods

sys-and services, including all of the activities associated with determining the types ofproducts needed, making purchases, receiving and storing shipments, and admin-istering purchase contracts.

Most people see procurement as the nuts and bolts of the buyer’s job Oncebuyers know what they want, they set about locating the suppliers who can bestfulfill their needs Buyers then attempt to order the correct amounts of products

or services at the appropriate times and best prices, see to it that shipments aretimely, and ensure that the delivered items meet company requirements A host

of related duties surround these activities: being on the lookout for new items andnew ideas, learning the production needs of other departments, appraising the re-liability of suppliers, identifying new technologies for procurement, and so on.Few operations have full-time buyers; most have managers and supervisorswho do the buying in addition to their other duties To these employees, buyingmeans more than the term “procurement” by itself implies These employees mustalso be aware of the relationship between purchasing and the other activities in thehospitality operation

Because there are so few full-time purchasing agents in our field, a textbookthat focuses solely on hospitality buying principles and procedures or product iden-tification, although useful to some, would unnecessarily restrict operating man-agers and supervisors in hospitality In other words, it is not enough to know how

to procure beef The typical operating manager must also consider what form ofbeef to purchase, as well as whether or not beef should even be on the menu.Today, operating managers must also deal with technology that has revolu-tionized how buyers and suppliers procure products and services This technologyenables purchasing managers to complete complex procurement functions with afew clicks of the mouse Most of these types of functions are taking place over theInternet

Transactions done electronically are commonly referred to as “e-commerce”(electronic commerce) “B2B e-commerce” is the term used for business-to-business electronic transactions and “B2C e-commerce” refers to business to con-sumer e-commerce Amazon.com, for example, relies on B2C e-commerce to sellits products to consumers B2B e-commerce that focuses specifically on procure-ment activities is referred to as “e-procurement” (electronic procurement) Exam-ples of companies that provide e-procurement applications to a wide variety of in-dustry segments include:

Perfect Commerce (www.perfect.com) CommerceOne (www.commerceone.com)

SAP (www.sap.com/solutions/marketplace/) Ariba (www.ariba.com)

VerticalNet (www.verticalnet.com) Sterling Commerce (www.sterlingcommerce.com/)

These companies have successfully revolutionized the way procurement isconducted by harnessing the power of the Internet One major company that fo-cuses on the development of e-procurement applications in the foodservice indus-try is Instill (www.instill.com) Companies such as Applebee’s, Sodexho, Hilton,and the purchasing arm for Yum! Brands rely on Instill’s e-procurement applica-tions to streamline their selection and procurement functions Avendra (www.aven-dra.com) has primarily focused on building e-procurement applications for hotels

The company was formed by ClubCorp USA, Inc., Fairmont Hotels & Resorts, att Hotels Corporation, Marriott International, Inc., and Six Continents Hotels

Hy-We discuss technology applications as they relate to purchasing in more tail in Chapter 2 Further, to better explain how technology has radically changedselection and procurement in the hospitality industry, we explore new software,hardware, and e-procurement applications throughout this textbook We also ex-amine the effect and ramifications this technology has had on operating managerswho are directly involved in hospitality selection and procurement functions

de-T Y P E S O F H O S P I de-T A L I de-T Y O P E R A de-T I O N S

com-mercial segment—the profit-oriented companies The second is the institutionalsegment—those facilities that are operated on a break-even basis The third is themilitary segment—those operations that include troop feeding and housing, as well

as the various military clubs and military exchanges that exist within military stallations The second and third segments are collectively referred to as “non-commercial” hospitality operations (see Figure 1.1)

in-The following types of operations are generally considered part of the mercial segment:

5. Lodges

6. Spas

buildings, day care facilities, assisted care facilities, senior care facilities,schools, recreation centers, hospitals, and sports centers

Types of Hospitality Operations

Military Operations

Profit-Oriented Operations

Institutional Operations

F I G U R E 1 1 A major segment outline of the hospitality industry.

21. Supermarkets with food services

The following types of operations are generally considered part of the commercial division of the hospitality industry:

pur-chasing function that the industry makes among the various types of hospitalityoperations Here in this introductory chapter, however, we attempt only to pro-vide you with sufficient understanding to carry you through to Chapter 6 When

we discuss hospitality operations in their traditional mode, we think first of the dependent operation In addition, those in the trade usually arrange the indepen-dent operations according to size: the small, medium, and large independents Theother major type of hospitality operation includes the multiunits and the franchises,which we discuss second

in-Major Purchasing Distinctions in Hospitality-Operation Types 5

T h e I n d e p e n d e n t O p e r a t i o n

The small independent is typically run by an owner-manager who usually does all

of the buying for the business He or she also oversees the other related ing activities, such as receiving deliveries and paying the bills

purchas-The medium independent generally involves more than one person in thepurchasing function Usually, the general manager coordinates the various activi-ties that other management personnel perform For instance, he or she typicallycoordinates the purchases of department heads, such as the dining room managerwho needs ashtrays, the bartender who requires liquor, and the chef who needsfood The general manager also oversees other related purchasing activities.The large independent, such as a hotel, follows the purchasing function in muchthe same way the medium independent does, except that it may employ a full-timebuyer This buyer purchases for the various production departments, such as house-keeping, maintenance, engineering, and food service Alternately, a designated em-ployee from each of these departments may be doing the purchasing: for example,

a hotel may employ an executive steward to order supplies and to supervise the itation crew Most familiar is the large independent operation that has a full-timefood buyer, a beverage buyer, and an equipment and other nonfood supplies buyer

san-A purchasing vice president or an equivalent official may or may not supervise thesethree buyers The buyers are, almost certainly, supervised by a management person

In the past, small- and medium-sized businesses may have had a tough timecompeting in the same markets as larger companies This was mainly because thesesmaller businesses had to pay higher prices for many of the products that they pro-cured because they were not afforded the same discounts as large companies (wetalk more about these types of discounts in Chapter 7) However, e-procurementtechnology has leveled the playing field in many instances by enabling these smallercompanies to procure products at more competitive prices, and therefore to com-pete with larger hospitality operations

Today, hospitality buyers can select and procure many quality goods and vices from suppliers and distributors all over the world These buyers and sellerscan come together in virtual marketplaces online (commonly referred to as “e-marketplaces”), which allow suppliers the opportunity to sell their wares to a va-riety of hospitality operations Examples of these marketplaces include FoodserviceCentral (www.foodservicecentral.com) and Restaurants and Institutions Market-place (www.rimarketplace.com)

ser-An idea addressed more completely in Chapter 6 is co-op buying, a conceptthat enjoys popularity among some independent hospitality operations, particularly

some foodservice operations As the phrase implies, co-op buying is a systemwhereby hospitality operations come together to achieve savings through the pur-chase of food and supplies in bulk Either the operations rotate the purchasing du-ties among themselves, or they hire someone (or a company) to coordinate all ofthe purchasing for them For instance, some lodging properties belong to referralgroups that provide, among other things, some central purchasing activities.

E-commerce has significantly affected co-op buying Companies are currentlyaggregating purchasing processes for similar hospitality organizations throughoutthe country These companies are commonly referred to as “aggregate purchasingcompanies” or “group purchasing organizations” (GPOs)

These aggregate purchasing companies do not buy or sell products Instead,they negotiate contracts on behalf of restaurants, hotels, management companies,resorts, and Real Estate Investment Trusts (REITs) Each company enrolling in this

“electronic co-op” might receive a purchasing guide that includes the names, e-mailaddresses, and telephone numbers of suppliers, along with a brief description ofthe programs negotiated on purchasing companies’ behalf Buyers can then access

a private e-commerce marketplace—or portal—to conduct business with approveddistributors or suppliers As more buyers become members of the GPO, purchas-ing power increases and so do savings Typically, either buyers pay a participationfee that provides access to the aggregate purchasing companies’ pricing or the GPOtakes a percentage of the savings achieved

T h e M u l t i u n i t s a n d F r a n c h i s e s

The second major category of hospitality operations in the purchasing function cludes the multiunit companies and franchises These interlocking operations orga-nize their purchasing somewhat differently from independent organizations Oneusually finds, when examining a chain of hospitals, for example, a centrally locatedvice president of purchasing Moreover, the company may maintain one or morecentral commissaries or distribution warehouses The managers of the company-owned outlets receive supplies from the central distribution points under the au-thority of the vice president of purchasing But these managers may also do a min-imal amount of purchasing from local or national suppliers that this vice presidentapproves; in some cases the managers may order from approved suppliers withoutconsulting the vice president of purchasing, or they may order everything from acentral commissary

in-In company-owned unit outlets, the internal organization for buying, ularly for restaurants, stipulates that the unit manager order most products from

partic-Major Purchasing Distinctions in Hospitality-Operation Types 7

the central commissary or approved suppliers The unit managers may, however,have the authority to make a few purchases on their own, such as a cleaning ser-vice or a locally produced beer But when the unit managers do this sort of pur-chasing, they nevertheless need to follow company policies and procedures.

In company-owned, large-hotel properties, a system similar to that of the largeindependents generally exists That is, the vice president of purchasing at corpo-rate headquarters may draw up some national contracts, establish purchase speci-fications, and set general purchasing policy He or she may also purchase the stockfor the central distribution warehouses and/or the central commissaries that thecompany owns But by and large, vice presidents of purchasing handle overall pol-icy, while the individual hotel units, although they do not have complete freedom,exercise a great deal of purchasing discretion within established limitations.The typical franchise receives many supplies from a central commissary, butmany of these non-company-owned units try to do some purchasing locally—tomaintain good relations in the community, if nothing else However, they quicklydiscover that they save considerable time, money, and energy by using the centralcommissary and/or central distribution center as much as possible If no centralcommissaries and distribution centers are available, the franchises usually ordertheir needed stock from suppliers that the vice president of purchasing has pre-screened and approved The franchises are, however, usually free to buy from any-one as long as that supplier meets the company’s requirements

T H E U S E O F T H I S B O O K

the hospitality industry Because we seek to address all of those individuals, notmerely the readers who expect to specialize in hospitality purchasing, we haveadded several areas of discussion not usually found in a book aimed specifically atthe professional purchasing agent

We emphasize the managerial principles of the purchasing function and tertwine the purchasing function with the other related management activities thatthe hospitality operator faces on a day-to-day basis We also de-emphasize productcharacteristics

in-The typical way to instruct hospitality purchasing agents is to teach them allabout the various products that will be purchased—that is, to focus on the devel-opment of product knowledge, since an item cannot be purchased effectively with-out the purchaser’s knowing a great deal about it We have not eschewed the prod-uct knowledge approach in this volume But we have presented this approach in

such a way that the typical hospitality operator will learn just enough about themajor product categories so that he or she can easily take on the burden, if neces-sary, of preparing the appropriate product specification required to select and pro-cure an item adequately.

This book includes product information, but it also includes several relatedpurchasing activities, such as bill paying, that most purchasing agents do not per-form However, the typical hospitality manager eventually becomes involved withmany of these related activities

We also incorporate a great deal of information on technology applicationsrelated to the purchasing function that will enable a hospitality student to learn thetechnological aspects of procurement With this person in mind, we begin our dis-cussion of selection and procurement for the hospitality industry

K E Y W O R D S A N D C O N C E P T S

A broad view of purchasing Aggregate purchasing companies

Business-to-business (B2B) Business-to-consumer (B2C) Central distribution center Commercial hospitality operations

Commissary Co-op buying

Electronic commerce (e-commerce) Electronic marketplace (e-marketplace) Electronic procurement (e-procurement) Executive steward Franchise Group purchasing organization (GPO) Noncommercial hospitality operations

Portal Procurement Purchasing Real Estate Investment Trust (REIT)

Referral groups Selection Varying purchasing organizations

Q U E S T I O N S A N D P R O B L E M S

do their purchasing

8 How has e-commerce affected co-op buying?

purchasing

E X P E R I E N T I A L E X E R C I S E S

1 Ask a manager of a local franchise operation the following questions.

a Do you currently purchase items from a commissary?

i i If so: What items are you required to purchase from the commissary?

ii Do you have to follow specific guidelines on the other products you purchase outside of the commissary?

Write a report detailing your findings.

2 Interview a noncommercial hospitality operator Ask him or her to describe the job and explain how the responsibilities differ from those of a commercial hospitality operator Write a report detailing your discussion with the operator.

3 Shadow (follow around) the owner of a small independent operation for a day Prepare a diary of all activities performed by the owner.

2

T E C H N O L O G Y A P P L I C A T I O N S

I N P U R C H A S I N GThe Purpose of this Chapter

After reading this chapter, you should be able to:

■ Explain how technologies are used by hospitality operators in the selection, procurement, and inventory processes.

I N T R O D U C T I O N

evolv-ing rapidly Today, many forms of technology are available to help distributorsand buyers to transact effectively with each other Those who decide to use thesetools can considerably streamline the cycle of purchasing, distribution, receiving,storage, issuing, and product usage Many of these tools are becoming a vital part

of the procurement process

T E C H N O L O G I E S T H A T D I S T R I B U T O R S U S E

business functions Typically, distributors use specialized software to build tomer databases that can help to predict customer behavior In addition, this type

cus-of scus-oftware can also be used to estimate, or forecast, the number and types cus-of pitality operations that might, or should, open in a particular area.

hos-Distributors also utilize software applications to facilitate the sales process.For instance, some distributors have all inventories counted, costed, organized, andstored on computerized product databases This detailed information enables thedistributors to manage and price their products quickly and easily It is much moreconvenient for everyone than the traditional method, whereby buyers receiveprinted product lists from distributors that note product names, manufacturers,identification numbers, and other descriptive information To obtain product sta-tus, buyers must call either the sales representative or the distributor directly Thebuyer then must call in the order or place it with the sales representative This tra-ditional method is still widely used, though many buyers use the fax machine ore-mail instead of the telephone to communicate

Some distributors have further streamlined the sales process and taken it tothe technological forefront by developing extensive online ordering systems, some-times referred to as “Web order entry systems.” Through this type of system, buy-ers and large distributors communicate directly with each other over the Internet.This method of communication permits buyers to order products directly and re-ceive instant feedback on pricing and availability Such systems also minimize theordering function and the paper trail for both buyers and distributors Distributorstypically provide these services free of charge Examples of these types of onlineordering systems include usfood.com (www.usfood.com)—US Foodservice’s Weborder entry system—and esysco (www.esysco.net)—Sysco’s Web order entry sys-tem These companies are two of the largest broadline foodservice distributors inthe United States

With the rapid development of inexpensive global positioning systems (GPS),many distributors use logistics and mapping software to outline the routing se-quences their delivery drivers must follow when delivering products A distributorcan enter into the GPS all of the locations drivers need to visit the following daysimply by typing an address or placing a marker on a digital map Using a routingmodel, the computer determines the most efficient route to take and indicates theoptimal number of delivery trucks to use

Logistics software is often integrated with time efficiency programs A timeefficiency program estimates both driver downtime and the amount of product thatshould be delivered per hour by taking into account street traffic flow, various times

of day, and the expected time spent loading and unloading shipments This kind ofprogram can also compare these estimates with actual results In addition the soft-ware can provide further feedback, such as which streets to take and what time of

day to avoid them in order to reduce delays caused by traffic or highway struction Related software can be integrated with a time efficiency program totrack delivery errors, discrepancies, and complaints or comments by customers, re-ceiving agents, and/or salespersons.

con-All of these software programs are usually integrated to form one cohesiveprocess This process enables the distributor to minimize order-placing and deliv-ery costs, as well as to resolve problems quickly, ultimately increasing margins andprofitability

T E C H N O L O G I E S T H A T B U Y E R S U S E

selection and procurement process and make life easier Hospitality operatorshave generally been eager to adopt labor- and time-saving electronic equipment toenhance the purchasing function and the overall inventory control process

F a x M a c h i n e

The introduction of a cost-effective fax (facsimile) machine in the 1980s ized the order-taking and -receiving process in hospitality operations It permitted buy-ers to check off on a piece of paper those items they wanted to purchase and then tosubmit this information instantaneously over the telephone lines This process signif-icantly reduced the confusion and mistakes sometimes associated with verbal orders

revolution-Furthermore, since a fax machine’s printed output could be stored for historicalrecords, it was used to verify orders, prove they were sent, and establish usage pat-terns However, as many managers soon realized, the thermal paper that fax machinesoriginally used had a limited life span The 1990s saw the introduction of fax machinesthat used plain paper, could store numerous faxes for distribution at off-peak hours,and could even use the Internet to send and receive documents (see Figure 2.1)

Although fax machines are still a very common tool that hospitality tions use to order products and services, personal computers (PCs) are quickly over-taking the duties of this office workhorse Today, most hospitality operators nowembrace the digital world

puters or the Internet With the invention of the first spreadsheet software gram for PCs in 1979 (VisiCalc [http://www.bricklin.com/visicalc.htm]), hospital-ity operators were given the ability to analyze huge amounts of data and to man-age inventories more effectively Previously, the majority of inventory costing andcounting had been done by individuals armed with calculators, paper, and pencils.PCs have also made it possible for hospitality operators to base their purchasingdecisions on current data, thus minimizing the need to estimate such items as cur-rent food costs and menu item popularity.

pro-F I G U R E 2 1 A fax machine Courtesy of PhotoDisc, Inc.

C o m p u t e r i z e d P o i n t - o f - S a l e S y s t e m s

Before the introduction of the computerized point-of-sale (POS) system, it was verydifficult to track sold menu items The gear-driven cash register merely stores cashand provides some limited sales information on printed receipts Today, POS sys-tems use PCs and are highly integrated in the daily functions of operations (see Fig-ure 2.2) These systems can tabulate and organize tremendous amounts of salesdata very quickly

Most POS systems now feature touch-screen technology They also permitusers to delete menu items, track employee activity, analyze worker productivity,and force order modifiers (e.g., when a food server enters a steak order, the com-puter asks, “What temperature?” or when the food server enters a baked potatoorder, the computer asks, “Butter and sour cream with that?”) Some advanced POSsystems even allow a server to carry a wireless ordering system to the table; ordersentered this way are automatically sent to the display screen in the bar and/orkitchen

In most hospitality operations, POS systems are networked and cate with a central computer, referred to as a “server.” This server can track salesfrom the connected computers in all departments or areas within the hospitalityoperation and instantly provide vital information to managers Advanced POS sys-tems integrate with inventory-tracking systems that automatically delete from in-ventory the standard amount of each ingredient that is used to make each menuitem The integration of POS and inventory systems provides the manager with atheoretical inventory usage figure that can later be compared with actual physicalcounts Furthermore, some POS systems facilitate the ability to permit purchaseorders to be drafted directly to the distributors, based on sales and inventory re-duction information

communi-B a r C o d e R e a d e r

Some hospitality operations place bar code labels on their inventory items (or usethose the distributors applied) to streamline the inventory-control process (see Figure 2.3) Bar code labels are vertical lines of varying thicknesses separated byblank spaces These lines and spaces, or “elements,” are used to provide a bar codereader with an identification code (ID) This ID is then used to look up the prod-uct on a database Bar code elements, IDs, and corresponding product informationare based on a standard that associates these pieces of information The most

Technologies that Buyers Use 15

F I G U R E 2 2 A sample screen of one available POS system, Revelation Courtesy of InfoGenesis.

commonly used standard is the Universal Product Code (UPC) However, otherstandards, such as EAN, Codabar, and Code 128, are also in use.

When a bar code system is used, the physical inventory count of a ity operation usually consists of scanning each product in the storeroom with aportable bar code reader There is no need to spend large amounts of time locat-ing a product on a lengthy printed inventory list and recording, by hand, the totalnumber of units in inventory at the end of the month Instead, the data are gath-ered quickly with the portable bar code reader and downloaded to the computerfor instant analysis Many bar code readers now provide wireless communication

hospital-to a computer and can instantaneously download and upload information over dio frequencies (RFs) (see Figure 2.4)

ra-The portable bar code reader can also be used to count in-process ries For instance, each type of alcohol in a lounge can be bar coded to streamlinethe beverage inventory procedure Without bar codes, the typical procedure in bev-erage operations is to estimate, by sight, the amount of beverage remaining in acontainer to the nearest tenth This is a very tedious, time-consuming process thatoften yields inaccurate results Using a handheld bar code reader and a program-mable small scale (see Figure 2.5), the operator simply reads the bar code and thenplaces the container on the scale By reading the code, the computerized scale as-sociates the product ID with the type and container size of the beverage, computesthe total weight, and subtracts the container weight and, if necessary, the weight

invento-Technologies that Buyers Use 17

Bar Code

Clear Area

Bearer Bar

Readable Code

Human-Stop Indicator Check

Digit

Case Item Number

Number System Indicator

Start Indicator

Manufacturer’s Identification Number

Assortment Indicator

0 0 0 1 2 3 4 5 6 7 8 9 0 5

F I G U R E 2 3 A UPC description.

of the attached pourer Next, the scale calculates the residual weight and converts

it to fluid ounces or milliliters This precise measurement system provides an credible amount of cost control in the beverage area because it immediately high-lights discrepancies between the amount of beverage the POS system indicatesshould have been used and the actual usage computed with the bar code reader

information and is illustrated with many full-color photographs Computer

tech-F I G U R E 2 4 (a) A bar code

reader Courtesy of Corbis Digital Stock

Technologies that Buyers Use 19

F I G U R E 2 4 (b) An example of a wireless inventory management system Courtesy of Eatec

Corporation.

(b) (Continued.)

nology, though, permits printed guidebooks to be converted to digital formats For

instance, printed publications, such as MBG, are also available on a compact disc

(CD-ROM, or CD for short) and should be available online in the near future Thisdigital version enhances the buyer’s ability to select meat products very efficiently

The buyer no longer has to flip through hundreds of pages to find a specific cut ofmeat He or she is able to search and find a suitable product in a few seconds Fur-

Technologies that Buyers Use 21

F I G U R E 2 5 The Free Pour Bottle Check system Courtesy of Free Pour Controls, Inc.

thermore, this CD allows the buyer to view the exact location on a meat carcassfrom which a specific retail cut of meat originates In the future, this retail cut ofmeat might then be linked to software that will suggest appropriate recipes andcooking techniques.

Other CD products on the market can also streamline the product cation and specification process These software packages enable users to searchdatabase indexes listing thousands of product categories and to locate informationabout the distributors who sell them These CDs contain a seemingly endlessamount of information If a product is made somewhere in the world and is dis-tributed, chances are that it can be found on one of these discs

identifi-An example of this is the Thomas Food and Beverage Market Place (www.tfir com) The Thomas Food and Beverage Market Place brings buyers and sellers together

through a searchable database of more than 40,000 company listings and nearly

6000 product categories All company listings are cross-indexed, and one may search

by product, location, company, or brand name Originally named the Thomas Food

Industry Register, the Thomas Food and Beverage Market Place has been making a

printed version of this document for more than 100 years The company’s digitalproducts, including CD and online versions, make searching even easier Every day,thousands of food-industry buyers use TFIR to search for new products, compari-son shop, and find new distributors

P r o d u c t O r d e r i n g

As discussed earlier in Chapter 1, several software companies specializing in e-procurement have developed systems that permit buyers to order products online These e-procurement applications streamline and minimize a buyer’s ordering procedure, thereby creating a value-added service for the buyer At thesame time, when a buyer uses this ordering system, he or she could streamline the order-taking process at the distributor’s end Previously, a distributor had to enter

a buyer’s order from a fax, telephone call, or written purchase order, but with thenew system, the inefficiencies of the “multiple-ordering” process are eliminated.Instead, a buyer enters the order on an e-marketplace and sends it directly to thedistributor This process reduces labor costs and time on both the buyer’s and thedistributor’s end Another distributor benefit of the process is the likelihood thatusers of this ordering system will become “house” or “prime-vendor” accounts.These e-marketplaces also allow hospitality purchasing managers and dis-tributors to negotiate contractual pricing agreements on selected products prior toordering (see Figure 2.6) Buyers and distributors who join an e-marketplace have

an instant line of communication to negotiate products and prices Buyers beginthis process by searching for an item they are interested in purchasing and identi-fying vendors who offer this product The buyers then submit a request for quote(RFQ) to these vendors An RFQ is a request for a formal document stating thepurchase price of a product from the vendor Distributors then make an offer, andthe buyer chooses the vendor from whom the buyer will procure the product orservice.

After pricing arrangements have been set, purchasing managers can allow partmental managers or staff to order items directly from the vendor through thee-marketplace This method of ordering minimizes the time between when an or-der is placed and when it is authorized Authorized individuals are given an accountand can order specific products as long as these orders do not exceed a designatedspending limit For example, a housekeeping manager might be able to order sham-poo and soap on the e-marketplace without writing out a purchase requisition aslong as the order does not exceed $1000

de-Product information on e-marketplaces can typically be retrieved in severalways, unlike the typical printed catalog in which everything is listed alphabetically

Technologies that Buyers Use 23

Purchasing Manager

Submit Purchase Orders

Product Information RFQs

Food and Beverage

Manager

Availability

Pricing E-Marketplace

F I G U R E 2 6 A conceptual model of an e-marketplace.

and/or by product categories For instance, databases on the e-marketplace enableusers to search for and evaluate all of the types of hot dogs a particular vendor sells.Buyers might view hot dogs by size, types of ingredients, and packers’ brands Userscan also narrow the search, for example, to 4–1 (four hot dogs per pound), pure-

the desired product or continue to refine and narrow the search Once users findthe desired product, the hospitality operators can then “tag,” or choose, productsthey want to procure or submit for RFQ

If an order is acceptable to the buyer, the order can be transmitted right onthe computer The buyer can also attach a note telling the vendor more specificinformation about an order Orders are then instantly communicated to the ven-dor, who might send this information to a local distribution center for processingand delivery

I n v e n t o r y - T r a c k i n g a n d S t o r a g e M a n a g e m e n t

If product orders have been made through an online ordering system, this mation can also be used in a number of ways For instance, it can be linked to othersoftware and used in the equations and formulas noted in Chapters 9, 10, and 15.Today, many hospitality operators use some type of computer application toincrease their inventory and cost-control efforts For example, some operators de-velop elaborate spreadsheets using generic spreadsheet software, such as Microsoft

mathematical formulas to calculate costs and usage On the last day of each month,they physically count their storeroom and in-process inventories and enter this in-formation on the spreadsheet They also enter all product costs, which usually comefrom typing in invoice receipts for the month or from directly downloading the in-formation from an ordering system they are using The information currently en-tered is the “ending inventory,” and the information entered the previous month

is the “beginning inventory.” Once the major variables have been entered ning inventory, ending inventory, purchases, and other end-of-month adjustments),the computer can easily calculate the monthly cost of goods sold

(begin-Some hospitality operators use off-the-shelf software packages and servicesthat are specifically designed to manage inventory in a hospitality environment.These software packages can streamline the back-of-the-house hospitality opera-tion Many of these software packages can be linked to an operator’s POS system.These packages can also cost recipes, analyze a recipe’s nutritional information, cal-culate food and beverage costs, evaluate a food item’s sales history, forecast sales,