The paper illustrates the role of Supply Chain Management in a Hotel’s Performance. It describes how supply chain management (SCM) system can help hotels to attain a sustainable competitive advantage by improving product quality and service while reducing cost at same time. As integrity of Supply chain is essential so to get benefited by its advantages, on this account, factors affecting the integration of supply chain management are explained. In conclusion Supply Chain Management has strong effects on overall hotel performance.

1. ROLE OF SUPPLY
CHAIN
MANAGEMENT IN A
HOTEL
Submitted to:
Prof. Arindam Lahiri
By: Gagan Pardeep
PG12
Indus Word School of Business
This paper illustrates the role of Supply Chain Management in a Hotel’s
Performance. It describes how supply chain management (SCM) system can help
organizations (hotels in this case) to attain a sustainable competitive advantage by improving
product quality and service while reducing cost at same time. As integrity of Supply chain is
essential so to get benefited by its advantages, on this account, factors affecting the
integration of supply chain management are explained. In conclusion Supply Chain
Management has strong effects on overall hotel performance.

2. Introduction
A smooth running supply chain management system can help organizations to acquire
a sustainable competitive advantage. It can help organization to improve product quality and
service while reducing the cost at same time. The nature of the tourism product is perishable
and must be consumed when it’s ready to be served, thus hotels have to provide services
simultaneously with demand. Due to such nature of industry internal integration is more
important than external customer integration for hospitality industry.
Supply chain management is closely related with the concept of best practices.
Adopting supply chain management initiatives first and the most importantly requires that
companies should have a long-term view. They must have an extensive focus on all the
mediums that are deployed in the transformation process of the raw materials to end-user
consumable. Top management commitment is also essential at this point. Organizations
should redesign how business is done at every level in and outside the organization.
First step in SCM must be breakdown each and every activity which comes across the
whole supply chain. Investigate each and every function a department handles and breaking it
down to possible extend. By performing this organization will be able to evaluate and
construct a specific supply chain, which enables a company to find and reduce if there is any
redundancies while improving reliability and flexibility of the system at the same time.
The creation of a supply chain leads to a better understanding of the whole chain and
thus implementation of common standards becomes easier. It is implied and obvious that in
coming era of hyper-competition the basis of competition in many industries will revolve
around supply chain development. Supply chain analysis promotes reducing non-core
processes (waste or redundant processes) and synchronization of the supplier and logistics
network. Despite the challenges that are created, developing an effective and efficient supply
chain can become a core competency1 or even a distinctive competency of any company.
. Supply chain practices were evolved from aerospace and automotive industries
where good constructed supply systems led to the concept of Lean production to grow. The
information and communication technology provide a backbone support to distribute and
share information real-time with all participants of supply chain and thus enables them for
effective decision making. Making changes to supply chain helps to lower costs and enables a
firm to more easily compete on the basis of price. This is especially important when
producing functional goods that are price sensitive (highly price elastic). It can also improve
customer service levels; therefore, increasing firm’s competitiveness.
Rather than business to business but supply chain to supply chain competition is
today’s trend. The system wide focus on costs is essential in order to gain a complete picture
of the forces that affect company performance. Cost savings created through working with
suppliers and distributors as supply chain partners can be reinvested into additional research
and development of whole chain. Working together to achieve cost savings allows firms to
target their resources into a specialized area of transformation.
From a financial point of view, any improvement in supply chain management has a
potential to reduce the costs with the help of greater operating efficiency, reduced waste
generation, and reduced consumption of energy and other resources. SCM practices can also
lead to increased revenue and shareholder value by generating more repeat business and
1
A core competency is any function, which a firm does well at performing. Core
competencies are the processes which are primary business activities that enable companies to obtain
a more than average return from business over long term. In management discipline “core
competencies” refers to focusing and exploring particular strengths within the company and
formulate strategies which will help in increasing market share and profits. On the other hand, a
distinctive competency is a function that is performed well and is unique.
2|Page

3. attracting new business from customers who value good environmental and social
performance. A strong reputation as a company that cares about supply chain issues, coupled
with improvements to the quality of the consumer experience provided, will defiantly result
an increment in customer satisfaction and their loyalty. It will strengthen the brand value; will
enhance publicity and marketing opportunities, and will ultimately lead to a better acceptance
by its target customers.
Supply chain practices cannot improve their own efficiencies by themselves, because
the efficiency can be achieved only through the interaction of various supply chain practices.
For a successful supply chain application, significant efforts for improvement in all of supply
chain functions within a firm should be made. First of all, the focus of supply chain practices
should shift from functional and independent to general and integrative. This implies that the
evaluation of any supply chain should be done by considering how the practice will affect the
efficiency of entire supply chain processes. Thus, the successful integration of supply chain
can be possible by the proper utilization of various supply chain practices.
The process of Supply chain integration should progress from the integration of
internal logistics processes to external integration with suppliers and customers. This internal
integration can be accomplished by the automation and standardization of each internal
logistics function, the introduction of new technology, and continuous performance control
under formalized and centralized organizational structure. External integration can be
achieved by information sharing and strategic linkage with suppliers and customers, and the
standardization of logistics process between firms.
Hospitality Industry
This industry is primarily service oriented; other product involving activities are
supportive activities of the primary. Services are considered to be most perishable items.
Unlike physical products the warehousing of services is quite difficult and thus if not
consumed at the time when it is ready to consume it just perishes without no time, air plane
seats which are not sold is an appropriate example.
Role of SCM (Strategic Level)
As the nature of industry, services can’t be stored, it become more essential to keep
supply chain at place. The criticality comes in existence when we have to manage the
inventory of services. However SCM is evolved from automobile industry it is equally
applicable and relevant to any other industry including service industries. It can be explained
by making an analogy on the bases of four basic paradigms as described below:
1. The lean Paradigm: However the concept of lean had been evolved from automobile
industry2 its essence is relevant for every business. The lean paradigm has essentially
focused on waste reduction as a means to increase actual value-added to fulfill
customer needs and maintain profitability. So when a room, a living facility or any
other service which was consumable but it was not consumed (which is waste in this
case) the cost of that service would be added to other consumers, partly if not
completely. For hospitality industry the concept lean is a must practicing exercise to
maximize its internal efficiency. It can help consumers to an access for quality service
by enabling the economic production of small quantities and enhancing cost
reduction. To provide added value to the customer, the lean approach seeks ways to
reduce demand variation by simplifying, optimizing and streamlining, and create
capability by utilizing assets more effectively than in traditional systems, so hotels are
required to do the demand estimation exercise properly by considering all demand
2
Developed by Taiichi Ohno of the Toyota Motor Corporation in Japan forms the basis for the
Toyota Production System.
3|Page

4. deviation factors (e.g. seasonality, economic conditions of environment in which it is
operation etc.).
2. The Agile Paradigm: The marketplace is always volatile and demand always varies
accordingly at the same time the prime objective of supply chain is to delivering the
right product, in the right quantity, in the right condition, at the right time, for the
right cost. Also since customer requirements are continuously changing, supply chain
must be adaptable to future changes and thus respond appropriately to market
requirements and changes. In context to an operations manager at a hotel the agility is
important to meet the changing preferences of customer and to address the challenges
offered by demand volatility. Thus the agility is essential to create the ability to
respond rapidly and cost effectively to unpredictable changes in markets and
increasing levels of environmental turbulence, both in terms of volume and variety in
services. Some of the main agile practices in the supply chain which can be practices
in a hotel context are:
 To increase frequencies of new packages introductions.
 Speed in improving customer service.
 Use of IT to coordinate and integrate activities e.g. booking orders must be
available to each department from housekeeping to kitchen handling guy and
to receptionist sitting over there to welcome the coming customer. They all
must be ready with the same amount of preparation.
 Speed in improving responsiveness to changing market needs: by maintaining
a database of its customers a hotel can easily use it by some interpretation for
demand forecasting, finding out the trends, tracking its loyal customers, habits
and likes of its most loyal customers so that they can be retained etc.
3. The Resilient Paradigm: Resilience is referred as the ability of supply chain to cope
with unexpected disturbances which might be due to any external environmental
factor like change in government rules and regulations of the environment in which
either supplier or hotel is operating or it might be change in the economic
environment from which its customers are coming. Hotels should deploy the
associated contingency plans efficiently and effectively when facing a disruption, and
thus making the SC more resilient. In such scenario following strategies could be
adopted:
 Flexible supply base: contacts with other hotels to accommodate on
commission bases. Hotels can use multiple suppliers for critical items.
 Make-and-buy trade-off: supplementary and support services weather to do by
own or hire some specialist in that service, both has its own pros and cons.
 Strategic stock: some services can be stocked as an inventory by pre-
performing related activates, so this can be done to meet the variation in
demand, however most of these activities can’t be stocked for longer duration.
So this is useful to meet the variation in the smaller period (e.g. day to day or
weekly variations) e.g. inspection and cleaning of room before it is sold.
 Economic supply incentives: responding to change in demand variation in
packages.
 Postponement: by showing no more capacity to accommodate.
4. The Green Paradigm: As lean relentlessly focuses on reducing non-value added
activities and producing just the right amount of a product as needed, an important
question is whether it improves or deteriorates environmental performance. Lean (as
originally documented by Womack and Jones) does not explicitly incorporate
4|Page

5. environmental performance metrics3. As lean implementation pushes manufacturing
processes toward the point of lowest cost, but the more relevant question in current
scenario is does it also push cost to the point of optimal environmental performance?
However after realization of importance of environmental issues firms started taking
interest in environmental care. The CSR and carbon credits earned are much more
relevant in hospitality industry than any other, so it makes sense for them to adopt a
green supply chain.
Role of SCM (Operational Level)
The ultimate objective of any activity in any business should be either maximization of
profit or minimization of the cost, and same applies to supply chain management. Like any
other supply chain, supply chain, in the hotel industry also, it has three distinct cost elements
to optimize:
o Cost of Transaction
o Cost of Product Procurement
o Cost of Inventory
These costs are the major factors that increase the cost of final product or service. How
supply chain can affect these costs is explained in this section.
1. Cost of Transaction
In Full Service hotels, many products like vegetables and fruits or some of the kitchen
items have a short shelf life and require repeat purchases (Approximately one third of
the products in the hotel industry belong to the low-value, high volume category).
These products increase the transaction cost. Ideally, a situation like this would
demand standardization and rationalization of the product portfolio, as well as
automation in the supply chain process. On the contrary, hotels generally have a
decentralized application environment with a moderate or low level of automation and
a very high degree of non-standardization. Non-standardization has a significant
impact on the cost structure of hotel supply chains; because of this even the hotels that
are open to the idea want to go for standardization are unable to switch to a
consolidated framework.
The cost of quality control is minimal when an organization deals with a small
number of suppliers. The cost of quality control goes down even further when the
supplier relationships are strategic in nature. The hotel industry is characterized by
large number of non-strategic suppliers, thereby increasing the cost of quality control.
Individual hotels also tend to work as silos. Hence, even if there are multiple hotels of
a particular chain operating in the same city, the inventory is generally not optimized
among them. It is quite possible that one hotel might have excess stock while the
other may be out-of stock for a particular product. Instead of transferring stocks,
however, each hotel will order fresh stocks, thus initiating a longer chain of events
resulting in increased transaction cost.
The indenting process in many hotels is manual, or at best semi-automatic, requiring
manual consolidation. For example, if the same product is required by four
departments, either paper indents are created or the system does not have the facility
to consolidate the requests. This is usually true for items that get indented separately
by each department in a hotel.
2. Cost of Product Purchase
Cost of purchase in a hotel can be up to one fourth of total sales, depending on the
type of hotel. The cost of purchase in the hotel industry is substantially higher than
other industries because of the following reasons:
3
EPA (US environmental Protection Agency) report 2003
5|Page

6.  Hotels have a tendency to purchase too many Stock-Keeping Units (SKUs) for
the same purpose. This includes alternate brands, pack sizes or substitutes.
This has a direct negative impact on consolidation benefit, increase in supplier
base, and a consequent increase in overall cost structure of the supply chain.
 It is a very common occurrence for two hotels belonging to the same group in
a city to purchase the same product at different prices from the same or
alternate supplier.
 The level of consolidation among hotels belonging to the same chain is often
nonexistent. These units lose the benefit of bulk purchase that consolidation
can provide.
 In cases where a central purchasing organization monitors and releases central
contracts, the adherence to the same is extremely poor. Contract leakage is a
common phenomenon in hotels.
 There is also a tendency to use a large supplier base but not develop a strategic
relationship with any one of them. As a result, concepts like product value re-
engineering, joint cost improvement initiatives, and so on, which are the
prevalent modes of cost reduction in the manufacturing industry, are rarely in
practice.
All these factors contribute heavily towards the increase in the unit price of products
in the hotel supply chain. Hotels today may be losing a significant fraction on
products purchased.
3. Cost of Inventory
Forecasting the material consumption based on forecasted occupancy of rooms is
usually not very well managed. The lack of an interface with the sales and purchasing
system is the major reason for poor forecasting. However this issue can be addressed
most effectively by using IT and thus providing an interface where sales people can
share the sales made on real time bases so that purchase department know how much
to procure.
The vendor-supplier relationship in the industry is also far from being comparative to
other industries. As a result, concepts like vendor-managed inventory or just-in- time
inventory that have been deployed by many industries to reduce inventory costs are
generally out of context for many hotels.
In addition, a large number of SKUs and lack of standardization often lead to a waste
of valuable shelf space. This can add up to significant cost as most of the hotels are
generally located in high value real estate areas.
Engineering spares form the most significant part of physical inventory in the hotel
inventory cost and as in this industry inventory turnover period for such items might
be as high as two to three years and thus add on in cost.
Usually these numbers are well reflected in the balance sheet of many hotels where
expensive inventory like wines may have significantly high inventory.
The genesis of the higher cost occurrence is the nature of hospitality industry. The traditional
operating style of hotels can be attributed to the following two reasons:
o The customer centricity of the industry
o Poorly integrated application systems
1. The customer centricity
Hospitality industry is one of the industries which is extremely customer centric, this
excessive customer centricity of the hotel industry over the years has given rise to a
redundancy of products in the service line. Some of them may be outdated and may be
superseded by newer products but they continue to be part of the offering by the hotel.
6|Page

7. When a product class consists of a large pool of individual products, it results in the
following:
 Does not allow volume discounts: It reduces the possibility of bulk purchase and
consequently pushes up the cost per product unit.
 Inconsistency: It becomes difficult to maintain quality and consistency of the product,
because the number of products and suppliers that must be controlled are far too
many.
 Cost of ordering: Large number of SKUs and suppliers increase the number of overall
transactions.
While customer centricity is unavoidable in the service industry, it may be worthwhile to
understand which products may bring true value to the customer and which do not.
However customer centricity does not necessarily mean that the industry adopts ad hoc
methods in the purchasing process.
A customer has a unique place in the service industry and more so in the hotel industry.
Unlike most industries where 90-95% customer satisfaction is an accepted norm, in the
hotel industry the target is always to reach 100% customer satisfaction.
This level of customer centricity usually leads to greater importance to customer facing
functions and a lesser emphasis on back-end functions like purchase and IT etc. As a
result, the purchase manager in a hotel is placed lower in the hierarchy and the main
function of this manager is to satisfy internal customer needs. This lopsided structure
invariably results in the purchase manger maintaining higher buffers in the inventory or in
the supply line resulting in an increase in overall cost in supply chain.
Excessive customer centricity to achieve a higher satisfaction and service level also gives
rise to a larger supplier base for the hotel industry. Often, a product that has a general lead
time of six days must be brought in six hours. The purchase manager has no option but to
use multiple suppliers for such emergencies.
2. Poorly integrated application systems
A typical application landscape in the hotel industry shows that customer-facing
applications and back-office applications do not interface with each other. This results in
a gap between sales systems and procurement systems which consequently hampers
forecasting. The lack of integration between purchasing, inventory and accounts payable
systems results in multiple data entry points results in data inconsistency and redundancy,
in turn pushing up transaction costs.
One of the main reasons behind the poor integration among hotels of a same chain is the
absence of a uniform product and supplier identity across hotels. Unlike a manufacturing
organization that has complete control over the identification of products through
specifications, a hotel may buy many commodities that lack global specification
standards, which is again because of the nature of industry. For example, a particular
quality of fish may have a different attribute association in different countries, or even in
different cities within same country.
Distributed technical architecture also results in very poorly developed management
information systems. As a result, benchmarking of prices, products, or suppliers becomes
a laborious exercise and thus making task of purchase manager more cumbersome and
inefficient.
The fact that almost no technology vendor in the hotel space today offers an integrated
solution does not improve the situation.
Conclusion
In conclusion we can say that role of supply chain is not limited to any industry rather it has
relevance over almost all industries. It would not be exaggeration of importance of the supply
chain management if one would say any firm can compete in its industry just only on the
7|Page

8. bases of how it manages its supply chain, work for betterment of it and move it towards
higher efficiency every day. In coming era of cut-throat competition the basis of competition
in many industries will revolve just around supply chain development.
Industries do not operate in isolation. A research or introduction of a breakthrough innovation
in one industry can change the whole scenario (e.g. introduction of internet changed the
whole operations of almost all the industries). Same is the case with hospitality industry, so it
must make optimal use of technology or any other innovation going around which can change
the rules of game.
8|Page