The growing influence of procurement
departments within corporations, and their extended reach into
meetings territory, has created a deep chasm of mistrust and
apprehension in the meetings industry. Parties on both sides of the
divide say this largely can be attributed to a lack of education on
the part of planners when it comes to the overall role of
procurement.
Indeed, insiders say it has become vital for meetings
professionals to learn the basic principles that procurement
officials apply to the supplier selection process, whether the
supply in question is paper clips, office furniture or hotel rooms.
Knowing the process could well make the difference between a
slashed budget and a cooperative effort to do right by
meetings.
To help shine light on an often obscure area of finance,
M&C spoke directly with procurement heads from several
organizations. What we learned might come as a surprise to many
meeting planners. As it turns out, procurement officials have much
the same job responsibilities, goals and philosophies as planners
do; even the language they use is very similar. The folks in
procurement are looking for value at a good price, with
consistency, accountability and limited risk to the organization as
a whole. Sound familiar? Read on.
Balancing cost and value
The common perception among meeting planners is that procurement
pays homage to one language and one language only the dollar sign.
Furthermore, the supplier with the lowest bid always wins the
contract and preferred status.
Not so at all, says Paul Davis, vice president of strategic
sourcing for White Plains, N.Y.-based Starwood Hotels & Resorts
Worldwide. “Yes, we want to save our hotels and owners monies
through lower cost of goods, but we are the same as any meeting
planner trying to balance quality and price.”
At Starwood, Davis oversees 200-plus vendor accounts for goods
and services ranging from TVs and bedding to security and food and
beverage delivery. His perspective from a service industry
standpoint, however, is no different from that of a procurement
official concerned solely with product purchasing.
“Companies are in business to make money, and there is a lot of
fat in most companies that deserves to be looked at,” says Jack
Frain, account manager for Beverly, Mass.-based Three Core Co.,
which provides procurement assistance to manufacturing firms. “If
you are not looking for ways to reduce cost while keeping your
product competitive, you are immediately at a disadvantage.”
Launched in 1999, Three Core has built a reputation in the
procurement industry for helping manufacturing companies harness
their buying power by creating and implementing internal customized
procurement systems. The average initial savings per client is 10
to 15 percent, with another 3 to 5 percent year-over-year, the
company claims.
But precisely because it is procurement’s job to drive costs
down, says Frain, outsiders miss the big picture. “Cost is
extremely important, but it’s always about quality,” he notes. “A
lot of things can be made in China and other countries much
cheaper. That’s a fact. What is unknown, though, is quality of the
product, and quality is what it always boils down to in the
end.”
Focused on objective
One company’s procurement objective might be to
consolidate and reduce its vendor base. Another’s might be to find
distribution channels in new markets. Whatever the case, the
individual company’s overall objective is what drives the
procurement buying process.
“You have to have a consistent procurement philosophy, a road
map from which to work,” says Tim McKenna, CMP, senior manager of
strategic procurement for Minneapolis-based Carlson Marketing
Group.
McKenna is responsible for procurement i.e., site selection for
corporations placing corporate as well as incentive business. And
precisely because his objectives change, depending on the meeting
client’s needs, McKenna never allows his prior knowledge of a hotel
to cloud his buying judgment.
“Just because I’ve been to a property four times in one year, know
it inside and out and what rate I can get, doesn’t mean I’ll go
with it,” says McKenna. “I always have to buy through the eyes of,
‘What is my client’s objective?’ That’s the basis for my
negotiation.”
TERMS TO KNOW
Procurement officials are professional buyers with a language unique to their role. The following definitions are from “The Purchasing Glossary,” by the American Purchasing Society (
www.american-purchasing.com) in Aurora, Ill., a national organization of procurement officials.
Acknowledgement. A communication indicating that something has been received or understood.
Centralized purchasing. An organization's structure where all buying is conducted and authorized by one department and in one location.
CPM. Critical Path Method, a management tool that is used to determine the shortest way to accomplish a task or project.
CPP. An acronym for Certified Purchasing Professional, a recognition of purchasing knowledge, business experience and a reputation for integrity.
Inventory turnover. The number of times the average inventory has been sold during the year, calculated by dividing the cost of goods sold by the average value of the inventory.
Materials management. The management function of an organization, which may include all or a portion of the responsibility for purchasing, inventory control, traffic, shipping, receiving and warehousing.
Price index. Usually refers to any of various numbers representing prices at a particular time for a product or category of products as reported to the Department of Labor and the Bureau of Labor Statistics
Purchasing agent. The person authorized to make purchase agreements for the organization.
RFQ. Request for Quotation form, used to obtain bids from suppliers.
Robinson-Patman. An antitrust law prohibiting unfair trading practices, such as giving a supplier false information about what the buyer is paying another supplier in order to obtain a lower price.
Single source. Where only one supplier is available for a particular product, or when only one supplier is used even though other suppliers are available.
Split sourcing. Where more than one supplier is used to buy the same item.
Supply chain management. The organizational structure and management function that includes all facets of the acquisition and delivery of material from the supplier to the final customer; its intent is to eliminate inefficiencies, facilitate rapid communications, minimize inventory and maximize delivery time.
Value analysis. A method of looking at the incremental cost of a product or service with the objective of reducing the cost by substituting material or changing design while accomplishing the same function or purpose; also referred to as “value engineering” -- C.A.S.
Delivering consistency
In order to be competitive and successful these days, companies
must have an in-house economic model that drives uniform expense
management across the organization.
At hotel giant Starwood, literally everything that goes into
running a property, from back of the house to lobby plants, goes
through the same rigorous vendor negotiation and selection process.
In turn, the different expenses generated by those preferred
vendors move through the same payment system, where they are
tracked, compared and benchmarked. To ensure consistency across its
procurement model, Starwood negotiates directly with the vendor
providing the product or service.
“We may buy our food delivery system, which is a service, from
one vendor. But when we buy the bacon that they deliver to the
hotel, we negotiate with them separately,” says Paul Davis. “From a
company perspective, it is essential to have that consistency,
because it ensures we acquire the right products and services that
represent our brands, which in turn meets our guests’
expectations.”
Avoiding risk
Qualifying which businesses they source to is an important step in
terms of managing risk exposure, particularly if international
vendors are involved. For Jack Frain of Three Core, that means
actually visiting a site to verify that the factories in question
really do exist and child labor is not employed.
“Just because we can get a cheaper product doesn’t necessarily
mean we take it,” says Frain. “We must physically see who we are
going to use. It is the only means of validating the source.”
Carlson Marketing, says McKenna, places as much emphasis on
ensuring that contractual language is airtight as it does on the
end hotel product it is buying. Exposing the client to any type of
potential financial or legal risk could completely undo any cost
savings gained from the product purchased. “If you don’t have the
right insurance or force majeure clause in your vendor contract, no
one cares until something goes horribly wrong,” he says. “But
ultimately, those issues will have legal costs associated with
them, and they could be huge.”
Risk mitigation, says Davis, is a means of protecting the
entire supply chain. That translates to ensuring vendors are in
good economic standing, are financially strong, have ethical
standards, are not under political scrutiny and have good
references.
“We use appropriate diligence to make sure we are doing
business with companies with good reputations,” says Davis. “You
are not going to buy from just anyone based on their presentation.”
In addition, he notes, Starwood has an “out clause” in every vendor
contract to protect the company from instances where, for example,
a supplier is found guilty of fraud or is sold to another parent
company, and quality of product becomes questionable.
Constantly reassessing
Procurement never sleeps. Months are spent selecting the right
vendors, and months more are spent benchmarking, evaluating and
renegotiating with them. The reason for this, say industry experts,
is that the marketplace is in constant motion with new players and
new markets, and there is no room for coasting.
“There are so many nitty-gritty things that go on behind the
scenes, you can’t rest for a minute,” says Frain. “Companies get
bought and sold, move into new markets. You have to constantly ask
yourself, ‘Am I still in the competition? Can I make it cheaper?
Sell it somewhere else?’ That’s procurement’s job.”
According to Davis of Starwood, most vendor contracts are
negotiated for periods of one to three years. Vendors with longer
contracts, he says, are typically those that have equipment, which
means they have invested heavily in their product. “You want to
renegotiate, because you have to remain flexible,” says Davis.
“Also, you have to constantly ensure there is value to the product
you are buying. Sometimes that means switching vendors.”
Davis’ advice to meeting planners on the issue of buying:
“Match up with a company that has similar core values to your own,
philosophically and strategically. Nothing turns off my procurement
team more than a vendor who does not make an attempt to know our
business before approaching us with a pitch.”