Journal of Foodservice Business Research, 15:143–155, 2012 Copyright © Taylor & Francis Group, LLC ISSN: 1537-8020 print/1537-8039 online DOI: 10.1080/15378020.2012.677387 Strategic Sourcing in the Hospitality Supply Chain NATASA CHRISTODOULIDOU College of Business Administration and Public Policy, California State University,Carson,CA,USA G. KEONG LEONG Lee Business School,University of Nevada, Las Vegas,Las Vegas,NV,USA CAROLA RAAB William F. Harrah College of Hotel Administration, University of Nevada,Las Vegas,Las Vegas,NV,USA This paper investigates the extent to which strategic sourcing is applied in the hospitality industry. This research showed that the hospitality industry applies only a limited part of the available and established strategic sourcing practices and sourcing strategies, which can be adopted to provide a firm with a competitive advantage. Our analysis shows that the hospitality industry is currently facing many challenges especially in the purchasing area where the decision making process is different than in other industries. KEYWORDS strategic sourcing, supply chain management, total cost of ownership INTRODUCTION This paper examines strategic sourcing in the hospitality industry, which plays a major role in the hospitality industry. If more widely adopted, strategic sourcing could give the hospitality industry articulated strategies for many of its purchases for services and key commodities (Carter & Narisinham, Address correspondence to Natasa Christodoulidou, Assistant Professor of Marketing, College of Business Administration and Public Policy, California State University, Dominguez Hills, 1000 E. Victoria Street, Carson, CA 90747. E-mail: [email protected] 143 144 N. Christodoulidou et al. 1996; Zsidisin, Ellram, & Ogden, 2003). Strategic sourcing is based on overall corporate strategy and support (Carr & Smeltzer, 1999; Carter & Narisinham, 1996; Ellram, Zsidisin, Siferd, & Stanley, 2002; Zsidsin et al., 2003). With strategic sourcing, products and services that belong to more than one business units are executed jointly (Carter & Narisinham, 1996; Zsidisin et al., 2003). Vendor-Managed Inventory (VMI) is another important component of strategic sourcing (Gumus, Jewkes, & Bookbinder, 2007). Those who manage strategic sourcing must provide specific, measureable goals (Ellram et al., 2002; Zsidsin et al., 2003), which should be visible and easily understood (Carter & Narisinham, 1996; Zsidisin et al., 2003). The goals of strategic sourcing and its actual performance are reported to top management (Carter & Narisinham, 1996; Ellram et al., 2002; Zsidisin et al., 2003). Furthermore, strategic sourcing is accountable for continuous improvement (Ellram et al., 2002; Zsidisin et al., 2003). In addition, sourcing management communicates cost savings to top management in a manner that aligns the savings with key corporate goals and objectives (Ellram et al., 2002; Zsidisin et al., 2003). In addition, risk assessment is an important part of the strategic sourcing concept (Carter & Narisinham, 1996; Integrity Interactive, 2007). So are social responsibility (Newman & McKeller, 1995), and supplier reliability (Newman and McKeller, 1995; Degraeve & Roodhooft, 1999). This paper will focus on strategic sourcing using Total Cost of Ownership (TCO), to inquire how strategic sourcing is applied in the hospitality industry; in order to do that, components of TCO such as diversity, VMI, and supplier selection and supplier relationship will be investigated. LITERATURE REVIEW Company wide integration of supply chain initiatives is important to an organization (Carr & Pearson, 1999; Ellram et al., 2002; Katz et al., 2003). Other areas within an organization view managing strategic sourcing as an important function (Carter & Narisinham, 1996; Ellram et al., 2002; Zsidisin et al., 2003). Sourcing goals are usually well understood and visible throughout the entire organization (Ellram et al., 2002; Zsidisin et al., 2003). Education regarding supply chain dynamics is also important to an organization (Carter & Narisinham, 1996; Nelson, Mayo, & Moody, 1998). TCO, also plays a key role in strategic sourcing: Strategic sourcing performance objectives are based on TCO, and TCO is a well-understood and accepted measurement tool used by the organization and by strategic sourcing management (Ellram & Siferd, 1998; Ellram et al., 2002; Ellram & Siferd, 1993; Zsidisin et al., 2003). Often, key supplier selection decisions are based on TCO rather than on price (Ellram & Siferd, 1998; Degraeve & Roofhooft, 1999; Ellram et al., 2002; Ellram & Siferd, 1993; Zsidisin et al., 2003). The cost of diversity selection (i.e., the cost of diversity integration) is Strategic Sourcing in the Hospitality Supply Chain 145 included in TCO (Adobor & McMuller, 2007; Whifield & Landeros, 2006; Shah & Ram, 2006). Supplier ethics is an important issue when determining TCO (Bendixen, Abratt, & Jones, 2007; Carson, 2003; Carter, 2000, 2005; Cooper, Frank, & Kemp, 2000; Fassin, 2005; Gonzalez-Padron, Hult, & Calantone, 2008; Gunlach & Murphy, 1993; Integrity Interactive, 2007; Landeros & Frank, 1996). In analyzing a supplier structure, one consideration is the breakdown of a supplier’s cost structure for key purchases (Kremic, Tukel, & Rom, 2006; Zsidisin et al., 2003). Strategic sourcing management works with suppliers to encourage them to disclose their costs and cost structures (Carter & Narisinham, 1996; Ellram, 1996; Ellram et al., 2002; Zsidisin et al., 2003). Strategic sourcing management and suppliers then work together to reduce the costs of products and services (Bendixen et al., 2007; Cousineau, Lauer, & Peacock, 2004; Ellram et al., 2002; Zsidisin et al., 2003). Business relationships between suppliers and strategic sourcing management are also important to the organization (Bendixen & Abratt, 2007; Bendixen et al., 2007; Carr & Pearson, 1999; Carter & Narisinham, 1996; Ellram et al., 2002; Gonzalez-Padron, et al., 2008; Gunlack & Murphy, 1993; Newman & McKeller, 1995; Peck, Payne, Christopher, & Clark, 2000; Sarkis & Tulluri, 2002; Ryder & Fearne, 2003). Vendor certification can be used as a guide for developing relationships (Carter & Narisinham, 1996). Finally, reducing the supplier base is important in strategic sourcing and supplier relationships (Degraeve & Roodhooft, 1999). VMI may be defined as a strategy between the vendor and the customer that aims to reduce the inventory at the customer’s site while at the same time minimizing the cost for the two companies involved in making the inventory available (Hines, Lamming, Jones, Cousins, & Rich, 2000). In VMI, the responsibility for managing a customer’s inventory is transferred from the customer to the supplier (Elvander, Sarpola, & Mattsson, 2007). In addition, the vendor decides “the appropriate inventory levels of each of the products and the appropriate inventory policies to maintain those levels” (Sari, 2007, p. 530). The supplier takes responsibility for the operational management of the inventory within a mutually agreed framework of performance targets, which are constantly monitored and updated to create an environment of continuous improvement. Since the supplier assumes the role of replenishing the customer’s products, the result can be lower costs associated with monitoring and ordering inventory for the customer (Sari, 2007). When VMI is used the supplier is routinely responsible for managing inventories for the customer (Cetinkaya & Lee, 2000; Danese, 2006; Dong, Xu, & Dresner, 2007). With its focus on partnership and information sharing, VMI has emerged as a significant trend in partnership and information sharing in supply chain management (Mishra & Raghunathan, 2004). Moreover, its information-sharing component can result in tremendous performance improvements for the supply chain (Sari, 2007). For example, when physical 146 N. Christodoulidou et al. inventory is reduced so is the need for storage space. Likewise, when the usage site is the storage site the cost of moving material from the warehouse to the actual usage site is reduced (Yao, Evers, & Dresner, 2007). Cost savings also improve as ordering costs are reduced through VMI. The overall goal of VMI is to efficiently manage inventory in the supply chain (Elvander et al., 2007; Schorr, 1998). Quality is also a crucial part of the strategic sourcing concept (Carter & Narisinham, 1996; Degraeve & Roodhooft, 1999; Kaynak, 1997; Newman & McKeller, 1995; Ting & Cho, 2008). In addition, on-time delivery is another issue when the firm participates in offshoring (Stringfellow, Teagarden, & Nie, 2007) or global sourcing (Zeng, 2003). In strategic sourcing, offshoring involves dealing with customs and duties and as such these issues can have an impact on costs and efficiencies. THEORETICAL FRAMEWORKS TCO is a purchasing tool and philosophy aimed at understanding the relevant cost of buying a particular good or service from a supplier (Ellram & Siferd, 1998). According to Ellram and Siferd (1998, p. 56) TCO is a “complex approach that requires the buying firm to determine which costs it considers most relevant or significant in the acquisition, possession, use and subsequent disposition of a good or service.” Since transaction costs can vary significantly among suppliers they can be an important and even deciding factor. Transaction cost analysis theory refers to the transaction of the transfer of goods or services between technologically separate units (Williamson, 1981) and the analysis of how efficient such intra agency transactions are (Walker and Weber, 1984; Williamson, 1981). RESEARCH QUESTION This research investigates the extent to which strategic sourcing is applied in the hospitality industry. The research question will be examined based on the TCO theory, inquiring about components of TCO such as diversity, VMI, and supplier selection and relationship. Perhaps some organizations in the hospitality industry may not be clear about the costs savings and benefits associated with successful strategic sourcing; hence it may be interesting to learn which factors may signal success and which ones may pose challenges? METHODOLOGY This case study is exploratory in nature and based on interviews conducted with high-level executives in the hospitality industry, attempts to identify the Strategic Sourcing in the Hospitality Supply Chain 147 challenges that the industry faces when it considers strategic sourcing. It also hopes to identify the procedures that the hospitality industry currently uses. Interviews were utilized as the main method of data collection in this study. The units of analysis are a set of large hotel corporations. The case study approach was picked as the best way to understand how strategic sourcing is currently managed in the hospitality industry. According to Yin (1994), the case study method is not only appropriate but also preferred when investigating contemporary events such as those involving the hospitality industry because it uses interviews, which enables the researcher to study events in their natural setting. For this study, the goal was not to establish general trends but rather to seek a greater understanding of the way inventory is managed. One of the strengths of the case study approach is that it can deal with a full variety of evidence including interviews. Four large hotel corporations in the western region of the United States were selected to collect the data out of the eight large hotels that are located in this particular region. Two of the hotel corporations owned only one property, while the other hotel corporations each owned a number of properties in the region. We protect the confidentiality of the companies and executives in the interview process by not identifying them directly in the study. Strict confidentiality was crucial to enable the company executives who participated in the interviews to speak openly about the issues being examined. Connolly (2005, p. 32) notes, “to encourage candor and to protect each company’s and interviewee’s identity, a promise of confidentiality is often made.” The interviews were semi-structured so the study could take on an exploratory nature. The interviewees had the opportunity to express what they thought are important components of strategic sourcing that were not addressed in the structured part of the interview. The semi-structured nature of the interviews also ensured that all topics of interest were covered during the interviews. The open-ended questions used in the interviews provided a frame of reference which encouraged discussion, eliminated the steering of responses, and allowed for depth to be established (Connolly, 2005). These questions were presented in such a way that allowed individuals to state his/her true opinions and/or knowledge. The length of each interview is approximately 90 minutes. In response to and because of the design of the questionnaire, interviewees provided factual information as well as professional opinions. The case study questions also asked that respondents offer insights with respect to various hypothetical events. Respondents also were invited to predict how those events would eventually unfold. Respondents’ answers were then used as the basis for further questioning and the basis for further refining and/or constructing a survey instrument. The executives interviewed were responsible for strategic purchasing at each of their companies, and their positions ranged from managers to presidents of the participating companies. All interviews were transcribed shortly after the interview. Furthermore, the researchers looked at documentation 148 N. Christodoulidou et al. TABLE 1 Interview Topics and Questions Sourcing topic Research question Sourcing strategy Tell us about your sourcing strategy. Sourcing philosophy What is your sourcing philosophy? Commodity sourcing (e.g., cleaning supplies, towels) How do you select suppliers for commodities in your organization? Customized sourcing (e.g., amenities, stationery) How do you select suppliers for goods and services that require customization in your organization? Supplier selection How do you select your suppliers? Supplier relationship How important are supplier relationships in your organization? VMI (Vendor Managed Inventory) / CMI (Co-Managed Inventory) Do you use VMI or CMI in your organization? Importance of goal setting How important is goal setting in your organization? relating to the strategic sourcing policies of the executives respective organizations; this information was collected either directly from company documents or from the company website. Table 1 provides the basic outline of the issues the interview questions covered. The data gathered through the methods previously described were analyzed using content analysis techniques and provided the bases for within and between case comparisons (Holsti, 1969). Latent analysis and manifest analysis, two of Holsti’s five content analysis units, were used to obtain both reliable and valid support for our research conclusions. The manifest analysis technique searches for a single key word or phrase to draw inferences about the raw data with respect to the research hypotheses. On the other hand, the latent analysis technique relies on the researchers’ interpretation of interviewees’ raw data to first understand a central theme and then to draw inferences with respect to the research questions. The application of these two approaches enhanced the validity of the analysis and the findings of this study. FINDINGS Semi-structured, one-on-one interviews were conducted with key executives from the leading hotels in order to obtain their current opinions about the part strategic sourcing presently plays in the hospitality industry and its long term potential. The interviews were conducted with two investigators present. Each interview lasted about 90 minutes. The interviewees were selected because of their involvement in the sourcing/purchasing area. All were presidents, vice-presidents, or other high-level executives. The results are summarized in Table 2. TABLE2SummaryofResults TopicCompany1Company2Company3Company4 Sourcingstrategy (philosophy)•Enableriskassessmenttobe carriedout •Tokeepcompetitive •Establishsupplier •relationshipsstrategies •Increaseoverseassourcing•Determinewhatconstitute savings •Identifyprimarycostdrivers Commodity sourcing•Implementdemand forecasting •Useofenvironmentally friendlyproducts •Establisheconomiesofscalefor commoditypurchasingsuchas towels. •Increaseoverseassourcing•Nostrategyinplace Customized sourcing•Costsavingsrealizedthrough offshoringofamenities•Decisivefactorsaretimeliness, quality,andprice•Costsavingsrealized throughoffshoringof amenities •Nostrategyinplace Supplierselection•Competitiveemphasisbased oncriteriasuchas:diversity policies,socialresponsibility •Lackofintegratedsourcing practicesamongdifferent departmentswithinthe organization •Diversity/ •Biddingpractices:40%of purchasingisbidoutwhile 60%ofpurchasingisfood beverageproductsfrom establishedsuppliersand hencenotbidout •Eachpropertychoosestheir ownsuppliersandthis resultsininefficient processes Supplier relationship•Amoreefficientrelationship achievedthroughvendor certification •Useofestablishedsuppliers forproduceandseafood •Criteriaforexclusiveannual vendorcontractsinclude trustworthinessandtheability toexchangeinformationwith transparencyofprofitmargins •Establishedrelationshipwith asinglesupplierforfood& beverage(excludingliquor) products •Eachpropertyhas developeddifferent relationshipsdependingon thesupplierschosen VMI/CMI used/Inventory control •Utilizationofelectronic receiptsystem •Differentreorderinventory pointsformidweekvs. weekend •Useofpointofsalesystemfor replenishmentpurposes•Goodrelationships •Supplierprovidesone employeeoncasino inventorysite •Noautomaticreplenishment system Goalsetting•Implementationofrisk managementandsocial responsibility •Casinoemployees,suchasfor examplehousekeepingneedsto beeducatedonhowtoavoid overusageofproducts •Betterpricing •Moresupplierreliability •Costsavings 149 150 N. Christodoulidou et al. The topics investigated are analyzed next. The key findings of each of the topics are presented below. Sourcing Strategy/Philosophy All four corporations appeared to be struggling with what their sourcing strategy was or what their sourcing strategy should be. The two casino corporations, which owned only one property, focused more on micro-issues such as risk assessment and supplier relationships. The corporations that owned a group of casinos had adopted more of a global approach and were primarily focused on strategies that could drive costs down by sourcing overseas for primarily customized commodities such as stationery, toiletries, and other amenity items. Therefore, depending on the size of the casino property, different priorities existed. Commodity and Customized Sourcing Most of the executives interviewed mentioned themes such as overseas sourcing. One executive stressed the importance of timeliness, quality, and price. Even though purchasing overseas was attractive to the sourcing executives because of the cost savings, concerns were raised about products arriving on time. Another concern was product availability; the issue that was raised was lack of alternatives should a product not arrive on time. Finally, the complication of dealing with customs and duties is a factor in dealing with overseas sourcing. One executive added that even when products are sourced locally, there was some discussion about the impact that natural disasters such as Katrina might have, in other words, the timely delivery of something like sugar to the hotel properties after such a disaster had occurred. Supplier Selection Two of the companies described the process of supplier selection as inefficient. One executive in a large hotel corporation consisting of multiple hotels in particular said that each property could choose its supplier and do so without specific or company guidelines. Finding diverse responsible suppliers were voiced as other issues of concern. Supplier Relationship Casinos consistently shared the opinion that Las Vegas is a “small” town as far as supplier selection and relationships are concerned. Suppliers negotiate differently in an oligopoly setting and thus free enterprise does not really exist. Since pricing is not a decisive factor in such an environment, some Strategic Sourcing in the Hospitality Supply Chain 151 sourcing executives use vendor certification as a guide when choosing suppliers. One executive shared that in the Las Vegas area, hotel corporations have few suppliers to choose from and sometimes only one supplier for the food and beverage division. VMI or Co-Managed Inventory (CMI) The larger groups of properties had stricter controls of inventory in place. The casino corporations that owned only one property used reorder inventory point system. All of the corporations welcomed the idea of implementing VMI, and some felt that they had used some form of comanaged inventory at the property level. One executive stated that it already had a dedicated person from the supplier’s end serving their property. Another executive in a different corporation did not have any automatic replenishment system in place. Importance of Setting Goals As expected because of differences in priority and stages of growth, some of the future goals listed by the various casinos were: social responsibility, education, reliability, and integration. Diversity integration was also deemed to be important for future goal setting. Continuous education was also part of the future goals. Furthermore, consistency and reliability in sourcing practices were also mentioned. Finally, stronger integration and communication with other divisions/departments of the organization were seen as crucial goals to work towards to. LIMITATIONS The participants were selected from a convenience sample of hospitality industry contacts based upon their involvement with strategic sourcing. Limitations of this method included bias response bias (i.e., the interviewee tells the interviewer what he or she wants to hear) and social desirability bias (i.e., inflated positive responses). These limitations were minimized to the extent possible by using multiple interviews with executives in top positions in the sourcing divisions and referencing extant literature and company documents and hence triangulating. In collecting the data, four hotel properties were used. CONCLUSIONS This exploratory study revealed that there are only a few procedures in place for strategic sourcing in the hospitality industry. These practices include 152 N. Christodoulidou et al. commodity and customized sourcing, supplier selection, supplier relationships, implementation of VMI/CMI, and goal setting. However, this research also showed that the hospitality industry applies only a limited part of the available and established strategic sourcing practices. Even though the hospitality industry traditionally has had lower inventory levels than other industries (Schmidgal & Damitio, 2006), the lack of emphasis on strategic sourcing contributes to the many challenges this industry confronts today. These challenges include global competition, technology evolution, pricing and revenue models, high overhead costs, lack of cost control, employee recruitment and retention, and intensive labor costs. Our study suggests that an opportunity exists for the industry to combat some of these challenges (quality, delivery, and cost issues) in today’s tough business and economic environment by increasing the use of sophisticated sourcing methods. For instance, more corporations need to establish goal setting in sourcing along with using more frequently VMI or CMI. Consequently, this research reemphasizes the importance of the role of purchasing in a company’s success as discussed by previous literature (Ellram et al., 2002). In addition, these authors also suggested that an investment in the educating of supply management will provide a substantial return. This research suggests that the industry can adopt sourcing strategies that will provide a firm with a competitive advantage. For instance, based on the interview findings, the hotel corporations need to establish a sourcing strategy that is currently lacking in order to achieve their long-term goals. The hospitality corporations also need to implement a process for supplier selection and purchasing procedures (Sanchez-Rodriguez, Hemsworth, Martinez-Lorente, & Clavel, 2006) in order to make the sourcing process more effective. The research results also revealed that company wide integration of efficient processes is also a priority for many of the organizations that were investigated. 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