The average U.S. hotel operates with a 30 percent profit margin, which is low compared to other industries. With tight margins to work with in a highly competitive market, it is important for hotel operators to streamline their practices to stay profitable and keep overhead costs low.
NB: This is an article from Craftable
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Optimizing back-of-house processes like procurement and using data to manage current inventory and help predict future trends can help operators control purchase orders, reduce financial risks and anticipate and adjust to future needs based on past trends.
Procurement: How to Use It to Your Advantage?
Procurement is more than just placing orders; it involves sourcing materials, negotiating contracts and payment terms and assessing and refining these processes. A well-managed procurement program can help increase margins by reducing cost and waste and increasing the efficiency of operations. Using technology to automate these tasks can help streamline efforts, allowing operators to focus on the front-of-house guest experience and brand building.
Measure Days on Hand to Refine Purchase Orders
When looking to control purchasing and reduce waste, operators should consider measuring days on hand (DOH) as a key performance indicator benchmark. DOH measures the amount of inventory a business has in stock and the estimated time that inventory will last before running out. It is a crucial number to monitor for both perishable and non-perishable goods. Let’s face it: in some cases, hotel operations might have more money on their shelf than in their safe. By managing your DOH, you minimize the risk of too much inventory, which leads to waste, spoilage, loss, etc. By the same token, by managing DOH, you also reduce the risk of running short on supplies that could compromise the ability to meet or exceed the customer experience, thus costing revenue that leads to profit.
To measure the average DOH, a hotel must understand the business’s usage of goods over the period they are tracking. While many might measure purchases as the usage, the actual usage is calculated by taking a beginning inventory count, adding in purchases and subtracting the ending inventory count. The sum of this is the usage. For instance, if a hotel started with 102 bottles of Heineken on Monday, they purchased 48 bottles of Heineken between Monday and Sunday, and then on Sunday they counted 80 bottles of Heineken left in their inventory, their usage in this scenario is 70 bottles of Heineken (102 + 48 – 80 = 70). 70 is the hotel’s usage.
Now, the hotel will want to divide the usage by how many days it was used to determine the average daily usage (70 divided by seven days = an average daily usage of 10 bottles of Heineken).
Finally, the hotel will want to divide the ending inventory count by the average daily usage to determine how many days the current inventory should last. In this example, if the hotel had 80 bottles on hand in their inventory and they are using 10 bottles per day on average, then in theory, it should last about eight days.
While you should always measure variables such as fluctuation of sales and a product mix (p-mix), this number should help to better understand what is needed in inventory to manage current trends and what should be ordered to ensure enough is on hand.
Once you understand the DOH, measure the days between deliveries to determine if you need to replenish stock on the next delivery or if it’s enough. For instance, in the above example, if the hotel has eight days of Heineken on hand, and their next delivery arrives in three days, then they should not run short before then. However, suppose the following delivery after that isn’t for another week (a total of 10 days from the inventory count). In that case, it isn’t enough, and the hotel procurement team should order at least one case of 24 to meet the projected need. If you do the math, the average daily usage is 10, the first delivery is in three days, and the second delivery is one week from the three days after the inventory, so the hotel needs enough for at least 10 days, and they only have enough for eight days. The two additional days would mean they need at least 20 more, so if they order Heineken by the case of 24, they will need to order at least one case. You should also always factor in a multiplier to adjust for fluctuations up or down according to the hotel’s occupancy or events. So, if the hotel is expected to have a 20 percent higher occupancy in the 10 days, then the average daily usage is 12, and they would need 120 to cover 10 days. I would suggest ordering two cases (48 bottles) in this scenario.
Consider now if the same hotel has 20 Heinekens in its ending inventory instead of 80, and replenishment of the product is not set to come on a vendor truck for three more days. The hotel will likely run out of Heineken after two days of operation. Without enough products to meet the DOH, this may cause issues with customer orders and, ultimately, profits.
Managing DOH for optimal business operation requires a balancing act. Think about the perishables; too high of the DOH in perishable goods can create opportunities for spoilage and other unnecessary losses. For operators, it’s important to remember that excess product is harder to manage and results in waste or mishandling, while less inventory is easier to track and control.
However, running out of products can leave the business in a vulnerable position. A low DOH can cause inventory to run out prior to the next delivery. When running out, the operator can compromise the guest experience or be forced to buy off its usual schedule to bridge the gap. Buying out of the businesses’ current program can result in a higher cost and less quality product supply than the entity is accustomed to and is counter-resistant to a well-managed procurement program.
Use This Data to Predict and Adjust for Future Needs
DOH is a powerful KPI that can help predict future supply issues that may arise. If an operator is short in their DOH, then they can react sooner to prevent running out of product. Similarly, an operator with a high DOH should move the product before it spoils. Operators want to avoid waiting until the items expire and then being forced to throw them out—directly taking profit away from the bottom line. In addition, hospitality entities should avoid running short and risk being forced to pay higher prices for lower-quality products to bridge the gap.
For hotel groups that use a central purchasing warehouse as a commissary, measuring each property’s DOH allows the procurement team to better understand the combined total needed to fulfill the demand as an aggregate between all properties. It can also help serve as an understanding of how to allocate inventory according to DOH vs. equally distributing inventory between departments or locations. Using technology that allows the accounting team to not only track the movement of the inventory between departments or locations but also account for the current value of the inventory as it is transferred is essential, making it a seamless requisition for the operations, procurement and accounting teams.
Understanding the DOH starts with understanding the actual usage, which requires counting inventory on a regular cadence. Utilizing the data these inventories can provide, the procurement team can stay on top of trends and make educated decisions that are critical to the hotel’s bottom line. That can be the difference between low-to-average profit margins vs. more efficient hotels with higher margins.
When managed efficiently, these processes can serve as a catalyst for identifying cost-saving opportunities and streamlining operations in more than just the F&B side of managing hotels. For instance, how does the same methodology apply when managing supplies, linen, toiletries, etc.? While you can manage this manually with pen and paper or an Excel worksheet, there are too many moving parts that create too much room for error, leaving that additional profit on the table. The cost to empower technology that manages and tracks the KPIs against your perpetual inventory far outweighs the ROI.