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Challenges Of Small/Mid Size Hospitality Organizations With Food/Hospitality


When confronted with the challenges of food / hospitality products purchasing, small and mid-size organizations (“S&MS”), like resorts, hotels, restaurants and hospitality groups are handling the situation with mixed results which cost them dearly on their bottom line.

OPTIMBUY provides supply chain consulting services to these organizations to implement new practices, negotiate better deals and generate savings and costs reduction, building long term relations with their suppliers – partners, while operating under a unique pay-for-performance model.

The day-to-day of small and mid-size operators:
Relying either on a one man show or a tiny team at Corporate or on each single location / property‘s chefs or managers, S&MS do their best to deal with the giants of the hospitality manufacturing and distribution worlds as well as their local purveyors. The show must go on: amazing foods on the tables, impeccable service and delighted customers who will come back to experience once again the magic delivered by our boutique S&MS.

Focused on problem solving, production and customer satisfaction, S&MS operators have, in the best case scenario, surrounded themselves with a network of trusted suppliers, but have spent little time on negotiating terms and conditions. They did not analyze their spend by category / sub-category, did not survey the potential providers, did not do a market basket comparison through a bid process, and didn’t have access to benchmark data.

Some are still cherry-picking suppliers. They feel they get the best deal by switching from Joe to Jack and Paul and back, except that vendors are smart. Some will be competitive on some key items but get their money on the rest. Some will be competitive for a few weeks / months and when the relationship is built and cherry-picking ends, they’ll get their money back. Some will split the business or alternate amongst themselves. S&MS using this practice are missing the big picture, lowering supplier’s service and commitment, and adding indirect costs like administrative costs, products receiving, quality control…

Some have joined a “GPO”, a Group Purchasing Organization, like Avendra, Premier, FoodBuy, BuyEfficient or anyone of the 800+ GPOs in business in the country. GPOs will provide access to their deals / preferred pricing / terms and conditions, some with manufacturers, some with distributors, some with both. This does come with constraints when you have to buy from the distributors or manufacturers selected by the GPO which may not be the perfect fit for your business or your liking. It also may not be the most competitive way to reduce costs as, rightfully, GPOs need to make a living and will get a share of the savings they generate. The questions become what share should a GPO get? 25% or 75% of the savings, and over which period? For a few years or forever?

When the general economy is not at its best and every penny counts, S&MS have to challenge the way they do business and look for every opportunity. They cannot only expect to stabilize and increase their top lines, they have to address the middle of the page and go after the dollars moving through their facilities, storerooms and freezers.

The mysteries of the food supply chain:
Let’s pick, coffee – a highly volatile commodity. Currently the raw material, the “Arabica Green”, trades at close to $2.50 per pound (a 65% increase from two years ago) and gets into our locations at $7 to $12 per pound. Don’t misunderstand: Lots of transformation / operations / transportation needs to happen between the hills of Columbia and the loading dock of your hotels or restaurants. But only large and X-large organizations have the resources to practice strategic sourcing and analyze the cost components of what they purchase in order to buy on futures or negotiate best in class deals with formula pricing.

The manufacturing world has built models initially developed to impact their costs and profitability and to reward distributors and operators with programs such as volume incentives or growth incentives. These have transformed into complex mechanisms such as pricing, deviated pricing, bill backs, rebates and allowances resembling a maze hard to navigate without insight knowledge and benchmarks.

The value-added products strategies (pre-washed, pre-cut …) which removed costs from the kitchen have also created opportunities for manufacturers to increase margins, but also for negotiation. When the question becomes “make” or “buy”, pricing and terms are critical in the decision making process.

Any craze is an additional opportunity for them: sustainability, green, organic, fair trade, low this / low that, Omega 3 enriched, free of trans-fats, hydrogenated oils, monosodium glutamate (MSG), high fructose corn syrup or artificial flavors. Should you pay more? And if so, how much more to get the products you need?

The consolidation of the food distribution industry, via mergers and acquisitions, is reducing the competitive landscape. The need for higher margins and ROIs has resulted in practices making it more complex and less transparent for S&MS operators to understand costs and value creation. Strategies such as Distributor brands, Packers programs, Regional distribution centers, Cross docking, Vertical Integration (production and/or transportation), Earned income need to be accounted for. Understanding the levers of distribution costs such as drop size, case cost or payment terms will help you drive win-win agreements with your distributors. Deciding which product categories to buy from which distributor, or whether to place orders online or over the phone, or to buy a distributor’s brand versus a national brand, will reduce or add to your costs.

The solution:
When hiring an in-house purchasing / negotiating team is not an option, S&MS should reach out to external consultants who can assist them in building the right programs with the right distributors and manufacturers, provide benchmarks, expertise or resources and, at the end of the day, reduce costs. They will also help with proper contracting to minimize risks, ensuring that suppliers do carry liability insurance, do trace the origin of their products, do have an HACCP plan, do have a recall process and more.

OPTIMBUY helps S&MS craft responses meeting their needs, one client at a time.

Based on an assessment of current practices and review of a client’s agreements / deals, OPTIMBUY expert consultants work with clients’ individual / purchasing team / management to build customized programs generating savings. OPTIMBUY negotiates / renegotiates current deals on a standalone basis or assists clients in selecting a GPO for partial or total participation in its programs, whatever makes more sense for the client. OPTIMBUY operates on a “Pay for Performance” model and earns a share of the savings generated for its client.

Editor’s note:
OPTIMBUY defines small / mid-size hospitality organizations as organizations with a foodservice spend ranging from $5M to $50M. Foodservice purchases primarily include food, beverages, paper and disposables, smallware, as well as cleaning products purchased from distributors or directly from manufacturers.

OPTIMBUY is a supply chain management consulting firm specializing in food and hospitality related products. In just three years, OPTIMBUY has advised clients on more than $1 Billion in foodservice spend. The new contracts they have negotiated have averaged for their clients savings ranging from 3 to 10%.

OPTIMBUY is a Cayuga Hospitality Advisors preferred partner.

About the Author

Chris Rochette is a former member of Cayuga Hospitality Consultants.