e buy goods

When the share prices of even the biggest Internet names start to wobble, it shows that all the excitement and hype surrounding the World Wide Web is beginning to wear thin. If the Internet is to be a serious business tool then it needs to justify itself by either making a business money from new revenue streams, or saving money by modifying existing models.

Advances in cyberspace

In hospitality, the rise of on-line booking for hotel rooms has been the most prominent use for the Internet - as a front of house interface between customer and hotel. But now it's about to make an impact back of house as well - starting with some of the biggest names in the business.

In May, Marriott and Hyatt in the USA signed a deal that combined the enormous buying power of the two companies in one Internet-based network, known as P-Co, linking all their purchasers and suppliers in a marketplace worth $5b (£3.3b) (Caterer, 11 May, page 8).

This purchase of supplies or services through electronic means, known as e-procurement, can include virtually every aspect of supply chain management, from monitoring inventory, ordering supplies and scheduling deliveries to helping marketing departments determine the "hot areas" for their products.

E-procurement's appeal is obviously a financial one; a recent report by Deutsche Bank estimated the potential business-to-business opportunity for the global hospitality industry at nearly $20b (£13.3b) in terms of cost savings or revenue enhancements.

Total business-to-business e-procurement is expected to reach nearly $8 trillion (£5.3 trillion) by 2004.

But how exactly can e-procurement create that kind of benefit?

The traditional way of sourcing, selecting and then purchasing anything is paper-based. Catalogues, forms, signatures, mail and so on can be involved in a process that takes weeks or even months. Go Co-op, the service provider for Marriott and Hyatt's P-Co system, estimates that it can cost a large business $107 (£71) to purchase a product or service using these traditional methods. It says purchasing a product via e-procurement methods can reduce that average cost to $5 (£3.30).

But it isn't just a question of price. By using e-procurement, buyers can manage their inventory much more easily - by tracking deliveries, for instance. And, because delivery and response times are so much quicker, a hotel doesn't have to stock huge amounts of product to ensure availability.

Go Co-op produced its first e-procurement product in November 1995 and now has not only Hyatt and Marriott as customers but also Wyndham International andGuest Supply. Chairman of Go Co-op Christopher Cogan says the benefits of on-line e-procurement are far-reaching.

A clearer picture

"Costs can be significantly driven down by eliminating a lot of those manual procedures that go with traditional procurement methods," he explains. "And it is estimated that between 10% and 30% of the total spend in the hotel and hospitality industry is done off-contract."

In other words, hotel company head offices can spend time and money picking vendors and signing contracts with them, only to have individual general managers buy from other people.

"These new systems enable the hoteliers to monitor who's buying what, where and at what price, generate reports and let them enforce contracts," Cogan says.

The Marriott and Hyatt deal is one of the most significant indications of the increasing move towards on-line e-commerce of this type. Brian Weed, vice-president of strategic planning at Hyatt, brokered the deal and says it took the new business methods developed around the Internet to make it happen.

"We had been looking for an e-commerce solution for almost a year," says Weed. "And through that process it dawned on us that we would benefit our hotels if we could get together with competitors who do similar things.

"It really wasn't a super-competitive element of our business and we could benefit from the economies of scale from being a combined larger entity."

This sounds simple logic, but two "rivals" combining in this way is an unusual way of operating.

"You're seeing it a lot now in other industries as well," Weed explains. "There are initiatives that are coming up in distribution of the room inventory side of the business too.

"It's interesting because everyone would say that it makes sense, purchasing items by getting together, but e-commerce is the excuse everyone has used finally to do it because they saw that they could actually make something of the business."

The Marriott-Hyatt deal, though, is something of an anomaly. It is unlikely that many other big players will rush to follow this "in-house" method of developing a new supply chain, mainly because of the potentially huge cost of setting up such a network.

It is more probable that independent, specific intermediary companies offering to provide space and facilities for businesses to use will become the most common e-procurement method.

This is especially likely in the UK where the proportion of individually operated hotels is significantly higher than the USA, and where chains have far fewer outlets than Marriott and Hyatt's combined 1,800 properties.

These kind of sites are more prevalent in the USA, such as the intermediarieshsupply.com, hotelsupplies.com, zoho.com, and merchants.com. But, as with many dotcom companies, not all are expected to survive in the hospitality industry, with one or two becoming the market leaders quite quickly.

Marriott and Hyatt have made no secret of the fact that they are looking to bring in other partners as their procurement system matures, and this evidence that they are embracing business-to-business opportunities should be seen as a step in the right direction for the entire hospitality industry.

But it is all still new, the applications and methods are in their infancy and Cogan from Go Co-op says the technology and use of the systems will move forward quicker than most people probably realise.

"Currently, we interface our technology into a user's accounting system," he explains. "And we're working on other technology now with features and functions that will ultimately link the procurement system in with the property management system, so a lot of purchasing of goods you buy every time a room is cleaned can be purchased automatically.

"We can have that in a matter of months, it's just a case of us working with our partners, such as Hyatt and Marriott, and seeing if that's what they want."

FACTS:

E-procurement: the purchasing of supplies or services through the Internet

Estimated current average cost of buying a product through traditional procurement methods: £71

Estimated cost using e-procurement: £3.30

Potential cost savings for global hospitality industry: £13.3b

Total global business-to-business e-procurement is expected to reach£5.5 trillion by 2004

Source: Caterer & Hotelkeeper magazine, 27 July - 2 August 2000