HAMA Spring 2014 Meeting Best Practices in Procurement May 6, 2014

1. HAMA Spring 2014 Meeting Best Practices in Procurement May 6, 2014

2. Agenda • Importance of Procurement in Hotel Management • Defining “Procurement” • Emerging Trends and Best Practices – Transforming from Purchasing/Procurement to Supply Chain Management • Summary • Q & A

3. A 2013 study by McKinsey and Company Revealed a Strong Correlation Between Purchasing Health and Corporate Performance Procurement followers Procurement leaders Middle of the pack …result in higher performance Better procurement practices… Percent Annual procurement savings Average EBITDA margin Average survey scores across all drivers Scale 1-5 Annual reduction of COGS Procurement leaders 3.5 4.9 0.4 20.2 Middle of the pack 2.7 3.8 0.1 17.0 Procurement followers 1.9 2.8 -0.1 10.9 Confidence level of correlations >99%

4. Procurement Has Implications and Impact Well Beyond Purchase Price Potential Procurement Impact on Hotel Management • Quality • Right products for right application • Consistency of product performance • Driving perception of value to customer • Service • Products and services available when needed • Supplier flexibility and knowledge of customer business • Cost • Optimal life cycle costs • Adequate Indemnity and Risk protection • Internal Controls • Establishing strong fiduciary relationship over the spend .

5. Defining “Procurement”

6. Defining “Procurement”

7. Supply chain Management vs. Transactional Purchasing - providing controls Supply chain management approach: • Drive lowest cost by bringing scale and commitment to supplier • Manage property-level compliance through spend reporting and field support • Manage service, quality and price performance through a longer term relationship • Traditional 3-bid procurement focus: • Control deal and process by individual purchasing transaction • Bid each purchase and verify price/quantity by 3-way match Vendor Selection and Contracting Ongoing Service, Quality and Price Management Transactional Purchasing Monitor Compliance Aggregate Purchases Manage Supplier Performance

8. Supply Chain Management The key to Supply Chain Management is focusing on where the cost exists and where there is leverage. Weighted Leverage Points 30% Margin Manufacturer Barriers To Entry Capex Brand 1-3% Margin Raw Materials 1-2% Margin Distributor Freight Freight 50-60% Cost

9. Supply Chain Management • Approach to Cost Management in the Supply Chain • Insert oneself at optimal point in supply chain • Make offering compelling to each part of the supply chain • Reduce supply chain costs, don’t focus only on profit Properties Supply Chain Materials Provider Distributor Manufacturer • Go to raw materials to manage key cost drivers of manufactured items • Drive collaborative (i.e. with customers) process to aggregate • Determine real alternatives (more=leverage) • Sell ability to take cost out of their business • Clearly defined specifications (key to making supply chain more efficient • Tight definition of service levels • Cost-plus: definition of cost is key • Control cost into distributor for ~80% of $ volume

10. Supply Chain Management

11. Enhancing Procurement by Utilizing Partners Little to no contribution Strong contribution

12. Summary • Procurement is important to property profitability and guest experience • “Best Practices” procurement provides significant value – but can be difficult to achieve • Companies utilize different procurement partners to complement their internal procurement efforts

13. Questions and Answers