Inventory Control and Cost

Practices of Major International Hotel Chains

JOHN K. RYANS, JR., IVAN R. VERNON, AND GUY R. BANVILLE
The international hotel/motel industry clearly
Methodology
A highly structured mail questionnaire was sent
has established its position among the major service
to the comptroller in 55 of the largest
industries. In fact, on a worldwide basis, the largest
hotel/motel
chains in the world.7 This total represented all of the
international hotel/motel chain, Holiday Inns, Inc.,
chains based in English-speaking countries that were
had sales of $1.9 billion for 1972.1 For comparison
listed in the 1971 Service World International &dquo;100,&dquo;
purposes, this chain would have ranked slightly ahead
the 100 largest hotel/motel chains ranked in terms of
of Coca Cola (61) on the Fortune Directory listing
total rooms. Responses were received from the chief
of the largest industrial corporations for that year.2
financial
executive in some 27 chains or 49 percent
such
as
of
the
chains,
Similarly, many
major
Trust Houses Forte Ltd. with its $596 million in annual sales, are based outside the U.S.3 In fact, there
are 7 non-U.S. based hotel/motel chains among the
top 25 international chains.4 Domestically, Americans
spent an estimated $6 billion for lodging. The total
receipts for the U.S. hotel/motel industry for 1972
was some $8.5 billion.6
Despite such impressive domestic and global
totals, relatively little empirical academic research has
focused on the international hotel/motel industry,
particularly regarding their purchasing and inventory control policies and practices.

Purposes of the Study

This note reports the findings of an exploratory
study conducted among executives in a select group
of the largest hotel/motel chains in the world. Basically, the study sought to determine (1) whether
purchasing was centralized or decentralized, (2) the
extent to which inventory control and other functions
were computerized, (3) the locus of chain decision
making regarding purchasing, and (4) the extent
to which local management performance was measured in terms of purchasing effectiveness. In addition, considerable information was gathered regarding purchase patterns for major classifications of items
(capital goods and operating supplies) and the use of
leased units such as gift shops. airline reservations,
chemist or pharmacy shops, and coffee shops.
Certainly the importance of developing (and optimizing) inventory control procedures has been
the subject of extensive research, yet little insight has
been developed about these activities in the hotel/
motel industry. This note is concerned with reporting
the portion of the findings of the study that relate
the
to the questions of centralization of
use of inventory control procedures, and the extent
to which computerization has become a factor in the
inventory control procedures of the industry.

purchasing,

John K. Ryans, Jr., is Associate Dean, Graduate

School of Business and Professor of Marketing, Kent
State University. Ivan R. Vernon is Assistant Professor of Marketing, Baylor University. Guy R. Banville is Associate Professor and Chairman, Department
of Marketing, Kent State University.

and of this group, 24 responses or 44 percent were

usable. The mail survey was conducted during February and March 1974.
Of these respondents, 14 represented U.S. based
organizations and 10 represented non-U.S. based or
foreign firms. This latter group included chains based
in such countries as South Africa, Canada, Great
Britain, Australia, and Ireland.
While these 24 respondents represented only
approximately one-fourth of the top 100 hotel/motel
chains in the world, it should be noted that those responding to this survey now account for an inordinant
share of the total units/rooms available. These 24
respondents represent 511,770 rooms or 48 percent
of all rooms provided by the top 100 hotel/motels in
1972. Therefore, they represent considerable size and
strength in the industry.

Findings

While this study was exploratory in nature, it

produced a number of findings regarding the inventory control and cost policies and practices of a
sample of major international hotels/motels. Further,
it examined their use of computers, not only in their
inventory control activities, but their reservation and
billing work as well.
Both the results relating to inventory control and
cost practices and those regarding computer usage
are reported in the following sections.
Centralization ofPurchasing
The study clearly reveals that capital items are
generally purchased centrally, while operating supplies and other noncapital items are often bought at
the local level.

Capital Products
Virtually all of the firms surveyed generally purchase their capital products at the central level. None
of the companies generally purchase bedding and
towels at the local level; only two companies generally
purchase electrical products locally; and only two companies generally purchase furniture items at the local
level. It should be pointed out that even of the firms
which do purchase certain capital items at the local
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level, all but

one such firm also purchases this same

item at the central level. It is probable that only small
or incidental
capital items are customarily purchased
at the local level.

Noncapital Items
Noncapital items were broken down into two
categories: operating supplies and food service items.
For operating supplies the purchasing practices were
less sharply defined. While there is a tendency for
these companies to purchase such supplies at the central level, a number of companies (seven) indicated
that they generally purchase paper products at both
levels, and eight companies indicated that they purchase cleaning supplies at both levels.
For food service items, the purchase decision is
usually made at the local level. Only two companies,
for example, indicated that they generally purchase
produce centrally and only six firms indicated that
they generally purchase any of the other food service
items centrally.
Respondents were also asked to indicate the percentage respectively of their capital items and operating supplies purchased centrally and locally. Most,
22 companies, purchase more than 50 percent of their
capital items at the central level, with only one firm
buying in excess of one-half of such items at the local
level. For operating supplies, only 10 of the firms
purchase 50 percent or more of these items centrally,
with another 10 buying more than 50 percent locally.
Two firms indicate an even split on purchase level
for operating supplies; i.e., they purchase one-half
of such items centrally and one-half locally.
The data regarding centralization of purchasing
was cross-classified against each of the following four

Cost Practices
The chain executives were asked whether each
of the units in their chain were treated as separate
profit centers and therefore &dquo;charged with all supplies
received from central inventory.&dquo; All of the respondents indicated this to be a policy of their particular

chain.

Subsequently, each was asked to indicate if these

supplies received from central inventory were charged
to them (local units) at a local retail price rate, at a
rate based on the price negotiated for the entire chain,
or at a rate determined by some other allocation
method. Roughly four-fifths of the respondents indicated their chains individual units were charged
at a chain-negotiated rate, while others indicated either a local retail price, a local competitive wholesale
rate, or some combination of. negotiated cost plus delivery charges.
Computerization of Inventory

Control and Other

Purchases

company variables:
I. Number of units in the hotel chain

2. Number of hotel

distributed between U.S. based and non-U.S.

based chains. Of course a much larger percent of
non-U.S. based chains maintain such warehouses than
do U.S. based chains.
Despite this lack of centralized or regional warehouse facilities, most of the chains do utilize formal
inventory control procedures to insure maintenance
of predetermined stock levels for centrally purchased
items. Nearly three-fourths of the respondents indicated that such procedures were employed in their
corporation. This policy is followed by a somewhat
larger percentage of overseas based hotel/motel
chains, but it is followed by a heavy majority of U.S.
based firms as well.

evenly

rooms

3. Number of food
operated by the chain

in the entire chain

units

(i.e., restaurants)

4. The dichotomous variable indicating U.S. vs.

foreign location of the chain.
No significant differences in purchasing policies
were found in terms of any of these variables with
respect to the centralization of the purchasing action.
While a finding indicating differences in purchasing
policies across these variables would have been of
perhaps greater interest, it is also significant (in a
nonstatistical sense) that such a homogeneity of practice does indeed exist. However, it must be remembered that the firms surveyed are all of considerable
size, and this likeness would perhaps have suggested a
similarity in purchasing practices.
Centralized Warehousing and Inventory Control
Levels
Of the twenty-four (24) responding international
hotel/motel corporations, only 9 maintain a centralized warehouse or regional warehouse to store goods
used throughout their chain. These nine were rather

Although computerized inventory control is becoming widely used in our domestic retailing industry (as well as other industries) the study indicates that the computer is being used in this capacity by only one-third (eight) of the major international hotels/motels. Naturally, greater use is being
made of the computer in handling room reservations
with some 10 U.S. based and 5 foreign based chains
employing computerized reservation services for
their patrons.
Since in the previous section it was reported that
nearly three-fourths of these major hotel/motel chains
utilize formal inventory control procedures to maintain a given stock level, the fact that only eight firms
(or one-third of the total) utilize the computer for
inventory control was unexpected.

Computerized Inventory Control System

Among those eight firms employing the computer
in their inventory control activities, the majority (six)
used the computer only to monitor stock levels of
centrally purchased items. Only two respondents

indicated that their firm used the computer to monitor predetermined stock levels at both the central
level and the local level. Interestingly enough, these
latter two chains were not among the larger hotel/

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motel chains and

one was

U.S. based and the other

foreign.
Reservations
More of the major hotel/motel chains use the
computer for handling reservations than for any other
purpose. This practice is followed most extensively
by U.S. based chains with executives in some 10 of
the 14 indicating that they employ computerized reservations systems.
The larger chains (over 10,000 rooms) make
greater use of computerized reservations than do the
smaller chains. However, geographic dispersion of
units does not appear to be a consideration in the
decision to utilize the computer in handling reservations. In fact, those chains with smaller numbers of
units (below 75 units) tended to be more likely to
utilize the computer in processing reservations.

Summary
portion of the study of major international
hotel/motel chains reported here provides some exploratory insights into the cost and inventory control
policies and practices of these firms-an area previously ignored in empirical academic research. Further,
it indicates the use (or lack of use) of the computer by
these organizations.
A few of the findings include:
1. Most capital goods (furniture, cleaning equipment, kitchen appliances, and like items) are centrally purchased (purchased at the home office level)
by the chains.
2. The chains are about equally divided regardthe
locus of purchase of operating supplies, but
ing
most food items are purchased locally.
3. Only nine chains maintain centralized or regional warehouse facilities for storage of centrally
purchased items.
4. A majority of the firms (17) utilized inventory
control procedures to maintain predetermined stock
The

levels. However, only eight firms employ the computer

in their inventory control activities. Of this number,
six use the computer for monitoring stock levels and
two use it for monitoring at both the central and
local level.
5. The computer finds its greatest use in the
handling of reservations. Some 15 chains employ the
computer for this purpose.

Final Comments
The hotel/motel chains included in this study
are among the largest in the world. Yet, the sample
was recognizably small. A further limitation of the
findings is that the survey included only chains from
English-speaking countries. Therefore, despite the
importance of the respondents in terms of the total
hotel/motel or hospitality industry, the authors feel
that the survey has many characteristics of a pilot
study and plan to broaden it to include the remaining top 100 chains in the world. This will require
translating the questionnaire into several languages
and surveying those located in non-English-speaking
countries. Efforts will be made, also, to develop a
roster of smaller hotel/motel chains that will permit
including more than the top 100 firms in a continuation of this study and in future research on this in-

dustry.
"The Service World International 100," Service World Interna1

tional, Vol. 7, No. 3 (May 1973) p. 15.

"The Fortune Directory of the 500 Largest Industrials," Fortune,
2
Vol. 87, No. 5 (May 1973), pp. 220-241.
"The Service World International 100," op. cit., p. 17.
3
Ibid., pp. 15-19.
4
"National Travel Expenditures Study," Journal of Travel Research,
5
Vol. 12, No. 3 (Winter 1974), p. 9.
Statistical Abstract of the United States, U.S. Department of Com6
merce, 1973, p. 753.
Sources include "The Service World International 100," Institu7
tions : Volume Feeding
, Vol. 68 (August 1, 1971), pp. 27-39, and updatings
from Service World International.
The major analytical tool employed is Chi-square analysis. Only
8
those relationships are indicated as significant that were significant at
equal to or less than the .05 probability level. This is consistent with
Ferber and Verdoorn, who indicate .05 to be the borderline probability
(Robert Ferber and P. J. Verdoorn, Research Methods in Economics
and Business (New York: The Macmillan Company, 1962), 73.)

Papers Presented

at the Western Economic

Association 50th Annual Conference

Economics of Outdoor Recreation and Travel

At the 50th Annual Conference of the Western
Economic Association held at the Sheraton Harbor
Island Hotel, San Diego, California, June 25-28, 1975,
there were a number of papers presented dealing with
the economics of outdoor recreation and travel. A
total of four sessions were organized by Turgut Var,
Simon Fraser University, Burnaby, British Columbia,
and he is to be commended for the fine group of sessions he organized. The papers are briefly summarized
here. Anyone wishing copies of the papers should
write directly to the authors.
in Secondary Impact of Through and Recreational Travelers on a Small Western Community,
by Floyd K. Harmston, University of MissouriColumbia, Columbia, Missouri.

Differences

This paper covered an cxperiment testing the

that because of differences in expenditure
travelers
patterns,
vacationing in an area have a greater impact on a community than do those just travel-

hypothesis

ing through.
Results showed that through travelers spent much
auto supplies, less on lodging, and much less
on other goods and services locally than did the recreational travelers. The first round expenditure patterns of the two groups were significantly different.
Secondary effects indicated that the overall effect
of the travelers in terms of total business or of personal income is appreciably the same. From this experiment one could conclude that even though the
overall effect of a traveler dollar is essentially the
same, for individual business categories in the commore on

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