Coffee contract negotiation

Coffee Contract Role of F&B Director(w), Statler Hotel

By Tony Simons & Thomas Tripp

© 2000-2016 Dispute Resolution Research Center (DRRC), Kellogg School of Management, Northwestern University. All rights reserved. Revised 2004. DRRC/KTAG teaching materials are protected by copyright law. DRRC requires a per person royalty for use of its exercises. Each purchase of an exercise authorizes copying or electronic distribution of that exercise equal to the quantity purchased. Access DRRC/KTAG materials at www.negotiationexercises.com Contact DRRC at drrc@kellogg.northwestern.edu

You are Sandy Grant, Director of Food & Beverage for the three-star Statler Hotel in Ithaca, New York. The hotel is scenically located near the center of the Cornell University campus and is attached to the renowned School of Hotel Administration. You assumed your position six months ago under a mandate to increase the cost-effectiveness of the hotel’s purchasing practices. After conversations with the campus-wide food service company (Cornell Dining), you have decided to add many of the hotel’s routine purchases to Cornell Dining’s supplier bidding process. In this way, you plan to make use of the entire campus’ substantial purchasing power to secure the best deals possible. One item that you cannot purchase as part of Cornell Dining’s bidding process is coffee. The Statler Hotel, with its three dining establishments (Banfi’s, Mac’s Cafe, and The Terrace/Statler Club) and in-room coffee machines, uses more coffee than the rest of the campus combined. Statler’s guests are demanding, and you realize that many guests judge the quality of a restaurant in large part by the caliber of its coffee. It is extremely important that the Statler serve very good coffee. The hotel has a reputation to protect. Your current vender, LaRoche, sells a very good product at a very fair price. Last year, you bought approximately 10,000 pounds (approximately 4,545 kilograms) of coffee from them at $4.70/lb. LaRoche annoyed you last year when they tried, in the middle of a contract, to pass along price increases in response to a very bad crop in Columbia. You threatened legal action to enforce the contract, which had a locked-in price, and they finally agreed to continue supplying you at the same price. Two months ago, you distributed a request for bids for coffee suppliers for the contract that runs July 2003 through June 2004. Because of internal delays, you later decided to extend your existing contract

through July and to extend the next contract period also through July. A copy of the request for bids is attached. You know that Anderson coffee is superior to LaRoche. In fact, you recently conducted a blind taste test of the two brands against each other during a training session for hotel general managers. The managers preferred Anderson to LaRoche by a margin of 3 to 1, with most of those managers saying they “somewhat” preferred Anderson, and about 10% saying they “strongly” preferred Anderson. Also, Anderson’s “fair trade” policy of paying a livable wage to independent farmers appeals to some of the university’s stakeholders. The only problem is that Anderson’s bid asks a much higher price than LaRoche offers. Anderson asks $7.94/lb. for their regular coffee. You are pretty sure, though, that the price is negotiable. A friend of yours works for a tourist attraction called “Colonial Williamsburg,” and you understand that they buy coffee from Anderson at just under $5.95/lb. You realize, though, that you are unlikely to negotiate that good a price, as your friend purchases around ten times more coffee annually than does the Statler. On the other hand, your friend does not offer the same level of product exposure to current and future hotel managers. You figure the Hotel School affiliation might represent good enough publicity for your coffee supplier that they might even be willing to accept a contract below their cost. In sum, you are willing to pay more to Anderson than you currently pay to LaRoche because they offer a superior product. However, the price difference is simply too great at this point. The LaRoche product meets your needs and is sold at a very fair price. If you can upgrade the quality of Statler Hotel coffee while remaining cost-effective, you think it will impress your boss, Rick Adie, the General Manager.

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2 Coffee Contract/Role of F&B Director(w)

In conversations with Mr. Adie, you discuss other available premium brands and decide that the quality difference between the Anderson and the LaRoche coffees is worth $2.70/lb. In other words, you are willing to pay as much as $7.40 for the Anderson coffee. Given the current effort at cost-cutting, though, you know that increases in expenses will be closely scrutinized. You figure that it is pretty important for your job security for you to obtain an excellent deal in this situation, which is one of your first major negotiations for the Statler. Your manager has suggested that every penny you are able to save the Statler will translate to a bonus of approximately $50 for you. You arrange to meet with Pat Hammer, East Coast Vice President of Sales for Anderson Coffee.

Summary of Key Points All prices include delivery

LaRoche Price $4.70/lb.

Anderson Bid Price $7.94/lb.

Colonial Williamsburg’s Price from Anderson

less than $5.95/lb.

Annual Quantity 10,000 lbs.

Worst deal acceptable $7.40/lb.

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3 Coffee Contract/Role of F&B Director(w)

STATLER HOTEL, CORNELL UNIVERSITY REQUEST FOR BID

The following bid request is for coffee products and coffee related services. The requested time frame is for a one- year period beginning July 1, 2003 through June 30, 2004. Please review the enclosed details that may affect the bid price. PRODUCT: Colombian Coffee. Product shall be 100% Colombian coffee. Coffee will be provided in grind form appropriate for the equipment owned by the Statler Hotel. PACKAGING: The above items should be available in both 12 ounce and 2 ounce packets. The individual packets should be gas-flushed or vacuum packed to maintain a shelf life of up to 6 months. EQUIPMENT: The Statler Hotel currently owns their own coffee equipment with the exception of 3 Bunn-0-Matic ten cup pour over machines. It is expected that the company awarded the bid will supply the hotel with the above equipment at no charge while under contract. Furthermore, it is expected that coffee filters are provided at no charge for all coffee machines. EQUIPMENT REPAIRS/SERVICE: It is expected that the vendor will provide service repairs on coffee machines at no charge. Any parts needed for the coffee machines owned by the Statler Hotel will be the responsibility of the Statler. ORDERS/DELIVERY SCHEUDLE: To be discussed once the bid has been awarded to vendor. The minimum requirement is one delivery per 14 days although one delivery per week is optimal and preferred. PRICING: Prices quoted are to remain in effect for the length of the contract beginning July 1, 2003 through June 30, 2004. CANCELLATION CLAUSE: Vendor may terminate the awarded contract upon 60 days written notice with a copy to both the Food and Beverage Director and the Purchasing Director of the Hotel. Statler Hotel may terminate the awarded contract upon 60 days written notice to the vendor. ACCEPTANCE TIME FRAME: Please submit your bid to James Robinnet, Purchasing Director of the Statler Hotel no later than June 1, 2003. In order for your company to calculate an appropriate price per pound for the coffee to be bid on, please note our annual usage this past year was approximately ten thousand pounds. In addition to the above, the Statler Hotel purchases flavored and decaffeinated coffees. In addition to the above bid, please enclose a product/price list of the flavored coffees offered by your company. If you have any questions in regards to this bid, please contact James Robinnet at 607-254-xxxx Thank you.

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STATLER HOTEL, CORNELL UNIVERSITY

REQUEST FOR BID

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