July 1, 2005
operations insight | Vendor Selection

Grounds for rejection?

grounds for rejection?

Think you're picky about vendors? Green Mountain Coffee Roasters once showed a bidder the door for suggesting it could learn Green Mountain's distribution business in just four days (the nerve!). So how did it ever find a supplier that measured up?

By John R. Johnson

Somewhere in the Northeast, there's a systems integrator that's probably still scratching its head, wondering how that contract with Green Mountain Coffee Roasters slipped through its fingers. A year and a half ago, it was one of a half dozen or so bidders hoping to land a multimillion dollar contract with the Waterbury, Vt.-based specialty coffee retailer. Explosive growth—on the order of 15 percent annually—had prompted Green Mountain to build a new DC—one that would feature a state-of-the-art material handling system. And it had fallen to the company's director of facilities and engineering, Jason King, to choose the vendor that would design and install that system.

After getting the basic requirements, the bidder had proposed to King that it spend four days at Green Mountain studying its distribution needs, then return eight weeks later with a bid and a design plan. But once he heard that, King promptly dropped the vendor from consideration. "That process just didn't work for us," he says. "Try learning my business in four days—not to mention how my business will look five years down the road!"

Though the integrator in question undoubtedly had the best of intentions, it had seriously misread its potential client's priorities. Like many DC executives today, King was looking for more than a mere supplier. He wanted a true partner—someone who genuinely understood his needs, someone who was in it for the long haul, someone who would stand ready to offer services and support as Green Mountain's volume swelled from the 18 million pounds of coffee shipped last year to the nearly 50 million pounds it expects to move in the not-too-distant future.

Though it might be easy to write off King as overly particular, his insistence on finding the right supplier makes good sense. When a company buys a complex integrated distribution system, it's buying more than just parts—conveyors, narrow-aisle trucks, shelving and software. It's also entering into a long-term relationship with the vendor.

In fact, that desire to find a partner for the long haul led King to make another of his somewhat unorthodox demands: that the bidders allow him to review their finances. To his way of thinking, partners should be willing to open their books to one another. King, therefore, asked to look at each bidder's books to assure himself that the company was profitable and would be around for the long term. Not all vendors were willing to open their books to Green Mountain, however, and so, those bidders too were dropped from the running.

For all his rigorous requirements, there was at least one vendor willing to meet King's demands. In March 2004, Green Mountain awarded a multi-million dollar contract to Lewiston, Maine-based systems integrator Diamond Phoenix to develop an innovative distribution system for the new warehouse and DC. When fully assembled, the system would include conveyors, an automated storage and retrieval system (AS/RS), a pick-to-light system, wire-guided narrow-aisle trucks, shelving, and a comprehensive software system that provided a new approach to wave picking.

The right parts at the right price
Of course, the contract award was just the beginning. Once King had chosen Diamond Phoenix as the vendor, the details of the agreement remained to be hammered out. Here again, King made a point of avoiding the adversarial mindset in favor of building a partnership. "There are two ways you can go into negotiations with your vendor," he says. "You can [treat the supplier like an opponent and try to squeeze] as much out of them for free as you can. Or you can be up front and admit that profit is not a dirty word. That symbiotic profit balance is what we're trying to achieve. We're in business to make money, and we expect our business partners to make money."

In fact, King, who insisted on retaining the final say over which manufacturers' products would be used, took pains to work out the component pricing issues with the systems integrator right from the start. The two parties arrived at a deal whereby if an item was made by Diamond Phoenix, Green Mountain would buy it from the vendor at a fixed markup. But that still left many components that would need to be purchased from outside suppliers. So once again, the two parties worked out a sliding scale for margins, with higher allotments for items that are more difficult to integrate, such as the three aisles of AS/RS equipment installed in the DC.

"We actually brought all the bids from the other suppliers to the table and sat down as a group and went through the pluses and minuses and the actual costs for each one," says King. "Whether [the component the group chose] was the most expensive option or the one in the middle, [Diamond Phoenix] still made [its] fixed margin. We negotiated all of that up front to ensure that eight months into the project I wasn't left saying, ėGeez, they're really having their way with us.' It's important to get that negotiating piece out of the way early."

King also let his vendor know right from the start that Green Mountain didn't have piles of cash available for the project. He and his staff would have to add on to the system in phases over time as demand increased.

"We don't have all this money growing on trees, yet we knew this was going to be the biggest capital project that we've ever done," says King. "We knew when we started that we couldn't afford to do the whole project at once, and that whatever design we ended up with would get pared down.

But it was important that our vendor understood that and be willing to work with us over the long haul on additional phases of the project."

A question of resources
Though Green Mountain and Diamond Phoenix obviously considered the usual factors when choosing what material handling systems to install—return on investment, budget limitations ("We just didn't have tons of money to spend on running 30 miles of conveyor like you see in some DCs," says King), and the risks involved—they were also careful to make sure Green Mountain didn't get in over its head. "You can install the best system in the world," says King, "but if we don't have the resources to run and maintain it, then it's not a good system. We took a lot of time to assess where we were and to match the technologies available to the resources we had as a company."

About the Author

John R. Johnson
Editor
John Johnson joined the DC Velocity team in March 2004. A veteran business journalist, John has over a dozen years of experience covering the supply chain field, including time as chief editor of Warehousing Management. In addition, he has covered the venture capital community and previously was a sports reporter covering professional and collegiate sports in the Boston area. John served as senior editor and chief editor of DC Velocity until April 2008.

More articles by John R. Johnson

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