Givaudan Flavors
Customer Value Driver Discovery

When Mukund Kumar’s assistant told him Arvind Mehta was on the phone, he thought “Finally.” Mukund had been waiting for two weeks to hear from Tastyco on a long term Strategic Supplier Agreement (SSA) and he was starting to worry…

Tastyco
Mukund was Givaudan’s account manager for Tastyco and the assignment had been a good one for Mukund. In the three years he handled the account, Mukund rarely ever had to compete with any other flavor supplier and he was generally able to get premium prices for both basic and custom flavor products. Tastyco flavor purchases had been growing steadily over the past three years because of the success they were having with some innovative beverage brands, and they were becoming a leader in the market for non-carbonated, nutritional beverages. The increasing volume growth and high prices had made Mukund a perennial hero at Givaudan’s National Sales Conferences, and Mukund’s sales bonuses had allowed him to finally purchase a home for his family last year.

Tastyco was one of Givaudan’s largest customers. As a diversified global corporation, Tastyco’s beverage category was best known for its traditional carbonated beverages, but it had recently introduced some very successful non-carbonated, nutritional drinks. While most of Mukund’s sales volume was still for the carbonated beverages, Givaudan flavorists had worked closely with Tastyco’s beverage R&D Group on some new products, and these brands were taking off in the market. As a result, Mukund had predicted to his boss, Michael Alphonso, that Tastyco would be buying a lot more volume this year!

Winds of Change
But lately, things at Tastyco were changing. A few weeks ago, Mukund was surprised to get a call from Tastyco’s new Purchasing Manager, Arvind Mehta. Arvind told Mukund that Tastyco had decided to implement some new purchasing policies this year, and they included negotiating “Strategic Supplier Agreements” (SSA) with several flavor suppliers.

After the initial shock, Mukund tried to quiz Arvind about the new agreement, but Arvind cut him off saying that he had to run to another meeting, but he would call him back in a few weeks to give him a schedule for responding to the SSA. Before hanging up, Arvind made a final comment that troubled Mukund: “Don’t forget Mukund, achieving SSA status will allow Givaudan to have a first shot at our new flavors projects, but it also means you will probably have to sharpen the pencil on some of the existing flavors.”

Mukund was not sure exactly what Arvind meant by the comment, but he knew that several of the older carbonated beverages that Givaudan supplied flavors for had been transitioned to the “productivity program.” When this happened, Mukund knew that Tastyco would start looking for ways to improve efficiencies for the product – and this usually meant cutting supplier costs.

Even with this concern, Mukund was very confident that he would be able to win SSA status with Tastyco. Mukund did not have every detail, but he knew that Givaudan’s R&D group had been a big help to Tastyco’s Beverage R&D team led by Milind Khare. While he had never met him, Mukund had heard through the grapevine that Milind was a supporter because Givaudan was helping Tastyco in a number of technical areas. Mukund also knew that his R&D team had conducted “Flavors 101” Training for Tastyco’s R&D team, which included some of Tastyco’s Brand Managers who reported to Vishwas, Beverage Category Manager. The training was widely viewed by Tastyco as a success and this was talk of making it an annual event.

Mukund was so sure that Givaudan would be selected as a Strategic Supplier that he told his boss, Michael Alphonso, that the deal was as good as signed. But lately Mukund was beginning to worry. He had not heard from Arvind in over two weeks and he wasn’t returning his phone calls.

Tough Speaking Customer
So, when Mukund heard Arvind was on the line, his next thought was about ways to celebrate the closing of the agreement with his wife. As he picked up the phone, Mukund greeted Arvind and asked if he would like to have lunch with him. Mukund was shocked when Arvind told him that was “premature.” Arvind continued: “Mukund, I have been reviewing our flavor purchases from you over the last 24 months and while I would like to see Givaudan become one of our strategic suppliers, my analysis shows that your prices are way out of line on a number of flavors and you better find a way to fix it quickly.”

Mukund hesitated, and then asked: “What do you mean?”

“Well, I told you about our new purchasing policy – we are going to identify several strategic flavor suppliers and seek competitive bids from them on flavors we believe have opportunities for cost savings,” Arvind said. “We will be implementing a matching program to give different vendors an opportunity to replace flavors we think should have lower prices. After reviewing the flavor products you supply to us, we think there are several candidates on the list.” Arvind continued “I have been speaking with two other suppliers Alpha and Beta, who say they can provide flavor products to replace many of the ones you sell us. I will need to include them unless you can adjust your prices as part of your SSA response.” Softening his tone, Arvind said “the good news, Mukund, is that as a Strategic Supplier you will have a great opportunity to be an exclusive provider on some of our new projects, and that could mean a lot more volume for Givaudan in the future – you just need to get some of these prices in line so we can list you as Strategic.”

Thinking quickly, Mukund replied: “Come on Arvind. You know you just can’t get the kind of service from either Beta or Alpha that you get from us. You know we always give you innovative flavors and great technical service. And you know that the way we ship product guarantees you won’t have material shortages – you can count on us to have the right flavors for your R&D team. We’re worth more than Beta and Alpha.”

Arvind responded immediately: “I agree Beta really can’t live up to your standard. But lately Alpha has really gotten a whole lot better. We’ve talked to two of their references, and those customers are really enthusiastic about how well Alpha is performing. And since your former employee – that guy Sahay – went over to Alpha, they seem to be a lot more focused on building a good relationship with us.”

Mukund began to replay to Arvind all the technical services and training Givaudan had provided to Tastyco. Mukund reminded Arvind of the quality and delivery problems Tastyco had in 2002 when they tried to include Alpha flavors in their carbonated drinks. Mukund also pointed out Givaudan’s large commitment to being a global supplier. But Arvind wasn’t buying any of it.

“You can’t be more committed to the global market than Alpha – you know they just spent $200M to build several manufacturing plants in Europe and Asia,” Arvind said. “And recently we’ve re-sampled Alpha flavors – and they met our flavor brief requirements – as well as yours, in fact. Mukund, you know about our new purchasing policies – I must look at competitive suppliers. You don’t have to convince me that Givaudan is good, that’s why I want you to become a Strategic Supplier – but you do have to be competitive. You don’t have to meet Alpha’s prices – but you do have to get close, and that means 20% below which you are now on the existing flavors. If you want the business, you’ve got to have lower prices.”

Mukund had not expected to hear pricing complaints from Tastyco. Tastyco had always been a leading edge company, driving product innovations to develop new products and new markets for their brands. And Tastyco always paid for quality and service, recognizing that they needed competent suppliers to support their pioneering mind set. Mukund decided to play that card with Arvind.

“You know Arvind, we’ve always helped your research and operations people” Mukund said. “We both know that your strategy requires lots of innovative flavors and we’ve always brought those to you. New flavors are not easy to produce and not everyone can do it. You also know that we have provided some new technologies, like the VAS, to help your sensory managers and consumer testing, and we’ve never billed you for that. Alpha can’t do that – they don’t have the people or the technology.”

Arvind responded: “Well, they’ve changed. They’ve already shown us that they can do the new flavors – they’ve already customized two flavor briefs for us, and we like the prices they are proposing for the matching program. And with that Sahay guy, they’re adopting some of the same operational support policies Givaudan provides.”

“I won’t knock Alpha,” Mukund said, “but they just don’t have our track record. I hope you can be sure they’ll supply you with flavors that pass the consumer and regulatory tests, or your development cycles will suffer. And I hope they’ll be able to put quality people on your flavor briefs – they have a really thin staff. You saw that announcement last December that they were laying off another 40 people. You know we bring you everything – and you know we’ve done it again and again.”

“We both know what we know,” said Arvind. “I’d suggest you think about how you will respond in your SSA proposal. I can’t wait beyond the end of this month to select the strategic suppliers. I’d like Givaudan to be one of them, but I can’t do that if you don’t come down 20% across the board on the list of existing flavors. You should also be thinking about future volume. Whoever gets SSA status will have the inside track for new projects over the next several years.”

Mukund told Arvind he would have to talk to his boss before he could move on price. Arvind reiterated that he needed a response to the SSA, including adjusted prices before the end of the month or he would be forced to eliminate Givaudan from consideration as a Strategic Supplier.

Boss Unmoved Mukund began to think about how to approach Michael Alphonso. His first thought was to prepare a “white paper” outlining the need to adjust some of the current flavor pricing to ensure being positioned as a Strategic Supplier for future orders. As he thought about Arvind’s comments, though, he began to think it would take too long to work this issue through memos. So Mukund walked into Michael’s office and briefed him on the call with Arvind. He concluded by suggesting that they drop prices on most of the existing flavors by 25% to ensure the business.

Michael would not budge. He told Mukund he would have to do a much better job selling Arvind and Tastyco on the value that Givaudan provides – but in any event, Michael would not agree to cutting prices.

Mukund responded: “But Michael, think about the future business. If we don’t win this SSA we’re likely to get locked out of all future opportunities. I can’t believe we would walk away from this business - we’re making a great profit on Tastyco’s business.”

Michael looked squarely at Mukund and said: “You’re right we’re making money over variable costs. But think about all the fixed costs we have – our manufacturing sites are big and expensive. We have the best flavorists in the business, but that expertise costs money. And all those technical innovations and our flavors library took time and money to build – we can’t give it away for free. To be honest, I am concerned about Alpha’s capabilities getting better. If they really are investing then we need to earn enough profit to pay for increased innovation and development capabilities – Mukund, we need to make high margins on these flavors to pay for that investment.”

“I guess I didn’t think of it that way,” said Mukund. “But still, it seems the Tastyco business is worth going after. All I need is your agreement to cut the older flavor prices by 20%.”

Michael replied: “Look, we’ve had Tastyco as a customer all these years because we give them all the services they need to succeed in their business. We’ve provided a lot of value to them, and they’ve always paid for it. But if they’ve decided they no longer want to pay for our value, then we shouldn’t cut price – maybe we should quit doing business with them. I can’t afford to have it get out that we’ve cut price with Tastyco, pretty soon everybody will want a lower price.”

“I hear you, Michael,” said Mukund, “but it seems that Tastyco just doesn’t value us as much as they used to. I need some help with lower prices.”

Michael told Mukund there was no way he would authorize the lower price. Instead, he asked Mukund to put together some options that would allow Givaudan to make money with Tastyco. Mukund got the message and left for his office.

Action Plan Back at his office, Mukund began to think about Givaudan’s offering to Tastyco, and he wondered how he could demonstrate the value Givaudan was really providing and what it was worth to Tastyco. Mukund began to sketch out an outline of what he thought Givaudan Flavors was worth to Tastyco, and he realized that he didn’t have enough information.

To realize the value, in real rupees, of the flavors that Mukund sold to Tastyco, he was going to have to speak with some executives at the account. Mukund liked Arvind personally, but he knew that he either didn’t know, or wouldn’t tell him how important the Givaudan’s flavors were to Tastyco in their business terms. So, he was just going to have to make some appointments with other Tastyco executives.

Mukund placed several calls, and by the end of the day he had meetings with three Tastyco executives he thought could give him the answers he needed. Tomorrow, Mukund was scheduled to see 1) Vishwas, Category Manager for Tastyco’s Beverage Products, 2) Kailash, Operations Manager, and 3.) Milind, the Beverage Products R&D Manager.

But first, Mukund had a little brainstorming to do – he wanted to think about the things that would be important to these executives so he was prepared for the meetings. He wanted to ensure he could ask the “right” questions.