Keurig is encountering five primary challenges in its attempt to penetrate the market: supply chain and supply, technology, funding and financing, management, and the market.
In the summer of 1998, Keurig had Nicholas Lazaris as the President/CEO and Board member, Christopher Stevens as the Vice President of Sales and Marketing, and Richard Sweeney as the Vice President of Operations and Engineering. Despite a difficult beginning, Keurig successfully partnered with another company by the end of 1997.
Keurig and Green Mountain partnered to gain ownership of the K-Cup packaging line at their facility. Keurig would receive a licensing fee for each K-Cup produced as part of this agreement. In 1998, Lazaris, Keurig’s CEO, received a call from Mike Moore, the CEO of Manufacturing Technology Systems (MTS), the Boston-based company responsible for developing the packaging line. Moore informed Lazaris that although the initial packaging line was complete, it would not be shipped until MTS received an additional payment of $180,000 in addition to the $700,000 already paid.
MTS revealed that the expense surpassed initial estimates because of design changes made by Keurig. Following extensive negotiations, Keurig compensated MTS in order to assume immediate authority over the packaging line. Upon its installation at Green Mountain, it became apparent that two extra lines would be required to accommodate anticipated brewer production for the upcoming eight months. On approaching MTS about procuring two additional packaging lines, Lazaris was informed by Moore that each line would cost $700,000, having sold the first one for $550,000 plus $180,000. Moore further indicated that the subsequent order would be priced at $900,000.
During the discussion, Keurig management considered different options if they decided to separate from MTS. One of these options was to collaborate with Pilgrim, a renowned manufacturer of specialized machinery and packaging lines in Boston, MA. Pilgrim proposed a price of $575,000 per machine, but it would take an additional two months for engineering schematics development and the procurement of new production equipment. Nonetheless, Keurig management was unsure about granting them the contract because Pilgrim did not have an internal machine shop.
The production process may be delayed if custom parts are required because an external machine shop would have to handle the work. Alternatively, Quantum Industries, a company from Minnesota specializing in packaging solutions for the food industry, could be considered. The Owner/President of Quantum Industries, along with two engineers, personally visited Green Mountain to evaluate the project and identify the necessary actions. They recognized the potential and emphasized their engineering expertise as well as their capacity to build multiple machines concurrently.
Keurig, despite suffering a considerable loss in business, still maintained a substantial production facility and machine shop. A bid was made by Quantum, offering $500,000 per machine and an estimated delivery time of 3 months. However, Keurig’s management expressed worry over Quantum’s financial instability and the fact that they were located 1500 miles away.
Keurig ultimately selected Amalgamated Technologies as their supplier. Amalgamated, based in Minnesota and having experience in the food industry, was renowned for their reputation and state-of-the-art equipment. They presented a bid of $525,000 per machine, estimating a delivery time of 4 months.
The factory at Keurig was typically busy and lively whenever new business arrived. However, the management observed a decrease in enthusiasm during negotiations with Amalgamated. If I were at Keurig, I would highly suggest selecting Quantum Industries as the manufacturer for the packaging line. One justification for this is that their recent funding was obtained from investors in Minnesota who are supporting a Massachusetts-based company. This local connection would instill greater confidence in their investment.
Quantum’s Owner/President and two engineers took a trip to Green Mountain to examine the existing packaging line. They expressed confidence in their ability to engineer additional lines for Keurig. This visit demonstrates Quantum’s dedication to delivering the top-tier packaging line for Keurig. Additionally, Quantum possesses adequate space to cater to both Keurig’s requirements and their own machine shop, enabling them to innovate and enhance production through new technology.
The delivery of Quantum Industries is anticipated to take place in 3 months. Despite the wait, it will be beneficial in the long term to collaborate with them. Green Mountain encountered challenges when the initial K-Cups were being produced on the packaging line. Keurig not only needed to find a new supplier for the packaging lines, but they were also facing difficulties with their brewer manufacturers. Lazaris and Sweeny expressed significant concerns regarding the quality of the brewers manufactured by their current supplier. Keurig projected that each packaging line could accommodate 1500 brewers, with an average of 43 cups per day.
Keurig had to stick to its schedule in order to keep expanding its network of distributors and premium roasters. The brewers and packaging lines were closely connected. At present, Vandelay Industries in Wellesley, MA serves as Keurig’s brewer supplier. Vandelay, a precision oceanographic instrumentation designer and manufacturer, became involved with Keurig because of cutbacks in the defense industry. Initially, Keurig placed an order for 1000 brewers with Vandelay.
Keurig faced a problem with Vandelay when their brewers did not pass quality checks because of loose screws and parts that fell out of the machines. Keurig calculated that it would cost between $50-100 for each service call to repair the brewers in the field. The first batch of 1000 brewers was originally priced at $789 per machine. However, when it was time to place the next order of 1000 brewers, Vandelay raised their price significantly to $825 per brewer. This forced Keurig into another challenging situation, prompting them to look for a new contract.
One day, Lakeland Instruments, a technology products company based in Rochester, MN, approached Sweeney. Lakeland also possessed a maquiladora plant in Mexico. The company proposed a bid of $680 per brewer and had the capability to effortlessly sustain more than 10,000 brewers every year. Keurig expressed worry that they might not receive sufficient attention from Lakeland if any problems arose during the rollout, considering they would only comprise 3% of Lakeland’s overall volume.
Keurig had another option for their manufacturing needs. They considered Philla Manufacturing in Poughkeepsie, NY, which has similar capabilities to Lakeland but with the added advantage of its own sheet metal fabrication shop. However, Philla’s financial situation is currently challenging as they are a heavily leveraged and thinly traded public company. As a result, they are urgently seeking new business to cover their fixed costs and machinery expenses. Philla offered a bid of $700 per brewer, but also indicated their willingness to reduce the bid if needed in order to secure the business.
Therefore, my recommendation is for Keurig to select Lakeland Instruments as their manufacturer for building the Brewers.
Keurig primarily manufactures various technology products, including disk drives, cell phones, and medical instruments. However, their brewer sets them apart from typical coffee makers and aligns better with a technology manufacturing company. Both Lakeland and Quantum have the capacity to support a significant number of brewers. Although Keurig’s management is worried about constituting only 3% of Lakeland’s volume, the fact that all their products, including medical instruments, are flawless upon completion is reassuring. Moreover, owning a maquiladora plant could potentially decrease production expenses.
