The Five main issues with Keurig is their supply chain/supply, technology, funding/financing, management, and the market. All of these are issue Keurig is facing as it tries to enter the marketplace. During the summer of 1998 Keurig’s senior management team was as follows. Nicholas Lazaris was President/CEO and also a Board member, Christopher Stevens was Vice President, Sales and Marketing, and Richard Sweeney was Vice President, Operations and Engineering. Keurig had a rough start but at the end of 1997 Keurig had its first partner.
This partnership was with Green Mountain whereby Keurig would own the K-Cup packaging line at the Green Mountain facility and Keurig would earn back a licensing fee for each K-Cup produced. In Early 1998, Lazaris received a phone call from Mike Moore, CEO of Manufacturing Technology Systems (MTS), the Boston based company that was the first to develop the packaging line for K-Cups. Moore informed Lazaris that the first packaging line was completed but wouldn’t be shipped until MTS received an additional $180,000 payment to the $700,000 already paid.
MTS said this was because it cost way more than they expected due to the fact Keuirg had design modifications. After long deliberations Keurig paid MTS to take immediate control over the packaging line. Once this machine was installed at Green Mountain, they realized that they need two more lines to support the number of brewers they projected for the next eight months. When Lazaris approached MTS about the next order of two packaging lines, Moore finally quoted them at $700,000 each after selling the first for $550,000 plus the $180,000 and said the next order would be $900,000.
Keurig management discussed its options if they were to not stay with MTS and they had a few choices. One option was to go with Pilgrim, which was located in Boston, MA and was a large producer of specialized machinery, including packaging lines. Pilgrim bid $575,000 for each machine and delivery was delayed for two months because Pilgrim would need to develop engineering schematics and purchase some new production equipment. Keurig management was hesitant to give them the contract because they didn’t have an internal machine shop.
This means that if custom parts had to be made they would have to have an outside machine shop do the work and this could delay the production process. Another option was Quantum Industries. They were a Minnesota based company and have experience in packaging solutions for the food industry. Quantum Industries Owner/President had taken personal interest in working with Keurig and had traveled to Green Mountain with two engineers to assess the project and what they needed to do. They saw a great opportunity and stressed that they not only had the engineering talent but the space to build several machines at the same time.
They had recently lost a good chunk of business, but they do have a large production facility and their own machine shop. Quantum bid $500,000 for each machine and they expected delivery to take 3 months. The problems Keurig management saw with Quantum were their financial instability and also their location, which is 1500 miles away. Keurig’s final choice was Amalgamated Technologies. They were also located in Minnesota and had experience in the food industry. They were known for their capabilities, reputation, and cutting edge equipment. Amalgamated bid $525,000 and they delivery to take 4 months.
Their factory was normally full of talking and excitement when there was new business and Keurig’s management felt that wasn’t the case when they started talking with Amalgamated. If I were at Keurig I would urge to go with Quantum Industries for being the manufacturer of the packaging line. One reason I would suggest this is because the most recent funding came from Minnesota. These investors are investing in a company located in Massachusetts so it would make them feel better about their investment if they could see thing benefiting them locally.
Also Quantum’s Owner/President and two engineers personally visited Green Mountain to look at the current packaging line and they felt very comfortable with engineering many more. By the Owner/President personally visiting Green Mountain this shows that they will do what they need to do to produce the best packaging line for Keurig. They also have they space to fulfill Keurig’s needs and have their own machine shop so they can develop new technology to put into the lines to increase production.
The expected delivery is 3 months away but it will be worth it in the long run working with Quantum Industries. As the first K-Cups were rolling off the packaging line at Green Mountain, finding someone to produce the next packaging lines wasn’t Keurig’s only problem. They also were having trouble with manufacturers of the brewers. Lazaris and Sweeny had become very concerned with the quality of the brewers its current supplier was producing. Keurig estimated that each packaging line could support 1500 brewers, averaging 43 cups per day.
The brewers and packaging lines were linked directly and Keurig needed to maintain its timetable to continue to develop its network of distributors and premium roasters. Keurig’s current supplier for brewers was Vandelay Industries, which is located in Wellesley, MA and is a designer and manufacturer of precision oceanographic instrumentation. They got involved with Keurig, because they were searching for new projects because of cutbacks in the defense industry. The initial order to Vandelay was for 1000 brewers.
Keurig ran into a problem with Vandelay when brewers were passing through its quality check with loose screws and parts literally falling out of the machines. Keurig estimated that repairing each of the brewers in the field would cost $50-100 per service call. The initial order of 1000 brewers was quoted at a price of $789 per machine and when it came time for the next order of 1000 brewers, Vandelay increased its price significantly to $825 per brewer. This left Keurig in another difficult position and they once again were looking for another contract.
One day Sweeney was approached by Lakeland Instruments, which is located in Rochester, MN, which makes mainly technology products, and also owned a maquiladora plant in Mexico. Lakeland bid $680 per brewer and they had the capabilities to easily support over 10,000 brewers a year and they were such a large company that Keurig would only be 3% of their volume. Keurig was worried that since they were such a small percentage of Lakelands volume. If there were problems in the rollout it wouldn’t get Lakelands attention and they wouldn’t recognize them.
Keurig’s other option was Philla Manufacturing, which is located in Poughkeepsie, NY. Philla had similar capabilities as Lakeland, but they also possessed its own sheet metal fabrication shop. Recently Philla had experienced financial difficulty. They are a highly leveraged and thinly traded public company. They are in desperate need of business to cover fixed costs of its facility and machinery. Philla bid $700 per brewer, but made it clear they would lower the bid if that’s what it takes to get the business. I would recommend Keurig going with Lakeland Instruments to build the Brewers.
They mainly make technology products such as disk drives, cell phones, and medical instruments, but when you think of it Keurig’s brewer isn’t a typical coffee maker. A technology manufacturer would be best fit for this product. Lakeland also can easily support a large number of brewers and Quantum also has large capabilities. Keurig management is worried about only being 3% of Lakelands volume, but since they are also producing medical instruments, once products roll of the production floor everything is free of all flaws. Also since they own a maquiladora plant, production costs may go down.