CASE ANALYSIS MEMO – SESSION 06 Keurig 2012. 11. 07 Entrepreneurial Management Dr. Sean M. Hackett Waseda Business School, MBA Fall, 2012 Panjapol wariratanaroj (pe)– #35112329-5 JOanna chen (joanna)– #35112318-7 li wei– #35122327-5 kemal SADULLAYEV (kemal)– #35129403-1 Gaetano d’imprima (tano)– #35129755-8 I. Identify/Define the Key Issues/Situation Analysis A. Key issues that will impact Keurig to survive, thrive and grow • Strong bargaining power from a supplier: MTS, being the only supplier for the K-Cup packaging line, has a control over the machine.
Having no substitution plan in place, Keurig is forced to follow MTS’s request to fulfill the K-Cup manufacturing capacity. • Difficult to ‘reverse engineer’ the manufacturing technology: despite the alternatives of having new K-Cup suppliers, there is no assurance that the new suppliers could complete the project on-time and on-budget as the learning curve is hard to be built at an initial stage. • Delays in the full roll-out of the new coffee brewing system: delays in manufacturing lines (both K-Cup’s production and brewing machines) caused a subsequent delay in distributing goods to consumers.
Thus, it created risk of losing market opportunity to other competitors. B. Critical Success Factors • Quality of the final product: despite marketing efforts and distribution channels, if either the final product (coffee) tastes bad or the brewer does not perform well, it can’t be sold. • Consistent and sufficient funding prior to the product launch: in order to create an impact to the coffee market, the large amount of funding is required to support the operations. Ability to bring a brewer’s price down in a consumer segment while keeping the good quality product: considering the high quality coffees, people are more likely to purchase a less expensive household version especially at a supermarket or grocery, which has the highest percentage for buying locations. II. Mobilize Strategic Choices A. Choice 1 – Work with multiple packaging line manufacturers at the same time and take advantage of the brewer that would take Keurig more seriously – Pilla. 1. Significance of choice 1 • The supplier in less favorable financial situations is more likely to pay attention to Keurig’s needs.
In this case, Pilla also possesses the capability to support the brewer production. • Keurig can prepare Pilgrim and Quantum for future production while MTS is currently manufacturing the K-Cup packaging lines. This will cover the delay time needed by Pilgrim and Quantum to deliver future productions. • More risk averse, multiple suppliers will decrease Keurig’s dependency on suppliers. Delivery time and costs can be more efficiently managed. Also, Keurig can observe suppliers’ efficiencies before deciding the major supplier. • Multiple packaging lines can provide larger supply of K-cups for future expansion. . Reasons why choice 1 may not be optimal • More price negotiations and work in progress varied by suppliers. Also, the working procedures may be different and buyers-suppliers relationship may be more complexed.
• The standard of the final products can be varied by suppliers due to a slight difference in manufacturing capability and technology. • The financially unstable suppliers can be unreliable. For example, they may be in risk of facing bankruptcy, or they may lower SG&A expenses and it will affect the operations. B. Choice 2 – Continue cooperation with MTS and change brewer to Pilla . Significance of choice 2 • Does not waste time on searching for alternative packaging line manufacturers. Hence, avoid the time to be consumed by ‘reverse engineering’ process. • MTS already has experience in making the first packaging line. Moreover, the product quality delivered by MTS is already known and acceptable. • Good communication with MTS would ensure on-time delivery of future packaging lines. • Enjoy cost-benefits from possibility of lower price from Pilla. 2. Reasons why choice 2 may not be optimal • MTS still have very large bargaining power for future productions.
Thus, the cost for K-Cup packaging line activities could be driven up significantly. • Pilla, being financially insecure, can be a risk for the roll-out schedule in case there is a problem in the manufacturing processes as it links to the packaging line. • Single packaging line supplier and brewer means lower production capacity compared with Choice 1, this would limit Keurig’s future expansion plans to go into the consumer market. C. Choice 3 Internalize brewer production and work with multiple packaging line suppliers 1. Significance of choice 3 Keurig will gain more control over the production because it’ll be easier to forecast production capacity and there’ll be more inventory control. • Kuerig already have the people and the capabilities that it needs.
• Finally gaining the learning curve: product brewers will help Keurig to reduce its production costs and thanks to this reduction it’ll be easier to sell more brewers to distributors at less price and less defected products. • Working with multiple suppliers on the packaging line side will give them less bargaining power making us more “independent”. 2. Reasons why choice 3 may not be optimal A big amount of investment required in terms of money to internalize the production • Keurig need to buy new assets and it will need time to set-up the production in the new factory. • Keurig will face the risks concerning the manufacturing activity. III. Recommend a Specific Strategic Choice Recommendation: . Choice 1 – Work with multiple packaging line manufacturers at the same time and take advantage of the brewer that would take Keurig more seriously – Pilla. 1. Keurig will be much more independent and it’ll not face again another situation as those encountered with Vandelay and MTS.
This choice, even if could be risky at the beginning due to possible delays in the delivery of the complete brewer system (K-cup+Brewer), will ensure Keurig not to rely too much to only one supplier with a lot of bargaining power. 2. Relying on many suppliers will give Keurig much more control over their suppliers’ prices, unleashing a competition between them to gain more and more orders. It’ll also help Keurig to draw up more precise budgets and business plans that will not be affected by suppliers’ whims. 3. Thinking on a future expansion, Keurig need to find new suppliers who can easily support the capacity it needs. Risks/Limitations: . Even if it is a good time to find new suppliers, the moment is very risky because we have a schedule that we need to respect to start building the company reputation.
Delays and other on-the-road problem with the new suppliers could be fatal for Keurig. 2. Some of the new suppliers suffer financial problems that, if not solved, can surely affect Keurig. A. Recapitulation of why this choice is the right recommendation We have a marketing plan that can be fulfilled only if everything on the supply side goes as it was supposed to. In order to penetrate the market K-cups will be sold to the Office Manager at a price of 0. 0$, with no charge to the coffee machine. The price of a cup of coffee is higher than our direct competitors but compared to other premium coffee (as Starbucks) the quality is very high and the people who tried our coffee “loved” it. The wholesale price to the OCS distributors and to the Food Service suppliers will be at 0. 25$ per cup and initially we will give them the machine for free if they buy a certain amount of cups. That’s the real marketing strategy, because distributors play a central role in this industry, so we need to be able to offer (actually fill them up with) machines so they’ll push hard to introduce it inside the market.
The free machine plus high margin (100%) per K-Cup will help us penetrate the market. However to do so we need an efficient supply chain that could grow with us and not take advantage of us. We need to take the risk and diversify our suppliers so we will be able to give our machines for free to distributor. We also need to get ready with our capacity for when the demand will grow. We can’t manage such changes in our business plan if we are to haggle with insolent suppliers.
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