PureNZ Foods: a quality problem with a supply chain symptom
PureNZ Foods makes chilled soups at a single plant with three production lines. Capacity is 210,000 units a month; demand is 180,000 units and is forecast to grow 15% in the next 12 months. The defect rate is 4.2%, against a target of 1.5%, and rework plus customer credits cost $480,000 a year. Customer complaints are up 40%. There have been two shutdowns in six months because the sole Auckland supplier of printed sleeves missed deliveries; each stopped the line for three days. Packaging costs $0.30 a unit. A Vietnamese supplier quotes $0.264 a unit but requires a 500,000-unit minimum order and a 30-day lead time, against the current five days. Inventory holding cost is 22% a year. The plant manager wants to switch suppliers immediately. The operations manager wants dual sourcing. Finance wants a leaner inventory. The quality team says 60% of defects trace to sleeve misalignment on Line 2.
1. Analyse the operational issue, distinguishing symptoms from root causes, and calculate the annual cost of defects and the annual saving from reducing the defect rate to 1.5%.
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Symptoms and root causes
The symptoms are a 4.2% defect rate, $480,000 of rework and credits, complaints up 40%, and two line stoppages. The root cause of the quality problem is likely Line 2 sleeve misalignment, because 60% of defects trace there. The supplier's missed deliveries are a separate root cause of downtime, not the cause of most defects. Confusing the two would lead to the wrong fix: switching packaging suppliers would not correct Line 2.
Defect cost
Annual volume is 180,000 × 12 = 2,160,000 units. At 4.2%, defects are 90,720 units. At 1.5%, they would be 32,400. The reduction is 58,320 units. Cost per defect is $480,000 ÷ 90,720 = $5.29. Saving from reaching 1.5% is 58,320 × $5.29 = about $308,600 a year.
Capacity
Capacity is 210,000 × 12 = 2,520,000 units. Demand is 2,160,000, so headroom is 360,000 units. A 15% demand increase is 2,484,000 units, only 36,000 below capacity. Defects consume capacity and rework time, so quality improvement is also a capacity strategy. The judgement is to fix Line 2 first, using root-cause analysis, standard work, maintenance and statistical process control, before buying capacity or switching suppliers.
2. Evaluate the two sourcing options: single-source from Vietnam versus dual sourcing with the Auckland supplier plus a smaller Vietnamese allocation. Include relevant costs and risks.
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Single-source from Vietnam
Packaging saving is $0.30 − $0.264 = $0.036 per unit. At 2,160,000 units, that is $77,760 a year. But the 30-day lead time versus five days requires about 25 extra days of stock: 2,160,000 ÷ 365 × 25 = 147,945 units. Holding cost is 22% × $0.264 = $0.058 per unit a year, or about $8,590. Net saving is about $69,200, or 10.7% of the $648,000 packaging spend. It is material but not huge. The bigger issue is risk: a single 30-day source with a 500,000-unit minimum creates exposure to disruption, quality problems, currency and obsolescence. A missed shipment could stop the line for longer than the current three days.
Dual sourcing
Keep Auckland for 60–70% and allocate 30–40% to Vietnam after a quality audit. The saving is lower, perhaps $23,000–$31,000, but the company gains a qualified second source, can test quality, and can increase the Vietnamese share if performance is good. It also keeps some five-day flexibility.
Recommendation
Do not switch immediately. First fix Line 2 and reduce defects. Then dual-source, with a supplier scorecard, a trial order, and safety stock for the imported sleeves. Finance's lean preference is reasonable in steady state, but not while supply is unreliable and demand is growing. The judgement balances cost against resilience.
3. Recommend an operations improvement plan for the next 12 months, with sequencing and one KPI for each phase.
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Phase 1: stabilise quality (months 0–3)
Focus on Line 2: root-cause analysis, sleeve alignment jigs, standard operating procedures, operator training and statistical process control. KPI: defect rate falls from 4.2% to below 2.5%. Do this first because adding volume before fixing quality multiplies rework and complaints.
Phase 2: secure supply (months 3–6)
Qualify the Vietnamese supplier with a trial order, then dual-source. Set safety stock for imported sleeves and introduce a supplier scorecard covering on-time-in-full delivery and quality. KPI: no line stoppages and OTIF above 98%. This addresses the shutdown cause without abandoning the reliable short-lead supplier.
Phase 3: build capacity for growth (months 6–12)
With defects under control, debottleneck Line 2 and plan for the 15% demand increase. Use overtime, small capital investment or a fourth shift only after calculating the constraint. KPI: overall equipment effectiveness above 80% and cost per unit stable or falling. Review whether the 500,000-unit minimum order still fits demand.
The sequence matters: quality, then supply resilience, then volume. A lean-only approach would cut inventory and increase stoppage risk; a switch-only approach would miss the Line 2 root cause. The recommended plan treats operations as a system.