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There is a 1957 article which specifies which city. 1957 is older than the sources in all the other answers.

The 1957 Newsweek says:

A nail factory at Kubishev (on the Volga River) is a model. Assigned a production quota, the manager proudly exceeded it - by producing nothing but small nails. When a shortage of large nails was reported by the Construction Trust, the quota standards were switched from number to weight, and the manager switched his production entirely to large nails to the exclusion of small. Seeing no quota advantage in medium nails, he had never made any.

There is a 1957 article which specifies which city.
The 1957 Newsweek says:

A nail factory at Kubishev (on the Volga River) is a model. Assigned a production quota, the manager proudly exceeded it - by producing nothing but small nails. When a shortage of large nails was reported by the Construction Trust, the quota standards were switched from number to weight, and the manager switched his production entirely to large nails to the exclusion of small. Seeing no quota advantage in medium nails, he had never made any.

(I think this answer should be unaccepted, because the cartoon in another answer is from 1954 according to several sources, appearing in Krokodil magazine No. 5, page 5.)

There is a 1957 article which specifies which city. 1957 is older than the sources in all the other answers.

The 1957 Newsweek says:

A nail factory at Kubishev (on the Volga River) is a model. Assigned a production quota, the manager proudly exceeded it - by producing nothing but small nails. When a shortage of large nails was reported by the Construction [?]- , the quota standards were switched from number to weight  , and the manager [?]ed his production entirely to large nails to the exclusion of small. Seeing no [?] advantage in medium nails, he [?] never made any.

(the ?'s are because both the OCR and image versions of the article are missing characters at the leftmost part of the article column)

There is a 1957 article which specifies which city. 1957 is older than the sources in all the other answers.

The 1957 Newsweek says:

A nail factory at Kubishev (on the Volga River) is a model. Assigned a production quota, the manager proudly exceeded it - by producing nothing but small nails. When a shortage of large nails was reported by the Construction Trust, the quota standards were switched from number to weight, and the manager switched his production entirely to large nails to the exclusion of small. Seeing no quota advantage in medium nails, he had never made any.

There is a 1957 article which specifies which city. 1957 is older than then sources in all the other answers.

The 1957 Newsweek says:

A nail factory at Kubishev (on the Volga River) is a model. Assigned a production quota, the manager proudly exceeded it - by producing nothing but small nails. When a shortage of large nails was reported by the Construction [?]- , the quota standards were switched from number to weight , and the manager [?]ed his production entirely to large nails to the exclusion of small. Seeing no [?] advantage in medium nails, he [?] never made any.

(the ?'s are because both the OCR and image versions of the article are missing characters at the leftmost part of the article column)

There is a 1957 article which specifies which city. 1957 is older than the sources in all the other answers.

The 1957 Newsweek says:

A nail factory at Kubishev (on the Volga River) is a model. Assigned a production quota, the manager proudly exceeded it - by producing nothing but small nails. When a shortage of large nails was reported by the Construction [?]- , the quota standards were switched from number to weight , and the manager [?]ed his production entirely to large nails to the exclusion of small. Seeing no [?] advantage in medium nails, he [?] never made any.

(the ?'s are because both the OCR and image versions of the article are missing characters at the leftmost part of the article column)