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WRITTEN ANALYSIS AND COMMUNICATION-I

Kanpur Confectioneries Private Limited (A) Assignment 2

Submitted to Dr. Gita Chaudhuri

By Pranav Gupta Pradeep Yadav

On August 19, 2012

INDIAN INSTITUTE OF MANAGEMENT UDAIPUR

Executive Summary
KPCL is incurring losses in its biscuits business because of high competition from organized and unorganized biscuit sector. To cover some part of the losses and to use its surplus capacity, it has signed a contract of 50 tonnes per month with Pearson. It also has an offer of manufacturing 70 tonnes per month for APL. As per cost analysis of this contract, it will not be profitable for KPCL. On evaluating the options it is recommended that KCPL continues its agreement with Pearson as it is cost beneficial. It should also take actions to strengthen its own brand MKG.

Word Count-100

Table of Contents

Situation Analysis ........................................................................................................................................ 1 The Problem ................................................................................................................................................ 1 Options ........................................................................................................................................................ 1 Criteria of Evaluation .................................................................................................................................. 2 Evaluation of Options.................................................................................................................................. 2 Recommendations ...................................................................................................................................... 3 Action Plan................................................................................................................................................... 3 Exhibits ........................................................................................................................................................ 4

Situation Analysis
Kanpur Confectionaries Private Limited (KCPL) started as a candy manufacturing unit in Rajasthan in 1945. Due to increased competition from the local units they suffered financial losses and were forced to shift their operations to Kanpur in 1954. In 1970 KCPL decided to diversify its business into making biscuits because of high growth rate of biscuits and lucrative return on investments. By 1973-74 KCPL emerged as 2nd largest player in northern region with its major competitors as Prince Biscuits, International Biscuits and A-One Confectionaries Pvt. Ltd. (APL). Between 1975 and 1980 large numbers of units in the unorganized sector were started which poor quality standards, low input costs and they had evaded taxes which helped them to keep their prices low. KCPL was a quality conscious company; it was unable to compete on prices with the small players. Moreover KCPL was unable to increase their prices since its customers were middle income groups from urban and semi-urban areas and they did not have a premium image. This led to decline in sales between 1983-84 and 1986-87 and it incurred a loss. Now KCPLs capacity is 240 tonnes per month, of which only 120 tonnes per month is in use. So, its capacity was rendered surplus. There was tough competition in candy business also and because of competition from both organized and unorganized players the margins were on decline. So, KCPL closed down the candy business. In lieu of the happenings KCPL went into contract manufacturing with Pearson for biscuits manufacturing. Under the agreement Pearson were giving them a conversion charge of Rs.3/kg apart from reimbursement of raw material costs with an assured business of 50 tonnes/month in the first year and 100-125 tonnes/month later on. But Pearson was unable to do well in the market as its product was seen as high priced and it was competing with APL, which was an established player. KCPL was then offered a contract manufacturing agreement by APL which assured them a business of 70 tonnes / month for three years with a conversion rate of Rs.1.5/kg. It was also proposed that APL will provide KCPL with technical expertise. Under the agreement KCPL was required to buy the raw materials from authorized suppliers of APL and APL will have control over quality and daily production and raw material consumption.

Problem Statement
What future course of action must be employed by KCPL which helps in improving their profits and brand image in the long run?

Options
KCPL can continue with the contract manufacturing agreement with Pearson without entering into agreement with APL KCPL can enter into contract manufacturing agreement with APL KCPL can continue their operations with only their brand without becoming contract manufacturer of any of the larger firms

Criteria
Various criteria in order of their priority are as follows: Cost benefits: The option chosen by KPCL must be profitable and must provide long term cost benefits to the firm. Brand Image: The chosen option must help KCPL to make sure that their own brand image is not lost and they are able to competitively operate in the market. Autonomy: The chosen option must ensure that their autonomy regarding the operating of business is not lost. Technological expertise: In the long run KCPL must be able to gain technological expertise for betterment of their operations.

Evaluation of options
Option 1: Continuing agreement with Pearson Criteria 1: Exhibit 2 shows that the there is a profit of Rs.20417 per month gained by getting into contract agreement of 50 tonnes per month with Pearson which will help in covering some of their losses. Criteria 2: Continuing with agreement with Pearson for contract manufacturing will not hamper their own brand building because Pearson is a new player in the market and is in competition with APL, which will help KCPL to gain expertise about brand positioning that will help them in the long run. Criteria 3: Since Pearson is involved in quality assurance of the products manufactured by KCPL and they do not have any say in the supplier selection or other manufacturing decisions hence the autonomy of the owners over the business will not be lost. Criteria 4: KCPL does not currently have any agreement with Pearson that there will be technology transfer and hence they will not gain much technology expertise by continuing agreement with them.

Option 2: Signing Agreement with APL for contract manufacturing Criteria 1: Exhibit 3 shows that there is loss of Rs.76417 incurred by KCPL by getting into contract manufacturing agreement with APL and hence it will inflate the losses that are being currently suffered by KCPL. Criteria 2: Signing agreement with APL will hamper their autonomy because apart from quality control KCPL under the agreement is bound to purchase raw material from the authorized suppliers of APL. Criteria 3: By becoming the contract manufacturer for APL, KCPL will not be able to put in the required resources to market their own brand and it will be difficult for them to compete with APL for market share. Criteria 4: Under the agreement there will be technology transfer from APL to KCPL which will help KCPL in gaining the required technology expertise which will help them in improving their operations in the long run.

Option 3: Continue their own operations Criteria 1: Exhibit 1 shows that by continuing with their own operations only KCPL are suffering a loss of Rs.141060/month and the kind of competition it is facing it will not be able to turn losses into profits. Criteria 2: Continuing their own business operations owners have the full autonomy to take the necessary decisions. Criteria 3: They can wholly concentrate on their own brand building and competing with the major players in the market. Criteria 4: By continuing their own operations KCPL will not be able to gain the technological expertise that is required to be differentiating factor.

Recommendations
Taking into consideration the order of priority of criteria it is recommended that KCPL continues its agreement of contract manufacturing with Pearson as it cost beneficial, it will not hamper their brand building and the owners will have complete control on the business decisions.

Action Plan
Following action plan can be adopted for future growth of the business: Continuing with contract manufacturing agreement with Pearson. In the long run more resources need to be put in for their own brand building.

Word Count: 1059

Exhibits
Exhibit 1

KPCL Cost analysis/Month


Total Monthly Sales Price per tonne(in Rs) Sales revenue generated per month Raw Material Cost and other costs/Month in Rs): Maida Vanaspathi Sugar Preservations & Packing Casual Labour Permanent salary Interest Other fixed amount Total Cost/Month Profit/Loss per month 750*120*10 150*120*34.67 200*120*12 1000*120 300*120 900000 624060 288000 120000 36000 275000 10000 60000 2313060 -141060 120 tonnes 18100 120*18100 2172000

Exhibit 2

Pearson Contract Cost Analysis/Month


Conversion Rate Units manufactured for Pearson Conversion revenue Total cost per month(KPCL data) Less Interest Less fixed cost Raw material and wages Cost/tonne for manufacturing 120 tonnes of KPCL products Cost for manufacturing 50 tonnes Raw material cost for 50 tonnes : Maida Vanaspathi Sugar Preservatives and Packing Total Cost for 50 tonnes after reimbursement of raw material cost Final profit/loss after reducing final cost of reimbursed material cost 934608.3-805025= 150000-129583.3= 750*50*10= 150*50*34.67= 200*50*12= 1000*50= 375000 260025 120000 50000 805025 129583.3 20416.67 (2313060-10000-60000)/120 18692.17*50= 3*50000 Rs. 3/kg 50000 kg 150000 2313060 10000 60000 18692.17 934608.3

Exhibit 3

APL Cost Analysis


Units manufactured for APL Sales Revenue (Conversion rate-Rs 1.5/kg) Raw Material costs Maida Vanaspathi Sugar Preservatives and packages Total Casual Labour Permanent salary corresponding to 120 tonnes Permanent salary corresponding to 70 tonnes Total temporary and permanent labour cost Net profit /loss after material reimbursement 105000-181417= 300*70= 700*70*9.8= 140*70*33.33= 190*70*11.5= 1000*70= 480200 326634 152950 70000 1029784 21000 275000 160417 181417 -76417 70*1.5*1000= 70 tonnes 105000