Assignment 3

Kanpur Confectionaries Private Limited

A report submitted to
Prof. Danesh Gojer

In partial fulfillment of the requirements of the course

Written Analysis and Communication-I

By
Akashdeep Katiyar
Roll No. 1911014
Amit Kumar Jaiswal
Roll No. 1911023
Section C

On
01-09-2019
 Letter of Transmittal

Date: September 10, 1987

Alok Kumar Gupta

Chairman and Managing Director,
Kanpur Confectionaries Private Limited (KCPL)

Subject: Analysis of APL’s Proposal

Dear Sir,

Please find appended below the report containing detailed analysis regarding whether to accept or reject APL’s
proposal to become one of its contract manufacturers (CMUs).

It also contains a recommendation and an action plan based on the analysis.

Thanks and Regards,

Akashdeep Katiyar (Independent consultant)
 A one-page outline of the report

Situation Analysis

Kanpur Confectionaries Private Limited (KCPL) is in a state of continuous declining sales. APL planning to
expand its northern market by subcontracting its production.According to the terms of contract, there are various
benefits and risks for KCPL.The benefits are that it can now have a full capacity manufacturing and continuous
sales.ALP is willing to share its expertise, which means there is a vast learning and growing for KCPL. The
risks are that there are chances of losing total independence over decision making process.

Problem Statement

Should KCPL accept APL’s proposal of becoming one of its CMUs?

Options

1. Yes
2. No

Criteria for Evaluation

· Affect on current business operations

· Opportunity for learning and expertise
· Loss of control and independence
· Impact on family reputation in society
· Relationship with Pearson
· In line with the Vision of Mohan Kumar

Evaluation of options

1)YES

The immediate need for this business is to be operational at its full capacity. It will ensure the full capacity
utilization and continuous sale.The opportunity and scope of learning from the market leader will be
immense.Independence and control over manufacturing and decision-making process will be diluted. Business
sustenance will ensure that family’s reputation is intact. There is a possibility of impact on relationship with
Pearson. It does not go in line with the vision Mohan Kumar.
2)NO

This might result in shutting down of the biscuit business similar to Candy.Losing an opportunity to learn from a
market leader ans using it at its own disposal can be huge loss in the long run.This will give complete control and
independence in the manufacturing process and decision making.It might impact the family’s reputation as the
business has the possibility of not sustaining given the present scenario.KCPL can enjoy a stable relationship with
Pearson.It will be in line with Mohan Kumar’s vision of becoming a leader in this sector and competing with
ALP.
Recommendation

KCPL should accept the proposal as it will ensure that the business achieves its maximum operational capacity,
and there are continuous sales.

Action Plan

KCPL should accept the proposal without any delay. Otherwise, there is a possibility of other companies
approaching APL. Additionally, a mutual understanding of the independence and control in manufacturing and
decision-making process can be agreed upon. Also, to ensure that relationship with Pearson is not impacted, KCPL
should be ready with an excellent strategy to tactfully tackle the situation.
 The Main Report

Situation Analysis

Competition increased when new players entered the biscuit industry in the unorganized sector between 1975
and 1980. It made it difficult for KCPL to maintain its profit margins and the company reported loss in 1986-87(
see exhibit 1). It is not a premium brand, hence can not charge high prices. Neither it can reduce its prices to
challenge those in the down-market because of increasing labor and material costs. All of these factors had
resulted in a decline in sales.
Moreover, after KCPL doubled its capacity, it is not able to utilize its maximum capacity. The agreement with
Pearson has helped to offtake 50 MT from the unused capacity, but the future of “Good Health” biscuits is not
very encouraging.

Apart from the declining margin, few other problems which KCPL is facing are the operational inefficiency in
terms of high absenteeism among permanent laborers and manufacturing inefficiency. KCPL requires a larger
quantity of raw materials every month for producing a unit MT of biscuits compared to APL ( see exhibit 2)
APL is seeking to expand its supply in the northern market. It is planning to do this by subcontracting
production to already established small and medium companies. However, it wants to retain full control over the
quality of biscuits.
The proposal to become one of its contract manufacturers (CMUs) has many potential benefits as well as risks
for KCPL. With sales on a decline, APL offers an assured return on investment with minimal risks, and with no
marketing, brand building and distribution expenses. Moreover, a 70 MT offtake means full utilization of its
production capacity provided the contract with Pearson remains intact. It also provides an opportunity to tap into
the network of APL’s authorized suppliers and reduce manufacturing costs. The main advantage is a chance to
learn from the national leader in the industry and access its manufacturing expertise.

The risks associated with this alliance are : APL wants to retain full control over the manufacturing process,
which meant loss of independence for KCPL. With manufacturing process being APL-centred, MKG brand runs
a risk of losing its identity in the market. Costs for making any changes to the manufacturing processes and
equipment would have to be borne by KCPL entirely. A possible increase in offtake by APL in future would
only make KCPL more dependent on APL leading to a further reduction of independence in decision making. It
might lead to a cut in conversion charge, which is already very low compared to what Pearson is paying. A new
partnership with APL might upset Pearson, leading to Pearson not renewing the contract or reducing the
conversion charge in future, making KCPL even more dependent on APL. Moreover, KCPL might not get
access to APL’s expertise as promised.
There is also an opportunity cost of missing out on possible stronger relations and higher offtake from Pearson,
in case Pearson starts doing well in future as Pearson is offering double the conversion rate as compared to
APL.(see exhibit 3)
Also, KCPL is the main reason for the Gupta family’s reputation in society. It envisions to emerge as a leader in
this industry and compete successfully with APL. Accepting the proposal would mean compromising with the
vision and accepting defeat in the competitive market, which can lead to loss of family prestige in society.
Problem Statement

Should KCPL accept APL’s proposal of becoming one of its CMUs?

Options

1. Yes
2. No

Criteria for Evaluation

 Affect on current business operations

 Opportunity for learning and expertise
 Loss of control and independence
 Impact on family reputation in society
 Relationship with Pearson
 In line with the Vision of Mohan Kumar

Evaluation of options

1)YES

 Affect on current business operations

The immediate need for this business is to be operational at its full capacity. It will ensure that the
remaining unused capacity of 70 MT units is fully utilized. It will also generate continuous revenue as it
is a guaranteed sale.
 Opportunity for learning and expertise
ALP is a market leader in the biscuit industry well equipped with modern technology and efficient quality
control measures. It allows KCPL to learn this expertise. It will help in improving the efficiency of its
manufacturing for MKG.
 Loss of control and independence
ALP wants to retain full control over quality and quantity. It wants to have two quality control officers
at KCPL’s plant for the inspection of the entire manufacturing process, which will result in the loss of
independence in decision making.
 Impact on family reputation in society
Family reputation has been built and tied to the success of the biscuit line. It will make sure the business
is continuing, and the family’s reputation is intact. However, the entire focus will not be on KCPL’s
family brand, MKG.
 Relationship with Pearson
It might impact the conversion charges that Pearson gives, and also future contracts.
 In line with the Vision of Mohan Kumar
Mohan Kumar wanted to be a leader in this sector and compete with ALP, and making a competitor
collaborator will go against the vision.

2)NO

 Affect on current business operations

Being in continuous declining sales, this might result in shutting down of the biscuit business similar to
Candy.
 Opportunity for learning and expertise
Rejecting the proposal will result in losing an opportunity to learn from a market leader.
 Loss of control and independence
 This will give complete control and independence in the manufacturing process and decision making.
 Impact on family reputation in society
It might impact the family’s reputation as the business has the possibility of not sustaining given the
present scenario. However, if it sustains, the entire focus can be on MKG brand.
 Relationship with Pearson
KCPL can enjoy a stable relationship with Pearson and expect increase in the number of units in future
contracts.
 In line with the Vision of Mohan Kumar
It will be in line with Mohan Kumar’s vision of becoming a leader in this sector and competing with
ALP.

Recommendation

KCPL should go ahead with the proposal as it will ensure that the business achieves its maximum operational
capacity, and continuous revenue. Additionally, it also gets an opportunity to learn from the market leader.

Action Plan

KCPL should accept the proposal without any delay. Otherwise, there is a possibility of other companies
approaching APL. Additionally, a mutual understanding of independence in decision-making process can be
agreed upon. Also, to ensure that relationship with Pearson is not impacted, KCPL should be ready to offer them
a reduction in conversion charge depending on the increase in the offtake amount.

Exhibit 1

Income Statement of KCPL for 1986-87

Particulars 1986-87

Income

I Sales revenue 26,064,000

Expenses

II Cost of materials consumed 23,184,000

III Preservative and packaging costs 1,440,000

IV Wages & Salaries 3,732,000

V Interest expenses 120,000

VI Other expenses 60,000

VII Total Expenses 28,536,000

VIII Profit or Loss -2,472,000

 Exhibit 2

Comparison of raw material and labor expenses of MKG and APL

Dimensions MKG APL

Sales per month 120 200

Price per MT(INR) 18,100 19,000

Price of flour per MT 7,500 6,860

Price of Vegetable Oil per MT 5,200 4,667

Price of Sugar per MT 2,400 2,185

Preservatives and packaging costs 1,000 1,000

per MT
Total raw material costs per MT 16,100 14,712

Casual labor cost per MT 300 400

Total raw material and labor cost 19,100 18,712

per MT

Exhibit 3
Comparison of contract offered by Pearson and APL

Pearson APL

Initial order for 50 MT glucose biscuits per month Initial order for 70 MT glucose biscuits per month

Conversion rate of INR 3 per kg Conversion rate of INR 1.5 per kg

No technical guidance provided Inspection of production process and recommending

changes in processes and equipments, if needed

Allowed KCPL to run its existing line of business, Possible loss of independence in decision making,
relied on KCPL’s expertise required to send a daily production and raw material
consumption to report

Offered new tools of quality management Offered manufacturing expertise such as their secret
ingredient for producing biscuits, pre-printed
packaging material carrying APL’s name
No previous experience in biscuit market National leader, experience of managing large plants