1. ACKNOWLEDGMENT............................................................................................

2
2. OVERVIEW...............................................................................................................3
3 CD COMMISSION BREAKUP MODEL..................................................................7
3.1 Objective..............................................................................................................7
3.2 Relevance.............................................................................................................7
3.3 Introduction..........................................................................................................8
3.3.1 Nestlé distribution chain................................................................................8
3.3.2 Nestlé CD Classification.............................................................................10
3.3.3 CD Profitability...........................................................................................10
3.3.4 CD Return on Investment............................................................................10
3.3.5 Nestlé CD ROI Analysis..............................................................................11
3.3.6 Factors governing CD Return on Investment..............................................14
3.4 Method Description............................................................................................16
3.5 Results................................................................................................................18
3.6 Issues Involved...................................................................................................20
3.7 Basic Assumptions.............................................................................................21
4 PRODUCT PORTFOLIO OPTIMIZATION............................................................22
4.1 Objective............................................................................................................22
4.2 Relevance...........................................................................................................22
4.3 Introduction........................................................................................................23
4.3.1 SKUs (Stock Keeping Units)......................................................................23
4.3.2 Complexity..................................................................................................23
4.3.3 Profitability..................................................................................................24
4.4 Method Description............................................................................................25
4.5 Instant Drinks-A Case Study..............................................................................32
4.6 Results................................................................................................................34
4.7 Conclusions........................................................................................................36
4.8 Issues Involved...................................................................................................38
5. MILK DATA COLLECTION AND COLLATION..................................................39
5.1 Objective............................................................................................................39
5.2 Key Issues..........................................................................................................39
5.3 About The Indian Milk Industry.........................................................................40
5.3.1 Operation Flood & the Cooperative sector.................................................41
5.3.2 Utilisation of milk in India..........................................................................43
5.3.3 Milk Flow Chart..........................................................................................44
5.3.4 Fluctuations in milk production..................................................................44
5.3.5 Gross Chemical Composition Of Cow’s Milk............................................45
5.4 Costs involved in milk procurement and processing.........................................46
5.5 Policies followed by players under the NDDB umbrella...................................48
5.6 Milk in India- a commodity?..............................................................................49
5.7 Mother Dairy-A study........................................................................................50
5.7.1 Different categories of milk sold by Mother Dairy:....................................50
5.7.2 Procurement & Quality tests.......................................................................50
5.7.3 Processes undergone by milk (bulk vending milk).....................................51
5.7.4 Costs involved.............................................................................................52
5.8 Procurement & Sales Data Liquid Milk.............................................................53
5.8.1 Procurement Data (2000-01).......................................................................53
5.8.2 Liquid Milk Sales Data (2000-01)..............................................................55
6. BIBLIOGRAPHY....................................................................................................58

1
2
1. ACKNOWLEDGMENT

At the outset I wish to thank Nestlé India Limited for giving me this opportunity to
gain an insight into the business world.
I am extremely grateful to Mr.Anurag Dikshit, Business Controller for his guidance
and valuable inputs throughout the course of my training.
I would like to thank Mr. Rajiv Thapar, Business Analyst (Chocolate &
Confectionery); Mr. Amiy Amitabh, Business Analyst (Instant Drinks) and Mr.
Siddharth Chirania Business Analyst (Milks) for their continuous support throughout
the duration of my stay.
I would like to thank all the employees of Nestlé for enabling the smooth completion
of my project.

3
2. OVERVIEW
About Nestlé
With a total workforce of approximately 224,541 people in some 479 factories
worldwide, Nestlé is not only Switzerland's largest industrial company, but it is also
the World's Largest Food Company. Nestlé products are available in nearly every
country around the world.
Nestlé originated in Switzerland in the year 1867 as the brainchild of Henri Nestlé to
whom the organization owes its corporate symbol – the “Nest” which symbolizes
family tradition, values, nature and nurture.
It was merged with the Anglo-Swiss Condensed Milk Company in 1905 and has
developed along the years by introduction of innovative products and the merger and
acquisition route.
It is now in a wide range of businesses ranging from Pet Foods to Chocolates and
Confectionery to the Dairy business to Coffees and Malted Drinks.
Nestlé activities in Switzerland account for less than 2% of its global turnover. Nestlé
is a highly decentralized "people and products" oriented company rather than a
systems centered organization. Nestlé operations around the world are divided into
three well- defined zones created on the basis of geographical areas and management
responsibility. These are: Zone Americas, Zone Europe and Zone Asia, Oceania and
Africa. Nestlé’s Indian subsidiary - Nestlé India Limited, a part of the Zone Asia,
Oceania and Africa handles the company’s Indian operations.

Nestlé’s Global Commitment And Responsibilities

The company has been a leading food manufacturer and major purchaser of
agricultural raw materials for over 130 years. Food and agriculture are an integral part
of the social, cultural, economic and political context of every community. Since
Nestlé activities in Switzerland, its country of origin, account for less than 2% of its
global turnover, Nestlé learned very early to respect the social, political and cultural
traditions of all countries in which the products are produced and sold, and to be a
highly decentralised “people and products” oriented company rather than a systems
centered organisation. Today, Nestlé is the world’s largest most diversified food

4
company, with over 500 factories around the globe, producing healthy, enjoyable food
products for every stage of life.

Nestlé Corporate Business Principles

Nestlé is committed to the following business principles in all countries, taking into
account local legislation, cultural and religious practice:
Nestlé business objective and that of management and employees at all levels, is to
manufacture and market the company’s products in such a way as to create value that
can be sustained over the long term for consumers, shareholders, employees, business
partners and large number of national economies in which Nestlé operates.
Nestlé does not favour short-term profit at the expense of successful long term
business development, but recognizes the need to generates profit each year in order
to maintain the support of the financial markets, and to finance investments.
Nestlé believes that, as a general rule, legislation is the most effective safeguard of
ethical conduct, although in certain areas, additional guidance to management and
employees in the form of voluntary business principles, is beneficial in order to ensure
that the highest standards are met throughout the organisation.
Nestlé is conscious of the fact that the success of a corporation is a reflection of the
professionalism, conduct and ethical values of its management and employees,
therefore recruitment of the right people, and ongoing training and development are
crucial.

About Nestlé India

Nestlé has been delighting Indian consumers since the beginning of the century with
the import and sale of Condensed milk, Infant milk formulae, Health beverages,
Coffee and Chocolates. Manufacturing operation began in India in early Sixties, and
the company since earned a reputation of applying State-of-Art Technologies to
produce world class brands in the country. Every year Nestlé puts over a hundred
thousand tones of value added food products in the market place. Close to 150 million
consumers- half the urban population in India purchase Nestlé products from 3
quarters of a million shops spread across the country.

5
Nestlé S.A Switzerland holds over 51% stake in Nestlé India. India contributes to 1%
of worldwide turnover. Nestlé’s association with India dates back to 1912. Nestlé
started it’s manufacturing operations in India in 1962.
Nestlé factories in India:
 Moga 1962
Milk Products / Infant Milk Formulae / Weaning Cereals / Culinary Products /
Beverages.
This was Nestlé’s first factory in India. It is currently Nestlé India’s biggest
factory.
 Choladi 1967
Instant Tea
 Nanjangud 1989
Instant Coffee / Health Beverages
 Samalkha 1992
Weaning Cereals / Culinary Products / Milk Products
 Ponda 1995
Wafers and Waffles / Chocolates
 Bicholim 1997
Culinary Products
Nestlé’s Product Portfolio (Food Categories) in India include
 Milk and Milk Products
 Culinary Products
 Chocolates and Confectioneries
 Infant Milk Formulae
 Weaning Cereals
 Tea, Coffee and Health Beverages
 Mineral Water

The Indian FMCG Industry

The FMCG segment is one of India’s fast growing sectors. The presence of several
multinational companies has added to its growth prospects considerably. Estimates
show that the turn over of the FMCG sector will be more than Rs 1lakh crores. It is
the third largest Industry in the Indian economy.

6
The participant profile of the FMCG sector is extensive and it includes food and
related products such as tea, salt, tobacco, oils, fats and processed foods, personnel
care products and cosmetic items etc. The growth of the Industry also helped to
contribute to the exchequer significantly. The FMCG sector contributes to the
exchequer by way of Income Tax and Central Excise to the extent of 9% and 16%
respectively of the total collection. It provides large employment both directly and
indirectly.

7
3 CD COMMISSION BREAKUP MODEL

3.1 Objective
The project involves categorisation of distributors and obtaining and preparing details
of expenses and income for the various categories. Also a breakup of CD commission
into Cost to Serve, Selling expenses and profit is desired. This would enable
comparison of similar CD commission heads for different CDs and possibly provide
an insight into the profitability of the business for the CD.

3.2 Relevance
Most producers do not sell their goods to final users. Between producers and final
consumers stand one or more marketing channels, a host of marketing intermediaries
performing a variety of functions. The use of intermediaries largely boils down to
their superior efficiency in making goods widely available and accessible target
markets.
A distributor is involved in selling goods or services to those who buy for resale or
business use (such as retailers). The profitability of a distributor depends on the
Return on Investment generated from the activity. This in turn governs the motivation
level of the distributor -to continue as a part of the channel.
In today’s highly competitive scenario, companies are increasingly reviewing the
quantity versus quality equation, as well as distribution synergies, to try and leverage
for the best possible distribution at the least possible cost. This could be a crucial
factor in deciding the fate of players.
This makes it extremely important for the producer/supplier to have a framework for
analysis and estimation of a distributor’s profitability in place. Basis the framework,
comparison of distributors is possible. Moreover, suggestions for improvement of a
weak distributor’s ROI can be made with regards expenses incurred
(fixed/administrative and distribution costs) and capital invested and comparing these
with those for a typical distributor. This approach can go a long way in fulfilling the
goal of effective channel management viz. build a long-term partnership that is
profitable for all channel members.

8
3.3 Introduction
The activities of a distributor includes all the activities involved in selling goods or
services to those who buy for resale or business use.
Distributors:
1. deal with business customers rather than final consumers,
2. wholesale transactions are usually larger than retail transactions
3. cover a larger trade area than retailers
In general, distributors are used when they are more efficient in performing one or
more of the following functions:
1. Selling and promoting: Wholesalers provide a sales force that helps
manufacturers reach many small business customers at a relatively cost.
2. Bulk breaking: Distributors achieve savings for their customers through
buying in large lots and breaking the bulk into smaller units.
3. Warehousing: Distributors hold inventories, thereby reducing the inventory
costs and risks to suppliers and customers.
4. Transportation: Distributors often provide quicker delivery to buyers being
closer to the buyers.
5. Financing: Distributors finance customers by granting credit, and finance
suppliers by ordering early and paying on time.

3.3.1 Nestlé distribution chain

Factory
C
Mother godown O
Wholesalers N
C&S S
CDs(Cash Distributors) Retailers U
M
E
Re-distributors R
S

9
Goods produced at the Factory are transported to the Mother godown or the C&S
(Carrying and Selling) agent of that region. Normally, each political state has a
company C&S agent. The goods then find their way to the distributors appointed by
Nestlé.
Nestlé distributors are referred to as CDs i.e. Cash Distributors. These are third party
entities appointed by Nestlé to function as distributors. They normally operate on cash
basis and are make payments immediately on delivery of goods, hence the name Cash
Distributors.
These distributors form a crucial link in the distribution chain because they enable the
goods to reach the final consumer by ensuring regular supply to their customers that
include one or more Wholesalers, Re-distributors and Retailers.
Retailers are the penultimate step in the distribution chain, responsible for the finished
good reaching the final consumers. The CD works through his representatives viz.
cycle boys, direct salesmen to supply the goods required by Retailers in his territory.
Wholesalers are agents that purchase bulk goods from the distributor and sell these to
the retailers. Thus the CD’s expense involved in distributing to the retailers is reduced
and he may decide to pass on a part of his benefit to the WS (in the form of a
discount).
Re-distributors are agents who re-distribute the goods purchased from the distributor
in their area of operation. Normally, RDs operate in upcountry towns and have a well-
defined area of operation.
Nestlé follows a policy of exclusive dealing and exclusive territory. In other words,
Nestlé requires its distributors not handle competitors’ products
producer (Nestlé) agrees not sell to other distributors in a given area or the buyer
(CD)may agree to sell only in its own territory (confirm-think both are true with
Nestlé i.e. ‘and’)
For comparatively new CDs- the transactions are conducted through bank drafts. For a
long serving CD, a number of cheques are signed by him and kept with the company.
With every delivery of goods, the amount corresponding to the stocks invoiced is
entered on the cheque and it is cashed within a day of the delivery.

10
3.3.2 Nestlé CD Classification
A Nestlé distributor can belong to any of the following categories:
Trade CDs: Distributors responsible for supplying goods to retailers who in turn
ensure availability to the household consumers.
Chocolate and Confectionery (C&C) CDs: Nestlé has some exclusive C&C
distributors who deal solely in the chocolate and confectionery products of the
company. These distributors can be expected to have higher expenses on account of
investment in additional infrastructure such as freezers to meet the business need of
maintaining the products in proper condition.
Food Service CDs: responsible for supplying Nestlé products to vending machines
such as those of Nescafe and Nestea. Bulk supplies to customers such as railways,
hotels and colleges that serve the ‘out of home customer’ may also be done by the
Food Service CDs.

3.3.3 CD Profitability
The CD’s profitability is measured by the return earned on his investment.
A higher return indicates better profitability of the CD’s business.

3.3.4 CD Return on Investment

A CD’s return on investment would simply be the net profit on the net investment,
where:
Net profit = CD commission – expenses
Net investment = Capital employed in (stocks + market credit +
reimbursements due from company – credit provided by company)
A CD would expect the return from his business to compensate the risk associated
with its running (which may be expected to be competitive compared to the bank
interest rate).
A Simple ROI Check that can be conducted for estimating a CD’s ROI can be based:
 ROI = (CD Commission – Distributio cost) X Rotation of capital
 Rotation of capital = 52 weeks/ (Number of weeks CD Holding + Market Credit)

11
3.3.5 Nestlé CD ROI Analysis
ROI analysis is important because it provides a ‘health check’ of the CD’s business.
For CDs forming a part of the Nestlé marketing channel, the profitability analysis is
performed for the Nestlé business carried out by him.

CD ROI analysis involves study of the following broad heads:

CD REVENUE
CD Revenue has two components:
 CD commission
Calculated on CD’s turnover on account of Nestlé business
CD commission is normally @5.8% for Nestlé products. However for Ghee the
commission is @3% and @4% for cream, butter and milk.
 Nestlé subsidies (if any)
Refers to subsidies provided by Nestlé to the CD – on a need basis.
These include any DS/PS subsidy, Merchandiser subsidy, Cycle boy subsidy, Van
subsidy and DS incentives.
CD EXPENSES
1. The Fixed/Administrative Expenses of a CD include:
 Godown/Office Rent
 Clerical Staff Salaries
Normally the Accountant, Godown keeper/ manager, loaders are shared
amongst all businesses that the CD handles. Also, overstaffing –if any must be
ascertained and disallowed to be factored as an expense.
 Telephone/Electricity/Repairs/Maintenance
 Stationary
Broadly includes cash memo books, ledgers and registers used for Nestlé
business. In cases where CD owns computers the computer stationary also
considered.
 Insurance
Considered against both Godown/vehicle stocks and premises. In case the cash
in-transit is also insured, it needs to be considered.
 Bank Charges

12
 Expenses incurred on chequebooks, drafts, and account statement printouts.
 Depreciation of Office Assets

ASSET DEPRECIATION RATE

Computers @33%
All assets (other than computers) @20%

 Discount to Wholesalers
Cash discount is offered by CDs to a few of their larger Wholesalers and/or
retailers to encourage prompt payment and loyalty.
Normally the % discount for each Wholesaler is fixed and CD’s usually
operate discounts under 2-3 slabs e.g. 0.5%, 1%, 2% etc.
 Audit fee
Audit fee amount from the auditor’s certificate to be attributed as CD’s
expense.
 Staff Welfare
 Re-distributor discounts
A CD supplying goods to a Re-distributor (RD) incurs an expense of 1% non-
reimbursable discount on the supplies made to the RD. This expense is non-
reimbursable in nature and must be considered on all the sales made to RDs.
 Interest Cost (on Borrowed Capital, premises security deposit)
2. The CD’s Distribution expenses typically include:
 Salaries
 DS (Direct Salesman) Salary
 Driver Salary
 Delivery Boys' Salary
 Cycle Boys
In addition to actual salaries, if the CD’s offer any other incentives or bonuses,
the same considered.
 Depreciation of Vehicles*
For the purpose of calculating depreciation, 5-year vehicle life span to be
considered (@20% depreciation).

13
 For CDs operating through hired vehicles, this expense head to be ignored and
instead- hire charges to be considered.
 Insurance/Taxes of Vehicles*
The insurance premiums paid on account of vehicle insurance as well as the
amount spent on getting the vehicle’s ‘fitness’ cleared.
However, in case of hired vehicles cost of hiring per day to be considered
instead.
 Fuel/Servicing/Repairs*
Calculated by considering average area of daily coverage (in kms) and the
running cost per km (daily km X cost/km X 25 working days). An average
monthly cost per vehicle for servicing and repairs can thus be obtained.
In case of hired vehicles, instead cost of hiring per day to be considered.
 Unloading Charges
If reimbursed by company, this charge not considered as CD’s expense.
NOTE: The * expenses to be considered only for vehicles owned by CD

CD INVESTMENT
The CD’s net investment can be found as:
 Gross Investment
Which is found as sum of
 Investment in stocks (excluding Mkt. Credit)
Average amount invested in the stock holding maintained by the CD.
 Market Credit
Refers to credit given by the CD to retailers and other people in the
market. Its expected value is between 10-15% of a CD’s monthly turnover.
 Average Reimbursements due from Company
Outstanding value of reimbursement due from the company
 Less credit provided by the company to the CD.
Calculated as (Yearly Turnover/365 * No. of days for cheque encashment)

CD PERFORMANCE INDICATORS
 ROI = Net Profit/Net Capital invested

14
 Number of months to double capital invested = (Net Capital invested/Net Profit)
 Number of Capital Rotations = (52 weeks/Number of weeks CD holding +
Market credit)

3.3.6 Factors governing CD Return on Investment

A CD’s ROI depends predominantly on five factors:
1. Infrastructure/manpower
 Infrastructure
This includes expenditure towards using premises that may be godowns to
store goods and/or office for carrying out daily work related activities. The
expenses incurred could be in the form of rents (applicable only for rented
premises), maintenance and repairs of the premises.
 Manpower
Expenditure towards maintaining clerical or administrative staff, salaries of
DS, drivers, cycle boys and delivery boys. In addition, expense incurred on
account of staff welfare are also attributable to this head.
2. Distribution (width/mode of market coverage)
 Width: refers to the area covered by the distributor.
The larger the distributor’s width, the greater are the distribution expenses. The
specific factors affected could include vehicle fuel expenses and salaries (incase
there exists a need for increased number of DS, cycle boys and/or delivery boys).
 Mode of market coverage can be Order Booking or Ready Delivery.
Ready Delivery refers to the DS and/or cycle boy going to the retailer outlets and
delivering goods on a need basis. This is evidently a more expensive way of
distribution because it involves a high dependency on the CD’s representative
making contact with the retailer at (or very close to) the time when the retailer
needs to refurbish his supply the goods available with the cycle boy/DS match the
retailer’s requirement
Order Booking on the other hand refers to delivery of goods corresponding to
orders booked in advance. Every visit of the DS to the market is accompanied by
booking of orders for the next visit.
3. Depth of selling

15
 Refers to the number of SKUs sold by the distributor to each outlet. Greater the
depth, higher is the expected expense on this account. This expense could be on
account of higher rentals due to increased godown area requirement and/or higher
distribution costs due to use of larger vehicles.
4. Stock holding
Indicates the capital invested by the CD in his stocks. Thus the higher the CD
holding, greater is the proportion of CD funds inevitably invested by him.
This translates to a correspondingly lower profitability measured by his ROI.
5. Finance
Borrowed capital, credit & outstanding claims are indicative of expenses incurred
a. Borrowed funds
 expense incurred by CD on account of capital borrowed by him for his
business
b. Credit
 market credit given by the CD is a form of investment in the business
c. Outstanding claims
 any claims made by the CD against the company and not yet settled also
contribute to an increase in his investment

16
3.4 Method Description

For the purpose of execution of the project, population of town of operation and
annual CD turnover was chosen as the basis for classification of CDs.
This basis was chosen because it enables a more effective grouping of CDs, especially
for the purpose of their comparison.
The need for this classification is explained through a simulation:
A typical CD located in a high population area such as a metro would be expected to
generate higher turnover compared to a typical CD in a small town. Moreover the
magnitudes of the expenses incurred by the metro CD would typically be many times
that of a small-town CD. Thus, for analysis purpose it would not be logical to attempt
comparison of two CDs without taking into consideration additional influencing
factors.

1. Data related to all CDs for one selected branch was obtained. This data broadly
included details of each CD, in terms of town of location and sales as invoiced by the
company to the CD (monthly as well as annual). The data referred pertains to the
period Jan-Dec 2001.
2. Population data for the CD location towns was obtained –basis 1991 census report.
3. Categorisation of CDs basis population of town and annual turnover was done. The
initial matrix prepared was a 5 X 6 matrix.
The rows contained annual turnover data (using an acceptable range for defining each
row) and the columns contained population data (an acceptable range considered).
Basis this broad classification, about 300 CDs (belonging to the selected branch) were
accommodated in the resulting matrix.
4. Consequent to the initial matrix (mentioned above), a redraft was prepared, the aim
being to reduce the number of cells from the current number of 30 with a view at
finally working with manageable data which should be also be representative data.
5. The final matrix chosen had seven well-defined categories mentioned:
POPULATION ANNUAL TURNOVER (Rs.)

17
>10 lac >20 million
>10 lac 10-20 million
5-10 lac 10-20 million
1-5 lac 5-10 million
1-5 lac 1-5 million
<1 lac 5-10 million
<1 lac <1 million

6. Each branch provided data a minimum of two CDs corresponding to each cell in
the aforementioned 7 X 2 matrix, resulting in an average of real data for 14 CDs per
branch.
Those CDs which satisfied the Population and Annual CD Turnover conditions (step
5) were classified in the appropriate cells to be used for further analysis.
7. For all CDs categorised in each cell, all revenue and expense heads were converted
from magnitude terms to % of CD annual turnover.
8. For all CDs belonging to a particular cell in the matrix, weighted averages for each
revenue and expense head weighed according to the CD’s turnover was obtained.
9. The pan- India value for CD commission (CDC) breakup was found by calculating
the average for the corresponding heads for all cells under consideration.

18
3.5 Results
The CD commission breakup on pan-India basis was finally obtained in the format
shown in the page that follows.
Three columns for each revenue/expense head were prepared. The first column titled
Avg was to give the pan-India breakup for the relevant revenue/expense heads. The
columns titled min and max were to give the minimum and maximum values on a per
category basis (the weighted average values obtained for each cell considered for this
purpose).
However due to the highly sensitive data involved the company did not wish it to be
revealed. Consequently all information has been masked.

19
3.6 Issues Involved
1. The classification of CDs basis population is as per Census 1991 data – due to
unavailability of data for census 2001.
2. CD data as made available by the Nestlé branch offices has been used. The
assumption is that the data sent has been verified at the branch level.
3. In case of some branches, the interest expenses have been included with bank
charges. Thus some disparity in these expense heads may be expected. For pan-India
comparisons, the consolidated value for these heads may instead be used.
4. The data used for analysis is for Trade CDs and a few C&C (Chocolate and
Confectionery) CDs. Identification of the CD into either of these categories can be
done for purpose of back calculation.

20
3.7 Basic Assumptions
For CD categorization
Due to unavailability of census 2001, population data from census 1991 used.
For CD revenue calculation
Turnover used for CD Revenue calculation is the Invoicing data- i.e. company
invoiced data.
For CD expenses allocation
1. For CD owned premises- no notional rentals or depreciation allocated as expense.
2. Similarly, depreciation, fuel costs and insurance/taxes treated as expense only for
CD owned vehicles (else considered/accommodated by hired vehicle costs).
3. For CDs involved in multiple businesses, expenses apportioned basis turnover
contribution of Nestlé’s business to the CD’s overall business.
4. For premises, staff etc. shared between Nestlé and one or more company (ie CD
holds distributorship for multiple companies/CD involved in multiple businesses) the
expenses to be apportioned -basis CD’s turnover principle.
5. For all expenses, caution exercised while considering the value.
For CD investment calculation
The capital invested to be considered at an average per month level- being the
actual amount put into circulation by the CD to do business throughout the year.

21
4 PRODUCT PORTFOLIO OPTIMIZATION

4.1 Objective
Propose a list of SKUs to be deleted from the current list of Nestlé SKUs to achieve a
more effective and efficient product portfolio.

4.2 Relevance
The FMCG industry is a competitive business. Volumes and market share hold the key
to success in this industry. That is why the industry players put so much emphasis on
marketing and distribution.
In addition, adopting specific strategies to attract the more accessible urban customer
as well as the rural customer is expected to help attain the desired volumes. Offering
value-additions to existing lines to lure the urban consumer and alongside offering the
rural consumer wide-ranging choices within a single product category is aimed at
generating high volumes. This is one of the reasons for the large number of different
grammage packs of a single product and also offering freebies along with many of
these packs, which has gained higher acceptance in these times of mini-recession
However, associated with each new pack are certain unavoidable costs.
Thus the decision to add a new SKU is an important business decision for any
company- and there is the inevitable tug between those who see additional volumes
and those who see additional gains.

22
4.3 Introduction

Nestle is the world’s largest food company and it operates in a number of product
categories ranging from Soluble Coffee to Dairy products, Infant Foods, Water,
Culinary products, Chocolate and Confectionery to many more. Each of the many
products under the various categories is often accompanied by the presence of
multiple stock-keeping units.

4.3.1 SKUs (Stock Keeping Units)

Stock keeping unit: is a distinct unit within a brand or product line distinguishable by
size, price, appearance or some other attribute.
These could be created by a company in order to serve the wide range of ever-
growing consumer needs or to meet some competition strategy.
For analysis purposes:
a. Packaging units of the same product (for instance, Maggi Masala Noodles) and
having the same specification (e.g. 400gm pack), but differing in one unit having an
accompanying promotional offer with no such offer valid for the other are treated as
two distinct SKUs.
b. Units packaged exclusively for Export purposes are also treated as distinct from
those packaged for domestic usage.
c. All SKUs have unique Item Codes that provide item specific information such as
product category and SKU type- standard domestic, promotional or export.

4.3.2 Complexity
Complexity increases with increase in the number of SKUs in the system under
consideration. Complexity increases due to increase in associated:
 packaging material specification requirement, stocking the material and
consequently an increased working capital requirement
 complexity at factory due to manufacturing related issues such as line
establishment, change parts- additional mechanical parts required by machines
for creation of the new SKU & time wasted -in preparing the machines for
additional operations involved.
 branch level complexity- sales & distribution issues and
 marketing issues- promoting and popularising the SKUs

23
4.3.3 Profitability
Allocation of general expenses (employee related costs) to each Product Category is
currently in proportion to topline contribution. However this allocation technique is
too simplistic and does not reflect the nature of these costs.
An ABC (Activity Based Costing) analysis of these costs and their drivers was
undertaken to arrive at a more equitable bases of distribution.

24
4.4 Method Description

1. Obtained list of all SKUs in the system (as on 31 Dec 2001). This list included
even those SKUs which may have been introduced in the past in order to cater to a
specific business objective, have fulfilled it, have now become defunct but
continue to be part of the system.
2. Obtained data for net sales for each of these SKUs for the period Jan-Dec 2001.
Thus, the data would exist only for those SKUs that have been transacted during
the period under consideration.
Note: Net –ve sales indicated situations wherein the SKU under consideration
suffered net returns (e.g. due to market returns) in the duration under
consideration.
3. Information required for categorisation of each SKU can be extracted using its
unique six-digit item code, item description and net sales information.
However, the SKUs in the list (referred to in 1.) were pre-classified into specific
Nestle product categories referred for the purpose of the project only as Category
A, B, C ….
Each SKU was grouped (for all practical purposes) on three parameters:
 Product Category
Specific category of the product viz. Noodles, Dahi, Sauces, Kitkat, Munch
etc;
However this categorization has not been used directly for the subsequent
stages of analyses.
 Category II (Analysis Category)
This forms another stage of grouping of the SKUs into relevant, coherent
categories basis the SKU Product Category (previously defined). This
grouping could be consolidation of multiple Product Categories (from above)
or further lower level sub-groupings of one or more of these Product
Categories.
This categorization was conducted with a view towards accommodating the
practical issue of availability of Analysis category specific data. The Analysis
category chosen was such that the following information about the category
(required for a later stage of analysis) could be obtained:

25
 a. Nestlé sector (i.e. product category) share,
b. Share of the biggest competitor,
c. Sector growth rate
d. Nestle sector growth rate
The aforementioned categorizations were done to arrive at the valid
categories- A, B,….
 Category III (Channel)
The specific marketing channel used for ensuring the availability of the SKU
to the consumer. (ie Retail, ATC-Additional Trade Channel, AE- Allied Export
ie Export to affiliated party which could be a Nestlé company in another
country such as coffee to Nestlé Russia, DE- Direct Export)
The channels considered were:
 ATC
Additional Trade Channels such as bulk sales to hotels, educational institutions
etc.
 AE
Allied Export i.e. Export to affiliated party which could be a Nestlé company
in another country such as coffee to Nestlé, Russia.
 DE
Direct Export refers to export to a third (i.e. unaffiliated/ unrelated) party.
 Retail
The regular channel involving company appointed cash distributors who
supply to various retail outlets in their territory. The final consumer buys from
the retailer and the volumes involved at this level are much higher compared
to the aforementioned channels.
4. Identification of type of SKU is possible basis it’s item code. For the purpose of
analysis, the following types have been considered:
Promotional
SKUs that have been launched as part of some promotion scheme. These include
both trade and consumer promotions.
Standard

26
 These SKUs include units packed specifically for Export purposes and also
Domestic packs with no accompanying promotion. Thus, under this head both
Export and Domestic SKUs have been accommodated.
Inactive
All SKUs for which no transactions have been registered for the period under
consideration (Jan-Dec 2001).
5. Detailed data for NPS, MC and EBITA for each transacted SKU was obtained.
NPS refers to Net Proceeds of Sales
MC is Marginal Contribution
EBITA – Measure of profit before interest, taxation and amortization.
5.1 This data was used to find the contribution of each SKU in terms of %NPS,
%MC and %EBITA.
This data was used to indicate the profitability of each Analysis Category and
thus enable their comparison. (5.2)
5.2 Comparison across various analysis categories is also possible by aggregating
SKU specific information obtained (refer 5.1) to the corresponding Analysis
category level.
The resultant information includes number of Standard, Promotional &
Inactive SKUs and net NPS, MC & EBITA for each Analysis category.

Standard Promotional
Category II description SKUs SKUs Inactive SKUs

A 62 3 23
B 50 3 3
C 49 44 59
D 44 27 37
E,F,I 96 100 119
G,K 53 10 7
Others 196 12 110
L 21 14 33
M 21 3 4
N 18 2 4
P 11 15 14

27
 Number of SKUs by Product Category

Standard SKUs Promotional SKUs Inactive SKUs

175
150
125
100
75
50
25
0
A B C D E F G H I J K L M N O P

Product Category

Financial Performance by Product Category

NPS ('1000) / SKU MC ('1000) / SKU NOP ('1000) / SKU

36,000,000

31,000,000

26,000,000

21,000,000

16,000,000

11,000,000

6,000,000

1,000,000

-4,000,000
A C D E F G H J L M O N P Q

5.3 Similar analysis for Channel Categories may be done to allow their
comparison in a similar manner.

28
 5.4 The number of SKUs contributing to the top X% of NPS (X may be chosen as
50,80,99.5 etc.- as per requirement) can be found. This provides a good
indication of the SKUs contributing effectively to the system- in terms of
contributing positively to the company’s top-line.
Interestingly, 139 SKUs i.e. about 11% of all SKUS in the system make a
100% contribution to the company bottomline. 39.7% of the system’s SKUs
i.e. 504 SKUs contribute 100% to the company topline.

Cumulative Contributions

Cu
Cum NPS % Cum MC % Cum NOP % mu
120% lati
100% EBITA :: 139 SKUs 100% NPS :: 504 SKUs ve
100% co
ntr
80%
ibu
60% tio
ns
40% in
%
20%

0 4 9 13 17 22 26 30 35 39 43 48 52 57 61 65 70 74 78 83 87 91 96 10
0%
% % % % % % % % % % % % % % % % % % % % % % % 0

Number of SKUs

6. The market information for the various Analysis Categories (refer 3) is used to
create the Growth Share Matrix.
The Growth Share Matrix depicts the relative sector share of Nestlé vs.
market/sector growth rate for each Analysis Category having the aforementioned
market information. The size of the bubble representing the Nestlé product group
on the matrix corresponds to NPS/SKU (for the Product Category).

29
 Thus, it considers both the factors- total number of SKUs in the Category and it’s
possible effect on the attractiveness of the category as a long-term business
proposition.
A large area circle placed high on both axes indicates an attractive category for
Nestle with strong growth opportunities and a well-established current position.
(Ideal location corresponds to a product analysis category with high Nestlé share
and fast market growth.) Thus the most attractive category would ideally occupy
the North-East most position.

Relative Market Share vs. Total Market Growth Based on

Product Category (Growth Share Matrix)
share/Biggest competitor share)
Relative market share (Nestlé

20 K

15 P
L O
F
10 C
N
A 5 E
G
D
0
-10% -5% 0% 5% 10% 15% 20% 25%
-5

Total market growth by category in %

7. All expenses incurred in the system have finally to be borne by the various
Product/ Analysis Categories- A, B… and hence are ultimately allocable to them.
One way of allocating the expenses:
 The allocation of all the expenses can be done simply basis NPS contributed
by each Category.
However, this generic rule effectively (though indirectly) penalizes all those
categories which have an appreciable contribution to the Total NPS.

30
  Instead of the afore-mentioned generic NPS based rule, it might be more
appropriate to accommodate the expense due to increased complexity owing to
the presence of vastly differing SKUs in each category.
MGE (Marketing General Expenses) and OGE (Other General Expenses) can
be reallocated basis detailed ABC study. Moreover, many cost heads could be
linked to the number of SKUs to reflect their dependency on the company
product portfolio.
8. The various expenses that cannot be allocated directly to any product/Analysis
group directly are treated as Tertiary expense heads. These may include expenses
on account of HR&O, Information System etc.
These tertiary expenses are allocated to relevant function ie Technical, Legal,
Product Group, Finance, Supply and Sales basis appropriate keys.
At this stage all expenses are allocated to the various functions. This is just prior
to the final allocation to the well- defined Product analysis categories.
9. All expenses once allocated across various Product Categories cause the EBITA to
be recast.
This modified EBITA gives a true insight into the effect of the presence of the
specified number of SKUs in each Product Category on it’s overall profitability.

31
4.5 Instant Drinks-A Case Study

With a view to bring home the significance of retaining only those SKUs whose
presence can be justified, a case study on the Instant Drinks group was undertaken.
It includes an insight into the factory side complexity. The factory side complexity has
been accommodated by considering the PM consumed at the Nanjangud factory-
involved in production and packaging of Instant Drinks.
This insight when combined with the knowledge of the Active SKUs present in the
system allows an understanding of the associated technical complexity.
The Instant Drinks group includes Malted drinks and Coffees.
1. Analysed the Instant Drinks product group using the steps 1-6 described above.
The product categories considered for analysis were chosen based on availability of
market relevant data required for preparation of Growth Share matrix (step 6)
The categories referred as ID1,ID2,ID3,ID4 and ID5.
2. The previously mentioned channel categorization continues:
 Retail
 ATC
 AE
 DE
3. Packaging Material for the Instant Drinks product category was considered (ie PM
data for the Nestlé factory, Nanjangud)
PM was categorised into
 Tins
 Laminates
 Jars
 Bags
 Duplex
 Cartons
 Tape/Adhesive
 Other (Any PM other that could not be accommodated with the above)
4. Data pertaining to consumption value (ie value of the material consumed) for each
item in each of the aforementioned PM categories was obtained.

32
 Each PM item has a unique code.
5. The number of PM items contributing to the top X% of Value (X may be chosen
as 50,80,99.5 etc.- as per requirement) can be found. This provides a good
indication of the items contributing to maximum consumption value in the system.

33
4.6 Results

1. The inactive SKUs (ie no transaction whatsoever incurred on their account in Jan-
Dec 2001) were about 400(exact value=413)

SKU Type

413 Standard
621 (Domestic & Export)
Promotional
Inactive
233

2.For the consolidated list of all SKUs, the summarised information appears:
NO. OF SKUs
Total SKUs 1267
Any Sale 854
Any +ve sale 657
99.5% sale 407
99% sale 357
95% sale 222
80% sale 94
50% sale 26
Note: The term ‘Sale’ here refers to Total NPS

34
3.For the consolidated list of SKUs for the ID group, consider:
NO. OF SKUs
Total SKUs 239
Any Sale 146
Any +ve sale 122
99.5% sale 93
99% sale 86
95% sale 63
80% sale 34
50% sale 9
Note: The term ‘Sale’ here refers to Total NPS for the ID group.

4.For the consolidated list of PM (Packaging Material) used for the ID group,
consider:
NO. OF PMs
Total PMs 98
Any consumed 97
99.5% consumption value 72
99% consumption value 64
95% consumption value 36
80% consumption value 13
50% consumption value 4
Basis consumption value of the PM for ID group- it can be made out that the trend
shown by PM is similar to that shown by SKUs as a whole. A few standard PM
contributed to a large percentage of the total consumption value of the (PM) category
as a whole.
Note: The term ‘value’ here refers to total consumption value.

35
4.7 Conclusions

The net sales proceeds (NPS) and profit contributed by the SKU may not always
justify their presence. Many of these ‘Active SKUs’ have a miniscule contribution to
the company turnover. However, the expenses incurred on their account to
accommodate the requirements of setting up of manufacturing facilities, ensuring
availability of packaging material and directing appropriate marketing effort may not
be justifiable.
Basis deletion criteria of recommending deletion of all SKUs contributing below
0.01% to the category NPS, about 870 SKUs were recommended for deletion.
Recommendations
1. A comprehensive business brief be prepared involving all groups that would
be impacted by the addition of a new SKU in the system. Specifically, the
completion of this document be made mandatory before the final decision to
add the SKU be made.
Typically, this document would have comments on the impact of the addition
of the recommended SKU as seen by
 Marketing
Competition scenario
Satisfy consumer need
 Finance
Financial viability
 SCM
Consider the increased logistics related complexities & their handling
 Technical
Issues foreseen at factory end due to addition of the SKU
2. Hurdle Rate
The addition of an SKU would be justified only if it is expected to deliver
sufficient returns to clear its hurdle rate.
The calculation of this hurdle rate should take into consideration
 Increased complexity due to additional costs incurred at factory, head
office etc.

36
 Additional costs incurred at all identifiable steps involved in the
addition of the SKU must be considered while calculating the hurdle
rate
 Current profitability of the Product Category
If the SKU under consideration for addition belongs to a highly
profitable category, it may be expected that its addition should generate
comparable returns i.e. expected to be highly profitable.
On the other hand, in case of attempting to add a new SKU to a
category with lower profitability the corresponding hurdle rate is
expected to be comparable i.e. lower
Thus, the hurdle rate calculated should be influenced by the
profitability of Product Category under consideration instead of being a
ballpark figure.
 Minimum returns that should be generated by the SKU in order to
justify its addition to the system
3. In addition to the afore-mentioned conditions, it may be desirable to set short-
term and long-term measurable targets for the SKU under consideration. Also,
continuous monitoring against the targets set should be carried out and basis
the same -revision of the targets as well as the decision to continue with the
SKU may be taken.
Overall, the inherent advantage of a system having fewer SKUs is that it
enables all the concerned teams to work with greater focus.
However, the business requirements must be considered while making any
recommendations or taking a decision leading to their deletion from an
existing system.
Ideally, both the business and financial perspectives need to be considered to
develop a system ensuring sustainable growth and optimum profitability
opportunities for the business. The ultimate aim should be to have an optimum
set of SKUs in the portfolio, each justifying its presence- in both financial and
business terms.

37
4.8 Issues Involved
1.A few business categories were not considered for the purpose of analysis (being
new, small or unavoidable businesses). Thus the analysis results and recommendations
do not hold valid for them.
2.Relatively new businesses for which the market information ie
 Nestlé growth rate
 Market growth rate
 Nestlé volume share
 Largest competitor volume share
pertaining to the said sector/business was not available or was incomplete could
not be accommodated for preparing the Growth Share matrix (i.e. Nestlé relative
market share vs. Category growth rate).
Consequently, no observations as to their market attractiveness can be made.
Note: Additional SKUs were created on a need basis for the purpose of analysis. This
was done specifically to accommodate the condition arising out of SKUs with a high
volume of inter- factory sales (ie sales to affiliated factories).

38
5. MILK DATA COLLECTION AND COLLATION

5.1 Objective
To collect and collate data on the Indian milk industry.

5.2 Key Issues

 India is the world’s largest producer of milk
 Indian milk industry is dominated by the co-operative sector
 No database is readily available on the Indian milk industry
 Seasonal fluctuations in milk production (lean & flush season)
 Milk surplus & milk deficit states- catered to by a national grid formed by NDDB

39
5.3 About The Indian Milk Industry
India is the world’s largest producer of milk, contributing 16% to the worldwide milk
output. Infact 80% of total milk produced by India is contributed by 10 states of UP,
Punjab, MP, Rajasthan, Andhra Pradesh, Tamil Nadu, Bihar, Maharashtra, Gujarat and
Haryana.

REGION %
North 44%
West + Central 22%
South 20%
East 14%
Total 100%

Growth rate of milk production in India is about 5% pa and estimated to reach 81

million Ton in 2000-01.

Milk production trends (in Million Tonnes)

100
90
80
70
60
50
40
30
20
10
0
1950 1960 1968 1973 1980 1990 1995 1996 1997 1998 1999 2000 2001 2002

Of the total milk produced in India, the organised dairy sector handles about 12-15%
through about 575 dairy factories in the cooperative, public and private sector with
about 55% handled by traditional dudhias/halwais. The rest is handled by milk
producing households for in-house consumption and local sales.
India follows a low input-low output model against a high input-high output model

40
adopted in major dairying nations (to do otherwise would raise the competition
between man & beast for food & feed resources from the limited land available).
Milk production is predominantly the domain of landless labourers, small and
marginal farmers in India, who generally keep 1-2 milch animals under the mixed
farming system.

5.3.1 Operation Flood & the Cooperative sector

Amul (Anand Milk Union Limited)- the first truly successful cooperative effort in the
Indian milk sector, was established in Anand, Gujarat.
NDDB, the apex body of cooperative sector was created in 1965 (in response to the
then PM- Shastri’s call) to replicate the Amul/Anand Dairy pattern of success
elsewhere. It (NDDB) merged with IDC (Indian Dairy Corporation) and was
registered under the Companies Act by a special NDDB Act passed by the parliament.
Under the aegis of the NDDB, Operation Flood launched in 1970 led to the
modernization of India's dairy sector and created a strong network for procurement
processing and distribution of milk by the co-operative sector. Infact, Operation Flood
is believed to be one of the world's largest dairy development programmes
The main thrust of Operation Flood was to organize dairy cooperatives in the
milkshed areas of the village and to link them to the four Metro cities - the main
markets for milk. Consequent to the success of Operation flood, per capita availability
of milk increased from 132 gm per day in 1950 to over 220 gm per day in 1998.
However, it is still much below the world average of 283 gm/day.

250

200

150

100

50

0 g/day
1950 1960 1968 1973 1980 1990 1997 1998 1999 2000 2001 2002

g/day 132 127 113 111 128 178 199 208 214 220 227 233

41
The efforts undertaken by NDDB not only led to enhanced production, improvement
in methods of processing and development of a strong marketing network, but also to
the emergence of dairying as an important source of employment and income
generation in the rural areas. It also led to an improvement in yields, longer lactation
periods, shorter calving intervals etc through the use of modern breeding techniques.
Establishment of milk collection centers and chilling centers enhanced life of raw
milk and enabled minimization of wastage due to spoilage of milk.

The Indian Milk Cooperative Sector is presently organized to follow the structure
shown:

NDDB

FEDERATIONS (State federations)

UNIONS (District level cooperatives)

VILLAGE COOPERATIVES

FARMERS IN THE VILLAGES

42
Farmers in the villages are the milk producers and need to be registered members of
the village cooperative in order to access the market made available through it. Village
level cooperatives in turn are organized to form Unions or cooperatives at district
level. State level federations provide the link between the unions and the apex body-
NDDB.

5.3.2 Utilisation of milk in India

Milk Product %
Liquid milk 45.0
Ghee 28.0
Dahi 7.0
Khoa 6.5
Butter 6.5
Milk Powder 2.6
Chhana, Cheese & Paneer 2.0
Cream 0.5
Ice-cream 0.2
Others 1.7

Product Urban Penetration % Households

(mio)
Liquid Milk 91 30
Milk Powder/ 12.4 4
Dairy Whitener
Butter 35 11.5
Condensed Milk 3.1 1
Cheese & Cheese Spreads 4.1 1.3
Paneer 24 7.8

5.3.3 Milk Flow Chart

The following diagram depicts the flow of milk in the Indian milk industry. Milk can
reach the consumer via a number of routes (as shown)

43
 5.3.4 Fluctuations in milk production

Milk production in lean months declines to about 30-40% of that of flush season.
Lean season: April to September
Flush season: Rest of the year
Reasons for low production in lean season are believed to be:
 Non- availability of green fodder
 Season unsuited for fertility of animals
 Lean months get prolonged due to failure of rains causing further decline in milk
production.

Herd size has a negative influence on milk yield. The possible reasons for this effect
are believed to be:
 better animal care
 application of high nutrient feed & fodder
 intensive operational efficiency of dairy operations

5.3.5 Gross Chemical Composition Of Cow’s Milk

Fat Casein
3.7% 2.8%
Protein
3.4%
Milk solids Whey proteins
12.6% Milks-SNF 0.6%
8.9% Lactose
Milk 4.8%

Whey proteins
0.6% Minerals
0.7%

44
Note: SNF refers to Solids- not fat.

45
5.4 Costs involved in milk procurement and processing

1. Support to farmers
 Payment
Varies from Rs. 10/ltr to Rs. 10.50/ltr- on an average. However, the price is highly
season dependent- rising upto 11-12/ltr during lean season and falling down to Rs.9/ltr
during flush season.
 Technical support
Veterinary doctors are made available to the farmers on a need basis. In addition,
medicines and fodder seeds are also provided to the farmers to enable maintenance
and feeding of his milch animals.

2. Society (village) cooperative commission

The milk collected from the farmer is procured by the village cooperative. A
commission of about Rs. 0.25/ltr is earned by them.

3. Inward transport cost

This refers to the cost of transporting from village cooperatives to dairy plants and is
estimated to lie between Rs. 0.40/ltr to Rs. 0.50/ltr.

4. Processing cost
Processing of liquid milk works out to about Rs. 0.60-0.70/ltr

5. Marketing
The costs involved in marketing are broadly treated as:
i. Packaging Rs.0.50/ltr
ii. Outward marketing
These are the costs involved in making the packaged product available to the final
consumer. Thus it includes:
 Outward transport Rs.0.40/ltr
Cost involved in transporting the product to the Distributor’s premises/ chillers.
 Distributor commission Rs.0.20/ltr

46
 Retailer commission Rs.0.40-0.60/ltr

6. Product manufacture
 Ghee
Processing cost for Ghee is about Rs. 9/kg (of which Rs. 1.80/kg are losses). This
value includes both the manufacturing and packaging costs.
The selling price of Ghee (regards the final consumer) varies according to
seasonal fluctuations. It goes upto Rs. 130/kg in the lean season and may fall
down to a low of Rs. 110/kg in flush season.
Highest ghee sales normally occur during mid-July to mid-September, attaining
peaks before Diwali.
 Milk powder
Processing cost (inclusive of both manufacturing and packaging costs) is about
Rs. 13/kg.
About 90% of milk powder is used for reconstitution purposes. Through this
process, milk powder is used to generate liquid milk in order to counter milk
shortages in the lean season. Thus most milk powder purchases are bulk in nature.
The price of the remaining 10% milk powder that does find it’s way to the open
market to be sold to the household consumer varies according to season. It may
reach a high of upto Rs. 80/kg during lean season.

47
5.5 Policies followed by players under the NDDB umbrella
 No bad goods policy.
The milk once transacted out of godown is treated as sold and no returns whatsoever
are entertained.
 All deliveries are against cash.
 Product Shelf life
Ghee 9 months
Powder 6 months
 For authorized vendors dealing in a specific brand and possessing the basic
infrastructure such as chillers, milk delivery is done twice a day- morning and
evening.
 Private players deliver milk once a day –early morning. The reason for this single
delivery schedule is that most retailers avoid the expense associated with installing
and maintaining chillers required for overnight storage of milk.
 Private players- relations with vendors, poorer milk quality, advance payment,
lower price-Rs.9/ltr
 Cross- subsidization
Varies from union to union- depending on the union and the higher selling product
in its region of operation. For instance, Mother Dairy subsidizes its lower selling
skimmed milk through the higher selling full cream milk.

48
5.6 Milk in India- a commodity?

Presently milk- as a product has a strong commodity perception. However- among the
educated people, there is a visible (though gradual shift) towards known names. In
case of people purchasing milk from retailers (normally pouched milk), the type of
milk i.e. Full cream, Toned, Double toned or Skimmed seems more important than the
brand associated with it. Pouched milk is perceived as more hygienic and with an
associated quality advantage when compared to milk sold by the traditional milkman.
However, liquid milk from sources like Mother Dairy has a strong perceived quality
associated with it.
Most consumers buying milk from the traditional doodhwallah believe that the price
paid to him is for the milk (per-se) along with a premium for the convenience of home
delivery.

49
5.7 Mother Dairy-A study

Mother Dairy- is one of the strongest players in the liquid milk market in and around
the National Capital Region.

5.7.1 Different categories of milk sold by Mother Dairy:

1.Full Cream milk
6% fat, 9% SNF and sold @ Rs.17/kg
Aimed at growing children & people whose work involves physical labour.
2.Toned milk
3% fat, 8.5% SNF and sold @ Rs.13-14/kg
Bulk vending milk sold at booths through the use of tokens is priced at Rs.
13/ltr. Packaged milk is priced at Rs. 14/ltr with Rs. 1 paying for the
packaging cost incurred.
Aimed primarily at people whose work does not involve too much physical
labour. This category includes teachers, office and administrative staff.
3.Double Toned milk
1.5% fat, 9%SNF and sold @ Rs.12/kg
Aimed at newly born babies, people having weak livers and others having a
weak constitution.
4.Skimmed milk
0% fat, 8.7% SNF and sold @ Rs.10/kg
Aimed at heart patients and highly weight conscious people.

5.7.2 Procurement & Quality tests

The milk received by Mother Dairy comes from various State federations in insulated
tankers where its temperature is maintained between 4-7°C. This milk before being
accepted by Mother Dairy undergoes 16 tests of various kinds. These are aimed at
testing for:
1.Cleanliness of tanker
2.Presence of foreign matter

50
3.Temperature (4-7°C)
4.Taste
5.COB (Clot on Boiling)
6.Alcohol test
It is a test for freshness. The milk from a cow having laid a calf cannot be boiled for
about the first week as it spoils. To avoid acceptance of such milk this test is
performed.
7.Neutralizer test (soda test)
To prolong the life of milk (ie prevent it from getting spoilt) caustic soda may be
added. This test is aimed at ensuring such milk is rejected.
8.Acidity test
9.Urea fertilizer test: To ensure the milk is not “synthetic” in nature.
10.MBRT (Methylene Blue Dye Reduction Test)
11.Fat test
12.SNF test
11 & 12:- To measure the presence of Fat & SNF in milk (on basis of which payment
is made to the State Federations)
13.BR reading
To ensure the cream present in the milk indeed belongs to the same animal as the
milk. It checks for the presence of dalda and similar additives.
14.Sugar test
15.Starch test
16.Mineral oil test

5.7.3 Processes undergone by milk (bulk vending milk)

1.Clarification
A conical clarifier is involved. Aimed at filtering the milk.
2.Homogenisation
Fat particles present in milk are broken into tiny particles and mixed with the liquid
milk (resulting in homogenised milk)
This milk is easily digestible, thicker than normal milk but does not form cream. The
curd formed using this milk does not lose water.
This is the milk sold in the booths.

51
3.Pasteurisation
Milk is heated upto 72 °C ; maintained at this temp for 15 sec and then cooled upto 4-
7°C.
Note: UHT ie ultra heat treated milk is heated upto 120°C.
4.Fructification
1 liter of milk contains 1500 IU(International Unit) of Vitamin A.
The milk sold in booths is “Fructified” ie an additional 2000 IU of Vit. A is added to it
(per liter).
On account of this expense, an estimated Rs. 50 lac is incurred.
Two glassful of this token milk a day would suffice a person’s Vitamin A requirement
for the day.

5.7.4 Costs involved

This production cost (from after transport to the dispatch stage)= Rs. 0.37-0.39/ltr
Total process cost = Rs. 2.37/ltr

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5.8 Procurement & Sales Data Liquid Milk

The latest data on liquid milk available for the Indian Milk Industry is for the year
2000-01. Some important procurement and sales data figures compiled state-wise
follow:

5.8.1 Procurement Data (2000-01)

a. Metro Dairies

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b. Rural Dairies

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5.8.2 Liquid Milk Sales Data (2000-01)

a. Metro Dairies

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b. Rural Dairies

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5.9 Conclusions

Basis the state-wise procurement figures as well as the state-wise sales figures, some
observations on the current status of milk availability in different states of India can
be made.
i. Majority of the states are self sufficient in milk procurement. The states that are
successful in collecting milk well- beyond the state’s requirements can be treated as
milk-surplus states. The data for the states of Gujarat, TN, UP, Punjab, Haryana,
Rajasthan, Karnataka, Andhra Pradesh and Maharashtra show a high milk surplus for
the period 2000-01.
ii. The Indian states where milk procurement (an indication of milk availability in the
region) falls short of milk sales (indicative of milk demand) are the North-Eastern
states of Assam, Tripura and Nagaland and the states of Goa and Orissa.
These states are milk-deficit states and can be identified as area with strong potential
as a future business opportunity for players in the industry

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6. BIBLIOGRAPHY
1. Principles of Marketing Management- Philip Kotler
2. www.nestle.com
3. www.karvy.com
4. www.myiris.com
5. www.nddb.com
6.Indian Dairy Year Book- 2001
7.Indian Dairy Man
8. Principles of Financial Management – Brealey, Myers

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