Existing machinery and resources over

loaded to meet higher demand – no

new investment
Introduction
Sparkle follows a traditional distribution channel involving
wholesalers and retailers
This study explores the reasons for decreasing profit
of Sparkle and tries to find short term and long term
solutions The replacement cost of defective pieces and pieces
damaged in transit is completely borne by Sparkle
The following assumptions have been taken for the
study:
Sparkle also exports some products abroad and imports
raw materials for LEDs

Sparkle took short financing from private lenders to meet

cash flow

Cost of raw materials and consumables is same for

competitors as well

Selling price was same in last two quarters

Why the fall in profits?
Cost Breakdown Cash flow crunch is bad

Inefficient collection on receivables – additional

cost due to short term private financing

Bad quality can hurt

Fall in quality due to overdependence on
Variable Fixed cost:
existing machinery – additional cost on
cost: 58.8%
replacement of defective items
41.2%

High cost of sales Inefficient distribution involving middlemen

High variable cost components – cost per High commission for multiple levels of
unit fluctuates middlemen has decreased profit margins

No investment External Factors

Increased operating cost due to no Increased cost on raw material import due to
investment in new machinery – needed to depreciation of INR, increase in logistics cost
meet higher market demand due to steep increase in fuel prices etc.
How bad can it get?
High cost and lack of investment
in technology and research -
Could lose market to competitors

Opportunities for Long term growth

Cash flow crunches can lead to
production and distribution might
be disrupted
Cash flow crunches can lead to production
and distribution disruptions – can lead to
huge losses
Could lose the faith of customers
and middlemen – difficult to stage
a comeback
Huge potential
Huge increase in demand in increasing
foreign and Indian markets
Customer confidence
Increase in sales imply customer
confidence – edge over competitors
Scope for Investment and
expansion
Be technologically updated to benefit
from demand – scope for research

Without efficient distributions

system, survival would be difficult
The way forward
Set correct pricing levels
Make slight changes in selling
price to compensate the increase
in logistics and import costs
Know your clients
Identify high, low and negative
margin clients – focus on high and
low margin clients
Law cost alternatives?
Alternate raw materials for LED
available locally – avoid high cost
of imports
References:
• https://www.investopedia.com
• http://www.yourarticlelibrary.com
• https://books.google.co.in
• http://www.mhlnews.com
• http://www.lightingindia.in/blogs
Costs matter
Question every expense on
staffing, capital expenditures, and
office costs – make cuts,
renegotiate wherever possible
Think long term
Invest in machinery – benefit
from the increasing demand the
right way
Be innovative
Introduce innovations in
manufacturing processes and
distribution networks to reduce
cost