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Situation Analysis
Kanpur Confectionaries Private Limited (KCPL) is a family owned business,
producing glucose, cream, salt and Marie biscuits under the ‘MKG’ brand. MKG is
a popular brand among the middle class families in urban and semi-urban areas of
North India and the biscuits are known for its quality and affordability. KCPL’s
founder’s vision is to emerge as a leading national brand in future. Once among the
leaders of the market in 70’s with fairly high revenue, KCCL stands stuck in the
middle of competitive environment today.

The glucose biscuit industry is very attractive due to growing demand in India and
due to high margins as much as 25%. The process of production is very simple,
requires low investment and less skilled labor, making it an easy to enter industry.
Rise of unorganized sector has increased competition. Two national players, A-
One Confectioneries Private Limited (APL) and International Biscuits Limited
dominate the industry. APL’s average monthly sale was 200 tonnes.

Being on the number two position with monthly sale of 110 tonnes in the regional
market and responding to the growing demand of glucose biscuits, KCPL doubled
its capacity from 120 tonne per month to 240 tonne per month in 1980-1981. But
high absenteeism rate of employees, 50% and scarcity of ingredients like maida,
sugar and vanaspathi led to uneven production. Current average monthly
production is 120 tonnes.

Costs of labor and materials are rising. 70 units in unorganized sector were able to
keep their costs low as they did not pay taxes and followed unethical practices,
giving a tough competition. In addition, 8 new units were setup in the organized
sector in U.P. KCPL followed ethical management practices laid by its family, it
paid all the taxes. It did not reduce its costs taking care of rising costs of labor nor
does it had a premium image to get a higher price. As a result of such competition
KPCL incurred a loss of Rs 141000 and its capacity was rendered surplus.

In an attempt to utilize surplus capacity and reduce losses KCPL signed an

agreement with Pearson which outsourced 50 tonnes per month biscuits initially
and promised to raise it to 100 to 125 tonnes per month. It would pay Rs 3 per kilo
as a conversion rate and agreed to allow KCPL to run its existing line. The market
response to these Good Health biscuits was not good as it was high-priced and had
no additional benefits. Pearson had not provided any technical guidance to KPCL.
Even after this agreement KPCL made a loss of Rs 6000 and had surplus
inventory.

KCPL is now looking forward to another offer to utilize its surplus capacity
further. The offer is to become APL’s contract manufacturers. APL is planning to
expand in northern region and this is an attempt to reduce its cost of
manufacturing. APL offers initial order of 70 tonnes per month, it would provide
technical guidance. It may recommend changes in processes and equipment whose
costs would be borne by the KCPL. It will supply ‘APL secret ingredient’ but
KCPL would have to buy ingredients from authorized suppliers of APL. It will pay
a conversion charge of Rs 1.50 per kg.

Problem Statement
Should KCPL accept APL’s proposal of becoming a contract manufacturer in order
to utilize surplus capacity and reduce costs?

Options
1. KCPL should take up APL’s offer.

2. KCPL should not take up the APL’s offer.

Criteria

1. Time – KCPL has to decide soon about the proposal or else other manufacturers
may out beat them in approaching APL.

2. Capacity utilization and loss reduction

3. A family venture – Family name was dependent on the success of the brand.
Founder’s vision was to make it a national leader. Same business will pass to their
further generations so what do they want to pass? A successful brand or just
another CMU.

4. Comparison between Pearson’s and APL agreement – Pearson gave them

independence to build their own brand, more conversion rate but no guidance
whereas APL restricted KCPL’s independence, offered less conversion rate but
provided guidance. APL also required that purchase of material be bought by their
authorized dealers.

Evaluation
Option 1: KCPL‘s capacity is 240 tonnes per month out of which it produces only
120 tonnes. It manufactures 50 tonnes for Pearson. If it takes up APL’s offer of 70
tonnes outsourcing, then it will be able to utilize its complete capacity and make a
profit of Rs 78000. Thus, it will get assured return on investment and will
eliminate the loss.

Though KCPL will have opportunity to learn from expertise and experience of
APL but it won’t be able to use it for its own growth.

KCPL may also end up increasing its costs as APL won’t pay for required
equipment and conversion rate it offers is also low.
Pearson may also change its conversion rate paid to KCPL from Rs 3 to Rs 1.50
after seeing that it working for APL at 1.50. In this KCPL will earn a profit of Rs
3000.

With APL’s offer KCPL does not have enough freedom to build its own brand
which may lead to dilution of brand and family prestige.

There is an uncertainty that relationship will work out between both. KCPL might
not be able to work happily due to restricted independence.

Option 2: If KCPL does not take up the offer then it will lose the opportunity of
utilization of full capacity and the learning it could gain from the national player in
biscuit industry. Its costs won’t reduce. KPCL would have its independence of
decision making, intact. Pearson which has provided business to KCPL on better
terms will not be offended. Only if they don’t accept APL’s offer they can work
for building their brand further and pass on a reputed business to their further
generations.

Action Plan
To use its capacity to full, reduce costs and gain profit

* Reject the APL offer

* It should tighten up its overall operations.

* Strict policies should be developed to reduce absenteeism.

* Find a reliable and constant source for supply of raw material – Find a supplier
who would give good quality at lesser price. Buy in more bulk.

* Once above steps are in effect plan to automate production process.

Recommendation
KCPL must not take up APL’s offer as it will lose all its independence and there
would be no scope of building own brand. They should rather focus on improving
their internal processes in order to reduce costs.