Study Assignment Questions on

Indraprastha Cold Storage Ltd Value Added

Strategy in an Emerging Market

1. A reduction in the price of cold storage services may give IPCSL an increase in
volume. Should IPCSL consider reducing its price by, say, 25 per cent?

Ans: Prepare following table:

Cost of upgradation: INR 60 million = INR 6 crore

Principal payment per annum: 9 years repayment 6 crore /9 = 66.67 lacs pa
Interest payment per annum: 18% = 6 crore x18% = 1.08 cr pa
Total repayment of principal and interest amount per annum = 0.67 cr + 1.08 cr = 1.75
cr pa
2. What non-price strategies should IPCSL consider for its long-term growth?

IPCSL should engage in vertical integration by stretching its operations backward to

procure fruits directly from the growers to store in its cold storage in addition to
serving the traders who store fruits on behalf of the growers they represent. Provide
Pros & Cons of this strategy

Ans: Backward integration is a form of vertical integration by which the Company

integrates its operations with the suppliers or the supply side of the business. The
Company gains control over the raw material suppliers by integrating them with their
ongoing business. The Company does so to maintain a competitive advantage in the
business and increase entry barriers. The Company can cut its costs by merging with its
suppliers and maintain quality standards.

With Respect to the case of IPCSL It is imperative that if they have to achieve the
desired sales then they need to first integrate- backward or forward.
Considering IPCSL owners’ family was into cold storage business for long and also
earlier they were mainly into vegetable cold storage business they are always close to
growers- they have natural advantage for backward integration.

Pros of backward integration.

1. Increased control
By integrating backward and merging with suppliers, IPCSL can control
their supply chain in an efficient manner. They will control the production of
raw materials until the production of the end product. By this, they will have
a larger control on the quality of raw material to be used in production. Also,
the Company secures itself with the supply of material.
2. Cost cutting
Backward integration is done to cut costs. In a supply chain, there is always
a markup when goods are sold from one party to another. The supply chain
involves various suppliers, distributors, middlemen. By integrating the
business with the producer of the material, the Company can remove these
middlemen from the supply chain and cut the markup costs, transportation,
and other unnecessary costs involved in the whole process
 3. Efficiency
While the Company will cut costs, backward integration also provides better
efficiency in the whole manufacturing process. With control over the supply side
of the chain, the Company can control when and which material to produce and
how much to produce. With improved efficiency, the Company can save its cost
on the material which gets unnecessarily wasted due to over purchase.

Cons of backword Integration

1. Huge Investments
Integration, merging, or acquiring the manufacturer will require huge
investments. It will be an extra burden on the Company’s balance sheet, which
may be in the form of debt or reduction cash and cash equivalents.
2. Costs
It is not always that the costs will be reduced in backward integration. Lack of
supplier competition can reduce efficiency and thus result in higher costs.
Further, it will be an extra burden on the Company if it could not achieve the
economies of scale that the supplier can achieve individually and produce
goods at a lower cost.
3. Quality
Lack of competition can lead to less innovation and thus low quality of products.
If there is no or less competition in the market, the Company will become less
efficient/less motivated in terms of innovation, research, and development as it
knows it can sell whatever it produces. Hence, this could impact the quality of
the products.
 3. Are the improved services provided by IPCSL worth the premium that the
company charges? What is the economic value to the customer (EVC)?

Ans: Economic Value of Customer

Economic value to the customer (EVC) is the maximum amount a customer should be
willing to pay, assuming that s/he is fully informed about the benefits of the product
and the offerings of competitors

EVC = Reference Value + Differentiation Value

Reference value: the price of perceived closest substitute

Differentiation value: value of a product’s attribute difference between your

offering and the closest substitute (+ or -)

 Calculate the advantages of storing in GC / CA storage. Net profit earned by

selling in offseason (after deducting the cost of GC / CA

One shipping container of kiwi is 20 tons

Life of kiwi in ordinary cold storage is around 10 days
At most 2/3rd of the 20 ton imported kiwi can be sold within 10 days. Hence
1/3rd is wastage

Price of kiwi is Rs. 100 per kg – hence we can assume that Rs. 33 per kg is wasted
In IPCSL kiwi can be store for 2 months (60 days) for which the cost would be Rs. 6
per kg for two months @ Rs. 60 per month box of 20 kg

Hence the additional cost for more 50 days additional perishability for kiwi = Rs. 6
Additional benefit when kiwi stored in IPCSL GC / CA cold store = Rs. 33
Hence the EVC for imported kiwi = 33 – 6 = Rs. 27 per kg

In the case of Indian Apples wholesaler sells at Rs. 550 per boxes in-season vs Rs.
680 per boxes off-season
Additional benefit in off-season for wholesaler is Rs. 680 – 550 = Rs. 130 per boxes

Cost of storage in GC / CA per box for three months = Rs. 60

Mandi charges of 1% = Rs. 6.80
Total extra cost for storing apples in IPCSL = Rs. 66.80

Hence the EVC in the case of Apples = 130 -66.80 = Rs. 63.20 per box

 Also calculate the cost of produce transported by refrigerated truck (both 3MT
& 10 MT) and suggest the benefit of using the same in both off-season and in-
season

 Also suggest how many 3MT & 10 MT refrigerated trucks should IPCSL
invest for its long-term business
4. How should IPCSL communicate the value to customers?

Ans: The organisation had only 3 managers:

 Manager 1: overseeing the technical operations

 Manager 2: finance
 Manager 3: human resource and administration

The direct employees held clerical, supervisory and business function responsibilities
and involved in transportation and security aspects. Indirect were contract labourers
deployed by labor supply contractors who worked on the floor and were mainly
involved in loading and unloading fruits.

The organization doesn't have a marketing team or an employee who could market
their product after the modernization and expansion drive. All farmers are not literate
enough to understand their modernization. Even their sales transactions are conducted
by artis by closed and open auction. There is no possibility that they understand the
value of such an advanced setup.

So IPCSL should create a new post to marketing where a marketing professional can
explain the setup of IPCSL, its advantages and the reason the cost is high. It will also be
more effective if the marketing professional could explain the above to them in their
local language or with the help of interactive videos to make them visualize and
understand it better
 5. What lessons you have learned about Industrial or Business Buying Behavior -
B2B Marketing & how the case offers an opportunity for a B2B player like
IPCSL?
Ans: The cold storage services is a price driven over quality driven market, the cold
storage service providers currently in business are not having any points of
differentiation which led to a price war and very slim margins. The very low profit
margins have restricted the competitors from changing out their old technology storage
facilities to an international standard facility. Some of the customers (wholesalers &
commission agents) are not highly appreciating the cold storage services especially
during the winter season where the fruits and vegetables don’t get affected much due to
the very low temperature.

In the case of conventional cold storage facility, the only way to make decent profit is
by maximizing the sales volume and effectively utilizing capacity available (dynamic
facility management system). This would give some cost preference over competitors
allowing to capture bigger market share and make higher profit margin. In the case of
IPCSL, the GC & CA storage technology is giving them a market edge to charge a
premium price. However the customers should value the added services provided over
the difference in charges.

Other than the limitation in the period fruits and vegetables can be stored in the
conventional cold storage facility, there are additional quantities wasted during storage
& handling which will not be the case in GC or CA operated facility. This will decrease
the cost per kg and increase the wholesalers / commission agent profit margin. IPCSL
didnt focus much on marketing of their new state-of-the-art cold storage facility;
instead, they focused on the value they add to the fruits and vegetables industry.

As rightly quoted by one of the company’s senior managers to Sanjay, the fruits and
markets industry lack formal education. It takes time to show value and build
confidence. However, to speed up the learning curve and attract customers, price &
marketing strategy can play a crucial factor especially in the introductory stage.

Advantages:

 Market reputation of quality service provider

  Good customer base before modernization (Exhibit 1)
 Huge capacity - 5000MT storage capacity
 Situated in Azadpur which is the central location for the fruit and vegetable
market of Delhi
 Superior cold storage technology. Latest technology in the world imported from
US
 Modern Technology - Gas controlled and Controlled Atmosphere storage which
is not available with competitors.

Disadvantages:

 Premium pricing due to premium services.

 No knowledge among customers about the benefits of modern technology like
Gas Controlled Cold Storage.
 Higher cost of operating