Global Detergents (B)/FM-II/002

Global Detergents (B)

By 12.00 Noon Rakesh was called inside only to be told that NBCL would require some more
time to decide on the deal. Mr. Sasank Maurya, The General Manager (Contracts) of NBCL
shared with Rakesh

“ Our marketing team is not in position to give a green signal to go ahead with
100 lakh units. They are asking for some more time to reach the precise
estimates. As of now they are tight lipped and I am expecting it could be about
20% on either side of the initial quantity of 100 lakh units. We are waiting for
them to finalize the issue from their side as that will have bearing on the price
we can pay per unit. Our CEO is of the opinion; should annual quantity be
more than 100 lakh units , we shall be paying little less (say 10%) than Rs. 20
per unit”

Put off by the delay and having read the thinking of NBCL, Rakesh called for an urgent meeting
of the top management the following morning. He wrote a mail stating the thinking of NBCL
and asked the members to ponder over

The top management met the following morning at the designated time. Arjun and Bindu were of
the opinion that they can’t do anything now and have to wait for the NBCL to respond. However,
Easwar wanted the team to take note of the fact that they can’t take 100 lakh units and Rs. 20
unit price for granted. What if it were only 80 lakh units and Rs. 20 per unit? Rakesh intervened
“Oh that’s going to be worse”. Easwar continued; what about 120 lakh units? Will NBCL still
pay Rs. 20 per unit?

Dr. Lokanandha Reddy Irala, IBS, Hyderabad prepared this case intended to be used as the basis for class room
discussion rather than to illustrate either effective or ineffective handling of a management situation.

© 2009, Irala.

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Global Detergents (B)/FM-II/002


While the discussion is on, Raghunath is seen scribbling some thing seriously. Rakesh asked
Raghunath, “Hi Raghu, what do you think of the issue?”. Raghunath, with his inimical style went
on to the white board and presented the three scenarios he was scribbling on his note pad (exhibit
B1).

Exhibit B1

Variable Optimistic Pessimistic Normal

Scenario Scenario Scenario
Annual Sales Units (lakhs) 120 80 100
Price Per Unit (Rs.) 22 18 20

Raghunath Continued, “why don’t we check out what would be the NPV in these scenarios?”

“Oh that has another important dimension”, intervened Rakesh. Should we were to get an order
for just 80 lakh units; can we cut the Fixed Cost? Arjun quickly replied “We have a margin of
about 10% if we try very hard. We can’t negotiate any more with the landlord, building
contractor and equipment supplier.

Raghunath suggested why don’t we extend similar thinking to other important variable like
Variable Cost Ratio? Bindu borrowed 30 minutes to work on the issue and she also revised the
three scenarios (exhibit B2)

Exhibit B2

Variable Best Case Worst Case Normal

Annual Sales Units (lakhs) 120 80 100
Price Per Unit 22 18 20
Fixed Cost (Rs. Lakhs) 90 110 100
Variable Cost Ratio 50% 70% 60%

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Global Detergents (B)/FM-II/002


By the time Bindu could analyze the best and worst case scenarios Raghu developed some more
food for thought

What if we end up with only 80 lakh unit order with other variables at their normal levels? How
great if the order is 120 lakh units with other variables being normal? Would it be useful to see
how sensitive is NPV for changes in each variable but changing the variables one at a time?

That would be an excellent idea, Easwar appreciated. Bindu promised she will do the needful
and present the results the following week.

Rakesh said closing the meeting,

“We shall meet next week once Bindu is done with her calculations,
However Easwar will be missing that meeting as he would be going to
Mumbai to pursue speeding up discussions with NBCL”

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