Case Study: Panchtantra Corporation

IIM Ahemdabad Case developed by Professor Nitin R. Patel and B. Anantaram

BMN - 616: Advanced Optimization for Managers

Planning the product mix at Panchtantra Corporation

Mr Ganesh, Project Director for the Kapadkunj Intensive Handloom Development (IHD) Project of the Panchtantra
Handloom Development Corporation, was preparing the production plan for his project for the next month. The IHD
project produced two types of handloom products: 60 × 40 lungis and 40 × 40 shirting. Every month, Mr Ganesh
had to decide on the quantities of each of the products to be produced after taking into account the loom capacity
available in the project, the availability of 40s and 60s yarn (both of which were procured and supplied to the project
by the Corporation’s centralized purchasing department), and information regarding sales from the sales department.
Mr Ganesh expected around 3000 loom days of production capacity to be available to his project next month. Mr
Kapasi, the purchase manager, had indicated that because of stringent market conditions, at the most 480 kg of 60s
yarn and 2400 kg of 40s yarn would be available to the Kapadkunj project next month. The sales department of the
Corporation had piled up adequate stocks of finished goods. Hence, the Sales Manager, Mr Bazari, did not want the
production quantity to exceed the normal sales level of 11000 metres of lungis and 22000 metres of shirting.
So far, Mr Ganesh had aimed at producing as much of lungis as possible (he had found the order booking for lungis
by the sales department the main limitation to the quantity of lungis produced) and had allocated the remaining loom
capacity to the production of shirting. He had adopted this strategy since he knew that the contribution1 (in Rs per
metre) was higher for lungis than for shirting (see Table 1). However, at the last meeting of all project directors of
the Panchtantra Corporation, Mr Ganapathy, project director for the Laxmikantha IHD Project, had told Mr Ganesh
that he could improve the profitability of his project by producing more of shirting material and less of lungis. Mr
Ganapathy had argued that even-though lungis fetched a higher contribution per metre, the higher production rate
for shirting would offset its lower contribution, thus making it more profitable to produce.
Mr Ganesh was intrigued by the concept which Mr Ganapathy had suggested. On returning to his project office,
he decided to assemble all data on production costs, contribution, yarn consumption, and production rates relating to
each of the products before deciding the product mix to be produced next month. The figures Mr Ganesh collected
are given in Table 1.

Questions
1. Given the production capacity, yarn availability, and sales constraints that Mr Ganesh is faced with, what
product mix would you suggest to him for the next month in order that he may maximize his profits? What
is the increase in profits that this product mix would generate compared to the product mix that Mr Ganesh
would have arrived at had he used his previous production planning rule?
2. Mr Ganesh feels that one of the objectives of the IHD Project is also to ensure adequate earnings to the weavers.
He feels that he is even willing to sacrifice to some extent, the profitability of his project in order to ensure that, on
an average, the production pays as wages to the weavers at least | 20.50 per loom day. Would you recommend to
him a different product mix in order that he may fulfil this objective? How much extra remuneration is provided
to weavers by this plan over the plan you suggested under (1) above?
3. The Finance Manager, Mr Rokado, informed Mr Ganesh that the production plan arrived at could not be
supported with the money available to Panchtantra. He indicated that not more than Rs 1.50 lakh could be
available for the next month. What should be the production plan in light of this new information? (The wages
and the yarn cost have to be paid for in cash.)

1 Contribution = Average sales price - variable cost (mainly wages paid to weavers and yarn cost)

1
 Parameters 60 × 40 lungis 40 × 40 shirting
1. Selling price (| per meter) | 10.90 | 6.60
2. Variable cost
a) Wages paid to weavers (| per metre) | 4.50 | 1.50
b) Yarn cost (| per meter) | 5.50 | 4.50
3. Contribution (| per meter) | 0.90 | 0.60
4. Production rate: No. of metre per loom day 5 mtr. 12 mtr.
5. Yarn consumption: (in gm per metre)
a) 40s yarn 60 gm. 100 gm.
b) 60s yarn 40 gm -

Table 1: Planning product mix at Panchtantra Corporation