Professional Documents
Culture Documents
Roll No - 0910010
1. Company Background
2. Market analysis & Demand Behavior
3. Production Details
4. Analysis
a. Calculate optimal inventory for finished goods & inventory
costs
i. Lead Time Demand
ii. Safety inventory
iii. Effect on Working Capital
5. Conclusion
1- Company Background
Royal Hygiene is the maker of ‘She’ brand of sanitary napkins. ‘She Comfort’
brand was launched in the year 2003. The sanitary napkins were imported from
North America and sold under ‘She comfort’ Brand in India. By Jan 2005, a
manufacturing facility was created at Turbe near Mumbai, under the name Royal
Hygiene Care Pvt. Ltd. Recently the company shifted its production to Kandla,
Gujarat. The company saw a turnover of over Rs 25 crores for 2008-09. The
company is growing at an impressive rate and is aiming a 50 crore turnover for
2009-10.
2.a-Market Structure
Feminine Hygiene ironically has not been the priority of Indian women so for. As
of now, only 5% women use sanitary pads in India. In China, 55% women use
sanitary pads with a market potential of 4 Billion USD. There are 1300
manufactures in China compared to only 5 major manufactures in our country.
The penetration rate in developed countries is close to 100%.
The company maintains higher MRP than the other premium products in the
market. However, it provides volume offers to its customers to bring the average
price lower than competitors. The market is largely segmented into modern trade
(large retail houses) and retail (traditional general merchant and pharmacy
shops).
P&G is the market leader with its brand ‘Whisper’ holding more than 52%
market share followed by J&J at 39% and Levers at 5%. She Comfort enjoys 2%
market share. Balance 1% sales are shared by eleven smaller companies.
Modern trade (organized retailers) accounts for roughly 30% of its volumes.
However, the company is forced to give higher discounts to large retail houses.
Its contribution margin is lower for a market segment where it has lower
volumes at the moment. However this has paid off. Its brands are ranked no 2 or
3 by shelf space in the large retail format in key cities. In Bangalore it ranks 1st by
shelf space in key Pantaloon locations. Royal Hygiene Health Care has already
taken 3rd position (ahead of HUL) in terms of sales in this format of business in
an industry with roughly 11 players.
3- Production Details
The company has source its production units from China. The ZYG type line that
the company deploys runs at the maximum speed of 200 pads/minute with the
normal steady operation speed of 150 pads/minute.
Size of the equipment: length: 10.5m x width: 1.5m x height: 2.4m
Weight of the equipment: about 4.5 MT
Providing
Designed Output for Monthly
Sr. Operationa
Description Speed Per breakdowns Output
No l Speed
(PPM) Shift - 75% Pcs
Efficiency
1 Panty Liner Machine 160 156 94,000 70,500 5,287,500
2 230 mm Regular Napkin Machine 150 140 84,000 63,000 4,725,000
3 284 mm Regular Napkin Machine 110 104 63,000 47,250 3,543,750
4 315 mm Regular Napkin Machine 100 88 53,000 39,750 2,981,250
5 284 mm Ultra Large Napkin Machine 210 200 120,000 90,000 6,750,000
6 315 mm Ultra Large Napkin Machine 210 200 120,000 90,000 6,750,000
The company has 3 production lines in their Kandla plant. As per the latest
estimates, the company has seen over 50% increases in its demands FOR 2009-10,
owing to market penetration and also due to Government contracts to supply
orders to low income and rural areas.
The production line is a single phase process. The machines are fully automated.
All the raw material (resin, pad, lining etc) are fed in the production line in
different parts of the process. The machines generate an average of around 150
pieces in a minute.
The company follows the standard sales and marketing mechanism prevalent in
the FMCG & FMHG (health goods) in the country. They sales are broadly
clubbed in 2 categories
• Modern Trade (large retail outfits like Pantaloon)
• Conventional Trade – Small General Merchant stores & Medical Stores
Wholesaler
(Medical industry Medical Stores
supply chain)
Wholesaler
Royal Hygiene
(FMCG supply General Merchant Stores
chain)
The large formats like Pantaloon are supplied directly. The smaller retails outlets
have the FMCG and the medical industry supply chain. As of now the FMCG
segment shows faster movement of goods than the medical line. However, in the
long run, based on experience of other manufacturers both lines are expected to
deliver similar sales.
Summary Statistics – Sales
Panty
315mm 284mm 315mm 284mm 230mm liner SP
2008 regular regular UL UL Regular 150
Mean 503,139 553,302 1,090,962 1,118,355 785,147 883,325
Min 18,300 42,200 799,860 773,030 533,840 599,000
1,093,50
Max 917,830 816,730 1,505,320 1,545,100 0 1,223,300
Std Dev 251,638 231,961 241,580 228,717 138,608 202,531
Coefficient
of variation 50% 42% 22% 20% 18% 23%
The demand data shows a high degree of variability. As had been mentioned
earlier, the nature of the product usage does not warranty such variability.
The promoters of the company agree about the stable usage behavior of the
product by end customer. They observed that their demand was coming from the
wholesalers and the manufacturers had made little progress in demand
estimation from them. The large retail buying behavior was much more stable. A
key reason is that for wholesalers in both the chains of medical and FMCG stock
a variety of goods. Sanitary napkins are a very small component of their total
turnover. Besides, they do not have systems and processes that can analyze flow
rates behaviors of various products. Typically the onus of demand management
lies with the manufacturer. Large MNCs like HUL and ITC have developed
sophisticated mechanisms to manage the demand side supply chain. For smaller
manufacturers the movement of goods follows ‘rules of thumb’.
Observations of Manufacturer
The manufacturers are very satisfied by the efficiency and stability of demand
behavior of the large retails (though the pricings involve a lot of negotiations).
The company’s products enjoy the highest shelf space in some of Pantaloon’s
stores in Bengaluru and Delhi. This has earned the manufacturer credibility from
Pantaloon. The purchase strategy has seen focus from senior managers of
Pantaloon for Royal Hygiene’s products.
Capital
Inventory blocked -
Mean Stdev of Lead Safety Safety Carry Finished
monthly monthly Time stdev Service Inventory Inventory Cost Goods
Product demand demand Demand of LTD level (units) (Rs lacs) (Rs lacs) (Rs lacs)
503,1 251,63 251,57 177,93
315mm regular 39 8 0 5 90% 228,033 7.0 1.0 8.0
584,9 174,73 292,47 123,55
284mm regular 52 6 6 7 90% 158,345 4.4 0.0 4.4
1,090,9 241,57 545,48 170,82
315mm UL 63 9 2 2 90% 218,917 7.9 0.0 7.9
1,118,3 228,70 559,17 161,72
284mm UL 56 7 8 0 90% 207,252 6.9 0.0 6.9
785,1 138,59 392,57 98,00
230mm Regular 41 6 0 2 90% 125,594 1.7 0.0 1.7
Panty liner SP 883,3 202,55 441,65 143,22
150 18 6 9 9 90% 183,555 1.0 0.0 1.0
Total 28.9 1.0 29.8
Assumptions – Lead Time– 0.5 month (same as lead time for local suppliers of raw material)
Cost of funds for inventory carry cost = 14% (interest on working capital loan)
Service Level for estimating safety inventory – 90%
As per discussions with the promoter, it did not seem that the firm consciously
categorizes its finished goods inventory as cycle and/or safety inventory. Given
that their lead time to supply is around half month, cycle inventory has been
estimated below.
Mean Mftg
monthly Costs Cost of
demand (Rs per Icycle
Product (units) unit) (Rs lacs)
315mm 503,13 7.7
regular 9 3.06 0
284mm 584,95 8.1
regular 2 2.79 6 Holding Costs for Cycle
1,090,96 19.6 inventory @14% = Rs 8.7 lacs
315mm UL 3 3.6 4
1,118,35 18.6
284mm UL 6 3.33 2
230mm 785,14 5.3
Regular 1 1.35 0
883,31 2.3
Panty liner 8 0.54 8
Total 61.80
Average
Holding
(months Rs
Inventory ) lacs
Raw material (imported ) 3 234.00
Raw Material (local) 1 10.72
Finished goods 1 194.90
As per the company’s figures it has finished goods inventory of almost double
the size of the estimates of the optimal inventory.
1. The study assumes 1 kind of buyer. However, there are 3 distinct lines of
buyers – FMCG line, FMHG & Large retails. Ideally the demand
variability should be estimated separately for each line. Analysis should
also be done by product lines (315 mm or 214 mm etc). However the
detailed data break up was not available.
2. Holding Period – while the lead time to ship the products is about half
month, the firm maintains 1 month of cycle inventory. This is a function of
their sales & marketing strategy. The company has set a target to double
its turnover this year and has been growing at over 50% rates for the past
2 years. They have also gone for aggressive advertising campaigns. In this
scenario the concept of mean monthly demand doesn’t hold for the firm.
It would like to see a significant increment in its sales every month. At
this stage the firm believes that it has to push its products aggressively to
the retailers. They have achieved success in key areas with Pantaloon
stores.
The raw materials for the napkins are all imported. Over 90% of the material
comes from Europe and the rest from China. The packaging material is procured
locally. The table below shows the supply behavior of the imports and locally
procured raw material. Given that the company is young and growing and also
short of funds (the company invited investments from investors last year and is
looking for fresh investments), the lag time on its raw materials supply is a
hindrance that ties up its crucial capital.
Sr. Lead
No Raw Materials Source Time
1 Fluff Pulp Imported 74 days
2 Super Absorbent Polymer Powder Imported 90 days
3 Perforated Film Imported 42 days
4 Air Laid Material Imported 42 days
5 Non Woven Imported 42 days
6 PE Back Sheet Imported 74 days
7 Release Paper Imported 74 days
8 Hot Melt Adhesive Imported 42 days
9 Pouch Film Imported 74 days
10 Adhesive Release Sticker Imported 30 days
Packaging Material
1 Poly Bags Local 30 days
2 Carton Boxes Local 15 days
3 BOPP tape Local 15 days
The tables below show the consumption details and selling price at the unit level.
The company makes 6 types of products and currently has widest bouquet of
products made in India. Whisper, the market leader gets some of its product
lines from China.
Net
Selling Direct Direct Packing
Type of Napkin Price material Labor material
315mm regular 3.40 1.62 0.20 0.15
284mm regular 3.10 1.50 0.18 0.15
315mm UL 4.00 1.73 0.20 0.13
284mm UL 3.70 1.47 0.18 0.10
230mm Regular 1.50 0.61 0.10 0.17
Panty liner SP
150 0.60 0.27 0.06 0.05
The 315mm product categories are the object of the analysis. Focus has been to
study the raw material consumption details of the 2 categories and the impact on
the supply side inventory behavior and the recommended optimal inventory
position given the lead times and the demand for the product. The inventory
analysis has been finally carried over the entire product range.
For simplification, raw materials are broadly classified into three categories –
Raw materials are clubbed on the basis of their lead time. The approximate breakup
composition of their usage across products is 55%, 45%, 10%.
2008
(Rs) R1 R2 R3
3,268,49 2,674,21 594,27
Jan 0 9 1
3,622,03 2,963,48 658,55
Feb 1 0 1
3,397,38 2,779,67 617,70
Mar 1 5 6
3,289,24 2,691,20 598,04
Apr 4 0 4
3,456,73 2,828,23 628,49
May 5 8 7
4,039,53 3,305,07 734,46
Jun 7 6 1
3,393,29 2,776,33 616,96
Jul 6 3 3
3,676,65 3,008,17 668,48
Aug 7 4 3
3,692,18 3,020,87 671,30
Sep 1 6 6
4,755,32 3,890,72 864,60
Oct 8 3 5
3,310,90 2,708,92 601,98
Nov 7 4 3
3,072,49 2,513,86 558,63
Dec 6 0 6
Rs
lacs R1 R2 R3
Total 429.74 351.61 78.14
Mean 35.81 29.30 6.51
Min 30.72 25.14 5.59
Max 47.55 38.91 8.65
Std
Dev 4.5 3.7 0.8
Rs lacs
Capital for
Mean Stdev of Lead Cycle Inventory carry cost &
monthly monthly Time Stdev of Service Safety Holding safety
Product demand demand Demand LTD level Inventory Cost inventory
R1 35.81 4.5 89.53 7.1 90% 9.1 1.27 10.36
R2 29.30 3.7 39.07 4.5 90% 5.8 0.81 6.56
R3 6.51 0.8 3.26 0.6 90% 0.7 0.10 0.84
*EOQ estimates
The company could not provide data on the costs it incurs for ordering. As a
thumb rule, we assume that the firm should purchase 1 month of supplies in a
single order. The estimates of cycle inventory are as follows –
Average
Holding
(months Rs
Inventory ) lacs
Raw material (imported ) 3 234.00
Raw Material (local) 1 10.72
Finished goods 1 194.90
*monthly inventory data was not available
As can be inferred from the calculations above, the company maintains almost 4
times inventory than what seems to be the optimal inventory level. Given the
lead times it has observed from its suppliers, a raw materials inventory over Rs 2
crores is not warranted. Given its cash flows, the company cannot afford to block
its capital in inventory.
The product contribution details based on the variable manufacturing costs and
production quantity per minute are given below –
The 315mm and 284mm regular lines show the highest contribution rate.
However the sales data show them to be ranking 4th and 5th by sales. The net
selling price for the 284mm UL seems to be disproportionately high compared to
other products based on the size and material consumed. The company probably
has not focused on the contribution rate generated by the products. With its
rapid growth plans it would be prudent for the firm to push the products with
the highest contribution rate to improve its bottom line. While the preferences of
consumers should be the primary driver, for new customers, right product
positioning based on bottom line contribution should be adopted. This would
also require co-ordination with the sales and marketing team. As of now the firm
has been advertising the ‘She’ brand as a single entity. The large MNCs have
much more sophisticated campaigns, promoting individual product lines. Royal
Hygiene has to develop its product differentiation strategies to maximize its
profitability.
4.d- Government Contract
The State Governments have recently put a lot of emphasis on feminine hygiene.
The Government has laid put promotional programs to distribute sanitary
napkins free of cost in low income and rural areas.
At this stage the Company has capacity to cater to its private and public sector
demands. However, in near future the company will be forced to rationalize its
production mix. While the Government contracts are expected to reach as high as
20% in the near future, the promoters are hesitant to increase their production
capabilities on the back of Government contracts. In the short term till the private
sector demand mandates a ramp up in production capabilities, the company will
have to streamline its production process to optimize its returns.
• Government Demand
There is a provision for a fixed fee over the production costs. There is a slight
reduction in direct material costs, as the company does not provide the premium
packaging that it provides for the private sector products. The company also
does not incur sales and marketing costs for the Government supply.
As per the contracts, the company won’t earn any contribution over its variable
costs to Government supplies. However, it is able to contribute towards
recovering its fixed costs based on the fixed fee received. Therefore it is
recommended that the firm bids for the contracts based on variable costs of its
cheapest products 230mm & 284mm regular lines (panty liners are not procured
by Government). This would maximize its chances of winning the bids.
5. Conclusion
• Aggregate Sales & Operations Planning – the firm is facing the classic
case of uncertain demand from its wholesalers for products whose
consumption pattern would probably show the least variability in the
market. The inefficiencies in the supply chain lead to sub-optimal
inventory levels & probably also misallocation of sales force in promoting
the wrong products.