KAMDHENU DAIRY Why do you maintain that FA milk is more profitable than any of one other product you

produce? Professor Puranik asked Mr. Mathias, the general manager of the Kamdhenu dairy. Mr. Mathias replied, This is because we incur very little overheads for this p roduct as compared to others; for instance we have no advertising or other promotional expenditure for this product. The production process is very simple and the product has assured success. However, you can study our costs for all the products we produce and satisfy yourself about the validity of my statement. I am sure you will come to the same conclusion as I have reached after many years of experience in the industry. This was the discussion that took place between Mr. Mathias and two professors of a leading Management institute. In April 1964 the two professors visited the dairy to study the problems it had faced concerning the supply of FA milk to the state Government of a large state in Western India. The Kamdhenu Dairy was located in Sanand, a small town on the railway line connecting loading cities in Western India. The dairy was started mainly to provide better marketing facilities to the farmer for marketing the milk they produced. In the year 1945 the state government of western state started a milk scheme for the supply of milk in a major city of the state. According to this scheme, milk was to be collected from the Kheda district in the city mentioned above. During the initial stages of the scheme the collection of milk was left to collectors. And private diaries with the result that very little of the increase in the price offered by the state government was received by the farmers. In order to get the benefit of increased prices, the farmers decided to start a union of milk producers and a central processing unit at Sanand. It was decided that this union would collect the milk from the farmers, pasteurized it and sell it to the State Government. A building and some old machinery belonging to the government of India was leased by the union, top start a pasteurizing unit at Sanand. This marked the beginning of the Kamdhenu Dairy. From June 1948, the dairy started pasteurizing about 250 litres of milk per day. The cooperative movement amongst milk producers became very popular, and the organization grew at a very rapid rate. In 1953 it was found that the state milk scheme could not accept all the milk collect by the union during the winter months. This was because the state scheme required that the state should be supplied more or less constant quantity of milk, while the production of milk in the Kheda District varied widely between the summer and the winter seasons. In winter the production was 250 % of the summer production. This left the Kamdhenu dairy with two alternatives: 1. Either to restrict drastically the collection of milk during the Winter months; or 2. To find alternative ways of consuming the surplus milk collected in winter months. The first alternative was not satisfactory, as the farmers wanted to be assured of a year round market for all he surplus milk they desired to sell. In order to assure the farmers a year round market, the management of Kamdhenu Dairy decided to construct a dairy factory to convert milk into milk products. It obtained assistance from UNICEF and the Government of New Zealand and with the investment of Rs. 50 lakhs a factory was put into operation from October 1955.

The opening of the dairy gave great incentive to milk production in the Kheda district. And the union was able to procure more and more milk each year. The progress of the union after the new factory was built is illustrated in Exhibit 1. The milk collected by the Kamdhenu Dairy was converted into the following main products: 1. FA milk for the state Milk Scheme. 2. Butter 3. Ghee 4. Skim Milk powder 5. Baby Food 6. Cheese Exhibit 2 gives the production processes for these products and the quantities in which they were produced during the financial year 1963-64. In early 1964 Mr. Shrivastava, the Asst. General Manager of the Kamdhenu Dairy attended a management development Programme organised by the management Institute already mentioned above. During this programme he discussed with a senior Professor of the Institute, the problem he faced in deciding the quantity of the FA milk that should commit to supply the state milk scheme. The difficulty had arisen because of the variation and uncertainty involved in the procurement of raw milk. The Professor asked him to contact Professors S. Purnik and D.K. Mehta, who were interested in problems of this nature. In April 1964 the two Professors visited the Kamdhenu Dairy and met Mr. Mathias and Mr. Shrivastava to understand the nature of the problem. Mr. Shrivastava explained the problem as under: Milk supply from our societies is at its minimum in the month of June and reached its maximum in December-January. Though this variation is known, it is impossible to predict with certainty the quantity of milk that we will be able to procure in the lean and the peak periods. Ideally we would like to vary our supply of FA milk to the state Milk Scheme according to the variation of our milk procurements. Unfortunately our contract terms do not permit us to do so. According to the contract we have to supply them with more or less a uniform quantity of FA milk throughout the year. In case we fail to supply the requisite quantity we have to pay a penalty at the rate of 8 Rs. for every litre that falls short of the contracted quantity. You must remember that FA Milk is the most profitable product that we make. In case we contract too little too small a quantity with the state because of the fear of not being able to supply it in summer we lose profit. On the other hand if we contract too large a quantity we have to pay a penalty. In a view of this, I would like to know what is the optimum quantity that I should settle for.

At this point, Professor Puranik asked Mr. Mathis the question stated at the beginning of the case. As the question of profitability of the various products was very important in this problem, the two professors decided to examine the cost structure of the various products and ascertain the profitability of each product. Mr. Mathis suggested that Mr. Shrivastava, Mr. Ramaswami, the accountant, and the two Professors get together, so that Mr. Ramaswami could explain the cost structure of various products. At a subsequent meeting, Mr. Ramaswami presented the statement given in Exhibit 3 and made the following comments. We find that our contention that FA milk is the most profitable product is borne out of facts. You will notice that in other products, except for whole milk powder and FA milk, we are either breaking even or losing money. Consider cheese for example, Mr. Shrivastavas favourite pro duct. In estimating the profitability of this product, I have not accounted for the expenditure that we incurred for development of this product and yet we are losing heavily on cheese, I am wondering why we should not drop this product. As for baby food, we do not make any money, but as Mr. Mathias says. We are a cooperative society and must look for the welfare of people in general, and should not merely concentrate on profit. For your information, this is our prestige product. However, I must say the concept of defining alternatives as I have used in the statement was something which I learned from discussions with the professors. Formerly we use to evaluate profitability of products individually rather than of combinations which is the correct way of looking at things from a technical as well as accounting point of view. At this point, Professor Puranik commented, we are glad that you have started considering product combinations rather than i ndividual products. However, we are not sure as to how far the cost you have worked out is relevant for deciding the cost profitable product mix. Mr Shrivastava said, Mr Ramaswami, the management bous always talk of relevant costs. At the management development programme they use to tell us that while choosing amongst the alternatives, one should consider only the costs that had to be incurred in future and not worry about the sunk cost. As they said, let bygones be bygones. I do not see how you can be wrong in your findings. You have not missed any relevant costs. However, let the professor scrutinise the cost statements and advise us. He said further to the professors I am interested in finding out the optimum product mix. Today we are enjoying a sellers market, and have no difficulty in selling all we produce. Our whole milk powder is purchased by the government of India for defence needs, our cheese has good demand and I can hope to sell cheese at a rate of thousand tons per year without any difficulty. In short, marketing is no problem for the present and I think the conditions will remain the same for some time to come. Our only constraints are production capacity (listed in Exhibit 5), the availability of raw milk and contractual obligation of supplying FA milk to state milk scheme at a rate of 75,000 litres a day. You may perhaps be aware that we have a big programme for expansion. We would like to know the direction in which we should expand. The professors were considering what they should do next.

Table illustrating Number of societies Number of farmer progress made by the members of the union from 1955-56 society to 1962-63 Year ending 31st march Position before new dairy was built 1955-56 64 22,828 Position after new dairy was built 1956-57 107 26,795 1957-58 130 29,003 1958-59 168 33,068 1959-60 167 40,181 1960-61 195 40,500 Position after the dairy was expanded for baby food and cheese 1961-62 219 46,400 1962-63 254 58,400

Share capital of the union (Rs)

Quantity of milk collected (Liters)

2,17,400 3,61,500 3,93,900 4,73,500 5,67,100 7,41,100 7,48,700 8,19,200

1,11,36,343 1,41,64,000 2,11,56,400 2,75,57,800 2,29,27,000 2,35,13,000 6,53,98,429 5,04,17,8112