Assignment 1: Kanpur Confectioneries Private Limited (A)

A report submitted to
Dr. Gita Chaudhuri

In partial fulfillment of the requirements of the course

Written Analysis and Communication-1

By
Alok Kumar Singh
Section C
Roll No. 155010
On
July 8th, 2015
 Letter of
Transmittal

Ms. Alok Kumar Gupta

Managing Director

Kanpur Confectionaries Private limited

Plot 1, Radha Industrial Estate

Kanpur, Uttar Pradesh

208001

July 2, 2015

Re: Analysis report for the case of Kanpur Confectionaries Private limited

Dear Mr. Alok Kumar Gupta

With reference to your earlier mail, Please find the report suggesting the course of action that KCPL
should take under current conditions. Comprehensive analysis of all possible options has been done
before arriving at the recommendation.

I hope you find the report satisfactory.

Thanks

Sincerely,

Alok Kumar Singh

Senior Consultant

Marvel consulting Services

C-241, Delta-1

1
Noida, Uttar Pradesh

201301

Email:alokkumar.singh.2015@iimu.ac.in

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Executive Summary:

Kanpur confectionaries private limited is a firm dealing in Biscuits manufacture. During its early years of
operation, KCPL has good business in north region. Due to emergence of various competitors in
organized and unorganized sectors, It incurred losses and sale declined. KCPL has offer to work with
Pearson Health Drinks Limited with their own expertise. KCPL has another option to work as a CMU for A-
one confectionaries but that will interfere with their independence. KCPL has the option to accept the
offer, reject the offers and continue on its own, preserve family name and prestige. While choosing among
these options, KPCL has to take into account incurred losses, maximizing profit margin and family name.
The best option will be working with APL and Pearson.

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Situation Analysis:-

Biscuit industry, as we know of, invites comparably lesser investment and an easy entry since the
technology is simple enough to opt.

Kanpur Confectionaries private limited started with its sugar candy business in Jaipur but in due course of
time, KCPL moved to Kanpur and entered into Biscuit business. It was a family business founded by
Mukesh Kumar Gupta and further the legacy is being carried out by his sons. KPCL has its business
basically in North India targeting mainly middle class people and small institutions. By 1970, Mr. M K
Gupta emerged as a leader in candy business in his region.

Since the profit margin in biscuit industry was more as compared to candy business, He launched biscuit
business as an extension to candy and reached the number two position in market with monthly sale of
about 110 tonnes. Prince biscuits held the first position while International biscuits was at number three in
the market. By 1980-81, KCPL’s capacity was doubled from 120 to 240 tonnes /month. The profits
increased to Rs. 2 crores and further to Rs. 3 crores.

Pearson – Pearson Health Drinks Limited, a multinational company was willing to indulge into health
biscuits by outsourcing the supply from small and medium scale units through technical support. KCPL
was offered an off take of 100-125 tonnes /month and a conversion rate of Rs. 3 per kilo along with the
reimbursement of material cost.

Pearson’s offer allowed KCPL to make fine usage of surplus capacity and chances to learn new tools of
quality management. KCPL could use their own expertise for manufacturing though the quality of biscuits
will be inspected before dispatch. This way KCPL could retain their family name and prestige.

A-one Confectionaries private limited and International Biscuits limited were the most dominant in the
industry. Competition for KCPL also increased due to emergence of 70 units in the unorganized sector
between 1975 and 1980. Moreover, eight new units were also set up in the organized sector in UP for
biscuits production. Now it was a challenge for KCPL to carry on the business with maximum return since
they cannot increase the prices to compensate for the rising costs of labor and material. As a result of all
these, KCPL‘s sales declined and it incurred a loss. Same was the case with candy business. Eventually,
they had to close the candy line in 1985.

APL, the national market leader, was willing to expand their supply by promoting contract manufacturing
units (CMU) that would make biscuits for APL as per their specifications. APL had its production plants
mainly in south India and its monthly capacity was 1200 tonnes in 1986-87.

KCPL received the initial offer for the production of 70 tonnes Glucose biscuits per month. Packing
material was supposed to be supplied by APL. Inspection of manufacturing process of KPCL will be done
by APL and possible changes might also be implemented. KCPL had to buy the raw material from
authorized suppliers of APL, although the raw material expenses will be reimbursed. Conversion charges

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of Rs. 1.5 per kilo will paid to KCPL to compensate for labor and other expenses. KCPL was offered to
sign a three years contract and the production order may be increased if APL likes KPCL’s production
output. APL wanted KPCL to send production and consumption report on daily basis.

Problem Statement:-

What measures Mr. Alok should take so as to ensure the best future for KCPL taking into account current
financials and family’s prestige?

Options to be considered:

Option1: KCPL agrees to work with Pearson as well with APL.

Option 2: KCPL works with Pearson’s offer only to retain independence and to preserve family’s name &
prestige.

Option3: KCPL tries to analyze the possible factor for its fall and works on them to get better returns.

Option4: KCPL works in collaboration with APL and applies those techniques in their manufacturing.

Criteria:-

 To minimize the losses and stabilize KCPL’s condition.

 To retain an optimum level of independence for KCPL.
 To strengthen the MKG brand and to preserve family’s prestige.

Evaluations of options:

i) Working with Pearson and accepting APL’s offer to become a CMU.

This will help KCPL to grow fast since they wouldn’t have to look for advertisement cost as well. KCPL will
have a broader perspective to look into working will APL. It can get maximum return of 78000. Although
KCPL has to compromise with independence and family name but this option will offer them the best
possible way to compensate losses and increase margins.

ii) Working with Pearson alone

This will allows KCPL to retain independence and preserve family legacy, but the losses would not be
covered and that cannot promise increase in returns. Going with option may offer liberty but that would
not cover the costs. Moreover, Health biscuits was not a success earlier.

iii) KCPL tries to look into the reason for losses and refines them

KCPL has tried to make changes earlier as well to promote the sales through making changes in
operations. This option will enable KPCL to work independently and building the family brand a success.
But this option will not guarantee loss minimization.

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iv) KCPL works with APL only

Consideration of this option will surely result in compromise with independence. But this may be seen as
a way to compensate losses and increase margin. APL has the latest technology and the cost for
advertisement will be borne by APL. But KCPL has to follow the norms laid by APL and the family name
will be lost.

Recommendation:-

Taking into account all the options, Mr. Gupta is recommended to go with Pearson’s and APL’s offer since
this will prove to be the best way to minimize losses incurred and will stabilize the firm’s condition.
Collaboration with Pearson and working as a CMU for APL will account to higher profit margin. Surplus
production capacity will be utilized which will lead to higher production. Pearson is offering a conversion
rate of Rs. 3 per kilo along with reimbursement of cost of materials and APL is offering a conversion rate
of Rs. 1.5 per kilo which will cover the labor costs and other expenses. Working with Pearson and APL will
also offer opportunities to learn fresh techniques for quality management. Option 1 is recommended.

Action Plan:

KCPL should accept APL’s offer to act as a contract manufacturing unit and should inform Pearson about
the same. KCPL should utilize the surplus capacity for maximum production and look forward to maximize
the margin.

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Exhibits:

Exhibit 1: Income Statement of KCPL with Pearson engagement and accepting APL’s proposal

Items Units Value

Overall Net Profit or Loss from KCPL and Pearson Combined

Production (in rupees) -6000

Production for APL (in tonnes) 70

Revenue

Conversion rate from APL (in rupees per kg) 1.5

Total Revenue from 70 tonne of production (in rupees) 105000

Expenses

Casual Labour Cost per tonne (in rupees) 300

Total Labour Cost for 70 tonne of production (in rupees) -21000

Profit or loss from APL proposal (in rupees) 84000

Overall Profit or Loss from KCPL, Pearson and APL combined operation (in rupees) 78000

Exhibit 2: Income statement of KCPL in collaboration with Pearson:

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 Items Units Value

Net Profit or Loss from Exhibit 1 (Profit/Loss Statement of KCPL) (in rupees) -141000

Production for Pearson (in tonnes) 50

Revenue

Conversion Rate (in rupees per kg) 3

Total Revenue for 50 tonne of production (in rupees) 150000

Expenses

Casual Labour Cost per tonne (in rupees) 300

Total Casual Labour Cost for 30 tonne (in rupees) -15000

Profit or Loss from Pearson Proposal (in rupees) 135000

Overall Net Profit or Loss from KCPL and Pearson Combined

Production (in rupees) -6000

Exhibit 3: Income Statement of KCPL without accepting any offer

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Items Units Value

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Revenue Collected from Sales

Sales of biscuits per Month (in tonnes) 120

Price of biscuits per tonne (in rupees) 18100

Total (in rupees) 2172000

Expense Incurred for Production

Maida Expense

Maida required per tonne (in kg) 750

Cost of Maida per kg (in rupees) 10

Total Maida Expense for 120 tonne of production (in rupees) -900000

Expenses in Vanaspati

Vanaspati required per tonne (in kg) 150

Cost of Vanaspathi per kg (in rupees) 36.67

Total Vanaspati Expense for 120 tonne of production (in rupees) -624000

Sugar Expense

Sugar required per tonne (in kg) 200

Cost of sugar per kg (in rupees) 12

Total Sugar Expense for 120 tonne of production (in rupees) -288000

Preservatives and Packaging Costs per tonne (in rupees) 1000

Total Preservative and Packaging Expense for 120 tonne of production (in rupees) -120000

Casual Labour Cost per tonne (in rupees) 300

Total Casual Labour Expense for 120 tonne of production (in rupees) -36000

Fixed Expenses Incurred* (in rupees) -345000

Total Expense (in rupees) -2313000

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 Net Profit or Loss (in rupees) -141000

Assumption:

*Fixed Expenses Incurred includes Permanent Salary bill per month, Interest per month and other fixed
commitment. Values of these costs are not affected by any business engagement.

*Overall Capacity of production of KCPL is assumed 240 tonnes.

Exhibit 4: Income Statement of KCPL in collaboration with APL only

Items Units Value

-
Net Profit or Loss from Exhibit 1 (Profit/Loss Statement of KCPL) (in rupees) 141000

Net Profit or Loss from Exhibit 3 APL Proposal (in rupees) 84000

Overall Profit or Loss from Discontinuing Pearson and Accepting APL

Proposal (in rupees) -57000

Assumption:

*Overall Capacity of production of KCPL is 240 tonnes. Out of which 120 tonnes capacity is used for
business engagements.

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