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Analysis: Kanpur Confectioneries Private Limited

Article · March 2014

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Dipak Singh
Shiv Nadar University
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Summary

The case is about the Kanpur Confectionaries Private Limited (KCPL) a family business
located in Kanpur, UP and started by Mohan Kumar Gupta in 1945, now the company is
looked after three of his son. The KCPL is Glucose manufacturing company and is known for
its good quality, crispness and affordable price. In 1973-74, Glucose biscuit were the growing
segment in the biscuit industry. The KCPL reached second position in the market with a
monthly sale of 110 tonnes. In 1980-81, KCPL doubled its capacity to 240 tonnes per month
from 120 tonnes per month. The turnover was Rs. 2 crores in 1979-80 and Rs. 3 crores in
1983-84. But its sales declined between 1983-84 and 1986-87, the capacity was rendered
surplus and incurred loss.

In May 1986, KCPL signed agreement to use its surplus capacity of 50 tonnes per month,
with promise off take of 100 to 125 tonnes in future. In 1987, KCPL received proposal from
APL, the national leader in the biscuit industry, for the supply of 70 tonnes per month. The
APL will also inspect the production process of the KCPL and recommend changes in the
processes and equipment, if needed. These changes has to be carried out by KCPL at its own
cost. APL will post quality control officer at the KCPL plants to monitor the quality. It would
also supply “APL secret ingredients” but KCPL will have to buy the raw material from the
authorised supplier of APL.

The dilemma faced by the KCPL is to accept the proposal of the APL or not. The proposal
will be judged based on the below criteria:
1. Effect on the profit of KCPL after signing of deal with APL
2. The process improvement and the technical expertise APL will bring with it.
3. Family image and long term goal of KCPL to become national player

After evaluating the APL proposal on all the three criteria, it is recommended that KCPL
should sign the agreement with APL. This way the KCPl will use its surplus capacity and ripe
the benefit from APL for its expertise in managing large company, effective production
process and technical expertise.

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Situation Analysis:

The Kanpur Confectionaries Private Limited (KCPL) was a family business started by Mohan
Kumar Gupta in 1945, and was the second largest biscuit manufacturing company in the
north India. The KCPL was manufacturing glucose biscuit using maida, sugar and Vanaspati
which they bought from the local market. In the year 1980-81 KCPL doubled its capacity
from 120 tonne to 240 tonnes per month. The turnover was Rs. 2 crores in 1970-81 and Rs. 3
crores in 1983-84. But

The glucose biscuit were the growing segment of the biscuit industry. The KCPL was well
known brand in the north India for selling high quality and affordable glucose biscuit. Since
the product was not unique and also the entry and exit from the biscuit manufacturing
industry was very easy as not much skilled labour was required and also the cost of
production was less. The KCPL was not able to withstand the competition and its sales
declined between 1983-84 and 1986-87, the capacity was rendered surplus and incurred loss.

The KCPL was making losses due to two factor:

1. Organised Sector: During the period from 1975 to 1980, 8 new units were setup in the
UP to produce biscuit. KCPL was not able to compete with them due to rising cost
and also could not increase the cost of its biscuit.
2. Unorganised Sector: During the same period, 70 new units came up, selling
unbranded biscuits or selling them with brand names sounding similar to the leading
brands.

The market was also changing, the cost of raw material was increasing along with the labour
cost. In 1986 KCPL signed agreement with Pearson with initial order of 50 tonnes per month
supply of biscuit with promised off take of 100 to 125 tonnes per month with conversion rate
of Rs. 3 per kilo after reimbursing fully the cost of material.

A-One Confectionaries Private Limited (APL), national leader in biscuit industry, offered to
place initial order for producing 70 tonnes of biscuit per month with conversion rate of Rs.
1.5 per kilo to KCPL. The initial contact was for three years. The APL would provide
technical expertise, inspect the production process and recommend change in the process and
equipment, these changes would be carried out by the KCPL at its own cost. The APL would
place post two quality control officer at the KCPL plants. The APL would also share its

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“APL secret ingredient” but KCPL would be required to buy the material from one of the
authorised suppliers of APL.

Problem Statement:

To accept the contract agreement from APL or not?

Options:

1. Accept the offer of the APL

2. Reject the offer of the APL

Criteria for Evaluation:

1. Effect on the profit of KCPL after signing of deal with APL

2. The process improvement and the technical expertise APL will bring with it.
3. Family image and long term goal of KCPL to become national player

Evaluation of Options

1. If KCPL accept the offer of the APL, it will use 70 tonnes of its surplus capacity.
Total Capacity= 240 tonnes
KCPL production = 120 tonnes
Capacity used for Pearson =50 tonnes
Unused Capacity = 240-120-50 = 70 tonnes
Fixed Costs:
Permanent salary bill per month = Rs. 275,000
Interest per month = Rs. 10,000
Other Fixed Commitments = Rs. 60,000
Total Fixed Costs = 275,000 + 10,000 + 60,000 = Rs. 345,000

Raw Material and Labour Cost:

Cost of maida = 750*120*(500/50) = Rs. 900,000
Cost of Vansanpathi = 150*120*(520/15) = Rs. 624,000
Cost of sugar = 200*120*(1200/100) = Rs. 288,000
Cost of preservatives and Packaging = Rs. 120,000
Casual labour charge = Rs. 36,000
Total cost = Rs. 1,968,000

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 Revenue:
Sales per month = 120 tonnes
Price per tonne = Rs. 18,100
Total sales = Rs. 120*18100 = 2,172,000
Profile = Revenue – Raw Material & Labour Cost – Fixes Cost
= Rs. (2,172,000 - 1,968,000 - 345,000)
= Rs. – 141,000

Profit from APL deal:

Percentage per month production for KCPL = 120/190*100 = 63.16

Percentage per month production for APL = 700/190*100 = 36.84
Fixed cost per month for KCPL = Rs. 217,902

Variable Cost for KCPL:

Cost of maida = 750*120*(490/50) = Rs. 882,000
Cost of Vansanpathi = 150*120*(500/15) = Rs. 600,000
Cost of sugar = 200*120*(1150/100) = Rs. 276,000
Cost of preservatives and Packaging = Rs. 120,000
Casual labour charge = Rs. 36,000
Total Variable Cost = 1,914,000
Fixed cost per month for APL = Rs. 127,098

Variable Cost for APL:

Cost of maida = 700*70*(490/50) = Rs. 480,200
Cost of Vansanpathi = 140*70*(500/15) = Rs. 326,666
Cost of sugar = 190*70*(1150/100) = Rs. 152,950
Reimbursement cost of the material from APL= Rs. 959,816
Casual labour charge = Rs. 21,000
Conversion charge per kilo = Rs. 1.5
Revenue from 70 tonnes = 1.5*1000*70 = Rs. 105,000
Cost to APL for conversion charges = 127,098 + 21,000 = Rs. 148,048
Profit from APL per month = 105,000 + 148,000 = -43,098
Profit from KCPL per month = 2,122,000 – 1,914,000 – 217,902 = Rs. 40,098
Total profit per month = 40,098 – 43,098 = Rs. -3000

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 Loss of = Rs. 3000

Profit from Person:

Raw Material and Labor Cost:

Cost of maida = 750*50*(500/50) = Rs. 375,000
Cost of Vansanpathi = 150*120*(520/15) = Rs. 260,000
Cost of sugar = 200*120*(1200/100) = Rs. 120,000
Cost of preservatives and Packaging = Rs. 50,000
Casual labour charge = Rs. 15,000
Conversion rate paid by Pearson = 3 * 1000 * 50 = Rs. 150,000
Profit to KCPL due to Pearson = 150,000 – 15,000 = Rs. 135,000
Total profit to KPCL = 135,000 – 141,000 = Rs. -6000
Loss = Rs. 6000

2. The process improvement and the technical expertise APL will bring with it.

The APL will inspect the KCPL and recommend changes in process and equipment .APL
will also provide technical expertise and process improvement from the APL, which may
help KCPL to reduce its cost and improve productin process in the long run.

3. Family image and long term goal of KCPL to become national player

The Mohan Kumar had the vision of emerging as the leading national brand, the deal with the
APL will help the KCPL to again access to others regional market and learn better
management process to manage the family business.

Recommendation

The KCPL should go ahead and sign the contract manufacturing agreement with the APL and
ripe the benefit from APL for its expertise in managing large company, effective production
process and technical expertise. If KCPL delay its decision, it may lose out the opportunity to
others companies which were in talk with APL.

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