WRITTEN ANALYSIS AND COMMUNICATION-I

Kanpur Confectioneries Private Limited (A)

Assignment 2

Submitted to

Dr. Gita Chaudhuri

By

Pranav Gupta
Pradeep Yadav

On

August 19, 2012

INDIAN INSTITUTE OF MANAGEMENT

UDAIPUR
Executive Summary

KPCL is incurring losses in its biscuits business because of high competition from organized and
unorganized biscuit sector. To cover some part of the losses and to use its surplus capacity, it has
signed a contract of 50 tonnes per month with Pearson. It also has an offer of manufacturing 70
tonnes per month for APL. As per cost analysis of this contract, it will not be profitable for
KPCL. On evaluating the options it is recommended that KCPL continues its agreement with
Pearson as it is cost beneficial. It should also take actions to strengthen its own brand ‘MKG’.

Word Count-100
 Table of Contents

Situation Analysis 1
The Problem 1
Options 1
Criteria of Evaluation 2
Evaluation of Options 2
Recommendations 3
Action Plan 3
Exhibits 4
Situation Analysis
Kanpur Confectionaries Private Limited (KCPL) started as a candy manufacturing unit in Rajasthan in 1945. Due to
increased competition from the local units they suffered financial losses and were forced to shift their operations to
Kanpur in 1954. In 1970 KCPL decided to diversify its business into making biscuits because of high growth rate of
biscuits and lucrative return on investments.

By 1973-74 KCPL emerged as 2nd largest player in northern region with its major competitors as Prince Biscuits,
International Biscuits and A-One Confectionaries Pvt. Ltd. (APL).

Between 1975 and 1980 large numbers of units in the unorganized sector were started which poor quality standards,
low input costs and they had evaded taxes which helped them to keep their prices low. KCPL was a quality
conscious company; it was unable to compete on prices with the small players. Moreover KCPL was unable to
increase their prices since its customers were middle income groups from urban and semi-urban areas and they did
not have a premium image. This led to decline in sales between 1983-84 and 1986-87 and it incurred a loss. Now
KCPL’s capacity is 240 tonnes per month, of which only 120 tonnes per month is in use. So, its capacity was
rendered surplus.

There was tough competition in candy business also and because of competition from both organized and
unorganized players the margins were on decline. So, KCPL closed down the candy business.

In lieu of the happenings KCPL went into contract manufacturing with Pearson for biscuits manufacturing. Under
the agreement Pearson were giving them a conversion charge of Rs.3/kg apart from reimbursement of raw material
costs with an assured business of 50 tonnes/month in the first year and 100-125 tonnes/month later on. But Pearson
was unable to do well in the market as its product was seen as high priced and it was competing with APL, which
was an established player.

KCPL was then offered a contract manufacturing agreement by APL which assured them a business of 70 tonnes /
month for three years with a conversion rate of Rs.1.5/kg. It was also proposed that APL will provide KCPL with
technical expertise. Under the agreement KCPL was required to buy the raw materials from authorized suppliers of
APL and APL will have control over quality and daily production and raw material consumption.

Problem Statement
What future course of action must be employed by KCPL which helps in improving their profits and brand image in
the long run?

Options
 KCPL can continue with the contract manufacturing agreement with Pearson without entering into
agreement with APL
 KCPL can enter into contract manufacturing agreement with APL
 KCPL can continue their operations with only their brand without becoming contract manufacturer of any
of the larger firms

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Criteria
Various criteria in order of their priority are as follows:

 Cost benefits: The option chosen by KPCL must be profitable and must provide long term cost benefits to
the firm.
 Brand Image: The chosen option must help KCPL to make sure that their own brand image is not lost and
they are able to competitively operate in the market.
 Autonomy: The chosen option must ensure that their autonomy regarding the operating of business is not
lost.
 Technological expertise: In the long run KCPL must be able to gain technological expertise for betterment
of their operations.

Evaluation of options
Option 1: Continuing agreement with Pearson

Criteria 1: Exhibit 2 shows that the there is a profit of Rs.20417 per month gained by getting into contract
agreement of 50 tonnes per month with Pearson which will help in covering some of their losses.

Criteria 2: Continuing with agreement with Pearson for contract manufacturing will not hamper their own brand
building because Pearson is a new player in the market and is in competition with APL, which will help KCPL to
gain expertise about brand positioning that will help them in the long run.

Criteria 3: Since Pearson is involved in quality assurance of the products manufactured by KCPL and they do not
have any say in the supplier selection or other manufacturing decisions hence the autonomy of the owners over the
business will not be lost.

Criteria 4: KCPL does not currently have any agreement with Pearson that there will be technology transfer and
hence they will not gain much technology expertise by continuing agreement with them.

Option 2: Signing Agreement with APL for contract manufacturing

Criteria 1: Exhibit 3 shows that there is loss of Rs.76417 incurred by KCPL by getting into contract manufacturing
agreement with APL and hence it will inflate the losses that are being currently suffered by KCPL.

Criteria 2: Signing agreement with APL will hamper their autonomy because apart from quality control KCPL
under the agreement is bound to purchase raw material from the authorized suppliers of APL.

Criteria 3: By becoming the contract manufacturer for APL, KCPL will not be able to put in the required resources
to market their own brand and it will be difficult for them to compete with APL for market share.

Criteria 4: Under the agreement there will be technology transfer from APL to KCPL which will help KCPL in
gaining the required technology expertise which will help them in improving their operations in the long run.

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Option 3: Continue their own operations

Criteria 1: Exhibit 1 shows that by continuing with their own operations only KCPL are suffering a loss of
Rs.141060/month and the kind of competition it is facing it will not be able to turn losses into profits.

Criteria 2: Continuing their own business operations owners have the full autonomy to take the necessary decisions.

Criteria 3: They can wholly concentrate on their own brand building and competing with the major players in the
market.

Criteria 4: By continuing their own operations KCPL will not be able to gain the technological expertise that is
required to be differentiating factor.

Recommendations
Taking into consideration the order of priority of criteria it is recommended that KCPL continues its agreement of
contract manufacturing with Pearson as it cost beneficial, it will not hamper their brand building and the owners will
have complete control on the business decisions.

Action Plan
Following action plan can be adopted for future growth of the business:

 Continuing with contract manufacturing agreement with Pearson.

 In the long run more resources need to be put in for their own brand building.

Word Count: 1059

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Exhibits
Exhibit 1

KPCL Cost analysis/Month

Total Monthly Sales 120 tonnes  

Price per tonne(in Rs) 18100  

Sales revenue generated per month 120*18100 2172000

Raw Material Cost and other costs/Month in Rs):    

Maida 750*120*10 900000

Vanaspathi 150*120*34.67 624060

Sugar 200*120*12 288000

Preservations & Packing 1000*120 120000

Casual Labour 300*120 36000

Permanent salary   275000

Interest   10000

Other fixed amount   60000

Total Cost/Month   2313060

Profit/Loss per month   -141060

Exhibit 2

Pearson Contract Cost Analysis/Month

Conversion Rate   Rs. 3/kg

50000
Units manufactured for Pearson  
kg

Conversion revenue 3*50000 150000

Total cost per month(KPCL data)   2313060

Less Interest   10000

Less fixed cost   60000

Raw material and wages Cost/tonne for manufacturing 120 tonnes 18692.1
(2313060-10000-60000)/120
of KPCL products 7

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 934608.
Cost for manufacturing 50 tonnes 18692.17*50=
3

Raw material cost for 50 tonnes :    

Maida 750*50*10= 375000

Vanaspathi 150*50*34.67= 260025

Sugar 200*50*12= 120000

Preservatives and Packing 1000*50= 50000

Total   805025

129583.
Cost for 50 tonnes after reimbursement of raw material cost 934608.3-805025=
3

Final profit/loss after reducing final cost of reimbursed 20416.6

150000-129583.3=
material cost 7

Exhibit 3

APL Cost Analysis

Units manufactured for APL   70 tonnes

Sales Revenue (Conversion rate-Rs 1.5/kg) 70*1.5*1000= 105000

Raw Material costs    

Maida 700*70*9.8= 480200

Vanaspathi 140*70*33.33= 326634

Sugar 190*70*11.5= 152950

Preservatives and packages 1000*70= 70000

Total   1029784

Casual Labour 300*70= 21000

Permanent salary corresponding to 120 tonnes   275000

Permanent salary corresponding to 70 tonnes   160417

Total temporary and permanent labour cost   181417

Net profit /loss after material reimbursement 105000-181417= -76417

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