1 Case Study - Analytics

TearyEyed: Packaging Operations Expansion Assessment

Case Introduction

TearyEyed Group of Companies, an Indian based Fast Moving Consumer Goods (FMCG) company
focusing on food and masala products, is looking at a pan-India expansion in the next two years. “We’re
expecting our turnover to reach INR 2000 crore in FY2018”, Mr. Kunal Agrawal, the promoter of the
company, told Business Times.

TearyEyed (TE) currently has a presence across 12 states in the country, including all the southern states
and Maharashtra, West Bengal, Madhya Pradesh, Uttar Pradesh, Jharkhand, Bihar, Orissa and New Delhi.
It made its presence felt in most of the North Indian states in the last two years.

While maintaining the quality of the inputs, the company had to continuously innovate its manufacturing
processes, including but not limited to, production and packaging. "There was no specific machinery for
the production of spices and spice blends earlier. Through experience and suitable changes in the process,
we were able to produce and package spices and spice mixes that retained the aroma and flavour," says
Mr. R S Sodhi, the VP of Manufacturing. "We had to arrive at the perfect blend of tradition and
technology", he said. The company also has a packaging firm which caters to all its present FMCG
business.

"We are in 12 states now and our plans are to have a pan-India presence by 2019. We will complete our
present capacity expansion programs for market expansion by November this year" Mr. Sodhi claims.

The company is also planning to enter a new category of ready-to-use pastes which includes Meal Mixes
and Masala Pastes among others. These products are growing in popularity amongst the Gen-X and Gen-
Y youngsters, who have busy work lives and are looking to minimize cooking times. These products are
also popular amongst the increasing number of young Indians moving abroad either for higher studies
or work purposes.

The company expects to enable this market expansion through an investment of INR 100 crore, which is
being spent on multiple projects getting completed by FY 2017-18. The capacity expansion plans under
progress include setting up of an R&D centre with an investment of INR 10 crore. The focus will be to
bring in changes to the product portfolio to suit the taste palette of Indian diaspora spread out
worldwide and ensure compliance with global FDA regulations. The company is also completing
expansion of its manufacturing facilities for grinding speciality spices with a budgetary spend of INR 28
crore, to support its market expansion. In the later part of this year, the company has planned an
investment of INR 15 crore for a cold storage facility. With big plans and huge investments planned for

TearyEyed: Packaging Operations Expansion Assessment Page 1 of 5

 2 Case Study - Analytics

the subsequent years, TearyEyed is also in the process of evaluating their packaging strategy to make it
more streamlined and cost effective.

Packaging Operations Expansion

In its current packaging operations, TE operates with 2 plants that are owned by the company and 10
Contract Packer (CP) plants. In the CP plants, the infrastructure is either owned by CP or rented from a
3rd Party. The factories are operated by the CP who occupies the factory. TE invests in machinery & pays
for the regular procurement of spares, but it is the CP’s responsibility to manage the maintenance of
machines. For the factories owned by TE, the maintenance cost is borne by the company.

CP contracts and manages the labour. Raw materials & Packaging materials are sourced by TE and are
supplied to CP for storage and handling as per TE standards. CP executes business processes defined by
TE. Manufacturing technology and product specifications are defined by TE and executed by CP. CP is
responsible for compliances and its execution defined by TE and the law. TE is only an influencer and CP
is held responsible for any non-compliance.

For TE’s entry into the Ready-to-Use category, the company needs to set up a new Packaging facility. For
the growth of TE’s operations, the organization’s primary consideration is to minimize cost through both
capital investment and cash flow. In order to assess the same, TE has shared some data for analysis of
different options available for them. Based on the direction and the indicators, TE is looking for a
recommendation.

Problem Statement & Exhibits

In order to expand their packaging operations, TE has the following options:-

Option A: TE owns the manufacturing unit and is responsible for everything

Option B: Contract Packer to provide the manpower. TE to own infrastructure, machinery, inventory,
business process, manufacturing technology & product specification, factory compliance and sales

Option C: Contract Packer would provide the infrastructure, which it could own or lease as well as
manpower. In this case, Factory compliance will also be CP’s responsibility. TE will own/ be responsible
for everything else

TearyEyed: Packaging Operations Expansion Assessment Page 2 of 5

 3 Case Study - Analytics

Option D: Contract Packer would provide the infrastructure, machinery, manpower, and inventory. In
this case the Factory compliance will also be their responsibility. TE will own/ be responsible for
everything else

Manufacturing
Business Technology Factory
Options Model Infrastructure Machinery Man Power Inventory Process & Product Spec Compliance Sales
Option A Own Manufacturing Yes Yes Yes** Yes Yes Yes Yes Yes
Option B Contract Packer A (CP-A) Yes Yes No Yes Yes Yes Yes Yes
Option C Contract Pakcer B (CP-B) No* Yes No Yes Yes Yes No Yes
Option D Contract Packer C (CP-C) No No No Yes Yes Yes No Yes

YES-Ownership of Company
NO-Ownership of Contract Packer
** only fixed Manpower is on company roles
* CP will either own infrastructure or lease it from a 3rd party

Exhibit 1: Ownership variations amongst different options

The total required plant capacity is 20 Lakh kg per month. The land rate available to TE is INR .40
(Crore/acre). The total land area required is 232834 sq. ft. The land to building ratio is 2.0, leading the
built up area to 116417sq. ft. Total land is available at a cost of INR 2.14 Crore. The building construction
cost is INR 1100 per sq. ft. leading to a total construction cost of INR 12.8 Crore. The total plant and
machinery cost is INR 23.6 Crore.

Financial Comparisons
Asset Costs
Land Rate (INR Crore/Acre) 0.4
Ratio of land to built-up area 2
Total land area (Sq. Ft.) 232834
Land Cost (INR Crore) 2.14
Building Construction cost (INR per Sq. Ft.) 1100
Plant & Machinery Cost (INR Crore) 23.6
Rentals (per annum)
Land & Building Rentals (INR per Sq. Ft.) based on the built up area 120
Plant & Machinery Rental (% of Plant & Machinery Cost) 25%
Maintenance Cost (per annum)
Land & Building Maintenance (INR Crore) 0.3
Plant & Machinery Maintenance (INR Crore) 1.42
Exhibit 2: Costs associated with factory expansion

If the land and building is rented, it is available at INR 120 per sq. ft. per annum on the built up area. The
plant and machinery is available for rent at 25% of the plant & machinery cost. Land and building

TearyEyed: Packaging Operations Expansion Assessment Page 3 of 5

 4 Case Study - Analytics

maintenance cost is about 2% of the land and building cost i.e. INR 30 Lakh. The plant and machinery
maintenance is INR 1.42 Cr.

Incremental fixed cost for hiring the manpower by TE is 50% greater than manpower hired by CP. The
annual Fixed Manpower in case TE owns it is INR 5.06 Crore. CP margin on fixed cost is 15%. The annual
variable cost in all scenarios is INR 4.92 Crore. CP margin on variable cost is 20%, however incremental
variable cost when TE owns it is 0%.

Plant Fixed vs Variable Cost

Incremental fixed manpower for Fixed cost of own manpower higher due to higher cost
own vs CP model 50% of people
Contract Packer margin on fixed cost 15%
Contract Packer margin on variable cost 20%
Incremental Variable cost for own vs CP Contract labour rate to be assumed to be minimum
model 0% wages for all the models
Inflation and Discounting rates
Inflation on Fixed Manpower - Own 12%
Inflation on Fixed Manpower - CP 10%
Inflation on Land Purchase 3%
Inflation on Building Construction 2%
Inflation on Land & Building rentals 5%
Inflation on Plant & Machinery rentals 1%
Discounting rate 9%
Exhibit 3: Other factors impacting the total cost of ownership

For every year that the operations are continued, inflation is incurred and the rates are as given in Exhibit
3. The rate of interest can also be found in Exhibit 3.

TearyEyed: Packaging Operations Expansion Assessment Page 4 of 5

 5 Case Study - Analytics

Objective

Assuming the planning span of 10 years, which of the 4 options would you recommend TE to establish
their packaging operations and the reasons behind the recommendation? Please use Exhibit 4 as a
directive to obtain your recommendation.

Please use the below instructions to arrive at the final solution.

· The solution should be based on the cash flow analysis of 10 years

· The candidates are allowed to use their laptops or any resources required
· The candidate has to fill in the table of exhibit 4 for Year 1
· Please make realistic assumptions in cases where data is not provided. Please list down the
assumptions clearly with the solution.

Description Own CP-A CP-B CP-C

Plant Capacity & Area
Plant Capacity (Lakhs kg per month) 20 20 20 20
Land Area (Sq. Ft.) 232834 232834 232834 232834

Fixed & Variable Cost Calculations

Fixed Manpower Annual cost (INR Cr) 5.06
Margin on Fixed Cost
Variable Cost Annual (INR Cr) 4.92 4.92 4.92 4.92
Margin on Variable Cost

Fixed Cost (INR per KG)

Variable Cost (INR Per KG)

Rentals & Maintenance

Land & Bldg Rentals
Land & Bldg Maintenance
Plant & Machinery Rental
Plant & Machinery Maintenance

Land & Bldg Cost per KG

Plant & Machinery Cost per KG

Total Cost per KG

Total CAPEX
Exhibit 4: Template for recommendation

TearyEyed: Packaging Operations Expansion Assessment Page 5 of 5