KANPUR CASE STUDY

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 by three of his sons.
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 tons. In 1980-81, KCPL
doubled its capacity to 240 tons per month from 120 tons per month. The turnover was Rs. 20 million in
1979-80 and Rs. 30 million in 1983-84 with net profit of Rs 2.5 million. 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 tons 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
authorized 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.
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 flour, sugar and vegetable oil which they bought from the local
market. In the year 1980-81 KCPL doubled its capacity from 120 ton to 240 tons per month. The turnover
was Rs. 2 crores in 1970-81 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.

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
labor 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 factors:

1. Organized 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. Unorganized 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 labor cost. In 1986
KCPL signed agreement with Pearson with initial order of 50 tons per month supply of biscuit with
promised off take of 100 to 125 tons 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 tons 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 officers at the KCPL plants. The APL
would also share its “APL secret ingredient” but KCPL would require to buy the material from one
authorized supplier 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 tons of its surplus capacity.

Total Capacity = 240 tons

KCPL production = 120 tons
Capacity used for Pearson = 50 tons
Unused Capacity = 240-120-50 = 70 tons

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 Labor Cost:

Cost of flour = 750*120*(500/50) = Rs. 900,000

Cost of vegetable oil = 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 labor charge = Rs. 36,000
Total cost = Rs. 1,968,000
4. Revenue:
Sales per month = 120 tons
Price per ton = Rs. 18,100
Total sales = Rs. 120*18100 = 2,172,000
Profit = Revenue – Raw Material & Labor Cost – Fixes Cost
= Rs. (2,172,000 - 1,968,000 - 345,000)
Loss = Rs. – 141,000

Profit from APL deal:

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

Percentage per month production for APL = 70/190*100 = 36.84

Fixed cost per month for KCPL = Rs. 217,902 (345,000*63.16%)

Variable Cost for KCPL:

Cost of flour = 750*120*(490/50) = Rs. 882,000
Cost of vegetable oil = 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 labor charge = Rs. 36,000
Total Variable Cost = 1,914,000

Fixed cost per month for APL = Rs. 127,098 (345,000-217,902)

Variable Cost for APL:

Cost of flour = 700*70*(490/50) = Rs. 480,200

Cost of vegetable oil = 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 (480,220+326,666+152,950)

Casual labor charge = Rs. 21,000 (70*36000/120)
Conversion charge per kg = Rs. 1.5
Revenue from 70 tons = 1.5*1000*70 = Rs. 105,000
Cost to APL for conversion charges (FC+ casual labor) = 127,098 + 21,000 = Rs. 148,048
Profit from APL per month = 105,000 - 148,048 = -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
Loss = Rs 3,000
Profit from Pearson:

Raw Material and Labor Cost:

Cost of flour = 750*50*(500/50) = Rs. 375,000

Cost of vegetable oil = 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 labor 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 production 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 other companies which
were in talk with APL.
Accept the APL offer, but limit the order size from APL. This will ensure that KCPL is minimizing their
losses, but still keeping the reputation and brand MKG intact.
Increase order from Pearson slowly to minimize the losses.