UNITED FOAM

INDUSTRIES (PVT)LTD
Cost accounting case

Group Members: Ali Yar Khan

Amna Zeb
Nasir Butt
Shahroze Aamir
Syed Jaffar Ali
Ushna Tahir

Submitted to: Abdul Rafay

DATED: 21-03-2015
 CASE STUDY: UNITED FOAM INDUSTRIES (PVT) LTD

Foam industry has been going through a stringent time with the rivalry at its peak and no support
from either the government or any kind of association. The year 2014 has been a good year for
Unifoam as it experienced a growth in the revenue to generate but still there are question that are
raised on the performance of the company. The industry dynamics as well as the company wide
restrictions are not letting the company to get in a flow of making exceptional performances. The
company despite growing sales have a profit margin in mid-single digit which the company is
targeting to increase to at least the initial double figures.

Company Background:

United Foam Industries (Pvt) Ltd (UFIL) is one of the pioneers and leading manufacturers of
foam and related products in Pakistan. The company was incorporated by its founder Mr. Khalid
Rashid Shaikh in 1976.

UFIL offers a wide and complete range of foam and foam related products including:
1. Covered Products: Foam mattresses, bonnell spring mattresses, quilted cover mattresses,
ortho mattresses and sofa cum beds of various sizes.
2. Uncovered Products: Sofa seats, slab sheets and micro sheets of various sizes.
3. By-Products: Pillows, gao pillows, rebonded foam, back care cushions, wash pads etc.

Through company owned outlets and extensive dealer network across Pakistan, UFIL offers
three primary qualities under leading brand names of Uni, Shaheen and Dream respectively to
cater to various market segments of retail customers, furniture makers and institutions.

Flexibility and durability of company’s products are recognized by the public at large through
company’s symbol of quality seal logo depicting a yellow Road Roller passing over a Unifoam
mattress:
UFIL has installed imported, made in Europe, Max foam plant, latest cutting machines and state
of the art equipment with production capacity of 4,000 tons of foam and 12,000 units of spring
mattresses per annum. UFIL is ISO 9001:2008 certified based on Quality Management Systems
(QMS).

Market Structure:
It is estimated that the current total foam production and consumption in Pakistan is around
35,000 tons per annum. Pakistan has a population of over 180 Million people, of which it is
estimated that less than 45% sleeps or sits on a foam-based product. Hence there exists a good
long term growth potential for polyurethane foam in Pakistan with the potential production and
consumption of at least 100,000 tons per annum by 2025. Foam and related products industry is
expected to grow consistently in the coming years due to ongoing urbanization, growth in upper
and middle class population and increase in purchasing power for consumer durable goods in
Pakistan.

The Industry is dominated by six players including Master Molty Foam (with its subsidiary
brand Dura Foam), Diamond Foam, Five Star Foam, Cannon Foam, Chairman Foam and
Unifoam. Following market information is a guesstimate based on chemical import data, number
of foam plants per company, dealer network, media expenditure, truck dispatches and private
market checks:

Positioning Companies Market Product Advertising Price

Share Focus Difference
st
1 Tier Brand Molty 20% to 25% Covered Yes 10% - 15%
Diamond
nd
2 Tier Brand Unifoam 60% to 65% Covered & Some 3% to 5%
Dura Uncovered
5 Star
Cannon
Chairman
rd
3 Tier Brand Unbranded & 10% to 15% Uncovered No n/a
New Entrants
How Foam is made
The company is producing polyurethane flexible foam products. The raw materials used to run
the plant, TDI, PPG, Catalysts, Pigments, Dry Colors and Kraft Paper, which are imported from
different parts of the world to cater all the requirements. The different proportions of different
chemicals give different density, which create different qualities. The chemicals are cooled in a
plant to make a cake of foam. A typical cake is 5 feet high, 7 feet in length and 6 feet in width.
These cakes are left in open air for two days to let go of fumes. These cakes are then taken to
cutting machines. These cutting machines cut according to the required sizes making foam
mattresses, sofa seats and foam sheets. These are uncovered products. Some of these are sold as
uncovered such as sofa seats and slab sheets to furniture makers. The foam mattresses are
transferred to the stitching department where the cover of the specific quality and brand is put
on. The foam is wrapped in a transparent plastic and ready to be distributed to the dealers.
The Factory Map:
UFIL is distributed on a functional basis with each function being carried out at different stations
and the concerned facilities are positioned side by side so to increase working efficiency the map
is:
Dealers Manipulation
Dealers are the distributors or retailers in the supply chain of Foam Industry. United Foam
Industries has more than 450 dealers all over Pakistan. These are spread over the 4 provinces.
Punjab has the highest percentage, then KPK, Sindh and Balochistan. Ranging from the urban
cities like Lahore, Faisalabad, Multan, Karachi, Quetta, Peshawar to the rural cities like Mardan,
Jhang, Mandi Bahuddin etc. The distribution to these places is via road and the company has a
fleet of carriage vehicles that go to the main urban cities and in many other places the
distribution takes place through private trucks. The company has a rule that there are not to be
more than 1 dealer in a 5km radius in any market. The dealers can be categorized in three types:

Type Monthly Sale

Small Dealers Less than 1 million
Medium Dealers Between 1 to 5 million
Big Dealers More than 5 million

Regions Over all Unifoam Dealer Percentage

Distribution of Distribution
Foam Dealers in
Pakistan

Punjab 40% 240 60%

KPK/Azad 30% 140 35%
Kahmir
Sindh/Balochist 30% 20 5%
an
Total 100% 400 100%
These dealers are the back bone of the industry as they are the ones who supply and market the
product to the end consumer and have constructive feedback from the end consumer. As they
facilitate the manufacturers in many ways they also manipulate the market, exploit the customers
and create distortions.

The price of a foam mattress depends on its size. It is per inch of foam. E.g. a mattress of size
78x72x4 inches will be Rs 200 to 300 costly as compared to a mattress of size 78x72x3 inches.
Most of the end consumer is not aware of these specifications. The Dealer orders a mattress of
3.5 inches thickness from the manufacturer and sells it to the customer claiming it is 4 inches
thick. The consumer will not open the mattress and check it to see whether it is 4 inches or 3
inches thick and the difference is not visible to the naked eye. However if you see the cost angle,
the dealer saves around Rs 200 by ordering this and sells it at the price of 4 inches. This type of
manipulation takes place mostly in uncovered sofa sheets or slab sheets which are used in
furniture products. Every dealer is very important to the company. Ethically this manipulation is
not correct but if the company tries to rectify it by pressurizing the dealer the dealer may quit and
join another foam manufacturer. So due to this the company is in no position to negotiate and has
to meet the requirements of the dealers.

Inventory Issues

Now this manipulation causes size issues which eventually lead to inventory issues. As dealers
are the middle men in the supply chain which deliver to the final customer their demands cannot
be ignored. Inventory issues rise when some dealers are ordering one size and the other dealer is
ordering the other. Also there are no standard bed sizes in Pakistan. Each furniture maker will
make a bed according to his own design specifications. For example a standard king size
mattress size is 78x72 inches, but different furniture makers have their own standards some make
it 78x75, some 76x72. This makes it impossible to hold inventory of so many different sizes and
then different brands. Also 6 inches is considered standard thickness but it may vary from
4inches up to 8 inches according to the consumers demand. Also there are about 3 main brands
and each brand has 3 sub- brands. Making it nine brands of the same foam but with different
density and then the different sizes in all 9 brands makes it impossible to hold such a large
inventory on 1 site. Therefore first an order is received and then the cutting process takes place
according to the specific size. The order is in a way custom made. This requires the company to
keep significant cutting machines as to meet the required demand in time. The company Unifoam
has its manufacturing plant in Lahore on Multan road. It is on an area of about 20 kannals. At the
moment they are at full utilization capacity. If inventory was to be stocked it would take a lot of
space which is not available at this time and if they were to set up ware houses this again will
lead to increase costs.

Receivable Issues
Another manipulation from the dealers is on the credit terms. The foam manufacturers in the run
of competition have consequently turned to selling foam on credit to dealers. This causes serious
receivable issues. New dealers mostly tend to take the first truck of foam on credit claiming
when it sells they will pay back. They clear the previous and tend to order more on the same
basis. By this some part of the receivable is always stuck. Multiply this by 500 dealers and this
makes a huge amount which is circulating as credit. Also many dealers take on credit and then
default. This happens rarely but affects negatively on the provisions in the balance sheets. This
has enabled the company to make credit limits for each dealer. These credit limits are one third
of the monthly sales. If any dealer exceeds this number no further products are delivered to him
unless he pays and comes back within the limit. Also if the number of day receivable is under 10
days the company is comfortable in terms of cash flow but if the number of day receivable
exceeds 30 days then the cash flow is hurt and can create working capital problems for the firm.
The company now is making new dealers on the condition of advance payments rather than
credit and also giving cash incentives to those who don’t take credit but the industry norms
eventually force the dealers to demand on credit as they themselves further give the product on
credit.
Category Mothly sales Percentage of Recovery Rate Percentage of
Total Dealers Total Dealers

A+ 3 million + 5% Advance Cash 5%

A 2-3 million 20% Upto 10 days 15%

B 1-2 million 35% 10-30 days 35%

C 5 Lac – 1 million 15% 30 days + 45%

D Under 5 Lac 25%

Price Wars
The Foam Industry in Pakistan is an Oligopoly. There are few sellers and many buyers. In total
there are about 14 foam manufacturers operating in Pakistan. The foam is branded here in
Pakistan i.e. it sells under a branded name, which is unlike in our neighboring country India
where the majority foam sold is un branded.
There is stiff competition in the industry. As all foam manufacturers have their own brand names
and foam is sold as a branded item rather than a commodity. Due to that purpose a lot of money
is spent on advertising and marketing.
Also due to heavy competition there are price wars taking place in the industry. The product is
homogeneous as there is no differentiation that the different companies can offer. This doesn’t
give margin to add value to the product and thus cannot charge a premium, as a result
competition goes on to offering the best possible price. There are no fast technological advances
so the product remains stagnant. This is damaging the manufacturers as this cuts their profit
margins and the retailers or dealers take advantage of this.
What happens is that those companies with a low market share tend to decrease their prices to
attract dealers and consumers. This brings an upward pressure on the big companies to also
lower their prices as their dealers demand foam on a low price to compete with other brands.
This indulges the industry in price wars. Although the sales volume is in billions of rupees but
the profit margins are in single digits. The dealers on the other hand were beneficiaries of this
war between the firms. They negotiated with the firms for lesser price and in return sell to the
final consumer for the same price, increasing their profit margins. The dealers have become more
cash rich than their firms. There are cases where some dealers have setup their own foam
manufacturing plants. There is no fixed retail price of the foam product. Each dealer has its own
margin, some keep high margins e.g. those dealers that are in the high end markets of the specific
city and those in places far from commercial areas tend to keep low margins

The major problem that UFIL is facing due to the pressure and industry dynamics discussed is
the low profit margins. The industry has become too competitive and despite a sales growth of
148% during the last decade the margins are in single digits. The problem is due to multiple
reasons of different magnitudes and urgencies. The rivalry factor in the industry is very high and
the product which is being sold is more of a commodity rather a differentiated product. The
market leaders are not ready to agree to a certain industry regulatory body so a fierce race for
market share prevails in the industry. This makes the prices elastic but this elasticity works only
on the downward trend due to competition in the industry. According to Mr. Faraz Khalid (CEO)
a decrease of Rs. 50 on a standard cushion can take the sales up by 2000 units per week but the
competitors reaction this price change will be hostile and a new low end category would be
launched within a day to target the price reduction by offering a product cheaper than even the
lowest quality product available. So the whole point here is that the company is already facing
low margins and a price reduction is near to impossible. The increase in price may increase the
margin but the overall market share will be lost due to a swift switch by dealers to a cheaper
brand. The industry that’s why does not accommodate to any kind of a price increase by a single
company so the margins are bleak and the company needs to live with the prices that are
prevailing in the industry.

The price movement restriction that’s why forces UFIL to sell at low margins which is evident
from the fact that despite having sales of around $2 billion the profit margin is somewhere in the
middle single digit as said by Mr. Faraz Khalid. During the discussion with the Chairman Mr.
Khalid Rashid Sheikh it came to our knowledge that the industry in the past had more margins
but the quantity being sold was very low which was a point of concern because the fixed cost to
sale ratio was alarming but since 2002 the company witnessed an increase in sales of 148% but
the profit Margins went down by 7-8%. The reason he specified for this turnaround is the
introduction of dry chemicals into the production and aggressive advertisement by the producers.

Batch Production System

The second industry wide factor that is creating concerns for UFIL with respect to its margin is
the type of production system it has to employ. As discussed the Foam industry is under severe
pressure from the dealer and the variation in products are too many to cater to through a flow
production system so despite having the ability and capability to adopt a flow production system
the company is still working on a batch production system because of the industry demand. This
compromises the efficiency to some bit and the maximum utilization of the plant is not possible
if used for different batches of different dimensions.

The store manager at UFIL stated that virtually every order is of different quality, quantity and
density required and the dimension that the plant can make goes up to 20, so this creates a
problem of producing in batches and also handling the inventories. This factor pushes up the cost
and hence the margins are again compromised. UFIL has been in the industry since 1976 and
according to the chairman the company used to produce only 3 variants of foam still 2000, but
after that the variants have gone up to 9 that the company sells under its own brand name and 20
different variants in the uncovered foam market. This makes it impossible to predict demands
and produce continuously and the company has to live with this factor for some time, so the plan
to increase margins by lowering cost with increased efficiency is not feasible given the industry
dynamics.

Imported Raw Material

The raw material breakup of the UFIL raw material percentage is:

ITEM Quantity Country

TDI 30% China
PPG 65% Singapore
Misc. 5% China

The table above clearly shows that the UFIL is completely dependent upon imported raw
material and this is one of the major concern for the company. According to Mr. Khalid Rashid
Sheikh the cost usage break up is as follows:
Cost Percentage of total
Raw material purchasing 79%
Other direct and indirect cost 21%

The import Process:

During the visit to the company the main area that we researched was the raw material
procurement process. The process is important because it constitutes to become the most
contributing factor of the costs. The thing that came to our knowledge was that the 79% figure
that was quoted by the chairman was a figure at full efficiency without any delay in legal
processes as well as employing the most adequate production process. The company imports the
material but have saved itself from any demurrage and official penalties. So the process actually
is cost accumulating because of the lead time of raw material procurement.

Lead time is the difference between the time at which the order is placed and the physical
delivery of the order. According to Mr. Faraz Khalid (CEO) the lead time for UFIL is 45-50 days.
This is a figure which is creating the raw material issue. The second aspect of the raw material
department is the raw material cost and according to the industry statistics PPG accommodates
half the raw material despite being a third of the total quantity.

So the scenario with UFIL is that it has a storage capacity of 30 days of chemical and the lead
time is at least 45 days so for this a buffer stock of 20 days need to be maintained which ties up
the cash portion of the working capital and the company has very low availability of cash in
hand. The storage requirement also is high because all the chemical is bought in a single batch
and used over a period of 30 days before the next order is placed so this makes another issue of
storage and cost.

In discussion with Mr. Faraz Khalid it was told that the company had a cash conversion cycle of
-120 days. Cash conversion cycle is the time taken by a business to convert its material into sales
and then sales into cash. In UFIL’s case the time is around negative 120 days, this is because the
company purchases all the raw material at once and makes onetime payment for it at the time of
purchase, due to the raw material being Imported the possibility of having credit purchases is
very low, so this makes a lot of cash getting tied up into raw material inventory. The working
capital liquidity is also weak because of this as although the company has a positive working
capital but the liquidity of this working capital is very low. Secondly due to heavy borrowing
from the banks for the procurement of chemicals the company does not have sufficient muscle to
make use of the positive working capital.

Operating cycle
The first aspect of the operating cycle has been discussed above which is the raw material
procurement and the cash tied up in it. The second phase is a swift phase and does not create
much of a problem because the company is able to sell what it is producing due the system of per
order production but one factor that is disturbing in this regard is the storage requirement due to
uncertainty of order as well as the variety of demand and the need to produce several different
sizes and quality. This takes the storage requirement to an alarming level and the cost of storage
becomes high. The COO Mr. Bilal Khalid was of the opinion that the company cannot undertake
any step towards growth unless and until new storage site is not rented and the storage capacity
is not increased. The ability of the company to turn its raw material into sales is satisfactory due
to commoditization of the product and the oligopolistic structure of the industry. UFIL is able to
convert a loaf of foam into finished product and sell it in a time of 3 days which is more than
average and highly satisfactory but the major problem arises at the time of collection. As
discussed in the dealer manipulation problem that the credit limits are exceeded and it takes
about on average 65 days to collect the cash from credit sales which again makes the conversion
very slow and the operating cycle too slow. All this affects the efficiency of the company
stopping it from achieving an efficiency fit and hence creating an adverse effect on the already
struck profit margins. The operating cycle hence cannot be easily improved due to raw material
being imported and the company having lower control over its suppliers.

On a discussion with Mr. Khalid Rashid a question was raised on whether the chemical can be
produced in Pakistan or not?

His reply “the production capacity of the TDI plant is way above the combined demand of the
chemical in Pakistan or the foam industry as a whole which makes it unfeasible to invest in such
an expensive venture and secondly the cost of the plant and the production process will make the
production of TDI in Pakistan more expensive and the material cost may rise, so for now
imported raw material seems the only option for the industry.”
Solution
According to Mr Khalid Rashid there are two ways to increase profitability which are either to
sell more with a low margin or to sell less at a higher margin, for example if a company make a
sale of 2 billion and earn a 5% that makes the profit to be 100 million on the contrary if the
company makes a sale of 1 billion and earn a 10% the profit still remains the same, but in this
foam industry one cannot be persuade without the other because of the intense rivalry for market
share the company cannot just cut down the quantity it sold. The three top executives the
chairman, the CEO and the COO were asked the solution to the problem and the three of them
had their different approaches toward it which can be summarized in this manner:

The chairman’s view was that the company United Foam Industries has grown significantly in
the last 8 years in terms of production volume, product range, turnover, profits, dealer network,
assets and manpower to successfully achieve 2nd market share position in the industry. The
company should continue with the aggressive strategy and target to become market leader in
market share ahead of the top foam brand (Master) in the next 5 years. This means we have to
increase our sales network and offer each and everything to our dealers what other companies are
offering. I don’t think we can independently increase our selling price. In addition, if the
company doesn’t provide the full product range, our dealers will switch to other companies. The
company can’t afford to lose our market share even in the short term because it is very difficult
to recapture a lost market share. The company should stick to what we have been doing and
follow the price lists of 2nd tier brands and continue to be competitive enough to compete with 3rd
tier brands. In fact we should launch new brands and qualities so that it can establish multiple
dealers in same markets or cities. As far as Phoolnagar project financing is concerned, we can
borrow from banks to raise cash.

The COO’s view was that going forward the company should consolidate its growth and generate
surplus cash to fund the future investments in project Phoolnagar. A conservative strategy in the
short term is needed to meet its long term goals through increase in average selling price and
profitability, controlling operating costs and reducing our product mix i.e. focus on high margin
products. Profits can be increased e.g. by positioning Unifoam quality with 1st tier brands, and
upgrading Shaheen quality to position with 2nd tier brands. The company can reduce its publicity
and marketing expenditure, control our receivables and manage our inventory effectively by
upgrading our MIS. The company wastes Rs 2 million annually on paper as part of the different
operations and system are run manually and documented in paper, thus developing a
computerized system and trying to decrease internal costs is beneficial. As far as launching new
brands are concerned, we might cannibalize our existing brands, not to mention the increase in
costs to maintain new brands. In the current business and economic environment the company
should actually reduce bank borrowings by converting growth into profits and surplus cash.

The CEO’s View was that while turnover has grown an average above 10% year on year, the
profit margins have reduced to mid-single digit level because uncovered product segment has
become very competitive and commoditized due to entry of new players in the industry. The
company needs to adopt a balanced growth strategy so that we can protect our profit margins
along with sales growth e.g. 1st tier brands also offer high margin, lower volume products like
pocket spring mattress or high end furniture range which it doesn’t. The 3rd tier brands are
pulling down our average selling prices. In addition, the position of Dura in 2nd tier brands
makes it difficult for our dealers to move up close to 1st tier brand pricing. Establishing parallel
brands for the purpose of market segmentation can be considered. The company’s thin profit
margins don’t allow us to borrow heavily to fund our capex investments. Also finance costs on
increased working capital borrowings are already very high. Additional borrowing option should
be explored as a last resort.

After discussing the issues faced by the industry and specifically the company and taking in view
the available resources and the view of the executives a list of possible solutions was created
after keen observation and thorough research and the proposed solutions are:

Foam Association
The success of most industries in our country can be credited to their respective associations.
These associations are bodies in the industry in which all manufacturers are members and they
collectively works for the betterment of the industry as a whole. Due to this reason it was the
initiative of the chairman of United Foam Industries Mr Khalid Rashid Shaikh to build a foam
association in which all the foam manufactures were invited. All the heads of the foam
manufacturers were invited to sit together and discuss problems to come to a conclusion. Several
meetings were held on the expense of Mr. Khalid Rashid to formulate this association. The sole
purpose of the association was to make a legal body for the protection and betterment of the
industry. Also it was for the purpose to establish a regulatory body as to which every member
adheres to. The main agenda's included a unanimous decision on a

-Fixed price list

-No one party to disturb or approach the other party dealer without his consent.
-to fight for subsidies, rebates and tax regulations from the government

However due to the personal jealousy and rivalry of some foam manufacturing owners this
association has been dissolved. Some companies with less market share don’t follow the price
list set by the association. They tend to offer lower prices. They know that if they adhere to the
list they won’t be able to survive. Also big companies with more market share want to keep their
margins high and disturb the market. There have been repeated attempts to establish the
association but all have gone in vain. The top reason being the lack of interest of owners of the
foam companies, as they are least bothered about the industry because for many this is their
secondary business. They have shifted attention to other businesses in which they have invested.

If we look at the example of the steel industry, the steel association is very strong and this
benefits all the manufacturers. They set a fix selling price which is high enough to cover their
costs and give good profit margins. Every manufacturer adheres to that price and does not sell
below it. If someone doesn’t follow it they are faced with serious consequences and also expelled
from the association. Being part of the association gives additional benefits to the firms in terms
of relaxation of government policies and subsidies, rebates etc. Therefore in this industry it is
very important that an independent and fair association be made with the consensus and presence
of all the manufacturers and some dealers. This will help to lower the dealer’s manipulation by
taking collective strict action against those dealers. A fixed price list with fixed floor price like in
the agriculture industry on wheat and rice would help in reducing price wars. If the association is
able to implement its decision the manufacturers will be in a better and relaxed position. The
industry will become regulated. This will eventually help improve profit margins. Right now as
the profit margin on almost all brands is in single digits percent it is expected that after this
measure of regulation it is expected to rise to more than 18%. Many of the working capital issues
can be dealt by such high profit margins. Such high margins measures will also help increase
investment by firms thus helping the industry to grow. The price monitoring will not only help
increase margins but will also provide safe havens for the small and medium size players in the
industry. There is still a lot of potential in the foam industry relating to growth as only 30% of
the populations use foam mattresses and products and a major chunk of the population is still to
be catered. The prospects are huge only the right direction and healthy competitive environment
is needed.

Launching a high end Brand

The second solution that is recommended from the research is to launch a high end brand to
target the 1st tier of the market. The high end brand should target brands like Molty by master and
this will help increase the margins. This seems to be a possible solution and can be supported by
the fact that Master foam which is the industry leader makes an annual sales of around 8 billion
of which 55% comes from the sale of Molty Foam which is a high end high margin product
whereas Unifoam makes an annual sale of around 2 billion of which 63% comes from Unifoam
which the highest quality brand of tier 2, this shows that the consumer has a tilt towards spending
more and targeting quality when it comes to Foam mattresses and this creates a vacuum for UFIL
that can be used to suit its purpose.

Company Product Margin %age of sales

Master Molty 18% 55%
Unifoam Unifoam 7% 63%

The table above clearly shows that the company can launch a brand which is high end, it will be
a good addition to the company’s product portfolio as no extra investment would be required to
take the initiative and most importantly the Brand name would be boosted and the customer may
be ready to pay the brand equity to the company. The main issue that can be solved by launching
a high end brand is that it will increase the margins and profitability and the company will have
enough profitability to finance its working capital on its own hence increasing efficiency and
decreasing costs especially the finance cost and in future may accommodate the funds to be used
for expansions as well.
In a discussion with the Chairman it came to our knowledge as well that the company is planning
to diversify for the purpose of creating back up for the company as Foam industry but our
proposal was to launch a chain of company operated stores which in future could be converted
into stores and used as retail chain to sell of products produces by the company working on the
model of HABBITT or Chen One.

Factory Outlets
Completely shifting to their own outlets in the whole country would be very costly and not
attainable as there are about 500 dealers covering the whole country. So covering such a big
distribution with their own outlets is very difficult. The resources financial and human needed
require huge investment. Also in some areas the sales are not enough but the fixed cost of the
outlets will greatly increase costs so it is better to outsource and have local dealers. So therefore
opening factory outlets or showrooms in areas where the dealer’s manipulation and disturbance
is high. Also the margin that the dealers take on retail can be used by the firm in their outlets to
increase their profit margins. Also the issue that many dealers sell two brands simultaneously can
be eliminated. In opening up their own factory outlets they can go for diversification. Related
diversification is recommended. Besides foam mattresses they can keep a furniture range which
includes beds and sofas. Also items like bed-sheets, pillows and duvets. These are value added
items which can be used to attract customers and also benefit from them by keeping high
margins on it. Turn the factory outlets into lifestyle stores. Providing many related things, a
consumer wanting to decorate his room can have all things in one place under one roof. This
gives the company to build up their brand name and also a chance to diversify as the foam is a
homogeneous product and the industry is very competitive.

Project Phoolnagar
The last solution in the list is the project which is nearing its completion which is opening of a
new production facility in Phoolnagar on Multan road in the outskirts of Lahore. The advantage
that Unifoam has had with the location is its edge over competitors as it is located in the northern
Punjab region which is the largest market of Pakistan. The transport cost does not hurt the
company much. The Phoolnagar is also a prodigy in making because of its accessibility to the
major markets. Project Phoolnagar will add a lot to the production capacity of the company, the
quantity is expected to be doubled up this project with the estimation of fixed cost per unit going
down by 20%, this will help the company adjust its cost structures and increase the margins to
get some breathing space. Project Phoolnagar seems a viable solution because the plant has
already been bought and the location has been setup and the added advantage of opening up this
new facility means that the storage capacity will be tripled hence solving one of the gravest
concerns for the company.

Recommended solution
In the current scenario of the economy and the industry dynamics and evaluating the resources of
the company and the competitive position of the industry no single solution is feasible to cater to
the needs or solve the issues so what we recommend after studying the situation is that the
company follow both mass production and differentiation to be well above of the competition in
such a competitive industry.

The first strategy that we would suggest is to launch a high end brand to compete with Molty as
it is established that a market exists for high end foam and this strategy would require the least
amount of cost and help the company increase its margin the proposed increase that we think it
will have in the cost and revenues are:

Item %Change
Sales revenue Increase by 10%-15%
Factory cost Increase by 0.5%
Fixed cost as %age of sales Decrease by 20%
Profit margin Increase by 12%-15%

The second solution that can be taken up by the company is the project Phoolnagar itself because
it is already in the final stages of production and company has invested a lot in it and as
discussed above, it would be of a great advantage to launch an aggressive attack to gain market
share and also the up gradation of the production capacity is the added advantage. The storage
would also be cushioned by the new facility as according to estimation the market share could go
up by 3% if the company can successfully materialize the project.

UFIL is the 2nd largest foam producer and seller in Punjab it has been operating since 1976 and is
a company with a lot of potential, although currently due to tied up funds and borrowed working
capital it is unable to perform at maximum, but in the next 10 years the company can easily
become the market leader if it is able to implement the vision of its chairman and the CEO.