IMB 685

VINYAS: TO BE A CONTRACT MANUFACTURER OR

SELL THROUGH OWN CHANNEL?

TARUN JAIN AND JISHNU HAZRA

Tarun Jain, Professor of Operation Management at IIM Udaipur and Jishnu Hazra, Professor of Production & Operation
Management, prepared this case for class discussion. This case is not intended to serve as an endorsement, source of primary data, or to show
effective or inefficient handling of decision or business processes.

Copyright © 2018 by the Indian Institute of Management Bangalore. No part of the publication may be reproduced or
transmitted in any form or by any means – electronic, mechanical, photocopying, recording, or otherwise (including internet) –
without the permission of Indian Institute of Management Bangalore.

This document is authorized for use only in Jing Shao's Supply chain management at University of International Business and Economics (UIBE) from Apr 2021 to Aug 2021.
 Vinyas: To Be a Contract Manufacturer or Sell through Own Channel?

In November 2016, Arun, Business Development Manager at Vinyas Innovative Technologies Pvt. Ltd.
(Vinyas henceforth), was facing a dilemma. Sitting in his office, he was carefully looking at a dataset on
consumers’ demand profile of a communication device shared by a client firm, Kyomo (disguised name).
He was thinking about the launch of the next generation of this communication device designed by
Kyomo under the brand name of Vinyas. Over the last few weeks, this new strategy had been under
discussion between the two firms.

There was a reminder email regarding a joint meeting with the Marketing and the Engineering team. In
this meeting, they were supposed to finalize the recommendations for deciding if they should continue to
remain a contract manufacturer of Kyomo or whether they should develop a channel to sell the product in
the downstream market under the Vinyas brand directly to consumers. Previously, each of the products
manufactured in their Mysuru-based (in the state of Karnataka, India) production facility carried the brand
name of the company which shared the design specifications. The final recommendations would be
shared with N. Narendra, Managing Director of Vinyas, in the meeting scheduled on December 7, 2016.

COMPANY BACKGROUND

In 2001, Vinyas Innovative Technologies Pvt. Ltd. was founded by N. Narendra to cater to various
original equipment manufacturers (OEMs) and original design manufacturers (ODMs) in the electronics
and semiconductor manufacturing industry. Over time, since its inception, the company had obtained
various quality certifications like AS9100C (Defence and Aerospace), TS 16949‐(Automotive Products),
and ISO 13485 (Medical Electronics).

The company’s total workforce strength was around 1,000 employees. Of these, more than 10% of the
workforce was differently abled. The company had a policy to hire and train at least two differently abled
persons every year. Exhibit 1 illustrates the workforce distribution across various departments. In 2011,
the company won the Best Employer Award instituted by the National Trust, Ministry of Social Justice
and Empowerment, Government of India.

In 2017, Vinyas was a Tier 1 supplier to major OEMs/ODMs across the globe for verticals such as
defense, power, aerospace, telecommunications, consumer durables, and medical electronics. Further,
Vinyas was an emerging player in electronics manufacturing services industry and was involved in the
manufacturing services of the items ranging from printed circuit board to complete integration of fully
packaged and tested products. Given that Vinyas was one of the major contract manufacturers to many
major OEMs and ODMs in India, in the past, it had always preferred to be in this B2B engagement rather
than trying to brand and develop its own downstream market channel.

CAPACITY REQUIREMENTS BY KYOMO INTERNATIONAL LTD.

Vinyas has been a contract manufacturer to produce a communication device (disguised product type)
with short product life cycle for a client firm Kyomo International Ltd. This communication device

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 Vinyas: To Be a Contract Manufacturer or Sell through Own Channel?

followed a typical product life cycle starting from product introduction, sales growth followed by
maturity, and finally decline.

The product was sold by Kyomo in downstream market under its brand name. The design requirement
and other manufacturing-related details for each generation of the product were provided by Kyomo.
Kyomo could use the dedicated capacity of Vinyas to mass manufacture its design requirements.

Though the product followed the product life cycle trajectory, yet, there was high volatility in demand.
This is because this small life cycle product underwent rapid technological changes in each generation.
Hence, there was high uncertainty in Kyomo’s demand. Moreover, it was also a challenge for Kyomo to
place a correct order size with Vinyas. Exhibit 2 provides the demand data for previous generations of the
communication device in the market.

Vinyas charged a unit wholesale price towards each unit of communication device manufactured by them
towards Kyomo’s requirements. Kyomo finally sold the product in the downstream consumer market. The
unsold inventories were salvaged.

For the next generation product, Sahil Naik (disguised name), product head of Kyomo, had approached
Vinyas with a different contract. Under this contract, Kyomo would share the design of the new product
with Vinyas, but Vinyas would sell the product directly to downstream market under Vinyas’s brand
name. This was because Kyomo wanted to exit from the product line of the telecommunication device
from the downstream market. The company still wanted to retain the design competency of the
communication device. In return, Vinyas would transfer a fraction of the total revenue earned by them to
Kyomo as royalty fees for providing the design and other manufacturing details. Sahil suggested that 25-
35% royalty rate seems to be appropriate, that is, Vinyas would retain 65-75% of the revenue earned.

Kyomo sold the existing version of the product at unit downstream price of Rs. 1,1001. Vinyas typically
charged Rs. 950 towards each unit manufactured for each version of the product. The unit manufacturing
cost was Rs. 200. Kyomo suggested that due to advances in design, the next version of product could be
offered at Rs. 1200. Further, the unsold inventories of the final product were salvaged at unit prices of Rs.
50 (under both scenarios).

Arun expected that since the product would be sold by Vinyas in the downstream market for the first
time, the demand variability would be higher than what was faced by Kyomo. He estimated that if
Vinayas offered the product under its own brand name, then, the standard deviation of demand would be
at least 1.25 times higher than that of Kyomo.

Since Vinyas did not have access to direct downstream selling channels as they were primarily a Tier 1
supplier, Arun further estimated an additional cost of Rs. 10 for each unit offered in the final market
towards developing a direct channel. This mainly involved the cost of marketing the Vinyas brand,
providing product demonstrations to potential customer base and providing free samples.
1
1USD = Rs. 67.50 in November 2016

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 Vinyas: To Be a Contract Manufacturer or Sell through Own Channel?

Later over a telephonic conversation, Arun shared his concerns relating to higher channel costs and higher
risk of unsold product with Sahil, who responded:

We completely understand that you folks will be facing lots of risks, hence, we would just
charge you some royalty share. This would not only benefit you guys as we also would be
sharing downstream market risks. At the same time, we would also be able to recover our
development costs. Believe me, our research and development team would continue to
design this class of device; we will keep on providing you guys the enhanced versions of
the product periodically. I myself believe this is a win-win situation for both of us. We
can further negotiate on royalty rates, but we still feel that something between 25 and 35
per cent should be reasonable for both of us.

Sahil further added, “At the same time, this would benefit you to build your own brand and product
distribution network.”

After speaking to Sahil, Arun realized that the supply chain structure would change due to the new
contracting arrangement. Exhibit 3 illustrates the diagrammatic representation of the existing and the
newly proposed supply network. As he walked across the galleries of the manufacturing facility looking
through the glass pane near the circuit board assembly station, he noted that:

Though the new contract offered by Kyomo seems to be attractive, establishing a direct
selling channel is a really different business for us than the electronics manufacturing
services. Further, since we are going to face large demand risks, the high royalty rate of
more than 25% does not seem reasonable to me. If we are going for this, then we
definitely have to negotiate over the net payable royalty fraction.

Arun further thought:

Currently, our customers do not care who our other clients are. But if we get into selling
the product directly to end consumers, our current clients may get upset with us.
Deciding the best strategy is certainly a difficult decision for me.

Arun was now wondering what to recommend to Narendra on December 7.

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 Vinyas: To Be a Contract Manufacturer or Sell through Own Channel?

Exhibit 1
Workforce distribution along various departments

Department Strength
Engineering 50
Quality Management & Control 50
Production* 750+
Purchasing & Vendor Development 20
Marketing 5
Administration 6
Finance & Accounting 10

*Differently abled youths are employed in this department.

Source: Company Records

Exhibit 2
Demand data of previous generations of the device (disguised data)

Generation Name Demand

I 2100
II 2025
III 2070
IV 2157
V 1951
VI 2051
VII 1850
VIII 1960
IX 2101
X 1964
XI 1828
XII 1950

Source: Company Records

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 Vinyas: To Be a Contract Manufacturer or Sell through Own Channel?

Exhibit 3
Supply chain structures under both the scenarios

Source: Case writers

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