Letter of Transmittal

Date: 20 September 1987

From: xxxxxxx
Consultant
XYZ Company
New Delhi
To: Mr Alok Kumar Gupta
Chairman and Managing Director
Kanpur Confectionaries Private Ltd.
Radha Industrial Estate, Kanpur
Uttar Pradesh

Subject: Analysis of the current business situation and business opportunities of KPCL

Dear Alok Kumar Gupta,

Please find the below report on the analysis of the KPCL’s business situation and
opportunities. Various factors such as profitability, competition, independence, problems
faced by the company have been taken into consideration to come up with the best possible
solution. Each option was evaluated against all the criteria set for evaluation and then only a
final option was selected.

I hope this report helps you to take the best course of action.

Yours Sincerely,

XXXXX
Consultant
XYZ Company
 SUMMARY
Situation Analysis:
Kanpur Confectionaries Private Limited (KCPL) is facing a strategic management dilemma. Its
‘MKG’ biscuit brand is going through a period of decreasing sales and is facing tough
competition. The brand is also making a loss. There is a direct increase in the number of
competitors, both in the unorganized and the organized sector. KCPL is neither able to
compete on price and nor on scale and image. KCPL has an agreement with Pearson for
manufacturing healthy biscuits. APL, a national player has offered a contract where KCPL
would be manufacturing and supplying 70 MT of biscuits per month. APL would be offering
its technical expertise but KCPL would have to forego independence in the manufacturing
process and could result in dilution of its MKG brand
Problem Statement:
How will KCPL overcome the present situation of loss-making while utilizing its surplus
production capacity and strengthening its MKG brand simultaneously?
Options
1. Become a contract manufacturing unit (CMU) for APL
2. Do not become a contract manufacturing unit (CMU) for APL
Criteria for Evaluation
1. Profit Margins
2. Competition
3. MKG brand
Evaluation of Options
Become a contract manufacturing unit (CMU) for APL:
Profit Margins: Profits will increase and it will be around 78000 per month
Competition: There will be a competitive advantage as expertise will increase efficiency
MKG brand: MKG brand is making losses and incomes from other sources is important
Do not become a contract manufacturing unit (CMU) for APL:
Profit Margins: There will be a loss of around 6000 per month
Competition: Competition will be increased more as APL will give the contract to others
MKG brand: There will be independency on the manufacturing process and the brand
Recommendation
Based upon the evaluation of the above options the company should go ahead with APL’s
proposal offer and become a CMU for APL
Situation Analysis

Kanpur Confectionaries Private Limited (KCPL) is facing a strategic management dilemma. Its
‘MKG’ biscuit brand is going through a period of decreasing sales and is facing tough
competition. Its candy business had already closed in 1985. There is a direct increase in the
number of competitors, both in the unorganized and the organized sector. The company’s
main market consists of middle-class families in urban and semi-urban areas and some small
volume supply to small and medium-sized institutions. Both of these segments are highly
elastic in nature. KCPL, which is the second-largest biscuit manufacturer in the north, is
neither able to compete on price and nor on scale and image. The company is not technically
advanced in its manufacturing operations and it faces frequent absenteeism from its
permanent employees. These factors coupled with rising material and labour costs are
leading to KCPL’s decrease in margins. The current arrangement with Pearson, wherein KCPL
produces 50 MT of its good health biscuits is also on a rocky front. The market response to
the good health biscuits is dismal and the biscuits are seen as higher-priced without offering
any substantial benefits. The current proposal made by Mr Bharat Shah; the chairman of APL
needs to be carefully analysed. In its given form, APL is offering a 3-year contract to KCPL, to
become its contract manufacturing unit. Essentially under the deal, KCPL would be
manufacturing and supplying 70 MT of biscuits per month to APL for a period of 3 years. If
found satisfactory, the contract can be further extended at the end of 3-years. KCPL is
suffering from financial losses along with under-utilization of its production capacity. Though
the current production capacity of the company is 240 MT per month, its sales are half that
of the production capacity i.e. of 120 MT per month. The deal with APL seems like a positive
move for the company under current situations. KCPL would be getting an assured return on
its investments and access to APL’s manufacturing expertise, which can drastically improve
the situation for KCPL. However, as part of the contract, for its contract manufacturing units
(CMU’s), APL would retain full control over the manufacturing process. This means a possible
loss of independence for KCPL and could further result in dilution of its own MKG brand.
Moreover, certain doubts over addition investments in manufacturing and conversion
charges still exist.
Problem Statement

How will the management of KCPL overcome the financially stressful situation that the
company is facing while utilizing its surplus production capacity in the best possible way and
strengthen its MKG brand simultaneously

Options

The company has two available options with it i.e. either it becomes a CMU for APL and
manufactures and supplies 70 MT of biscuits to APL for 3 years or it does not become a part
of APL and continues with its current manufacturing trends and focuses on its MKG brand

Criteria

The following are options that are available with KCPL based upon the level of priority:

1.) Profit Margins: As the sales are declining, KCPL is suffering from financial losses in
business. These losses need to be minimized and the company must return back to
profit making
2.) Competition: KCPL is facing very high competition from unorganized as well as the
organized sector
3.) MKG brand: Maintaining the brand value of MKG brand is an important factor for
KCPL. The brand is built over years and it still serves a market

Evaluation of options

Option 1: Become a contract manufacturing unit (CMU) for APL

Profit Margins

Profit margins will improve substantially when KCPL becomes a CMU for APL. KCPL will cover
up its losses from the MKG brand and make an overall profit of 78000 per month (Exhibit 3)

Competition

Due to a lot of competition and inefficiency of operations, KCPL is not able to compete with
its competitors. Taking help from a national player in confectionaries business will improve
its operation efficiency by tapping into their expertise in manufacturing processes
MKG brand

Right now MKG brand is making a loss of 141000 per month (Exhibit 1). Given the current
scenario, it is wise to increase incomes from other operations or investments

Option 2: Do not become a contract manufacturing unit for APL

Profit Margins

With its current operations and income from Pearson which is 135000 per month (Exhibit 2),
KCPL is making a loss of 6000 per month (Exhibit 3)

Competition

Due to a lot of competition, the drawback that KCPL will face if it does not go with APL is that
APL will go to other manufacturing companies with its offer and this, in turn, will increase the
competition

MKG brand

Without APL, KCPL will retain its independence and maintain its legacy for their upcoming
generations

Recommendation

Based upon the evaluation of the above options the company should go ahead with APL’s
proposal offer. The current health of KCPL is a matter of grave concern as the company is
suffering from financial losses. By accepting the offer from APL and becoming its contract
manufacturing unit, the current losses of about 1.4 lakhs per month can be transformed into
profits of about Rs. 78000 per month. Since the contract would be of 3 years, the company
can go in the economic short run for 3 years and gain technical manufacturing expertise and
operational excellence from APL and also work upon its human resources management such
that it minimizes the high absenteeism rate from its permanent employees. It would
ultimately be beneficial for MKG brand. Since KCPL has a manufacturing capacity of 240 MT
per month, 50 is being used for Pearson and 70 would be used for APL, the remaining 120
would be utilized as per the original plan to manufacture MKG biscuits. The deal with APL
would be in-turn beneficial for MKG as a brand, as the profits generated from the APL deal
can be used for creating the brand equity for MKG and thus serving the long-term strategic
goals of KCPL

Action Plan

KCPL should immediately grab the opportunity to become a CMU for APL. As other
competitors are vying for the same opportunity, any delay in the same could be catastrophic
for KCPL. KCPL would not want to create another competitor for itself, by letting APL side with
some other firm. The contract with APL should be finalized and the manufacturing process
should be begun as soon as possible so that the financial losses are minimized at the earliest.

Word Count: 1076 words

Exhibit 1: Profit/loss calculation for MKG in 1986-87

Component Amount
Total Revenue 2172000
Flour 900000
Vegetable oil 624000
Sugar 288000
Preservative and packaging 120000
Casual Labour 36000
Permanent Salary 275000
Interest 10000
Other fixed commitments 60000
Total Cost 2313000
Total profit/loss -141000

Note: KCPL sold 120 MT biscuits at 18,100 INR per MT

Exhibit 2: Earnings of KCPL from Pearson and APL

Component Pearson APL

Revenue 150000 105000
Casual labour 15000 21000
Profit/loss 135000 84000

Note: KCPL had an order of 50 MT from Pearson and 70 MT from APL. Material costs (Flour, Oil,
Sugar, packaging) were reimbursed by both the companies and Fixed costs (Permanent Salary,
Interest, other commitments) were covered by KCPL itself.

Exhibit 3: Profit/loss when doing business with Pearson and APL

Component Pearson Pearson and APL

Profit/loss from MKG -141000 -141000
Profit/loss from contracts 135000 219000
Net Profit/loss -6000 78000