Kanpur Confectioneries Essay Example

hoardings. Expanding his success, he also established a network of dealers in neighboring states Bihar and Madhya Pradesh. By the 1960s, he had become a leader in the candy industry in the northern region.

He made the decision to use his excess funds to expand his business by producing and selling glucose biscuits under the brand name 'MKG'. By 1970, there were several national and regional manufacturers in the market, with demand for the biscuits growing at a rate of over 15% per year. The profit margins were attractive, and he believed that this venture was a natural extension of his candy business. The production process was straightforward, and all the necessary equipment could be sourced locally. The primary ingredient, sugar, was readily available. However, he had to ensure that he remained anonymous by using pseudonyms for all geographical locations, products, and individuals involved.

The authors of this case would like to thank the cooperating family members who helped in its creation. This teaching material from the Indian Institute of Management, Ahmedabad serves as a foundation for classroom discussions. These cases do not aim to demonstrate either correct or incorrect ways to handle administrative problems. © 2001 by the Indian Institute of Management, Ahmedabad. 2 of 6 IIMA/BP0268(A) The entrepreneur also made arrangements for a consistent supply of other raw materials such as maida (refined wheat flour) and vegetable oil (vanaspathi). In 1970, he partnered with local merchants and began production.

The company rented warehouses in important towns to store the biscuits. They continued advertising the brand in local newspapers and retail shops. Although the business was profitable, they faced limitations in increasing production

due to a scarcity of essential ingredients such as maida, sugar, and vanaspathi. To expand their range, they introduced cream, salt, and Marie biscuits under the 'MKG' brand. By 1973-74, KCPL became the second largest player in the market, selling 110 tonnes (1 tonne = 1000 kg) per month. The leading brand was Prince Biscuits, promoted by Ghanshyam Das in 1960, which sold 130 tonnes monthly.

Located in Agra, Uttar Pradesh, KCPL's plant had a monthly capacity of 150 tonnes, making it a significant player in the region. International Biscuits Ltd., situated in Mumbai, Maharashtra, held the third position with a monthly sale of 100 tonnes, but boasted a much larger capacity of 800 tonnes. A-One Confectioneries Limited, the overall national leader with a total capacity of 900 tonnes per month, lacked a prominent presence in the North but dominated the South. In the year 1980-81, KCPL's turnover in the biscuits business reached Rs. 2 crores, marking a 15% increase from the previous year.

Its net profits increased by 12% over the previous year, reaching Rs. 20 Lakhs. In 1980-81, KCPL doubled its capacity from 120 tonnes per month to 240 tonnes per month. By 1983-84, sales reached Rs. 3 crores and net profits reached Rs. 25 lakhs. In 1987, biscuit making involved the preparation of dough by mixing maida, sugar syrup, vanaspathi, and certain preservative chemicals in specific proportions. The dough was then stamped into various shapes and sizes and baked to create ready-to-eat biscuits. The company's secret formula was developed based on the proportion of ingredients used in this process.

The laboratory checked the received materials for impurities and metal particles. Maida was

manually cleaned and fed into the mixing unit. The sugar crystals were dissolved in water and heated to create sugar syrup. The hot solution was then cooled and stored in cylinders at room temperature. The syrup was combined with maida and vanaspathi in small mixers. The resulting dough was then passed through the stamping unit, and the wet biscuits were baked in the oven. The baking temperature varied at each stage.

The temperature control during various stages of baking was crucial for the quality of biscuits. Once ready to be consumed, the biscuits were packed manually in 100-gram packets. During the 1986-87 period, the average monthly production of 'MKG' biscuits reached 120 tonnes. KCPL relied on a combination of permanent and casual workers to carry out its operations, employing a total of ninety permanent employees. The monthly salary expenditure for these employees amounted to Rs. 2.75 Lakhs. Additionally, casual workers were hired on a daily basis to assist with packing and material handling tasks.

The casual workforce size was dependent on the production volume, with an average of six casual workers hired for every one tonne of production. These workers, who were from the local region, were paid a daily wage rate of Rs. 50. The main issue faced in operations was absenteeism, with a high absenteeism rate of fifty percent. This resulted in inconsistent production levels, ranging from 2 tonnes per day to 6 tonnes per day. Due to these challenges, the company decided to seek guidance from technical consultants for advice on capacity expansion, equipment selection, and productivity improvements.

The overall operations were supervised by Arun Kapoor, Manager (Operations). He was a science

graduate from a local college. KCPL bought maida in bags of 50 kg, sugar in bags of 100 kg, and vanaspathi in tins of 15 kg from local suppliers and stocked them near the mixing unit. Mohan Kumar had six sons, and Alok Kumar, the eldest son, joined the business in 1960 after completing his graduation in commerce. Vivek, the elder son, joined the company in 1965 after completing his graduation in mechanical engineering.

In 1974, Sanjay, the youngest son, joined the business after graduating in arts. The other three sons of Mohan Kumar started their own trading concerns focusing on metal parts and containers. In 1982, Mohan Kumar passed on the leadership of KCPL to his oldest son. At that time, Alok's sons, Vivek and Sanjay, were still studying in school. The family members had clear responsibilities assigned to them - Alok Kumar handled finance and liaison functions, Vivek took charge of human resource management and manufacturing, and Sanjay was responsible for marketing, logistics, and administration.

They refrained from interfering in each other’s areas and instead met as a family on a monthly basis to evaluate the operations and achievements of their businesses, while also contemplating future concerns. They considered the decision-making process within the family to be participatory, allowing members to express differing opinions without undermining the fraternal hierarchy. The family established management principles which included abiding by legal regulations, treating labor fairly, conducting business ethically, prioritizing consumer satisfaction, and fulfilling tax obligations.

The State Bank of India served as the banker to KCPL since 1954, as the company believed in reinvesting their surplus funds. The family members received a salary. The 'MKG'

brand was well-known in the Northern region and was famous for its high quality, crispy biscuits at an affordable price. The brand was promoted through advertisements in local newspapers and magazines, as well as on billboards at major intersections and at "Kirana" shops in residential areas. The biscuits were sold in 100-gram standard packs.

KCPL did not sell loose biscuits to the Kirana shop. Instead, the Kirana shop owners broke the pack and sold them individually as needed. The consumers of these biscuits were primarily middle-class families residing in urban and semi-urban areas. In metropolitan cities, however, A-One or International brands were more popular among families. When it came to purchasing biscuits for canteens in institutions, competitive tenders were floated and orders were placed with the lowest bidder. During 1986-87, KCPL managed to sell 360 tonnes of biscuits to small and medium-sized institutions, but the total demand from these institutions was estimated to be around 2400 tonnes. Large institutions, on the other hand, showed a preference for the other three brands.

Competition in the biscuit industry saw a rise in 1973-74 due to the growth of Glucose biscuits. At that time, the industry was dominated by two national players, A-One Confectioneries Private Limited and International Biscuits Limited. However, the unorganized sector witnessed the establishment of seventy units between 1975 and 1980, which increased competition further. These units, often operated under unsanitary production conditions, either sold unbranded biscuits or used brand names that sounded similar to the leading brands.

The unorganized sector in the industry imitated the packaging style of leading brands and avoided paying taxes. Manufacturers in this sector had to pay 15% excise duty

and 7% sales tax. Meanwhile, 8 new units were established in the organized sector in Uttar Pradesh, creating a competitive environment. In this new landscape, KCPL struggled as it couldn't raise its prices to cover rising labor and material costs. Additionally, it lacked the national scale to significantly reduce costs or a premium image to command higher prices. Unable to withstand the competition, KCPL experienced a decline in sales between 1983-84 and 1986-87, resulting in surplus capacity and financial losses. Refer to exhibit 1 for detailed monthly operating performance of 'MKG' operations in 1986-87. With increased competition from both organized and unorganized players, the candy business became unattractive and uncompetitive. As a result, the family members made the decision to discontinue the candy line.

In 1985, Pearson Health Drinks Ltd. (Pearson), a multinational company, made arrangements to expand into the health biscuit market. Instead of setting up its own manufacturing facility, Pearson decided to outsource the supply from small and medium scale units while providing technical support. Mr. Ramakant Joshi, a consultant to KCPL, recommended KCPL's case to Pearson based on his previous work experience with the company.

Pearson made a commitment to provide KCPL with a monthly load of 100 to 125 tonnes, with a conversion rate of Rs. 3 per kilo after fully reimbursing the cost of materials. KCPL, in turn, was permitted to continue its current line of business and saw an opportunity to utilize its excess capacity. KCPL also anticipated acquiring new quality management tools through this collaboration. Rather than viewing Pearson as a rival, KCPL saw the potential benefits of this agreement. The signing of the agreement took place at

Pearson's corporate office in Paris in May 1986. Initially, Pearson placed an order for 50 tonnes per month from May 1986 until March 1987.

Pearson trusted KCPL for expertise without offering technical guidance. Pearson's officers inspected biscuit quality before shipment. The market response to Good Health biscuits was disappointing, as they were viewed as expensive without extra benefits. Customers perceived AOne biscuits as nourishing and energizing, while A-One biscuits were priced at two-thirds of 'Good Health' biscuits. APL promoted their biscuits as containing milk solids in advertisements. Mr. APL made an offer on September 8, 1987.

In the Confectioneries Manufacturers Association of India (CMAI) meeting, Bharat Shah, Chairman of APL, expressed interest in increasing their supplying capacity through the promotion of contract manufacturing units (CMUs) that would produce biscuits for APL based on their specific requirements. Shah also stated that his company would provide technical guidance to the CMUs and offer fair conversion charges. Mr. Alok Kumar Gupta approached Shah after the conference to inquire about the seriousness of his proposal, to which Shah confirmed. APL sees the CMU route as a means to reduce manufacturing costs.

APL, a national market leader known for quality and competitive prices, had not altered its pricing for the past three years. The company had its manufacturing plants situated in Chennai, Tamil Nadu, with a monthly capacity of 1200 tonnes in 1986-87. APL had implemented mechanization in most of its operations, resulting in advantageous economies of scale. Furthermore, the company had implemented quality control procedures inspired by Japanese practices, leading to reduced wastage and improved responsiveness to customer orders. APL faced competition from both national and regional players in

various biscuit segments with a goal of becoming a leader in each regional segment. The company had entered the Northern segment in 1973-74 and by 1986-87 had become a significant player with a monthly sale of 200 tonnes.

APL proposed an initial order for producing seventy tonnes of Glucose biscuits every month. Additionally, they offered to supply pre-printed packing material with the APL brand. The company would inspect KCPL's production processes and suggest any necessary changes in methods and equipment. However, it was KCPL's responsibility to carry out these changes at their own expense.

APL would station two quality control officers at KCPL plants and assist KCPL in following quality procedures. APL would provide the ‘APL secret ingredient’ to KCPL, but KCPL would need to purchase other ingredients like sugar, maida, and vanaspathi oil from an authorized APL supplier. APL offered to reimburse the expenses for raw materials according to their standards and pay a conversion charge of Rs. 1.50 per Kilogram, which would cover labor, overheads, and depreciation costs. The initial contract duration was three years. Shah had suggested that the off-take could increase if KCPL met APL's expectations.

KCPL would need to send a daily production and raw material consumption report to APL for control purposes. Alok Kumar discussed APL's proposal with his brothers in the Family. The proposal had both advantages and disadvantages. One clear advantage was the avoidance of expenses related to marketing, brand building, and distribution, as well as minimizing business risks. Additionally, it would allow them to effectively use their surplus capacity. However, the disadvantage was the potential loss of independence and concerns over the ability to focus on

strengthening the 'MKG' brand developed over the years.

The success of the biscuit line was crucial for the family name. Mohan Kumar, in the early stages of growth, aimed to become a top national brand and compete with APL. However, there were concerns about how the partnership with APL would function and whether their experience in managing large plants in Chennai would be beneficial for running a small plant in Kanpur. Questions arose about potential interference, required investments in manufacturing, the fairness of conversion charges, and how Pearson would perceive the venture.

The family members had two questions: what were their expectations from their business ventures and what did they want to pass on to their sons in the future? They needed to make a decision quickly because they were uncertain if other biscuit manufacturers were also interested and would beat KCPL in approaching.