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Kanpur Confectioneries Private Limited (A)On September 10, 1981, Mr. Alok Kumar Gupta, 47, Chairman and Managing Director of KanpurConfectioneries Private Limited (KCPL), was in a meeting with his brothers, Vivek, 42, andSanjay, 33, to decide their response to the proposal of A~One Confectioneries Private Limited(APL) that KCPL might consider becoming its contract manufacturer. APL was a leadingnational player in the confectionery industry. It had desired to expand its supply to the market bysubcontracting orders to other manufac ture rs . It had also desired to retain full control over thequality and production processes. Ithad promised to the sub contractors that it would compensatethem adequately in terms of volume of business and conversion charges. To KCPL theadvantages were in getting assured return on its investment and access to APVs manufacturingexpertise but the disadvantages were in the possible loss of independence in decision making,dilution of company's own brand. 'MKG'. and family prestige.KCPL and its BackgroundKCPL was started in 1945 by Mohan Kumar Gupta, then 28~ in Jaipur, Rajasthan State, to sel1sugar candies under the brand 'MKG'. Earlier, he was a worker in a candy unit in Jaipur. Hestarted his ow n business with th e dealership of candies produced by oth ers. W ith th e experiencegained he set up a production unit in Jaipur in 1946. Between 1946 and 1950 thirty units were setup in the unorganised sector in Rajasthan to sell a variety of candies. As com petition increased themargins came down. KePL could not compete on costs as its costs were higher than th e oth ermanufacturers. Mohan Kumar faced a financial crisis. He decided to shift the production toanother state an d reduce costs. In 1954, he bought one and a half acres plot in Radha IndustrialEstate, Kanpur, U ttar Pradesh (UP) and set up a candy making unit. He became the firstentrepreneur to set up 8 candy making unit in UP. He appointed three sales representatives tocover th e entire state, establish dealership and promote 'M KG' as a lead ing brand . He advertised"MKG' in the vernacular news papers and on hoardings located at cross roads. To build further onhis success, he established a dealer's network in the neighbouring states of Bihar and MadhyaPradesh. By the end of sixties he was a leader in candies in the northern region. He decided toinvest his surplus cash to diversify into making glucose biscuits and selling them under the~MKG' brand. In 1970 there were two large national and six regional manufacturers. The demandwas growing at more than 15% per annum. The marg ins w ere attractive. He saw th e biscuits'venture as a n extension of the candy business. The process was simple and the equipments wereavailable indigenously. Sugar was the common raw material. However, he had to arrange forregular supply of other raw materials like maida (refined wheat flour) and vegetable oil(vanaspathi). He tied up with local merchants and commenced production in 1970. He renteddepots in key towns for stocking the biscuits. He continued to advertise the brand in vernacularnewspapers. He also advertised the brand at retail shops. The business was profitable but theacceleration of production was constrained by the scarcity of ingredients like maida, sugar andvanaspathi, He extended his range and offered cream, salt and marie biscuits under the ':MKGIb rand ..

Prepared by Professor M ukund Dixit and Mrs. Vandana Dixit. The nam es of places, pro ducts and peopleare disguised. The case writers express their gratitude to the members of the family that co-operated withthem in writing this case.

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2of6 IIMAlBP-268In 197374 KCPL reached the number two position in the market with a monthly sale of 11tonnes (1 tonne=IOOO kg). Prince Biscuits, promoted by Ghanshyam Das in 1960t was th e leade, "with a monthly sale of 130 tonnes. His plant, located at Agra, Uttar Pradesh, had a monthly

'pu\.'i"'capacity of 150 tonnes, International Biscuits Ltd. held the third position with a sale of 10'\ ~,/ ~'(' tonnes per month. Its plant located at Mumbai, Maharashtra, had a capacity of 800 tonnes pefiv -, '\J~ month. It was a leading player in the Western and Eastern regions. AOne Confectioneries\\\j 'rA' Limited, an overall national leader with a total capacity of 900 tonnes per month, did not have a

r \ , f ' - J$ignificant presence in the North. However it had a leading position in the South.( , t VIn 1980-81 KCPL's turnover in biscuits' business was Rs.2 crores, an increase of ]5% over 197980. Its net profits were Rs. 20 Lakhs, an increase of 12% over the p rev io us y ear. In 1980-81KePL doubled its capacity from 120 tonnes per month to 240 tonnes per month. In 1983-84 itssales increased to Rs.3 crores and net profits to Rs.25 lakhs,Technology and Operations in 1987Biscuit making involved preparation of dough by mixing maida sugar syrup, vanaspathi andcertain preservative chemicals in a given proportion, stamping the dough to get various shapesand sizes. and baking the shapes to get ready to eat biscuits. It is the proportion of ingredientsthat enabled the company to develop a secret formula. The quality of materials received waschecked in a laboratory for impurities and existence of metal particles. Maida was cleaned andfed to the m ixing unit manually. The sug ar crystals w ere converted into sugar syrup by dissolvingthe crystals in water and heatiQ.g the solution. The hot solution was cooled to room temperatureand stored in cylinders. The syrup was mixed with maida an d vanaspathi in small m ix er s. Themixed dough was fed to the stamping unit and the stamped wet biscuits were fed to the oven forbaking. The temperature needed for baking varied from stage to stage. The quality of biscuitsdepended on the care with which the temperature was maintained at different phases of baking.The ready to eat biscuits were sent to the packing department. Tbe biscuits were manually packedin packets of 100 grams.In 1986-87 the average monthly production of 'MKG' biscuits was 120 tonnes. KCPL dependedon both permanent and casual workers for its operations. In all there were ninety permanentem ployees. The m onthly salary bill was R s, 2.75 Lakhs. Casual workers were employed o n d ailybasis to support activities in the packing and ma te ria l- hand lin g d ep ar tment, The size of casualwork force depended on the volume of production. On an average, six casual workers wereemployed 10 support one tonne of production. The daily wage rate was Rs. 5O. The workers werefrom the local region. The prime problem in operations was absenteeism. The workers used toabstain from work without notice. The absenteeism was fifty per cent. This had led to unevenproduction. The daily production varied between 2 tonnes per day to 6 tonnes per day. Thecompany sought the advice of technical consultants on issues relating to capacity expansion.equipment selection and productivity improvements. The overall operations were supervised bA run K apoor, M anager (Operations). He was a graduate in science from a local college.KePL bought maida in bags of 50 kg, sugar in bags of 100kg and vauaspathi in tins of 15 kgfrom local suppliers and stocked them near the mixing unit.Induction of Family MembersMohan Kwnar had six sons. Alok Kumar, the eldest son of Mohan Kumar.joined the business i1960 after completing his graduation in commerce. Vlvek, the elder son, joined the company in1965 after completing his graduation in mechanical engineering. Sanjay, the last son, joined th'eo~_f971. ~ . ~ . ~ - ..

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e allocation 01 ' responsioumes among the ramuy memoers was Clear. i'\IUK l'\..UIU41 IUUr...COU1ance and liaison functions. Vivek looked after human resource management anufacturing, and Sanjay was responsible for marketing, logistics and administration. They dt interfere in each other's areas. The family members met on the fifth of every month to revieoperations and performance of the businesses, and think through the issues for the futurcision making within the family was seen by them as participative. The family members couagree on issues without disrespect to the fraternal hierarchy.e management principles laid down by the family were: respecting the laws of the land, nploiting labour, running business on ethical Lines, treating the consumer as king, and nading taxes.nds Managemente banker to the company w as State Bank of India. KCPL was associated with this bank sin54. The company believed in the policy of ploughing back the surplus. The family memberned a salary.KG' Brandt was a popular brand in th e No rth ern region. IMKG' biscuits were k nown for their qualit

spness and affordable price. The brand was advertised in the vernacular dailies and weekliewas also advertised on hoarding on cross roads and at the point of sale in "Kirana" shoated in residential colonies. The biscuits were available in standard packs of I 00 gramPL did not sell loose biscuits to the Kirana shop. The Kirana shop owners broke the pack anld them loose w henever needed. The consum ers were m iddle class fam ilies in urban and seman areas. The families in metropolitan cities preferred A-One or International.nteens of institutions bought biscuits by floating competitive tenders. _They placed orderslowest bidder. In 1986~87 KCPL had sold 360 tonnes to the small and medium size

titutions. The total demand from these institutions was estimated to be around 2400 tonnee large institutions preferred the other three brands.ompetition and KCPLts Performance1973-74, Glucose b iscu its were a growing segment of the biscu it indus try. Only two nationyers, A-One Confectioneries Private Limited and International Biscuits Limited, dominated tustry. However, competition increased with the setting up of seventy units in the unorganizector between 1975 and 1980. Some of them were set up in the backyards of entrepreneurs unds hygienic producdon conditions. They either sold unbranded biscuits or sold them with branmes sounding similar to the leading brands. They even imitated the packaging style of tding brands. It was apprehended by the industry that the units in unorganized sector avoideyment of taxes. The manufacturers had to pay an excise duty of 1 5 0 / D and sales tax of 7%les value. During the same period 8 new units were set up in the organised sector in Utt

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r $ ~ (I(.G-t"t..)as rendered' surplus. It incurred a loss. See exhibit 1 for details of monthly operatingerformance of'MKG' operations in 1986-87.he candy business was on the decline. Owing to increased competition from both organized annorganized players the margins were under pressure. The business had become unattractive ancompetitive. The family members decided to close the candy line.

rrangements with Pearson Health Drinks Ltd.1985 Pearson H ealth D rinks Lim ited (Pearson), a m ultinational com pany selling 'G ood H ealthourishing health drink, decided to diversify into health biscuits by building on its good will i

drink market. It also decided that it would not set up it s own manufacturing facility.ould outsource th e supply from small and medium scale units by providing technical supportr. Ramakant Joshi, a consultant to KCPL, recommended KCPL's case to Pearson. He hawith Pearson before starting his consulting company. Pearson promised a load of 100 t25 tonnes per month and a conversion rate of Rs.3 per kilo after reimbursing fully the cost oaterials. It also agreed to allow KCPL to run its existing line of business. KCPL saw apportunity to utilise its surplus capacity. It also hoped to learn new tools of quality management.did not see Pearson as a com petitor to KCPL. The agreement with Pearson was signed at itorporate office in Paris in May 1986. The initial order from Pearson was for SO tonnes peonth between May 1986 and March 1987. Pearson relied on the expertise of KCPL. It did noany technical guidance. I ts o ff icers inspected the quality of the biscuits before dispatch.he market response to Good Health biscuits was not very encouraging. They were seen as highriced biscuits without any additional benefits. The customers had perceived the A-One biscuitss health and energy providing biscuits. The price of A-One biscuits was two-thirds of 'Goodealth' biscuits. APL had stressed in its advertisements that its biscuits contained milk solids.fferor APLSeptember 8) 1987 Mr. Bharat Shah, Chairman of APL, mentioned in the meeting oManufacturers Association of India (eMAI) that his company was in te re ste d iits supplying capacity by promoting contract manufacturing units (eMU) that madiscuits for APL according to the specifications developed by APL. He also mentioned that hi

would provide technical guidance to the CMUs and offer fair conversion charges. Mrlok Kumar Gupta met Shah after the conference and enquired whether he was serious in hiShah answered in the affirmative.o APL. eMU route was an attempt to reduce its cost of manufacturing. APL was an overaltio nal m arke t leader w ith a reputation for quality and price competitiveness. It had not changeds prices in the last three years. Ithad its plants in Chennai, Tamil Nadu.lts monthly capacity i

was 1200 tonnes. It had mechainsed most of its operations and reaped benefits of larga le economies. Ittad introduced quality control procedures based on Japanese practices. Theseractices had enabled the company to minimize wastage and improve responsiveness tustomer's orders. It competed with both national and regional players in various biscui

It had aspirations ofhernmtno ~ 1":::IIrft"r in ""'~I'h n.f'tl, 1 ._.._ T. L~...1 _ __

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50f6 lIMAlBP-26

The ProposalAPL o ffe re d to place an initial order for producing seventy tonnes of G lucose biscuits p er mo nthIt also offered to supply the pre printed packing material w ith APL nam e. It w ould inspect thproduction processes of KCPL and recommend changes in processes and equipm ents, if neededThe changes needed to be carried out by KCPL at its own cost. APL would post two qualitycontrol officers at KCPL plants and enable KCPL to a dh ere to quality procedures. Itwould supplythe 'APL secret ingredient' to KCPL but KePL would be required to buy th e other ingredientslike sugar, maida and vanaspathi oil from one of the authorized suppliers of APL. It offered treim burse the raw m aterial expenses as per its norms and pay a conversion charge of Rs. 1 .5 0 peK ilogram to cover the expenses on labour, overheads and depreciation. The initial contract w as tbe for three -years. Shah had hinted that the off take would be increased if KCPL rose to thexpectations of APL. In terms of control, KCPL would be required to send da ily p roduc tion anraw m aterial consum ption report to A PL.Discussion in the FamilyAlok Kumar presented the proposal of APL to his brothers. There were both advantages anddisadvantages. A clear advantage was in terms of avoid ing marketing , brand build ing anddistribution expenses and m inim izing the business risks. It would also help them utilise thsurplus capacity. The disadvantage was in th e possible loss of independence. It was also fearedthat they might not be able to concentrate on strengthening the 'MlCG' brand built over the yearsIn fact, th e fam ily name was dependent on the success of the biscuit line. In the early years of itg rowth , Mohan Kumar had the vision of emerging as a leading national brand and competingsuccessfully w ith APL .There were also anxieties in tennsof how the relationship with APL would work out and howAPL's experience of m anaging large plants in Chennai would help in running a small plant iKanpur. W ould there be interference? W ould they be asked to make additional investments imanufacturing? Was the conversion charge fair? How would Pearson view the venture waanother issue.The other questions were: what did the family members want from their business ventures? Whawould they like to give to their sons when they grew up? They had to decide soon as they werenot sure whether other biscuit manufacturers were also interested in the opportunity and wouldout beat KePL in approach ing APL .

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Exhibit 1Details of IMKG's Monthly Operations in 1986-87Dimension 'MKG' APLSale Per Month (Tonnes) 120 1200National (200 North)Price Per Tonne (Rs.) 18,100 19,000Consumption ofMaida Per Tonne (in Kg) 750 700Consumption of Vanaspathi Per Tonne (In 150 140Kg)Consumption of Sugar Per Tonne (In K~) 100 190Price of Maida per bag of S O Kg. 500 49 0Price of VanliSl!_athi> I ? ! tin of 15Kg 520 500Pr\ce of Sugar per bag' of 100 Kg 1200 1150!:,J;~ives and Packaging costs per 1,000 1,000

cas~ k : b O u r cost per tonne (Rs.) 300 40 0Wage'R3te 50 80Permanent Salary Bill Per Month (Rs, 2.75 NA}..akhs)

, Iaterest Per Month (Rs.) 10,000 NA..other fixed Commitments 60,000 NAThe data relates to 'MiCG' biscuits operations. They do not cover the impact of Pearson contract.Source: Discussion with company executives and trade.

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