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Kanpur Confectioneries Private Limited
In September 1987, Mr. Alok Kumar Gupta, 47, Chairman and Managing Director of Kanpur Confectioneries
Private Limited (KCPL), was in a meeting with his brothers, Vivek, 42, and Sanjay, 33, to decide their response to the
proposal of A-One Confectioneries Private Limited (APL) that KCPL might consider becoming its contract
manufacturer. APL, an overall national leader, did not have a significant presence in the North. However, it had a
leading position in the South. It had desired to expand its supply to the market by subcontracting orders to other
manufacturers.

KCPL and its Background

Mohan Kumar Gupta was the first entrepreneur to set up a candy making unit in UP. By the end of sixties he was a
leader in candies in the northern region. Later he decided to invest his surplus cash to diversify into making glucose
biscuits and selling them under the ‘MKG’ brand. He continued to advertise the brand in vernacular newspapers. He
also advertised the brand at retail shops. The business was profitable but the acceleration of production was
constrained by the scarcity of ingredients like flour, sugar and hydrogenated vegetable oil (HVO). He extended his
range and offered cream, salt and marie biscuits under the `MKG' brand.

Biscuit making was a relatively straightforward process. The quality of biscuits depended on the quality and
proportion of ingredients and the carefulness with which the temperature was maintained at different phases of
baking. The ready to eat biscuits were sent to the packing department. The biscuits were manually packed in
packets of 100 grams.

In 1980-81 KCPL’s turnover in biscuits’ business was Rs.2 crores, an increase of 15% over 1979-80. Its net profits
were Rs.20 Lakhs, an increase of 12% over the previous year. In 1980-81 KCPL doubled its capacity from 120 tons
per month to 240 tons per month. In 1983-84 its sales increased to Rs.3 crores and net profits to Rs.25 lakhs.

Situation in 1987
In 1986-87 the average monthly production of ‘MKG’ biscuits was 120 tons. KCPL depended on both permanent
and casual workers for its operations. In all there were ninety permanent employees. Casual workers were
employed on daily basis to support activities in the packing and material-handling department. The size of casual
work force depended on the volume of production. The prime problem in operations was absenteeism. The workers
used to abstain from work without notice. The absenteeism was fifty per cent. This had led to uneven production. The
daily production varied between 2 tons per day to 6 tons per day.

Induction of Family Members

In 1982, Mohan Kumar handed over the leadership of KCPL to his eldest son Alok. He also involved two of his other
sons. There was clear allocation of responsibilities among the family. Alok Kumar looked after finance and liaison
functions. Vivek looked after human resource management and manufacturing, and Sanjay was responsible for
marketing, logistics and administration. They did not interfere in each other’s areas. The family members met on the
fifth of every month to review the operations and performance of the businesses, and think through the issues for the
future.

The management principles laid down by the family were: respecting the laws of the land, not exploiting labour,
running business on ethical lines, treating the consumer as king, and not evading taxes. The banker to the company
was State Bank of India. KCPL was associated with this bank since 1954. The company believed in the policy of
ploughing back the surplus. The family members earned a salary.

‘MKG’ Brand
`MKG' was a popular brand in the Northern region. 'MKG' biscuits were known for their quality, crispness and
affordable price. The brand was advertised in the vernacular dailies and weeklies. It was also advertised on
hoarding on cross roads and at the point of sale in "Kirana" shops located in residential colonies. The biscuits were
available in standard packs of 100 grams. KCPL did not sell loose biscuits to the Kirana shop. The Kirana shop
owners broke the pack and sold them loose whenever needed. The consumers were middle class families in urban
and semi urban areas. The families in metropolitan cities preferred A-One or International.
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Canteens of institutions bought biscuits by floating competitive tenders. They placed orders on the lowest bidder. In
1986-87 KCPL had sold 360 tons to the small and medium sized institutions. The total demand from these institutions
was estimated to be around 2400 tons. The large institutions preferred the other three brands.

Competition and KCPL's Performance

In 1973-74, Glucose biscuits were a growing segment of the biscuit industry. Only two national level players, A-One
Confectioneries Private Limited and International Biscuits Limited, dominated the industry. However, competition
increased with the setting up of seventy units in the unorganized sector between 1975 and 1980. Some of them
were set up in the backyards of entrepreneurs under less hygienic production conditions. They either sold unbranded
biscuits or sold them with brand names sounding similar to the leading brands. They even imitated the packaging
style of the leading brands. It was apprehended by the industry that the units in unorganized sector avoided
payment of taxes. The manufacturers had to pay an excise duty of 15% and sales tax of 7% of sales value.
During the same period 8 new units were set up in the organized sector in Uttar Pradesh.

In the new competitive environment, KCPL got stuck in the middle. It could not increase its prices to take care of
rising costs of labour and material. It did not have the national scale to reduce costs considerably nor did it have
the premium image to get a higher price. It could not withstand the competitive pressure. Between 1983-84 and
1986-87 its sales declined. Its capacity was rendered surplus. It incurred a loss. See exhibit 1 for details of monthly
operating performance of ‘MKG’ operations in 1986-87.

The candy business was on the decline. Owing to increased competition from both organized and unorganized
players the margins were under pressure. The business had become unattractive and uncompetitive. The family
members decided to close the candy line.

Arrangements with Pearson Health Drinks Ltd.

In 1985 Pearson Health Drinks Limited (Pearson), a multinational company selling ‘Good Health’ nourishing health
drink, decided to diversify into health biscuits by building on its good will in health drink market. It also decided that
it would not set up its own manufacturing facility. It would outsource the supply from small and medium scale units by
providing technical support. Mr. Ramakant Joshi, a consultant to KCPL, recommended KCPL’s case to Pearson. He had
worked with Pearson before starting his consulting company. Pearson promised a load of 100 to 125 tons per month
and a conversion rate of Rs.3 per kg after reimbursing fully the cost of materials. It also agreed to allow KCPL to
run its existing line of business. KCPL saw an opportunity to utilize its surplus capacity. It also hoped to learn new
tools of quality management. It did not see Pearson as a competitor to KCPL. The agreement with Pearson was
signed at its corporate office in Paris in May 1986. The initial order from Pearson was for 50 tons per month
between May 1986 and March 1987. Pearson relied on the expertise of KCPL. It did not provide any technical
guidance. Its officers inspected the quality of the biscuits before dispatch.

The market response to Good Health biscuits was not very encouraging. They were seen as high priced biscuits
without any additional benefits. The customers had perceived the A-One biscuits as health and energy providing
biscuits. The price of A-One biscuits was two-thirds of 'Good Health' biscuits. APL had stressed in its advertisements
that its biscuits contained milk solids.

Offer of APL
APL was an overall national market leader with a reputation for quality and price competitiveness. APL had plans to
reduce its cost of manufacturing by resorting to contract manufacturing route. It had its plants in Chennai, Tamil
Nadu. It had mechanized most of its operations and reaped benefits of large-scale economies. It had introduced
quality control procedures based on Japanese practices. These practices had enabled the company to minimize
wastage and improve responsiveness to customer's orders. It had aspirations of becoming a leader in each of the
regional segments. It had entered the Northern segment in 1973-74. By 1986-87 it had become a leading player in
the segment with a monthly sale of 200 tons.

The Proposal
APL offered to place an initial order for producing seventy tons of Glucose biscuits per month. It also offered to
supply the pre printed packing material with APL name. It would inspect the production processes of KCPL and
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recommend changes in processes and equipments, if needed. The changes needed to be carried out by KCPL at its
own cost. APL would post two quality control officers at KCPL plants and enable KCPL to adhere to quality
procedures. It would supply the ‘APL secret ingredient’ to KCPL but KCPL would be required to buy the other
ingredients like sugar, flour and HVO oil from one of the authorized suppliers of APL. It offered to reimburse the
raw material expenses as per its norms and pay a conversion charge of Rs. 1.50 per kg to cover the expenses on
labour, overheads and depreciation. The initial contract was to be for three years. APL had hinted that the off take
would be increased if KCPL rose to the expectations of APL. In terms of control, KCPL would be required to send
daily production and raw material consumption report to APL.

Discussion in the Family

Alok Kumar presented the proposal of APL to his brothers. There were both advantages and disadvantages. A clear
advantage was in terms of avoiding marketing, brand building and distribution expenses and minimizing the
business risks. It would also help them utilize the surplus capacity. The disadvantage was in the possible loss of
independence. It was also feared that they might not be able to concentrate on strengthening the ‘MKG’ brand built
over the years. In fact, the family name was dependent on the success of the biscuit line. In the early years of its
growth, Mohan Kumar had the vision of emerging as a leading national brand and competing successfully with APL.

There were also anxieties in terms of how the relationship with APL would work out and how APL’s experience of
managing large plants in Chennai would help in running a small plant in Kanpur. Would there be interference? Was
the conversion charge fair? What all they should be careful about if they take-up the offer? They had to decide
soon as they were not sure whether other biscuit manufacturers were also interested in the opportunity and would
out beat KCPL in approaching APL.

Exhibit 1
Details of MKG’s Monthly Operations in 1986-87

Dimension MKG APL

Sale Per Month (Tons) 120 1200 National
(200 North)
Price Per Ton (Rs.) 18,100 19,000
Consumption of Flour Per Ton (in Kg) 750 700
Consumption of HVO Per Ton (In Kg) 150 140
Consumption of Sugar Per Ton (In Kg) 200 190
Price of Flour per bag of 50 Kg. 500 490
Price of HVO per tin of 15 Kg 520 500
Price of Sugar per bag of 100 Kg 1200 1150
Preservatives and Packaging costs per ton 1000 1000
Casual Labour cost per ton (Rs.) 300 400
Daily wage rate (Rs.) 50 80
Permanent Salary Bill Per Month (Rs. Lakhs) 2.75 NA
Interest Per Month (Rs.) 10,000 NA
Other fixed Commitments (Rs.) 60,000 NA