Prabhat Dairy: The Crossover Challenge - … to End Supply Chain. Key Issues. Analysis. ... 50%...
Transcript of Prabhat Dairy: The Crossover Challenge - … to End Supply Chain. Key Issues. Analysis. ... 50%...
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Prabhat Dairy: The Crossover Challenge
DeGroote Consulting, Strategy Division
Sarah SchweinbergerBriana KnowltonMichael WidlickiShelby Gorelle
Opportunity Statement
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How can Prabhat Dairy execute a successful product mix and distribution strategy to maximize profitability and realize an optimal
balance between B2B and B2C?
Recommended Solution
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We recommend that Prabhat Dairy aims for a 50:50 B2B and B2C mix, by increasing value added and polypack products, and maximizing production capacity, using the MILK
strategy:
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Key Considerations
Key Considerations
Key Issues Analysis Alternatives Solution Execution Contingencies 5
Urge
ncy
ImportanceHighLow
High
Low
Product Profitability
• As a public firm, Prabhat Dairy must deliver profitable results to its shareholders
• Alternatives will be scored highly based on their ability to deliver a profitable solution
Profitability
Key Considerations
Key Issues Analysis Alternatives Solution Execution Contingencies 6
Urge
ncy
ImportanceHighLow
High
Low
Declining Working Capital
• Prabhat is getting stretched on both ends (AR and AP)
• High receivables, interest free loans to farmers and cattle feed has led to declining working capital
Profitability
Declining Capital
Key Considerations
Key Issues Analysis Alternatives Solution Execution Contingencies 7
Urge
ncy
ImportanceHighLow
High
Low
Optimal Expansion Strategy re: Distribution and Market Mix
• Currently, Prabhat utilizes a two pronged strategy – focusing on Mumbai, and then Tier 2 & 3 cities
• Management is divided on this strategy – some feel that Prabhatshould move into Tier 1
• The optimal recommendation will provide justification for the selected distribution strategy and reconcile these differences
Profitability
Declining Capital
Expansion Strategy
Key Considerations
Key Issues Analysis Alternatives Solution Execution Contingencies 8
Urge
ncy
ImportanceHighLow
High
Low
Optimal Capacity Usage
• For some products, Prabhat is running at low capacity; for others, near maximum capacity
• An ideal recommendation would allow Prabhat to optimally use its capacity, eliminating waste
Profitability
Declining Capital
Expansion Strategy
Capacity usage
Key Considerations
Key Issues Analysis Alternatives Solution Execution Contingencies 9
Urge
ncy
ImportanceHighLow
High
Low
Lack of B2C Branding Competencies
• Prabhat is mostly a B2B player and does not have competencies in selling to customers, branding and retail marketing
Profitability
Declining Capital
Expansion Strategy
Capacity usage
Branding competencies
Key Considerations
Key Issues Analysis Alternatives Solution Execution Contingencies 10
Urge
ncy
ImportanceHighLow
High
Low
Key Takeaway: Prabhat’s profitability and working capital are suffering.
Profitability
Declining Capital
Expansion Strategy
Capacity usage
Branding competencies
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Analysis
Breakdown of the Indian Market
Key Issues Analysis Alternatives Solution Execution Contingencies 12
Population: 1.254B, 17.5% of the world’s population
Breakdown of the Indian Market
Key Issues Analysis Alternatives Solution Execution Contingencies 13
Population: 1.254B, 17.5% of the world’s population
Broken down into four key territories:
Breakdown of the Indian Market
Key Issues Analysis Alternatives Solution Execution Contingencies 14
Population: 1.254B, 17.5% of the world’s population
Broken down into four key territories:
North India South India East India West India
Breakdown of the Indian Market
Key Issues Analysis Alternatives Solution Execution Contingencies 15
Population: 1.254B, 17.5% of the world’s population
Broken down into four key territories:
North India South India East India West India
• Lactose-tolerant individuals
• More milk consumed here than rest of country
• Food preferences: spicy and traditional
• Conflict prone region along border
• Home of New Delhi
Breakdown of the Indian Market
Key Issues Analysis Alternatives Solution Execution Contingencies 16
Population: 1.254B, 17.5% of the world’s population
Broken down into four key territories:
North India South India East India West India
• Lactose-tolerant individuals
• More milk consumed here than rest of country
• Food preferences: spicy and traditional
• Conflict prone region along border
• Home of New Delhi
• Food preferences: fried, traditional foods
• Most traditional of four provinces
Breakdown of the Indian Market
Key Issues Analysis Alternatives Solution Execution Contingencies 17
Population: 1.254B, 17.5% of the world’s population
Broken down into four key territories:
North India South India East India West India
• Lactose-tolerant individuals
• More milk consumed here than rest of country
• Food preferences: spicy and traditional
• Conflict prone region along border
• Home of New Delhi
• Food preferences: fried, traditional foods
• Most traditional of four provinces
• Food preferences: sweeter spice, likely due to proximity to Asia
Breakdown of the Indian Market
Key Issues Analysis Alternatives Solution Execution Contingencies 18
Population: 1.254B, 17.5% of the world’s population
Broken down into four key territories:
North India South India East India West India
• Lactose-tolerant individuals
• More milk consumed here than rest of country
• Food preferences: spicy and traditional
• Conflict prone region along border
• Home of New Delhi
• Food preferences: fried, traditional foods
• Most traditional of four provinces
• Food preferences: sweeter spice, likely due to proximity to Asia
• Food preferences: freshness
• Home of Mumbai
Breakdown of the Indian Market
Key Issues Analysis Alternatives Solution Execution Contingencies 19
Population: 1.254B, 17.5% of the world’s population
Broken down into four key territories:
North India South India East India West India
Indian Consumers• 72% rural areas, 28% cities• 47% live in North/West India• Growing labor force/income• More women in the workforce• 80% consume only liquid milk• Family oriented; meals are eaten at
home, filling spiritual/relationship needs as well as physical ones
Breakdown of the Indian Market
Key Issues Analysis Alternatives Solution Execution Contingencies 20
Population: 1.254B, 17.5% of the world’s population
Broken down into four key territories:
North India South India East India West India
Indian Consumers• 72% rural areas, 28% cities• 47% live in North/West India• Growing labor force/income• More women in the workforce• 80% consumer only liquid milk• Family oriented; meals are eaten at
home, filling spiritual/relationship needs as well as physical ones
Key Takeaway: The Northern and Western territories of India are a good fit for Prabhat’s products in a B2C environment.
End to End Supply Chain
Key Issues Analysis Alternatives Solution Execution Contingencies 21
Farmers
• Located close to Prabhat facilities (Maharashtra)
• 10,000• 3rd party
End to End Supply Chain
Key Issues Analysis Alternatives Solution Execution Contingencies 22
Farmers
450 Collection Points
Milk Contractors (3rd
party)
65% of milk
35% of milk
End to End Supply Chain
Key Issues Analysis Alternatives Solution Execution Contingencies 23
Farmers
450 Collection Points
Milk Contractors (3rd
party)
65% of milk
35% of milk
Loans, cattle feed, vets
Key Takeaway: No formal contracts in place, but Prabhat enforces good
relationships via benefits
End to End Supply Chain
Key Issues Analysis Alternatives Solution Execution Contingencies 24
Farmers
450 Collection Points
Milk Contractors (3rd
party)
65% of milk
35% of milk
Loans, cattle feed, vets
15 Chilling Centers
• 80 bulk milk coolers total
End to End Supply Chain
Key Issues Analysis Alternatives Solution Execution Contingencies 25
Farmers
450 Collection Points
Milk Contractors (3rd
party)
65% of milk
35% of milk
Loans, cattle feed, vets
15 Chilling Centers
2 Centers for Manufacturing
• Owned by Prabhat• Can process 1.5M
L/day• ISO certified, award
winning
Current Capacity Usage:50% Polypack milk
71% condensed milk20% value add products (ex. Ghee)
96% milk powder
End to End Supply Chain
Key Issues Analysis Alternatives Solution Execution Contingencies 26
• Fast Food Chains• MNCs (ex. Cadbury)• Hotels• Local Players (Prabhat
owns some)
B2B• Milk powders• Condensed milk
End to End Supply Chain
Key Issues Analysis Alternatives Solution Execution Contingencies 27
• Fast Food Chains• MNCs (ex. Cadbury)• Hotels• Local Players (Prabhat
owns some)
B2B
500 Distributors
B2C • Polypack (liquid) milk• Value add products (ex. Ghee)
End to End Supply Chain
Key Issues Analysis Alternatives Solution Execution Contingencies 28
• Fast Food Chains• MNCs (ex. Cadbury)• Hotels• Local Players (Prabhat
owns some)
B2B
500 Distributors
Large Chain Stores
Kiranas (15,000)*10K in Mumbai
B2C
End to End Supply Chain
Key Issues Analysis Alternatives Solution Execution Contingencies 29
• Fast Food Chains• MNCs (ex. Cadbury)• Hotels• Local Players (Prabhat
owns some)
B2B
500 Distributors
Large Chain Stores
Kiranas (15,000)*10K in Mumbai
End Consumer
Key Success Factor: Retailers must be within walking distance of consumers
B2C
End to End Supply Chain
Key Issues Analysis Alternatives Solution Execution Contingencies 30
• Fast Food Chains• MNCs (ex. Cadbury)• Hotels• Local Players (Prabhat
owns some)
B2B
500 Distributors
Large Chain Stores
Kiranas (15,000)*10K in Mumbai
End Consumer
B2C
Key Takeaway: There is excess capacity that Prabhat can take advantage of, especially in the value-add product category. There are also redundancies (ex. Milk contractors, B2C distributors).
Cash Conversion & Performance
Key Issues Analysis Alternatives Solution Execution Contingencies 31
AssumptionsCOGS is 43% of Total OpEXAccounts Payable is 20% of Current Liabilities
Key Takeaway: Cash conversion cycle continues to be pressured by Customers and Suppliers, result is a decrease in Financial Performance
Cash Conversion Cycle 2015 2016
DIO 23.3 25.1DSO 27.4 35.8DPO 28.5 16.9
Days 22.3 44.0
DuPont 2015 2016
Profit Margin 2.59% 2.09%Asset Turnover 2.12 1.75Leverage 2.01 1.28
ROE 11.04% 4.68%
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Alternatives
Alternatives - B2B 70: B2C 30
Key Issues Analysis Alternatives Solution Execution Contingencies 33
Maintain product mix of approx. 70:30 ratio, favoring B2B.
• High revenue generation• Capitalizes on existing structures
and core competencies of Prabhat
• B2B only requires a few key relationships, as selling is done in bulk
• B2B is less susceptible to economic fluctuations than B2C
• Lost potential for polypackmilk; does not target the high number of consumers that drink it – little sold B2B
• More resource intensive from a marketing standpoint; B2B dependent on building and maintaining relationships
• Current operations are not at full capacity for B2C, but are close for B2B
Key Takeaway: While B2B markets are profitable, Prabhat has nearly maximized its capacity in this space; this alternative also does not meet Prabhat’s future goal of expanding into B2C.
Alternatives - B2B 50: B2C 50
Key Issues Analysis Alternatives Solution Execution Contingencies 34
• Aligned with management goals of a 50:50 split
• Capacity exists to meet demand (ex. Polypack milk at 50% of Prabhat)
• Appeases both sides of management (disagreed over B2B or B2C focus)
• Vast market to tap in India• Diversified portfolio
• No competencies in marketing to B2C customers
• Low working capital; this is taking a risk
• B2C is more susceptible to economic fluctuations
• Existing product focus of condensed milk and milk powder are traditionally B2B products
Key Takeaway: This alternative is directly aligned with management goals, and offers a balance between B2C and B2B.
Maintain product mix of approx. 50:50 ratio.
Alternatives - B2B 30: B2C 70
Key Issues Analysis Alternatives Solution Execution Contingencies 35
• 80% of Indians drink only liquid milk; this is where Prabhat primarily sells liquid milk
• Excess capacity for value-add products and polypack(B2C preferences)
• Unions and cooperatives in this space are losing economies of scale
• There are redundancies using distributors for Prabhat in the B2C channel
• Addressing these redundancies could lead to retaliation by distributors
• Processing awards won by Prabhat were issued by B2B clients; takes longer to build back B2B relationships
• No B2C marketing competencies
Key Takeaway: While focusing heavily on B2C would allow Prabhat to tap a new market, there are inherent risks that must be considered, including misalignment with existing competencies.
Maintain product mix of approx. 30:70 ratio, in favor of B2C.
Decision Matrix
Key Issues Analysis Alternatives Solution Execution Contingencies 36
Key Considerations Weight B2B 70: B2C 30 B2B 50: B2C 50 B2B 30: B2C 70
Profitability 0.3 1 5 3Declining Capital 0.2 1 5 3Expansion Strategy 0.2 3 3 3Capacity Usage 0.1 1 3 5Branding competencies
0.1 5 3 1
TOTAL 1.0 1.7 3.7 2.71 – does not address5 – fully addresses
Recommended Solution
Key Issues Analysis Alternatives Solution Execution Contingencies 37
We recommend that Prabhat Dairy aims for a 50:50 B2B and B2C mix, by increasing value added and polypack products, and maximizing production capacity, using the MILK
strategy:
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Implementation Plan
Implementation Overview
Key Issues Analysis Alternatives Solution Execution Contingencies 39
M I L KMarketing and Positioning
Improving DistributionRedundancies Lean
Manufacturing
KPIs and Evaluation
Marketing and Positioning
Key Issues Analysis Alternatives Solution Execution Contingencies 40
MMarketing and Positioning
• Target Northern India• Highest consumers of dairy• Highest consumers of spicy food
• Hire 2-3 marketing specialists, with B2C competencies• Competencies should include: digital marketing, brand
marketing and product marketing
Marketing and Positioning
Key Issues Analysis Alternatives Solution Execution Contingencies 41
MMarketing and Positioning
• Target Northern India, Tier 1 cities (ex. New Delhi)• Highest consumers of dairy• Highest consumers of spicy food
• Hire 2-3 marketing specialists, with B2C competencies• Competencies should include: digital marketing, brand
marketing and product marketing
And now, where should they start?
Marketing and Positioning
Key Issues Analysis Alternatives Solution Execution Contingencies 42
MMarketing and Positioning
• Target Northern India• Highest consumers of dairy• Highest consumers of spicy food
• Hire 2-3 marketing specialists, with B2C competencies• Competencies should include: digital marketing, brand
marketing and product marketing
And now, where should they start?• “Lassi” pairing – a dairy beverage paired with spicy food, offered
by both street vendors and restaurants• Offer an “at home” Lassi alternative, for sale via organized sector
• Look into two product lines – standard for sale at supermarkets/hypermarkets, and if successful, add a gourmet line for gourmet stores
• Advertise to Northern Indian, female consumers via social media and taste testing in supermarkets; explore CSR
Improving Distribution Redundancies
Key Issues Analysis Alternatives Solution Execution Contingencies 43
IImproving DistributionRedundancies
• Transition away from 3rd party contractors and B2C distributors
Improving Distribution Redundancies
Key Issues Analysis Alternatives Solution Execution Contingencies 44
Improving Distribution Redundancies
Key Issues Analysis Alternatives Solution Execution Contingencies 45
IImproving DistributionRedundancies
• Look in to transitioning away from 3rd party contractors and B2C distributors
• Ensure that there are no regulations requiring their assistance• Build relationships (ex. Loans, veterinary assistance) with farmers
using contractors, and attempt to create a direct relationship• Replace distributors with existing 250 Prabhat salespeople
currently working in B2C• Hire more as necessary
Improving Distribution Redundancies
Key Issues Analysis Alternatives Solution Execution Contingencies 46
IImproving DistributionRedundancies
• Look in to transitioning away from 3rd party contractors and B2C distributors
• Ensure that there are no regulations requiring their assistance• Build relationships (ex. Loans, veterinary assistance) with farmers
using contractors, and attempt to create a direct relationship• Replace distributors with existing 250 Prabhat salespeople
currently working in B2C• Hire more as necessary
Assumptions:Retail price of 21 rupees/LCo-ops pay 77% of this to the farmer (assume we pay 70% - 14 rupees to the farmer)5% of retail cost goes to contractor
Savings:5% of retail price per L sold
Lean Manufacturing
Key Issues Analysis Alternatives Solution Execution Contingencies 47
LLean Manufacturing
• Increase production of value add products• Currently using 20% of capacity• Goal: 100%• Threshold target: 60%
• Increase production of polypack products• Currently using 50% of capacity• Goal: 100%• Threshold target: 60%
Lean Manufacturing
Key Issues Analysis Alternatives Solution Execution Contingencies 48
LLean Manufacturing
• Increase production of value add products• Currently using 20% of capacity• Goal: 100%• Threshold target: 60%
• Increase production of polypack products• Currently using 50% of capacity• Goal: 100%• Threshold target: 60%
Utilize Lean Six Sigma methodology
• Eliminates 8 key types of waste: TIMWOODS
Assumption: biggest contributor is defects; more information required.
Lean Manufacturing
Key Issues Analysis Alternatives Solution Execution Contingencies 49
LLean Manufacturing
• Increase production of value add products (ex. Cheese)• Currently using 20% of capacity• Goal: 100%• Threshold target: 60%
• Increase production of polypack products• Currently using 50% of capacity• Goal: 100%• Threshold target: 60%
Utilize Lean Six Sigma methodology
• Eliminates 8 key types of waste: TIMWOODS
Assumption: biggest contributor is defects; more information required.
• Look to source milk directly from farmers; order more to meet capacity requirements
• Hire 1-2 operations analysts to better understand wastes and bottlenecks
• Lean 6 Sigma Competencies
KPIs and Evaluation
Key Issues Analysis Alternatives Solution Execution Contingencies 50
KKPIs and Evaluation
• Measuring success is vital when entering a new market
KPIs and Evaluation
Key Issues Analysis Alternatives Solution Execution Contingencies 51
KKPIs and Evaluation
• Measuring success is vital when entering a new market
Marketing
• Sales (rupees and volumes)
• Impressions via social media
• Taste testing uptake at store locating
• Conversions after testing• Grant usage
KPIs and Evaluation
Key Issues Analysis Alternatives Solution Execution Contingencies 52
KKPIs and Evaluation
• Measuring success is vital when entering a new market
Marketing
• Sales (rupees and volumes)
• Impressions via social media
• Taste testing uptake at store locating
• Conversions after testing• Grant usage
Operations
• % waste reduction• Reaching two 60%
capacity targets• Leaner supply chain; by-
passing redundancies
KPIs and Evaluation
Key Issues Analysis Alternatives Solution Execution Contingencies 53
KKPIs and Evaluation
• Measuring success is vital when entering a new market
Marketing
• Sales (rupees and volumes)
• Impressions via social media
• Taste testing uptake at store locating
• Conversions after testing• Grant usage
Operations
• % waste reduction• Reaching two 60%
capacity targets• Leaner supply chain; by-
passing redundancies
Financials
• ROE > 11%• Cash conversion
cycle > 25 days
Timeline
Key Issues Analysis Alternatives Solution Execution Contingencies 54
Short Term (0-6 months)
Medium Term (6-10 months)
Long Term (11+ months)
Increased supply chain capacity
Hire new personnel
Rebranding DesignLaunch of “Lassi” line
Lassi expansion
Negotiations with farmers
Costs
Key Issues Analysis Alternatives Solution Execution Contingencies 55
Marketing Costs2-3 marketing specialists 1,100,000Budget marketing 2,500,000
Events, Re-brandGrants 500,000
Operations CostsOperations Budget 5,000,0002-3 operations specialists 1,100,000Source more Milk 8,400,000
Total Costs 18,600,000
Assumption 50:1 Rupee to USD
Revenue Expansion
Key Issues Analysis Alternatives Solution Execution Contingencies 56
% Capacity UsedTotal Output possibility
Currently (1500000 L/day) Price Margin DaysPolypack 0.50 375,000 21 6% 270Milk Powder 0.96 375,000 17 15% 270Condensed Milk 0.71 375,000 25 30% 270Value-add Products 0.20 375,000 160 30% 270
(in Rupees) Utilization of Capacity70% 80% 90%
Polypack 25,515,000 38,272,500 51,030,000Milk PowderCondensed MilkValue-add Products 2,430,000,000 2,916,000,000 3,402,000,000
Additional Profit 2,455,515,000 2,954,272,500 3,453,030,000Growth in Revenue from Base year 2016 21.0% 25.2% 29.5%
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Risks & Contingencies
Risks & Contingencies
Key Issues Analysis Alternatives Solution Execution Contingencies 58
Situation Trigger Likelihood Solution
Cost of Fodder RisesFor three consecutive
years Fodder costs increase 5-8%
Low
Investigateintegrating Fodder
production into Supply Chain
B2C Customertraction is low
Demand for products does not hit capacity production of >60%
LowIncrease marking
Budget according to demand discrepancy
Polypack and Value add machinery is
overwhelmed
Processing Machinery cannot keep up with
demands for 3-4 consecutive months
Medium
Purchase additional machinery
accordingly to demand
Recommended Solution
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We recommend that Prabhat Dairy aims for a 50:50 B2B and B2C mix, by increasing value added and polypack products, and maximizing production capacity, using the MILK
strategy:
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Appendix
Products and Competitors
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Private DomesticPlayers Cooperatives MNCs (ex. Nestle) Prabhat
Polypack X Value Add: X
Milk Powder X
Condensed milk X X
Calculation for milk we need to buy
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Current Capacity-50% Polypack-96% Milk Powder-71% Condensed Milk-20% Value Add Products
(50+96+70+20)/4 = 237/4 = 60%
60% of 1.5ML = 0.9M
1.5M – 0.9 = 0.6M
Milk Market
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Product Market Dynamics Key Players
Ghee Homemade preferred; 90% unorganized
Amul (coop) 8% market share: Parag (private),
CavinKare (private)
Cheese 52% institutional market, 48% retail market
Amul (coop), Mother Dairy (coop); Prabhat (private)
Curd Homemade preferred; 15% branded, 85% unbranded
Amul (coop), Danone(MNC), Nestle (MNC)
Paneer Consumer market: 40-50%: bulk market: 50-60%
Amul (coop); Prabhat(private), Britannia
Yogurt Nascent but finding quick acceptance
Nestle (MNC), Danone (MNC)
Flavored Milk Nascent but fast-growing Mother Dairy (coop), Nadhini
Ice cream North and West India account for 70% of sales
Amul (coop), Mother Dairy (coop), Vadilal (private),
Kwality (private)
Financial Statements
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Income Statement2015 2016
Revenue 1,004.33 1,171.97Operating Expenses 874.25 1,023.07Personnel Cost 25.60 28.19Depreciation 34.40 39.90Interest & Financing Cost 41.20 42.70Provision for Taxation 2.90 13.59Profit after Tax 25.98 24.52
Financial Statements
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Balance Sheet2015 2016
Fixed Assets 289.53 295.88Current Assets
Inventories 24.04 30.30Trade Receivables 75.50 114.80Other Current Assets 84.77 229.15
Total Assets 473.84 670.13
Long-term Debt 91.64 44.97Current Liabilities 146.89 101.76Shareholders' Capital 235.31 523.41Total Liabilities & Shareholders' Capital 473.84 670.13