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


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


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


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


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


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


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: sweeter spice, likely due to proximity to Asia

• Food preferences: freshness

• Home of Mumbai






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






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


Farmers

• Located close to Prabhat facilities (Maharashtra)

• 10,000• 3rd party



Farmers

450 Collection Points

Milk Contractors (3rd

party)

65% of milk

35% of milk



Farmers



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



Farmers



party)

65% of milk

35% of milk


15 Chilling Centers

• 80 bulk milk coolers total



Farmers



party)

65% of milk

35% of milk


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



• Fast Food Chains• MNCs (ex. Cadbury)• Hotels• Local Players (Prabhat

owns some)

B2B• Milk powders• Condensed milk




owns some)

B2B

500 Distributors

B2C • Polypack (liquid) milk• Value add products (ex. Ghee)




owns some)

B2B

500 Distributors

Large Chain Stores

Kiranas (15,000)*10K in Mumbai

B2C




owns some)

B2B

500 Distributors

Large Chain Stores


End Consumer

Key Success Factor: Retailers must be within walking distance of consumers

B2C




owns some)

B2B

500 Distributors

Large Chain Stores


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


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


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.



• 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.



• 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 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




strategy:

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Implementation Plan

Implementation Overview


M I L KMarketing and Positioning

Improving DistributionRedundancies Lean

Manufacturing

KPIs and Evaluation

Marketing and Positioning


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




• Target Northern India, Tier 1 cities (ex. New Delhi)• Highest consumers of dairy• Highest consumers of spicy food



And now, where should they start?




• Target Northern India• Highest consumers of dairy• Highest consumers of spicy food



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


IImproving DistributionRedundancies

• Transition away from 3rd party contractors and B2C distributors




• 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




• 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


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


LLean Manufacturing

• Increase production of value add products• Currently using 20% 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


LLean Manufacturing

• Increase production of value add products (ex. Cheese)• Currently using 20% 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


KKPIs and Evaluation

• Measuring success is vital when entering a new market

KPIs and Evaluation




Marketing

• Sales (rupees and volumes)

• Impressions via social media

• Taste testing uptake at store locating

• Conversions after testing• Grant usage

KPIs and Evaluation




Marketing





Operations

• % waste reduction• Reaching two 60%

capacity targets• Leaner supply chain; by-

passing redundancies

KPIs and Evaluation




Marketing





Operations

• % waste reduction• Reaching two 60%

capacity targets• Leaner supply chain; by-

passing redundancies

Financials

• ROE > 11%• Cash conversion

cycle > 25 days

Timeline


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


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


% 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


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


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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

prabhat dairy: the crossover challenge - … to end supply chain. key issues. analysis. ... 50%...

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