Seth Dhaniram – C & FA

A report submitted to

Course Instructor: Prof. Avani Desai
Academic Associate: Ms. Surabhi Koul

In partial fulfillment of the requirements of the course
Written Analysis and Communication – I (2015-2017)
By
Ketan Murali (15169)
Section A

On
July 25, 2015

INDIAN INSTITUTE OF MANAGEMENT, AHMEDABAD
Letter of Transmittal

Date: 25/ 07/ 1999

To: Seth Dhaniram
Logistics Solutions
Ahmedabad

Dear Sir,

Subject: Advice regarding the future of RDS Operations

Please find enclosed a decision report presenting a comprehensive analysis of the operations of RDS, listing the possible options and the criteria for evaluation of the options. Subsequently, an action plan has been proposed.
Based on my assessment, I recommend continuing with the agency operations and renegotiating with JOSH after eight months. An investment of ₹18,000 per month should be made towards additional manpower and the 30% drop in margins should be supported temporarily. After eight months, a remuneration of 3% of total sales should be renegotiated with JOSH.

Yours sincerely,
Ketan Murali
External Consultant to Logistics Solutions

EXECUTIVE SUMMARY
RDS wants to decide on the course of action to address a decrease of 30% in its profit margins following a policy change by JOSH. Renegotiation for the next eight months seems unlikely.
RDS can either continue with operations and renegotiate after eight months or give up operations completely. The options have been evaluated on the criteria of financial soundness, market reputation and perception, grooming of the next generation and relations with distributors. My recommendation is to continue with operations and renegotiate after eight months in the manner as detailed in the action plan.
(94 words)

TABLE OF CONTENTS

Situation Analysis | 5 | The Problem Statement | 6 | Options | 6 | Criteria for Evaluation | 6 | Evaluation of Options | 7 | Recommendation | 8 | Action Plan | 8 | | |

SITUATION ANALYSIS
Over the past 100 years, Logistics Solutions (LS) has partnered with several domestic and multinational corporations and developed an excellent portfolio of C&FA agencies by roping in market leaders in pharmaceuticals, processed foods and FMCG. This family owned business has restrained from diversifying into allied businesses and focused on offering a high level of service and professionalism to its partners. The firm enjoys an excellent reputation in the market and finances itself by personal sources in spite of its financial soundness. The firm is focused on grooming the next generation to take over the reins of the business.
JOSH Denims (JOSH), a market leader in denims has been a partner of Raj Distribution Services (RDS, a C&FA of LS) for the past 15 months and the two firms have enjoyed a mutually beneficial relationship thus far. While JOSH has taken advantage of the excellent professional services of RDS, RDS has gained a lead over its competitors by roping in a market leader, building a network with distributors and obtaining better bargaining power. The contract did not involve high fixed costs and RDS was not required to deviate from its core competency of C&F, thus making the remuneration offered by JOSH (2% of total sales of ₹30,00,000) attractive. LS was handling a sophisticated product range for the first time and thus the agency had proved to be a healthy training ground for the next generation.
However, the sudden policy change brought about by JOSH after 15 months has substantially increased the scope of work while reducing the expected profit margins for RDS. By doing away with all its distributors, JOSH has now made RDS responsible for delivering supplies directly to 180 retail outlets as opposed to 10 distributor locations previously. This enhances the complexity and costs involved in the overall operations. The manpower costs are expected to grow by ₹18,000 a month (Exhibits 1 and 2) and the profit margins for RDS are subsequently expected to decrease by 30%. (Assumptions specified in the exhibits) To maintain the profit margins being enjoyed earlier, RDS would need to renegotiate with JOSH for a remuneration of 3% of total sales. (Exhibit 3)
RDS faces the possibility of a serious backlash from infuriated distributors who have suddenly been eliminated from the supply chain. A breakdown of this relationship can negatively impact LS’ market reputation and close the door on business that the distributors could have otherwise helped RDS get from other manufacturers.
Another factor that needs to be considered is the perception of LS by potential clients and competitors. Accepting the harsh demands of JOSH without any resistance might send a signal to potential clients and the public at large that LS can easily be forced into changing their supply chain structure.
What started out as a beneficial relationship has become a cause of concern for LS as the policy change threatens to significantly impact their market reputation and bottom line. While LS would like to maintain the profit margins enjoyed earlier, renegotiations with JOSH before eight months seem unlikely and thus a decision needs to be made on supporting a decline in margins or giving up operations completely.

THE PROBLEM STATEMENT
RDS currently expects a profit margin of 9.09%, while the profit margin desired is 39.09%.

OPTIONS
The following options are open to LS: * Continue with the agency operations and renegotiate after eight months: Invest ₹18,000 per month (Exhibit 2) in additional manpower and support the drop in margins temporarily, renegotiate for a remuneration of 3% of total sales after eight months. * Give up the agency operations
CRITERIA FOR EVALUATION
The criteria for evaluation in the decreasing order of their importance would be: 1. Maintaining financial soundness 2. Maintaining good market reputation and perception 3. Grooming the next generation for leadership 4. Maintaining a good relationship with distributors

EVALUATION OF OPTIONS
Option 1
Continue with the agency operations and renegotiate after eight months (Exhibits 1, 2, 3) * There is a 30% temporary reduction in profit, but renegotiation for a higher remuneration of 3% of total costs after eight months is possible. Moreover, a loss is not being made at any point despite the change in supply chain structure. Thus, financial soundness is maintained. * Since JOSH is a market leader, operating its C&F is a prestigious affair and will enhance its reputation. Renegotiations after eight months will signal that LS is not a ‘soft’ firm and cannot be forced to change its structure easily. * Handling JOSH’s sophisticated product range and continuing with the agency in difficult times would serve as an excellent training ground for the next generation. * Relations with distributors might be damaged temporarily but the benefits of continuing with the agency at this point outweigh the potential disadvantage of losing a market leader.

Option 2
Give up the agency operations * Financial soundness is maintained since operations are shut down on a decrease in profit margin. * While LS is perceived as a firm that cannot be forced to change its structure, the fact remains that giving up operations could potentially assign LS a reputation of a 100 year old firm that could not sustain a relationship with a market leader. * A good opportunity for grooming the next generation is lost. * Good relations with the network of distributors are maintained; which can help find LS new business.

RECOMMENDATION
It is recommended to continue with the agency operations, invest ₹18,000 per month in additional manpower, support the drop in profit margins temporarily and renegotiate for a remuneration of 3% of total sales after eight months.

ACTION PLAN * Continue with the agency operations to maintain market reputation as a partner of market leaders * Invest ₹18,000 per month in additional manpower to take care of enhanced complexity of operations in terms of repackaging, transport and delivery, credit and collection management and so on. * Support the drop in margins from 39.09% to 9.09% temporarily * Renegotiate with JOSH for a remuneration of 3% of total sales after eight months in order to maintain the same profit margins enjoyed earlier * Motivate the next generation to build a long term relationship with JOSH

(998 words)
Exhibit 1
Monthly Costs Incurred by RDS before July 1999
Remuneration per month: 60,000 INR (2% of Total Sales of 30,00,000 INR) Item | INR | Warehousing | 12,000 | Manpower (1 Manager, 1 Store Keeper, 1 Computer Operator, 2 Packers) | 18,000 | Transportation from warehouse to carrier’s dock (60 trips/month*60 INR) | 3,600 | Electricity | 1,000 | Depreciation on computers and fixed expense (over 3 years)@ | 70,000/36 = 1944 | Total Expenses | 36,544 | Remuneration | 60,000 | Profits | 23,456 | Profit Margin | 39.09% | Return on Investment (23,456/70,000) | 33.50% |

@ - Assuming computers and fixed expenses get depreciated over 3 years or 36 months

Exhibit 2
Monthly Costs Incurred by RDS after July 1999
Remuneration per month: 60,000 INR (2% of Total Sales of 30,00,000 INR) Item | INR | Warehousing | 12,000 | Manpower (2 Managers, 2 Store Keepers, 2 Computer Operator, 4 Packers)# | 36,000 | Transportation from warehouse to carrier’s dock (60 trips/month*60 INR)$ | 3,600 | Electricity | 1,000 | Depreciation on computers and fixed expense (over 3 years)@ | 1,944 | Total Expenses | 54,544 | Remuneration | 60,000 | Profits | 5,456 | Profit Margin | 9.09% | Return on Investment (5,456/70,000) | 7.79% |

# - Assuming that as a result of the policy change, the following costs will increase – 1.) Repackaging (substantial), due to the significantly higher number of locations now being serviced that order less than case lot quantities. 2.) Transport and delivery owing to increased complexity 3.) Credit and collection management as now many more locations need to be serviced 4.) Customer servicing and query handling, since handling more customers directly
The monthly costs on manpower have been assumed to have doubled as a result of the policy change
$ - Assuming that transportation costs won’t change since Josh will reimburse RDS for the additional travel costs. Not doing so would mean heavy losses for RDS; giving up the operations with JOSH would be a no brainer in that case.
@ - Assuming computers and fixed expenses get depreciated over 3 years or 36 months

Exhibit 3
Ideal Monthly Remuneration to be renegotiated with JOSH after 8 months Item | INR | Warehousing | 12,000 | Manpower (2 Managers, 2 Store Keepers, 2 Computer Operator, 4 Packers)# | 36,000 | Transportation from warehouse to carrier’s dock (60 trips/month*60 INR)$ | 3,600 | Electricity | 1,000 | Depreciation on computers and fixed expense (over 3 years)@ | 1,944 | Total Expenses | 54,544 | Ideal Profit Margin Desired (From Exhibit 1) | 39.09% | Ideal Remuneration Desired (54,544 / (1-0.3909)) | 89,548 | Ideal Remuneration as Percentage of Total Sales (89,548/30,00,000) | 3% |