Question

What should Ajanta do about its recent order from SF?

AJANTA PACKAGING: KEY ACCOUNT MANAGEMENT Sandeep Puri and Rakesh Singh wrote this case solely to provide material for class discussion. The authors do not intend to iustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authonzation by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Westem University, London, Ontario, Canada, N6G ON1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com. Version: 2018-12-17 Offer good quality products at a reasonable cost and provide exceptional customer service, and the customers will remain loyal Pushpak Agarwal, managing director, Ajanta Packaging On October 18,2017, during festival season in India, Ajanta Packaging (Ajanta) shifted base to a new, modern office in New Delhi, India. At that time, Pusbpak Agarwai, the managing director of Ajanta, was pleased with the company's growth over the past five years Ajanta had reported revenue of 604 million in 2016, a growth of 21.3 per cent over the previous financial year. Agarwal seemed positive about the company's future and was planning for the next five years. His positive mood dissipated, however, when his son Deepanker director at the company, walked into his office seeming extremely concerned. Agarwal asked his son, "Why do you look worried, DeepankeIs anything bothering you?" Deepanker's reply acquainted his father with a problem he had not been anticipating. "Have you seen the rate quotation from our biggest client, S.F. Foods [SF]? The company is offering a 50 million order with profit margins of less than 7 per cent. They want us to supply the goods by December 1, 2017, but have set the payment period for 60 days. Our key account management needs to be reworked. In addition to SF's order, Ajanta had 90 million worth of orders from other customers that had profit margins of more than 10 per cent and that were to be supplied on December 15, 2017. Supplying to SF with a 60-day payment period risked jeopardizing other orders, which could result in higher customer dissatisfaction and the possible defection of customers to competitors. Ajanta had good customer-management practices in place, with more than 80 per cent of its revenues coming from repeat customers. One cause of concern for the company, however, was its over-reliance on SF, which accounted for 15 per cent of Ajanta's business, and 10 other customers who made up almost 50 per cent of the company's total revenue Deepanke other orders with a higher profit margin. He wanted to retain business with SF as well as keep his company's commitments to its vendors and other customers. Now that he had a larger buyer base of 1,700 customers, and realizing the importance of doing well by all of them, Deepanker had to consider some serious are of the worth of a company such as SF-and of the consequenc es of defaulting on the r was aw uestions: Would it be wiser to accept the order on SF's terms, or renegotiate the price, payment date, and delivery schedule to favour Ajanta? What processes could Ajanta adopt to prevent such a situation in future? Indian rupee: 21 -USS0.0153 on October 10, 2017 COMPANY BACKGROUND Deepanker joined Ajanta in 2005 after completing his MBA as a gold medalist frem the Institute of Management Technology, Ghaziabad. He wanted to lead the change in the three-decade-old company set up by his father. Ajanta, which began with an initial investment of S500 and only three employces in 1981, had over 100 employees and a net revenue of 604 million in 2016 (see Exhibit 1), and was among the torp glass bottle suppliers in India. The company began by supplying bottles, vials, and jars to pharmaceutical companies and manufacturers of fast-moving consumer goods, and glass bottles to large liquor and wine companies. Over time, it diversified and changed with the times. Soon after Deepanker joined the company, he effected some rapid changes in the business model to attract new customers. An authorized stockist and distributor for Hindusthan National Glass & Industries Ltd., Ajanta became the first company in the Indian bottle-trade industry to become fully computerized. Although Ajanta's customers still preferred glass bottles and 90 per cent of its business came from glass bottles, the company began offering polyethylene terephthalate (PET) bottles, crown caps, and glass bottle printing services. Ajanta's success was driven by sourcing service contracts with various global manufacturing companies. The idea was to put in place strong procurement and supply-chain systems and a diverse supplier base to eliminate operational risks. Having warehouses in naultiple locations gave Ajanta a strategic advantage over competitors in that it was able to offer its customers lower freight costs, resulting in higher sales for the company. Ajanta could also capitalize on the location advantage it gained from its four marketing offices across northem India by offering flexible, just-in-time service to its customers because of lower lead times. By October 2017, Ajanta was a niche supplier of glass bottles in India and had 1,700 customers. Not only was it a quality-focused and cost-effective company, but it also offered its customers prompt and customized glass- packaging solutions. Wide-ranging quality products and professional expertise gave Ajanta muscle power to negotiate with its suppliers and customers, and forge successful and profitable collaborations. Deepanker was a stickler for commitment and quality of service. Because more than 80 per cent of Ajanta's revenues came from repeat customers, Deepanker knew that his business triumphs depended on customer loyalty. Thus, he worked to enhance Ajanta's customer-relationship management practices, as this augmented the company's use of resources when providing customized services Deepanker also introduced many innovative packaging materials to serve the growing hotel, restaurant, and catering segment. Although the company had no presence in the food segment until 2015, by October 2017, 40 per cent of its business came from that segment (see Exhibit 2) INDIAN PACKAGING INDUSTRY The global packaging industry saw an annual global turnover of around $550 billion in 2015, of which India's share was around $16.5 billion. The Indian packaging industry was ranked 1 lth in the world, and is turnover was projected to reach S32 billion by 2020. In the five-year period between 2016 and 2021, the Indian packaging industry was expected to grow at a compound annual growth rate of 9.2 per cent as opposed to the 6.2 percent growth registered between 2011 All currency amounts are in U.S. dollars unless specified otherwi and 2016. Factors such as rapid urbanization, a surge in middle-class consumers, an organized retail sector, and the e-commerce boom were all key drivers of growth in the Indian packaging industry. Growth was also fuelled by innovations such as the development of lighter packaging with better barrier properties. These changes increased the demand for new packaging formats, such as different sizes, materials, and strengths. The projections for 2016-2021 expected the soft drink and food industries to capture the highest packaging market share by units, with a share growth of 3.4 per cent and 13 per cent, respectively. Glass and rigid plastic packaging material were expected to be the major share gainers, with market share growth of 0.7 per cent and 0.6 per cent, respectively, during the same period GLASS BOTTLE INDUSTRY The global glass packaging market, which was worth S57.22 billion in 2017, was estimated to grow at a compound annual growth rate of 4.5 per cent and reach $108.3 billion in 2025. In 2015, the Asia-Pacific (APAC) region led the market with a market share of 33.7 per ceni, followed by Europe with a share of 28.5 per cent. Factors such as a rise in disposable income and greater acceptability of alcohol consumption fuelled increased demand for glass bottles in the APAC region. The growing beer industry in India was expected to increase sales and market share in the region. Whiie the industry was losing its share in regions such as the United States and Western Europe, it was gaining share in India because of greater penetration level availability. Cost advantage, lighter and thinner glass products, and sustainability were important factors aiding industry growth: glass bottles were about 30 per cent lighter than they had been in the past decade, which resulted in better profits for manufacturers because of reduced raw material costs. Yet, glass packaging was facing rising competition from other materials that were stronger, lighter, and cheaper to manufacture and transport Its recyclability, non-corrosive nature, non-permeability, and zero rate of chemical interaction made glass a suitable packaging material for beer, soft drinks, beverages, and pharmaceuticals. Glass packaging ensured that the products inside the bottles retained their strength and/or aroma and flavour. It also helped preserve food and beverages for a ionger time, and prevented contamination. Packaged glass was trusted to safeguard not only people's health and taste, but also the environment because it was 100 per cent recycl and had neutral reaction. The introduction and growth of the organized retail market led to both competition and innovation in the Indian glass bottle-packaging industry. Considerable upgrades, and research and development led to newer designs and technologies in glass production. While narrow neck press and blow process technology helped increase the productivity of lighter and thinner containers, which made glass packaging cost effective and consumer- and ecoiogy-friendly, distribution was improved by a well-developed retail network. Because of these promising factors, the industry was expecting immense growth potential through to 2021. Because of consumers' view of glass as a premium packaging medium, Ajanta's promotional campaigns emphasized the benefits of glass packaging (see Exhibit 3) The glass bottle industry was characterized by large buyers in each segment, and the demand for glass packaging had become highly seasonal, especially for products such as soft drinks, cosmetics, and beer Challenges Facing the Indian Glass Packaging Industry Although glass was viewed as a premium packaging medium, the Indian glass packaging industry faced some serious challenges. The price of raw materials was always rising, which put immense cost pressures on the glass packaging industry. As a result, glass bottles became costlier, driving smaller buyers to look for other packaging options such as plastic and Tetra Pak cartons. For Ajanta, this meant spending more money on raw materials. Moreover, increased warehouse rentals costs, interest, and freight costs put immense pressure on profitability The number of companies selling glass packagin in India had risen since 2014, leading to increased competition, price wars, customer poaching among suppliers, and clients renegotiating purchase costs. All of these problems considerably reduced profit margins in the industry. In light of the slashed prices of competitors, many of Ajanta's customers wanted the company to revise prices before they placed their orders. Light, clear, tough, sustainable, and an excellent barrier to oxygen and carbon dioxide the many positive attributes of PET made the most opted-for packaging medium among several industries that had previously favoured glass. This had helped PET gain market share at a rapid rate and even replace a considerable portion of glass bottles, which, in contrast, were extremely fragile, prone to breakage, and costly. While consumers chose PET plastic for its convenience, ease of use, lightness, and sturdiness, marketers were attracted to the material because of its light weight, cost effectiveness, product safety, and pliability for their execution of innovative package designs; retailers found the unbreakable PET packages easy to stack. PET was the packaging of convenience for companies in the soft drink, mineral water, fast moving consumer goods, pharmaceutical, agrochemical, wine and liquor, and food sectors. KEY ACCOUNT MANAGEMENT AT AJANTA Deepanker maintained a near-obsessive focus on Ajanta's key customers because 80 per cent of its revenues came from repeat customers. The company had two sales teams for customer management- one managed the key accounts and the other catered to the other customers. Deepanker knew that developing and maintaining solid relationships with key accounts was critical to the company's success in the hyper- competitive market. While Ajanta's churn rate0 for 2016 was 4.5 per cent, which was quite low compared to the competition, the defection rate was 11 per cent. Until 2014, the company's focus was big clients. It also supplied to around 400 customers, some of which were major accounts. Most large deals were based on price and quantity, so when many of its bigger customers delayed payments, Ajanta's profitability was severely dented. Deepanker wanted to reduce this severe dependence on the company's larger customers, so it began encouraging smailer orders to increase its customer base. This strategy paid off, and by October 2017, Ajanta had 1,700 customers. Many of its small-order customers wanted unique packaging, and were less price sensitive than iis larger customers were. For example, the first order placed by one small-order customer in May 2015 was for only 35 bottles, but by 2017, that customer had begun to buy around a million bottles. Until 2015, the company assigned new designs to manufacturers after the receipt of orders, but beginning in January 2017, it began maintaining an inventory to cater to new and old customers. Key Accounts Ajanta had many renowned, revenue-generating customers, including Patanjali Ayurved Limited, G.K Dairy and Milk Products Private Limited (famous for the brand Gopaljee), Veeba Food Services Private Limited, Amrit Food, Coffee Day Global Limited (also known as CCD), Carnation Hospitality Private Limited (famous for the brand Barista), Super Miik Products Private Limited, SF, and Akums Drugs& Pharmaceuticals Limited S.F. FOODS AND AJANTA PACKAGING SF was a leading manufacturer in India of sauces, pickles, jam, custard powder, instant mixes, noodles, and baking powder. The company was also a leading exporter of these products to the United States, Europe, and the APAC region. SF reported net revenue of 15.5 billion in 2016 and registered year-over-year growth of 23 per cent over 2015. Its expansion plan included launching new products and increasing its footprint across Australia and Africa by 2018. Purchase decisions at SF were made by a purchasing committee comprising a member each of the marketing, quality assurance, finance, and procurement departments. The decisions were based on price, quality, previous experience, capacity, delivery period, and payment terms. SF had good logistics management practices in place, and initially had a good delivery time of 45 days to Ajanta. This time frame was sufficient for Ajanta to procure the required material from the manufacturer and supply it to SF. SF bought bottles from three companies, but the majority share (of 60 per cent) went to Ajanta. SF had been Ajanta's customer since 2001. It was one of Ajanta's oldest and most important customers, and constituted around 15 per cent of Ajanta's business. However, although Ajanta received good business from SF, the profit margins were very low. Also, over time, SF had begun making payments after 60 days and sometimes even as late as 90 days. This did not work well for Ajanta, as it was expected to pay its suppliers within 30 days. While this affected Ajanta's profitability, Deepanker continued to compromise because of the volume of SF's business. EXHIBIT 1: SELECTED FINANCIALS FOR AJANTA PACKAGING (IN MILLIONS) 2015 498 42.6 540.6 443.7 2013 306 22.4 328.4 275.4 2014 Sales Turnover Other Income Total Income Total Expenses Operating Profit 2 56.6 660.6 537.6 428.4 352.6 0 2 8 Note: Figures have been changed to maintain confidentiality EXHIBIT 2: BUSINESS FROM DIFFERENT SEGMENTS % Share in 2015 % Share in 2016 % Share in 2017 Food Pharmaceuticals Others Source: Company documents. EXHIBIT 3: AJANTA PACKAGING PROMOTION POSTERS Glass Preserves The Soul Of Your Product Use Glass, Be Healthy. g BeSafe. Glass is 100% Recyclable 9 Be Smart, i PharmaBe Sure. i

Answer 1

As given in the case, Ajanta packaging need to take certain decisions on how to proceed with the recent order from SF foods. SF Foods is one of Ajanta`s biggest customer providing around 15% of the revenue and they place high volume orders. They are one of the key customers at Ajanta and receive special offers from Ajanta from being a special customer. The last order that SF gave amounted to Rs.50 million but it came with a very low profit margin. The payment policy was not in favor of Ajanta. SF maintained that they would make the payment only after 60 days. Accepting this order would mean Ajanta would have to delay payment to its vendors and this could affect other orders.

There are two propositions to this – one is to accept the order as it is, second is to reject the proposal and ask for a renewed terms and conditions. If we look at the first proposition then it would mean Ajanta would have to jeopardize the entire supply chain just to favor one customer. Based on past payment history there is no assurance that SF would make the payment in 60 days too with payment delayed as far as 90 days. In case of payment to its Vendors Ajanta usually pays them in 30 days. But accepting this order would mean delay to payment to its other vendors which can cause delay to its other orders. Ajanta already have Rs 90 million worth orders for the same month and these are from customer who offer more than 10 percent profit margins. Accepting the offer would mean other orders could suffer.

The second option to consider is to reject the offer and renegotiate the price and terms with SF. This would mean SF might feel uncomfortable but the business will keep running. When Deepanker took over the management there has huge over reliance on major players such as SF foods. But over past few years the management and sales team have managed to reduce the dependency and have a large customer base at its disposal. While key accounts are of primal importance disrupting the supply chain over one customers who is not providing the best profit margin does not sound like a good business proposition. Instead if they can discuss the terms in such a way that payment can be expedited only for this month then it would mean Ajanta can push its vendors to supply more and stretch the supply chain to incorporate all the customer demands. This is not a frequent issue and such outlier issues can be discussed with customers. If Ajanta has been giving credit period of 60 days then they can ask for one month payment in advance or else they can plan the delivery in a periodic basis with all customers such that the deliveries can be made over a period rather than all at once. This would mean all the customers get a minimum requirement met on a JIT basis rather than provide all the delivery at once.

If we analyze both the options available to Ajanta, I would recommend going with the second option since it helps all the partners involved. This would be a challenge to ensure SF agrees to faster payment and on vendors to provide the additional support but this can be considered as a outlier event and can be discussed and resolved. For future Ajanta needs to start keeping inventories and make accurate forecast of demand so that the needs can be forecasted and appropriate actions can be done earlier.