Packaging Company

I: You are the CEO of a packaging company. Your main client is a whiskey manufacturer that needs cardboard boxes. They are planning to release a new brand in the upcoming IPL season. The demand for the new brand is very high, and they are planning to have a blockbuster tie-up with a team, but the deal is not signed yet. The demand for boxes will be regular if the deal is not signed but will increase if the deal is signed.

Your company is evaluating whether to upgrade the boxes manufacturing technology or not, given there is a possibility of delay in the upgradation process. Please evaluate the profit-maximizing alternative for your company.

C: Okay! Our company has two alternatives – to upgrade our technology or not upgrade our technology. You also mentioned the possibility of delay. Can I know how this technology and delay will impact our operations?

I:  Sure. So our current capacity is 15M units, and by upgradation, we will be able to manufacture 25M units with a reduced cost. If there is a delay in upgradation, we will only be able to produce 8M units even if the deal is signed.

C: Alright! What is the current demand, and how much increase are we expecting due to the deal?

I: The current demand is 10M, and the demand will increase to 20M units in case of the deal.

C: I have got a fair understanding of the capacity. Do we have any alternative if we do not upgrade but still want to cater to the increased demand, maybe something temporary?

I: Yes, we can outsource the complete production. But we cannot outsource partial orders; complete orders must be outsourced.

C: Understood. Now that I have an idea about all the possibilities we have, I would like to analyze profits in each of these cases. What is the price we are charging per unit of the box, and will it remain the same even after the increase in demand?

I: We charge Rs 30/unit to our client. Yes, it would remain the same.

C: Can you please tell me the cost which we will incur in case of technology upgradation? I would also like to know the current cost/unit and also if we outsource.

I:  Sure! The costs for each operation is available. (Given in the table below)

C: Okay. I would also like to know the probability of delay in the upgradation. Also, do we know what's the probability of the deal getting signed.

I: There is 75% chance that delay would happen if we go for upgradation. We have received the information that probability of deal happening is 60%.

C: Thank you. I think I have enough information.

As per the analysis (given below), I think we should go ahead with the upgradation as we are getting a profit of 60M in case of upgradation and 56M in case of not upgrading the current technology.

I: Alright. We can end the case here. Thank you for the discussion.