working capital management as a key for value creation: case study

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Management & Change, Volume 13, Number 1 (2009)

WORKING CAPITAL MANAGEMENT AS A KEY FORVALUE CREATION: CASE STUDY OF AGRIBUSINESS

PRIVATE DAIRY FIRMS

Viqar Ali Baig

Working capital is just like the heart of business. If it becomesweak, the business can hardly prosper and survive. Previousresearch findings related to working capital managementpractices indicated that if the financial management practices,especially working capital management, of the agribusinessfirms, generally small in size, could be significantly improved,then few firms would fail, and therefore proper working capitalmanagement practices are extremely important for these firms.In order to improve the working capital management practices,it is essential for the finance managers to adopt a properapproach of working capital decisions making to drive theirrespective firms towards success in order to generate the valuefor the shareholders.

Therefore, the main purpose of this paper is to reportfindings of a survey of working capital management practicesof agribusiness (private dairy) firms as a part of my thesisconducted in July 2008. Working capital management practicesof private dairy firms are analyzed with the help of a twodimensional approach for working capital decision making,developed as a part of my thesis, in order to analyze theimprovements in the working capital management practices.This approach is based on optimising the cash flows, forshareholder value creation, through the management of currentassets, current liabilities, sales and purchase operations as wellas relationship with the customers and suppliers. A sample ofthree private dairy firms is taken for the study in which MotherDairy Food Processing Ltd is selected as main firm for studyand Kwality Dairy and VRS Foods are selected for making acomparative study. These findings provide deeper insights intoworking capital management practices and provide suggestionsfor improvements.

Key words: Working capital management, two dimensionalapproach: inernally, externally, private dairy firms.

Management & Change, Volume 13, Number 1 (2009)© 2009 IILM Institute for Higher Education. All Rights Reserved.

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INTRODUCTION

In firms of all sizes, a basic aim of management accounting routines is tocontrol vital areas and to monitor, and hopefully improve, performance(Emmanuel et al., 1990; Dent, 1996). Agribusiness firms generally small insize need to particularly control and monitor their working capital. This isbecause they are generally associated with a higher proportion of currentassets (up to 60per cent) relative to large firms, less liquidity, volatile cashflows, and a reliance on short-term debt (Peel et al., 2000). Evidence suggeststhat mostly these firms practice ad hoc or subjective working capital decision-making rather than modern approach for creating the value for the firm(Nayak and Greenfield, 1994; Khoury et al., 1999). Peel and Wilson (1996)assert that these firms should adopt proper working capital managementpractices in order to reduce the probability of business closure, as well as toenhance business performance.

Knowledge and understanding of the working capital managementpractices of Agribusiness firms is currently inadequate. Research in thisarea is determined by absence of an agreed framework for modeldevelopment and hypothesis formulation. Little theoretical justification hasbeen provided for the lower take-up of working capital management practicesby agribusiness firms (Pike and Pass, 1987; Mitchell et al., 1998). Mostempirical studies simply describe the characteristics of their sampled firmsand the proportion of firms reporting the utilization of specific working capitalmanagement techniques (Peel and Wilson, 1996; Maxwell et al., 1998). Thefactors associated with the adoption of working capital management practiceshave generally been explored within a univariate statistical framework (Kimand Chung, 1990; Mian and Smith, 1992; Ng et al., 1999).

Therefore, the main purpose of this paper is to report findings of asurvey of working capital management practices of agribusiness (privatedairy) firms as a part of my thesis conducted in July 2008. Working capitalmanagement practices of private dairy firms are analyzed with the help of atwo dimensional approach for working capital decision making, developedas a part of my thesis, in order to analyze the improvements in the workingcapital management practices. This approach is based on optimising thecash flows, for shareholder value creation, through the management ofcurrent assets, current liabilities, sales and purchase operations as well asrelationship with the customers and suppliers.

46 Working Capital Management as a Key for Value Creation:...

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This paper is divided into five sections; second section covers introductionof approached used for studying the working capital management practices,research methodology is a part of section third and empirical findings ofdairy firms, are discussed in section four, and section five concludes thepaper findings.

METHODOLOGY USED FOR STUDYING WCM PRACTICES

Methodology used of this paper is a two-dimensional approach - internaland external. This approach is developed as part of author's doctoral work.Internally, it takes care of the management of level of investment in currentassets and short-term financing as well as management of operations (thataffect the balances of current assets and liabilities) and therefore maximisesbenefits and minimizes cost of the working capital assets and short-termfinancing (short-term debts) by taking care of internally generated problems.Externally, it manages firm-supplier and firm-customer cooperation and thusminimizes costs of inter-firm transactional relations and thereby resulting insynergy effects on firm value by taking care of externally generated problems.This is achieved by reducing inter-firm transaction costs and creates firmvalue in a win-win condition (Rubin and Alvarez, 1998).

Functions of two-dimensional approach used

It is attempted to classify functions of managing working capital internally,the first dimension, into the management of level of current assets, currentliabilities and management of operations that affect the balances of currentassets and liabilities as well as the management of activities of cash paymentsand cash receipts (Fig. 1). As for working capital management on operations,it focuses on operations of purchases and sales and related activities ofcash payments and cash receipts.

Viqar Ali Baig 47

ZEAL

It is difficult to achieve highest aim without zeal.- Emerson

Nothing is difficult in this world for a person possessing zeal.- Valmiki

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If a firm can effectively design purchasing and sales policies, it would haveother direct effect in a firm's external value chain as credit purchasing andpayment as well as credit selling and collection policies have. For instance,a policy of speeding-up collections and slowing down payments may havenegative effects in the value chain and on the confidence and trust buildingwith transaction partners. In the management of the activities of cashpayment, the firm has to slow-down cash payments and pay debts as late asit is reliable with maintaining its credit standing with suppliers so that it canmake the most efficient use of the money it already has. According toScherr (1989), methods used to slow-down cash disbursements may include:control of disbursements, using payable through drafts, zero base account,and managing payroll and dividend disbursements and playing the float. Inthe management of the activities of cash receipt, the firm has to speed-upand control cash collection. A firm has to speed-up the collection of sales sothat it earns income and uses the money sooner, for investment or payingbills and save future expenses. The methods that can be used to speed cashcollection process include earlier billing, a lock-box system and concentrationbanking. For purposes of managing working capital internally refers only tothe levels and operations, which are directly, connected with the firms externallinkages (that its suppliers and customers). This paper does not refer tointernal operations such as production operations and other internallyperformed administrative activities.

It is attempted to classify function of managing working capital externally,second dimension, as the management of relations (cooperation) of firmswith their forward linkages (Customers) and backward linkages (suppliers)(Fig. 1). As not a single firm can survive in isolation, it has to make transactionswith the other firms e.g. suppliers, customer. Every transaction betweenthe two firms has costs, which can only be minimized, for both, by mutualco-operation. It, therefore, originates need for development of an appropriateinter-firm managerial control pattern. With the help of which transactioncosts for both the firms may decrease. It may cause to increase in value ofthe firm. Two types of costs are associated with each transaction, one is ofworking capital balances (change in the balances of current assets andliabilities caused by the transaction) and other originates from the inter-firmtransactional relationship. Therefore total cost of a transaction is aggregateof these two costs. Cost of working capital balances is subjected to controlin managing working capital internally. Here, our issue of discussion is thesecond component of transaction cost. The volume and spread of inter-firm

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transactional relationship cost depend upon the transacting characteristicsexisting between the transacting firms. Aggregate cost of transaction of afirm may increase if both the firms in transaction seek to maximize theirown benefits without considering the effects of their actions on othertransaction firm. But there are some costs, under the head of inter-firmrelationship costs, which can be avoided if the two transacting partiescoordinate their common operations (Williamson, 1985). It can be achievedif firms can assess their transaction and decide on the appropriate inter-firmmanagerial control pattern. It will possibly reduce the aggregate costs offirms to a level below the sum total of costs of both firms without co-operation. Therefore the environment of cooperation (inter firm managerialcontrol pattern) between transacting parties may result at a concomitantbenefit of creating value to both firms by reducing inter-firm transactionalrelationship cost.

Inter-firm cooperation has become important as a result of specializationand globalisation. Number of inter-firm transactions will rapidly increase innumbers as the firms are specializing in few of their operations and leavingthe rest to other firms. Inter-firm cooperation will also decrease cost ofworking capital balances within the firm. Proper inter-firm cooperationdecreases the need to hold extra balances of cash, receivables and inventorieswithin the firm. Another factor that generates the need of inter-firmcooperation is globalisation of firms due to cost and market factors. When afirm goes global it is forced to depend on the cooperation of other firms,which are accustomed to the new environment in terms of business culture,social culture and regulatory requirements. This inter-firm cooperation createsvalue chain (Porte, 1985), which is inter-connected with value network(Rappaport, 1986). However, firms have to establish a workable inter-firmcontrol patterns (Van Der Meer Kooistra and Vosselman, 2000). Table 2indicates working capital management approach expectations of ourtheoretical model in a summary form.

RESEARCH METHODOLOGY

A qualitative approach with the emphasis on case study method of researchcorrectly suits for the approach used for studying the working capitalmanagement practices. Though it has an input of the exploratory case study,the study has basically focused on the descriptive and explanatory casestudy approach. In this paper a brief review is made for the approach used


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for working capital management - internally and externally. Internally, studyrelates to the value creating characteristics of working capital. Externally,business to business cooperation is assessed. After that, description is onwhat working capital approaches - internally and externally private dairyfirms use. Finally a comparison is made among the practices of the dairyfirms. Accordingly, research sub-divided the design of the case researchinto overall case study, the field research or data collection, data analysisand criteria used to ensure the credibility of the findings.

Both the qualitative and quantitative data analysis is used. WCMapproach requires using the qualitative data analysis, which according toMiles and Huberman (1994), refers to essences of people, objects andsituations and is expressed in terms of words based on observations,interviews and documents. Quantitative data analysis refers to the evaluationof working capital decisions using financial performance ratios. Out of thesources of data collection for case study, archival records, interviews andquestionnaires are selected to be used, because of their relevance to theresearch. Focused and open-ended interviews are conducted with therespondents (managers of firm, its supplier and customer). Interviews wouldenable to target directly at the case study topic and to perceive casualinferences. Questionnaires are also personally administered and collectedfrom the firms' managers. As archival records, the audited (as much as it ispossible) financial statements of the firms for five years (2003 to 2007) arecollected and are used in this research. Taking audited financial data of fiveconsecutive years has the advantage of retrievability, unbiased selectivity(by both researcher and provider) and accessibility.

Questions were referred on overall working capital management to thefirms' general managers, questions on levels of investment in current assetsand short-term financing to financial managers and the questions onoperations to commercial managers.

Selected Cases: Main Firms and their Supplier and CustomerLinkages

Main Firms: The firms that this paper concentrates on are three mainfirms along with one supplier and one customer for each firm (Table 3). Themain firms include three private dairy firms - Mother Dairy Fruit & VegetablePvt. Ltd., Kwality Dairy (India) Ltd., V R S Foods Ltd.

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Suppliers: The suppliers of whose responses have been studied includeSimbhaoli Sugars Ltd. for Mother Dairy, Anirudh Foods Ltd. for KwalityDairy, Parag Dairy - supplier of VRS foods.

Customers The customers of the for private dairy firm from customerpoint of view, wholesalers are taken located in the vicinity of Delhi and theirname are not mentioned as per their choice.

Table 3 The data base - Firm, Suppliers, Customer

Firm and ownership group Supplier Customer

2. Private Dairy FirmsMother Dairy Fruit &Vegetable Pvt. Ltd., Simbhaoli Sugars Ltd WholesalerKwality Dairy (India) Ltd., Anirudh Foods Ltd. WholesalerV R S Foods Ltd., Parag Dairy Wholesaler

Main Case: Researcher has selected a Mother Dairy as a main case forthe detail study. Mother Dairy Pvt. Ltd is presented for managing workingcapital internally, its supplier linkage with Simbhaoli Sugars Ltd. and itscustomer linkage with wholesaler. A comparison is then made between themanagement of working capital levels and operations -internally and externallyof Mother Dairy Fruit & Vegetable Pvt. Ltd and the other two private dairyfirms namely - Kwality Dairy (India) Ltd. and V R S Foods Ltd.

EMPIRICAL FINDINGS

A. Overall Working Capital Management

Historical Background of the main firm: Mother Dairy - Delhi was setup in 1974 under the Operation Flood Program. It is now a wholly ownedcompany of the National Dairy Development Board (NDDB). Mother Dairymarkets & sells dairy products under the Mother Dairy brand (like LiquidMilk, Dahi, Ice creams, Cheese and Butter), Dhara range of edible oils andthe Safal range of fresh fruits & vegetables, frozen vegetables and fruitjuices at a national level through its sales and distribution networks formarketing food items. With a view to separating the commercial activitiesfrom developmental activities, the NDDB merged Mother Dairy and the


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Fruit & Vegetable project into a wholly owned company named MotherDairy Fruit & Vegetable Ltd (MDFVL) in Feb 2003.This becomes the holdingcompany of Mother Dairy India Ltd (MDIL)-a marketing company andMother Dairy Foods Processing Ltd (MDFPL)-a processing company.MDFPL is a multiunit company, with units at various locations in India.Mother Dairy, Delhi is one of the units of MDFPL

"Mother Dairy" is the single largest brand of milk in India as well as inAsia, marketing about 2.2 million litres of milk per day. Mother Dairycommands 40per cent market share in the organized sector in and aroundDelhi, primarily because of consistent quality and service whatever be thecrisis-floods, transport strike, curfew etc. Mother Dairy, Patparganj, Delhi,is presently manufacturing & selling around 8.5 lakh litres of toned milkthrough bulk vending shops.

Organizational structure: Its organizational structure includes the generalmanager, financial manager and a commercial manager. According to thegeneral manager's opinion, he is fully empowered to make decisions regardingworking capital levels of investments and financing, as well as operations ofproduction, purchasing and sales. The financial manager controls the firm'sfinancial operations and reports to the general manager periodically.Commercial manager is responsible to investigate and assess the marketand apply an appropriate marketing strategy. The general manager reportsto the owners' annual general meeting.

Firm's policies and constraints: According to the opinion of the firm'sfinancial manager, the main objectives of working capital management includethe increase of sales, the decrease of costs and to remain liquid as well as tokeep operations smooth but not to generate profit. The firm manages itsworking capital in such a way that it buys its materials on credit and sells itsgoods to customers on a monthly credit basis and uses cash collected fromoperations to finance its working capital investments and daily activities. Itpays its suppliers and collects from customers in the first 10 days followingthe months of purchases and sales. It does not keep raw materials andfinished goods inventory in the store because production starts immediatelywhen the materials are received and the sales is directly after production.During the interview conducted with the firm's finance manager, he saidthat: "our short-term aim is to maintain current production and sales capacitywhile in the long-term; we have a plan to diversify our products". The financial

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manager believes that the factors that determine working capital levels includemostly seasonality of sales, sales growth, and credit policy. However, pricelevels of inputs, availability of credit and operating efficiency do not influencethe levels of working capital. On the constraints in achieving short and long-term objectives the manager said that: "We have no constraints to achieveshort-term objectives at all, however how efficiently we achieve ourlong-term objectives will depend on the availability of capital".

According to the finance manager, the factors that hinder the firm fromachieving its objectives are working capital investment and financing.However, production capacity and markets are not problems. According tothe opinion of the general manager, there are no government regulationsthat affect management's decisions. Similarly, there are no cultural issues,which seriously affect the sales of the firm's products. The two religionsdominantly followed in India are Hinduism and Islam, and followers of bothare comfortable with the products.

Working capital management and value creation: On the role of workingcapital management in promoting the firm's objectives on value creation,the finance manager said that: "Managing working capital investments andshort-term financing has a major role to play in promoting our short-termand log-term objectives. Our planned capacity expansion and productdiversification will depend upon how successfully we performed the currentworking capital investments and financing, because future success can onlybe extension of current success". The firm's financial manager also believesthat overall working capital management has a pivotal role to play in valuecreation, particularly in increasing sales and decreasing costs of purchases,production and inventory. He believes that managing cash, receivables,inventory, receivables, purchase and sales of materials and trade payablescan achieve these objectives.

A .2. Overall Working Capital Management Issues : Comparison ofPrivate Firms

Here objective of study is if three private firms make known similarity orhave a major difference on the overall working capital management, mainlythe policy of management of working capital, the constraints in achievingfirm objectives and the factors determining firm objectives.


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Historical Background of VRS and Kwality Dairy

VRS Food Ltd

Paras history reflects back to 1960, when the procurement of milk startedwith 60 liters of milk. The only fundamental that worked right from day oneis the quality, which got reinforced in every day of progress. ChairmanVedram, the founder and promoter of company is one of the connoisseurs inthe dairy farm industry. Ved Ram & Sons started as partnership company in1987 under company's name VRS foods limited and since then in tune withthe rapidly changing technology, production units are well armed with thelatest equipment. These facilities enable to cater the needs of the clients byselling over 250000 liters of milk per day in Delhi Metro.

At the heart of the entire network of the Paras are hundreds of villagelevel collection centers covering 5000 villages across Western UP. Haryana,Rajasthan, Maharashtra and Gujrat, from where milk is collected everyday. The farmers are not only helped in finance but also in buying cattle,feed, providing veterinary services and other infrastructure support. Thetrust of the farmer has grown stronger and so has the network. VRS's largemanufacturing capacity at five different locations across most part of Indiais backed by an impressive distribution network, to ensure that our productsfind their way to every household in India.

Kwality Dairy India Ltd

The Company was incorporated as a Public Limited Company on August21, 1992 and registered with the Registrar of Companies (West Bengal) atCalcutta. The Company obtained a Certificate of Commencement ofBusiness on 7th July, 1993. The Company is setting up a new project withan installed capacity of 3600 tpa for manufacture of Ice Cream Mix Powder.The said project would require about 43,700 litres of milk to be processedevery day to achieve its peak production of 10 tpd of Ice Cream Milk Powder.

In addition to Ice Cream Milk Powder, the Company will also beproducing small quantities of Skimmed Milk Powder (SMP), Ghee andCasein out of its unused Solid Non Fat (SNF)/White Butter (WB) and sourmilk. The project is being set up to primarily act as a captive supplier of IceCream Mix Powder to various ice-cream manufacturing companies in the

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group loosely referred to as the Kwality group. In 1999 Kwality DairyIndia a subsidiary of Kwality Ice creams India unveils a range of dairyproducts under the brand name KreamKountry.

Firm policies and constraints: The financial managers of the private firmsresponded that their working capital management policy is tailored towardsincreasing sales, decreasing costs and thereby generating profit but onlyVRS Foods ltd responded that it also aims at smooth operations and remainliquid. On the constraints in achieving firm objectives, the managers of MotherDairy, Kwality Dairy and VRS Foods believe that the factors, which areconstraining firm objectives, include working capital investment and financing.Mother Dairy and Kwality Dairy also have sometimes a lack of productioncapacity, product demand and markets. Similarly VRS Foods havesometimes lack of production capacity and market.

Role of working capital management in value creation: Financialmanagers of all the three private firms believe that working capitalmanagement has an important role in value creation. The managers' responsedenote that working capital management is important for the purpose ofincreasing sales by managing cash, trade receivables, inventory, trade payable,sales of finished goods and purchase of materials. They also believe thatworking capital management can be used to decrease costs by managingpurchase of materials, inventory, cash and receivables, but not payables,bank loans or liquidity.

B. Working Capital Management - Internally

This section covers working capital management - internally of MotherDairy Food Processing Ltd,, which is divided into levels of investment (4.B.1.)and financing (4.B.2.) as well as operations of purchasing (4.B.3.) andselling (4.B.4).

B.1. Managing Working Capital Investments

In this section, discussion is on the manager's responses to questions onhow the Mother Dairy Food Processing Ltd, manages working capitalinvestments of cash, receivables and inventories. The objective is to findout if Mother Dairy Food Processing Ltd, applies value-creating methods ofmanaging working capital levels of investment.


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B.1.1. Management of Cash

Motives for holding cash: According to the firm's financial manager, themain purpose for holding cash in the firm is for transaction purposes - tomake regular predetermined payments. The firm rarely keeps any cash formaking for unforeseen transactions (precautionary purpose) and it does notkeep cash opportunity (speculative purpose) to pay or as a guarantee forbank loans.

Cash budgeting and control: The factory's management prepares cashbudgets mainly to plan for short and long-term cash needs to control liquidity,cash payments and receipts. The primary bases used to forecast the cashbudget are past experience, opinion of the management and forecastedsales levels. Mother Dairy Food Processing Ltd, prepares cash flowstatements using the receipts and disbursements method, which it uses toimprove its future cash forecasts as well as to control cash payments andreceipts.

Management of cash payment and collection: The firm has a petty cashfund with a maximum balance of Rs 20000. It uses this petty cash fund topay for expenses less than Rs.5000, payments above this amount are madeusing checks approved by the general and financial managers. Collectionsfrom lager customers (from the point of sales volume) are made mostlyusing customer checks. The firm purchases only on credit without discount,which it considers as a policy of slowing-down cash payments and the cashsales to smaller customers is considered as a means of speeding-up thecash collection. The Mother Dairy Food Processing Ltd, controls its cashpayments using a petty cash system, voucher system, using checkssequentially numbered, which are controlled and accounted regularly. Itcontrols cash collections by making customer pay at the bank account.

B.1.2. Management of Inventory

Management of finished goods inventory: According to the financialmanager, the firm produce varieties of product - Butter, Dahi, Ghee, Cheese,UHT Milk, Lassi & Flavored Milk. The production process takes only oneday, so there is no work-in-process. The cost of holding, of finished goodsinventory, includes mainly the opportunity cost of capital, cost of physicaldeterioration and handling. Finished goods inventory is valued on the basis

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of lower of average cost or market cost. According to the firm's financialmanagers the factory minimizes finished goods holding and ordering costsusing the "just-in-time" approach of inventory management, establish long-term customer relations, and making customer pay the costs. Holding costsof finished goods inventory is minimized by agreeing with customers to useits own transportation to take the goods to the place of customers on a dailybasis. Ordering costs are minimized by making a contract agreement onlyonce, where customers indicate the supply of products that they want on adaily basis. Mother Dairy Food Processing Ltd, uses the average costapproach to determine the cost and value of cost of goods sold and remainingin inventory.

Material inventory management: According to financial manager MotherDairy Food Processing Ltd,, the firm's materials inventory is mostly rawmilk, sugar, or plastic cases, which are used to pack the processed products.Main objective of Mother Dairy Food Processing Ltd, in managing theseinventories of materials is to reduce holding and ordering costs as well as tosafeguard against shortages and to keep the production running. The firm'smajor cost of holding inventory of materials is the costs of handling, powerand opportunity cost of capital. The firm minimizes materials holding andordering costs using the "just-in-time" approach of inventory managementand tries to keep only the minimum required. Ordering costs are minimizedby making a contract agreement only once. The factory uses the averagecost approach to determine the cost of materials issued to production andremaining in inventory and these inventories are presented in the balancesheet as such.

B.1.3. Management of Receivables

Credit policy and management of receivables: Mother Dairy FoodProcessing Ltd, sells to larger customers on the basis of a monthly creditwithout discounts and these customers generally pay within the first 10days of the month after sales. However, the financial manager believes thatthe firm does not have problem of managing receivables. The main sourceof information for screening credit applicants is the size of the customer'sproposed purchase, firm's prior experience and the customer's paymenthistory. Customers who order large daily purchases are preferred for creditsales. The firm uses an open account with no discount for those who buy oncredit. The 5 C's (capital, character, collateral, capacity, conditions), one


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time sale approach are used to evaluate any future credit application. Inorder to collect overdue receivables the firm makes telephone calls, sendreminder and extends credit periods. However, it never employs a collectionagent or takes legal action. Mother Dairy Food Processing Ltd, reduces thelevels of receivables by making customer pay outstanding debts. If the levelof receivables is too high the firm does not have a control mechanism.

B.1.4. Managing Working Capital Investment: Comparison ofPrivate Firm

Here the purpose is to know if the private firms reveal similarities ordifferences in the management of their working capital levels of investment,particularly cash, inventories and receivables.

Management of cash: The purpose of cash planning for all the privatefirms is the transaction purpose of making regular pre-determined payments.The financial manager of VRS Foods and Kwality Dairy also reported thatthe firm's cash management has the objective of bank compensating. Thesetwo private firms also reported that they do not manage cash for the purposesof speculative or precautionary reasons mainly because they have noopportunity to make cash investments with a profit motive. Mother Dairyforecasts cash in order to control cash payments, collections and levels aswell as, to plan short-term and long-term cash needs using past experience,management opinion and forecasted sales as bases. The other two privatefirms also forecast cash requirements and make hedges against cashshortages.

However, all firms prepare cash flow statements by using the receiptsand disbursements approach and they use it to control cash payments andcollections. All the three private firms experience cash surpluses that itdeposits at its bank checking account. VRS Foods and Kwality Dairy controlcash payments by using a voucher system, checks, and a petty cash system.All the three firms collect cash at sales and in the ten days after the monthof sale. The firms consider the cash sale as means of speeding-up cashcollection, which they control by making customer pay at the bank account.

Management of finish goods inventory: The financial managers of VRSFoods and Kwality Dairy firms reported that they hold finished goods inventoryto satisfy regular customer demands, and to keep safety stock, Mother

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Dairy has its objective in meeting seasonal high demand along with satisfycustomer demand. For VRS Foods and Kwality Dairy the opportunity costsof capital invested in the materials inventory, deterioration of material andthe costs of handlings are considered relevant costs, similarly to MotherDairy, of finished goods inventory. Mother Dairy use only the technique ofholding the minimum level required in managing the costs of holding finishedgoods inventory, otherwise all three are common in using just in time andlong-term customer relations. VRS Foods and Kwality Dairy use first-in-first-out method for finished goods inventory, while Mother Dairy usesaverage costing method. For valuation of finished goods inventory bothMother Dairy and VRS Foods use lower of average cost or market cost,while Kwality Dairy uses average cost method for finished goods inventoryvaluation. All three private firms selectively control the physical safety ofthe finished goods on the basis of average costs and usage rate.

Management of material inventory: Materials inventory policy of all threeprivate firms is tailored strongly towards minimizing inventory holding andordering costs as well as safeguarding against inventory shortages and tokeep production running. They apply inventory management approacheslike holding the minimum level required, just in time but not economic orderquantity. They all selectively control the physical safety of their materialsinventory on the basis of average cost and usage rate. Mother Dairy alsocontrol on the basis of criticality in case of shortage in the market. Whereas,Kwality Dairy also controls on the basis of scarcity of material in the market.They use only the average cost technique to determine the value and costof materials used in production and left in the inventory. For Kwality Dairyand VRS Foods the opportunity costs of capital invested in the materialsinventory and the costs of deterioration and handling are considered relevantcosts of materials inventory. Whereas, VRS Foods also consider cost ofpower as part of holding cost of material inventory like Mother Dairy.However, the overall cost of material inventory management is not relevantwith all the firms, because the possibility and duration of material inventoryis small.

Management of receivables: The private firms have different sales policiesdepending on whether the customer is large or small and a government firmor a private firm. The cash sales refer to smaller private firms while thecredit sales refer to larger private and all government firms. With regard totheir private credit customers they apply credit standards based on a one


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time sale approach and five C's (capital, character, collateral capacity andconditions) while VRS Foods and Kwality Dairy also use the same standardsto screen credit applicants. In order to collect overdue receivables they allsend reminder, make telephone calls and extend credit periods, and none ofthem employs collection agents or takes legal action. However, the risk ofbad debt is very low and none of them makes allowances for it.

B.2. Management of Working Capital Finances

Sources, costs and influences of working capital financing: MotherDairy Food Processing Ltd, uses the cash earned from operations anddeposited in its bank's current account as a source of working capitalfinancing. The response of the finance manager indicated that, the firm'scash balance is not excessive, but enough to pay for the working capitalneeds. Mother Dairy Food Processing Ltd, also considers retained earnings,bank overdraft, trade creditors, and accruals as sources of financing itsworking capital investments. According to the financial manager, price levelsof inputs, operating efficiency, seasonality of sales, the firm's credit policyand availability of credit do not influence the levels of short-term financing.

Management of Working Capital Finances : Comparison of PrivateFirms

Sources, costs and influences of working capital financing: All threeprivate firms (Mother Dairy, Kwality Dairy and VRS Foods) use cashcollected from operations to finance their short-term financing needs.However, Kwality Dairy and VRS Foods also use short-term debt, bankoverdraft, retained earnings and accruals. Only Mother Dairy reported thatits operations result at cash surplus so it does not have any external cost offinancing its working capital investments. However, the other two firms -Kwality Dairy and VRS Foods use bank overdraft loan with annual interestcosts of around 9.5per cent to finance their short-term investments in workingcapital assets. According to the financial managers of Kwality Dairy andVRS Foods, the main factors that influence the levels of financing of workingcapital levels are price levels of inputs and sales growth. On the other hand,the financial managers of the three-private firms believe that seasonality ofsales (except VRS Foods), credit policy and availability of credit do notdetermine the levels short-term financing for working capital investments.

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B.3 Management of Working Capital Operations

B.3.1. Management of Purchase Operation

Purchase policies: In order to study the firm-supplier cooperation onpurchase operations, a sugar supplier is chosen from the firm concern. Assugar, after milk, is one of the main ingredients for many products, therefore,firm's relations with sugar supplier are of importance for management. Outof many sugar suppliers, a private supplier is chosen, because in case ofgovernment supplier many things are not in control of firm.

Mother Dairy Food Processing Ltd, purchases its materials on a creditbasis with a policy geared towards smoothing out production during normalperiods of supply, to take care of seasonal fluctuations in demand andproduction requirements, to meet market demand and to keep productionuninterrupted. According to the commercial manager, the firm's purchasepolicy is also to decrease inventory holding and ordering costs, but not as asole objective. The firm forecasts its materials purchase requirements inorder to establish the quantity on hand and on order during lead time and tomeet its production demands. The base that the firm uses to estimate materialspurchase requirement is mainly its past experience, forecasted sales volume,and management opinion.

Contacting, contracting and controlling of suppliers: Mother Dairy FoodProcessing Ltd, makes efforts to find suppliers by getting in contact anddescribing the materials to potential suppliers. According to the commercialmanager, the costs of the efforts made to find suppliers are significant andtherefore relevant for the management. When entering into contract with apotential supplier the firm evaluates the proposal and negotiates theagreement and the manager believes that the costs are relevant to attractmanagerial attention. Overall, according to the commercial manager, thecosts of contacting, contracting and controlling suppliers are relevant to themanagement. Therefore, management uses approaches like choosing thecheapest channel of communication, making its terms of agreement knownto its suppliers in advance, developing long lasting relationships, managingby trust and routine contract agreements.


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B.3.2. Management of Sales Operations

Sales Policy: According to the firm's commercial manager, Mother DairyFood Processing Ltd, sells its dairy products through its outlets all overIndia. Some products it sells through wholesaler, dealer and retailer network.According to the commercial manager, Mother Dairy Food Processing Ltd,'sapproach to find markets for its products is by getting directly in contactwith potential customers. The firm sells on cash basis to small customersand on credit basis (using the 5 Cs) to the larger customers and governmentfirms. According to the commercial manager, the reason why it makespreferential customer treatment is because of the trust factor. He says: "thelarger private firms and all government firms are highly trusted and will notfail to pay back their debt, while the small retail buyers buy small amountswhose collection cost and efforts does not warrant the credit selling andmay not pay back on time". Its sales objective is to take care of regularcustomer demands. In interview with the commercial manager, it isunderstand that the firm's other sales objective is to decrease inventoryholding costs. It forecasts its sales requirements in order to forecast futuredemand and inventory usage. The firm uses statistically forecasted sales asa base to plan the sales volume along with past experience and managementopinion but not the opinion of the sales staff.

Contacting, contracting and controlling customers: Mother Dairy FoodProcessing Ltd, contacts its customer by directly approaching potentialcustomers. It also negotiates the sales agreement with potential customers,including the terms of sale and evaluates the proposed purchase terms of itscustomer. However, the firm does not sign the agreements. Mother DairyFood Processing Ltd, also relies on the commitment and trust of its customers.Moreover, he believes that the overall costs of contacting, contracting andcontrolling customers are not relevant to the management.

B.3.3. Management of Working Capital Operations : Comparison ofPrivate Firms

Management of purchase operation: The managers of Kwality Dairyand VRS food reported that they purchase materials mainly to meet marketdemand, and to keep production running. These firms rarely use purchasepolicy to decrease inventory holding and purchase ordering costs. They allforecast the purchase of materials based on past experience and forecastedsales volume; however, Kwality Dairy and Mother Dairy also usemanagement opinion. All the three firms purchase on both cash and credit

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terms. The costs of the efforts made to contact, contract and control suppliersare relevant only to Mother Dairy. Moreover, the commercial managers ofall firms replied that they use approaches such as choosing the cheapestchannel of communication and making terms of agreement known in advanceto contact suppliers as well as having routine contract agreement with termsknown in advance during contracting. They install routine control procedureswith terms known in advance to both partners as control measures. However,none of them employs lawyers or purchase agents to manage the costs ofcontact, contract and control of suppliers.

Management of sales operation: All private firms sell their products tothe local market while Mother Dairy also exports. The commercial managersof all private firms said that the objective of their sales policy is to satisfycustomer demands and expand market. The objectives of sales policy, todecrease inventory holding and ordering costs and meeting seasonal salesrequirements are rare for all the firms. All three private firms forecast salesbased on past experience and also use statistical forecasts while MotherDairy also use management opinion. Only VRS Foods use the opinion of itssales staff to forecast its sales. Kwality Dairy and VRS Foods forecastsales in order to estimate future demand, while Kwality Dairy also has theobjective of forecast quantity on hand and on order.

The private firms produce for the general market as well as they alsoproduce by the order of specific customers. Kwality Dairy and VRS Foodsensure that their customers do not back down from their agreement byhaving a written contract. The firms reported from their experience thatthere is no probability of customers backing down from their agreement andthe difficulty of getting another customer is small (except VRS Foods). Allthe private firms choose the cheapest channel of communication to contactcustomers and they enter into routine contract agreements with terms knownin advance of transaction to get into contract and control customers. Allfirms do not employ sales agents or lawyers to facilitate the contacting,contracting and controlling customers.

B.4. Performance Evaluation of Working Capital Decision

Evaluation of the result of their decisions is also done as it is reflected in thefirms' five years (2003 - 2007) financial statements. For this, various typesof financial performance indicators are applied using the approach of ratioanalyses.


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Performance measurement and evaluation criteria: According to thefirm's financial manager, Mother Dairy Food Processing Ltd, evaluates theperformance of its working capital decisions by comparing the performanceof its past with the present, the actual with the expected and comparinginter-firm benchmarks. Moreover, the firm uses customer satisfaction criteriaparticularly on quality of products by decreasing defect rates, maintaininghigher customer retention rates as well as providing higher customer'sperceived value of goods. Firm improves communication with customer byfollowing the policy of fast delivery and response time. The evaluation ofMother Dairy Food Processing Ltd,'s financial performance is divided intothree sections. First, it is studied the investment composition using assetstructure ratios. Second, the liquidity and short-term financing compositionratios are used to evaluate efficiency of the firm's working capital financingand liquidity position. Third, activity and profitability ratios are used to studythe firms overall efficiency in turning over the working capital assets andgenerating profit.

B.4.1. Performance Evaluation of Working Capital Investment

Working capital investment composition: In order to find Mother DairyFood Processing Ltd,'s investment composition, researcher evaluated itsfinancial statement data using asset structure ratios. The main asset structureratio relevant to the study is working capital to total assets and its breakdowns,particularly cash, receivables and inventory to working capital ratios.

Working capital to total asset ratio: is expressed in percentages and mayindicate the extent that the firm uses working capital assets. It can also beused to study if such a composition is sound given the nature of the activitiesthe firm is in. Asset structure ratios of Mother Dairy Food Processing Ltd,for the ten years studied indicate that, on the average 76.53per cent of totalinvestment is in current assets. Taking the global norm of 50per cent intoconsideration, this working capital to total assets investment ratio is veryhigh. This is a reflection of the absence of investments in fixed assets. Thisworking capital to total assets investment ratio has increased from apercentage 69per cent in 2003 to as high as 82.3per cent in 2004 and thandecreasing onward. (See figure 4.A). Normally, this is at the expense ofexpanding production capacity by investing in more productive fixed assetsin the long-term. Therefore, the low production capacity and profit marginsexperienced by Mother Dairy Food Processing Ltd, may also be due to thishigh current asset investment. Researcher also computed inventory toworking capital, receivables to working capital and cash to working capital,

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which on average accounted to 41.2per cent, 25per cent and 32.8per centrespectively.

A reference to Figure 4.B reveals that the firm's major working capitalinvestment is on inventory, which has moderately increased till 2005 andthen decreasing, which normally implies a warning on the policy of workingcapital management particularly with respect to inventory management.Increase in the component of cash is also the signal of bad liquiditymanagement. As profitability of Mother Dairy Food Processing Ltd, wasfound suffering, so it can be concluded that increase in cash and receivablescomponent were affecting profitability.

B.4.2. Performance Evaluation of Working Capital Financing

Liquidity position: The ability to pay debts as they fall due and the degreeof certainty and ease with which an asset is converted into cash is measuredusing liquidity ratios. The liquidity position is analyzed using the current ratioand the quick ratio, which for the years averaged 1.4 and 0.8 respectively.Which is below the global norm of 2.0 and 1.0 respectively? As figure 4.Cshows, during the study period, the Mother Dairy Food Processing Ltd, hasmaintained a more or less constant below the global norm current ratio andquick ratio and therefore can be concluded that it does not has satisfactoryliquidity position. Liquidity ratios were found lowest in 2005.


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Short-term financing composition: As it is indicated in Figure (4.D) short-term financing of Mother Dairy Food Processing Ltd, is composed mainlyof trade creditors which accounted on the average 61.3per cent of the totalshort-term financing. The remaining short-term financing includes othersources, particularly provision for taxation amounting to 36per cent on theaverage. The factory does not use short-term bank loans, however it usesbank overdraft and accruals to finance its working capital investments. Useof creditors as a source of short-term financing is in increasing mode.

B.4.3. Performance Evaluation of Working Capital Operations

Activity and profitability ratios are used to study how efficient and profitableMother Dairy Food Processing Ltd,'s investments and operations aremanaged.

Operational efficiencies of working capital activities: It was targeted toknow how efficient the management of Mother Dairy Food Processing Ltd,turns over each type of working capital element. The operational efficiencyof working capital activities is measured using activity ratios includinginventory turnover, receivables turnover and overall working capital turnover.Inventory turnover of Mother Dairy Food Processing Ltd, for the studyyears indicates that annual cost of goods sold is on the average 8.5 timesaverage inventory. This implies inventories were held an average of 51days. Receivables turnover measures the number of times credit sales orreceivables is turned over to cash. The firm's average receivables indicatethat an annual sale was 13.8 times average receivables or 31 days accountsreceivable held uncollected. Overall working capital turnover measures thecapacity of working capital to generate sales volume and was 3.2 timesaverage current assets. As Figure 4.E clearly shows the firm's workingcapital turnovers are increasing during the years of study. All the turnoversare found satisfactory and according to the global norms of agribusinessindustry, this indicates the efficient management of the working capitalactivities of the Mother Dairy Food Processing Ltd,. In 2005, inventoryturnover improved, however, receivables and working capital turnoverdecreased. It indicates that cash collection efficiency of Mother Dairy FoodProcessing Ltd, reduced in 2005, however, production efficiency improved.

Overall profitability: the profitability ratios analyzed, in order to assess theprofitability of Mother Dairy Food Processing Ltd,'s operations. These ratios

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relate the firm's operating and net profits to sales as well as net profits tototal assets and respectively include, operating profit margin, net profit marginand return on total assets. As Figure 4.F shows, the firm's average operatingprofit margin amounted to 0.78per cent, net profit margin was -0.3per centand the return on assets -0.76per cent. On the other hand, the firm has theability to purchase raw materials at favorable terms, efficient utilization ofplant and machinery and lowering cost of production. The firm's relativelymore efficient management of its backward linkages could have alsocontributed for high profitability. One of the reasons for the low or negativeprofitability for the Mother Dairy Food Processing Ltd, was that during 2003, itwas putted in expansion and divided into two firms, due to which cash out flowsof large volumes took place. Moreover, a reference to Figure 7.F indicates thatthe profitability ratios have been decreased sharply during 2004.


Cash flow analysis It can be observed from table 4.A that the net cashinflows of Mother Dairy Food Processing Ltd, except for 2004 ended atpositive balance. It can moreover also be observed that the changes inworking capital assets (stocks) had an average negative impact on the netcash flow and while the changes in debtors and creditors had positive effect.The fact that the overall net cash flow ended up at a positive averageimplies also that the major sources of cash for the firm were items otherthan, debtors and creditors, implying that these items did not make muchcontribution to the net cash inflows of the firm. Maximum annual percentageeffect on net cash flows was of inventory and other items.

PROMISE VERSUS PERFORMANCE

Those who are quick to promise are generally slow to perform.

- Charles Haddon

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Table 4 A Cash Flow Analysis - Mother Dairy Food Processing Ltd, Pvt Ltd.(Figures in Crores)

Indicator Dec-03 Dec-04 Dec-05 Dec-06 Average

A. Annual Net Cash Flow 142.07 -46.3 3.84 36.46 34.0175

B. Net Cash Flow to TotalAssets 28.80 -10.2795 0.70816 8.210787 6.859982

C. Annual Changes

Increase (-), Decrease: Stock* -47.46 -115.54 162.23 -0.25667

Increase (-), Decrease:Debtors* -26.02 48.95 -13.2 3.243333

Increase, Decrease (-):Creditors** 29.14 7.8 -13.46 7.826667

D. Annual Percentage Effect on NCF

Increase (-), Decrease: Stock* -33.40 249.5464 4224.74 1480.293

Increase (-), Decrease:Debtors* -18.31 -105.724 -343.75 -155.929

Increase, Decrease (-):Creditors** 20.51 -16.8467 -350.521 -115.619

Others 31.20 -126.976 -3530.47 -1208.75

*(Year1-Year2), **(Year2-Year1)

B.4.4. Working Capital Performance : Comparison of Private DairyFirms

In order to study the impact of management's decisions on the private firms'investments, financing and operations, relevant ratios have been computedfrom the firms' financial statements.

Performance measurement and evaluation criteria: According to theirfinancial managers, the private firms evaluate their performance of workingcapital investment decision by using a comparative analysis of past versuspresent, actual versus expected and using inter-firm bench marks. Moreover,all the firms reported that they uses almost all the accounting and customersatisfaction measures of performance other than minimizing cost. Thecomputation of the firms' accounting based performance evaluation revealsthe following results.

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Investment: Here research compares asset structure ratios of the threeprivate firms. The average composition of current assets to total assetsrevealed 76.5per cent for Mother Dairy, 42.5per cent for Kwality Dairy,56.1per cent for VRS Foods. The average working capital investmentcomposition on inventories, receivables and cash respectively shows 41.2percent, 24.9per cent and 32.9per cent for Mother Dairy, 48.6per cent, 44.6percent and 1.8per cent for Kwality Dairy, and 48.6per cent, 43.9per cent and7.4per cent for VRS Foods.

It could be observed from the above information on current assets tototal assets and working capital investment composition that Mother Dairyhas the highest (76.5per cent) current asset composition, 41.2per cent ofwhich is invested in inventories. The second to Mother Dairy current assetcomposition is VRS Foods with 56.1per cent of total assets invested incurrent assets out of which 48.6per cent is on inventories. Maximumcomposition for inventory is for Kwality Dairy and VRS Foods, forreceivables is Kwality Dairy and for cash is Mother Dairy.

Financing: the overall financing management of the private firms is analyzedusing liquidity ratios, particularly current and quick ratios. The current andquick ratio positions respectively for the private firms show an average of1.4 and 0.8 for Kwality Dairy 1.2 and 0.55 for VRS Foods, 2.1 and 0.98. Asit was mentioned earlier in this chapter the current and quick ratios forMother Dairy were respectively 1.5 and 0.786. Kwality Dairy has recordedthe lowest liquidity position while VRS Foods is the most liquid private firmand the only firm meeting global standards.

The average working capital financing composition of trade creditors,short-term bank loans, bank overdrafts and others accruals respectivelyshows 61.3per cent, 38.6per cent, for Mother Dairy, 60.3per cent, 39.6percent, for Kwality Dairy and 70.8per cent, 29.2per cent for VRS Foods.Trade creditors (which includes credits to related firms) is observed to bethe main source of finance while the short-term bank loans is then leastused in all the private firms.

Operations: Profitability and activity ratios are used to study a firms'efficiency of its overall operations. The average activity ratios - inventory,receivables and working capital turnovers respectively revealed 15.7, 19.6and 3.9 for Kwality Dairy, and 13.3, 11.3 and 4.9 for VRS Foods. As it has


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been indicated earlier the inventory, receivables and working capital turnoversfor Mother Dairy were 8.5, 13.8 and 3.23 respectively. The inventory andreceivables turnovers for Kwality Dairy indicates highest ratio. Otherwise,VRS Foods scored the highest while the other two private firms have relativelylow working capital turnovers.

Profitability: (operating profit, net profit and return on assets) ratios for thestudy years averaged respectively -13.4per cent, -17.05per cent and -11.11percent for Kwality Dairy, 3.8per cent, 1.7per cent and 4.9per cent for VRSFoods. The operating profit, net profit and return on assets for Mother Dairywere 0.77per cent, -3.16per cent and -0.765per cent respectively. VRS Foodsis found to be the most profitable firm during the study years. The other twoprivate firms reported average negative returns for the years of study.

Cash flow analysis: Comparison of net cash flows of the three privatefirms revealed that all had experienced positive net cash flows on the averageduring the years because both the working capital assets have showed anincreasing trend. The largest impact on net cash flows for Kwality Dairywas by debtors followed by creditors, and for VRS Foods was by the stocksfollowed by debtors and creditors.

Reflections: Comparing the private firms' average composition of currentassets in the total assets with the global norm of 50per cent gives a clearindication that their major investment is in current assets. As, researcherhas understood from the interviews with the firms' managers this is becauseof the nature of the output products of the industry. More than 48per cent ofthe investment in working capital for all the firms, (except for Mother Dairy)is on inventories. Mother Dairy has the highest current asset to total assetratio (76.5per cent).

The liquidity ratios indicate that all transition firms except VRS Foodface liquidity problems because both current and quick ratios are well belowthe acceptable global norm of 2 for current ratio and 1 for quick ratio. It isalso observed that Kwality Dairy, which has the lowest current to totalasset ratio, has also the lowest current and quick ratios. This implies that theexcessive current asset investment is financed with long-term liabilities andthat the firm may not face liquidity problems in short period. The analysesof the working capital activities indicate that all the firms have good inventory,receivables and overall working capital turnovers.

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The implication of this is that the firms are holding their inventories andreceivables for a short period, which is a sign of efficiency in working capitalmanagement. As for the profitability ratios, two out of the three firms revealthat they experienced losses and ended up at a negative return on assetsduring the study years.

C. Managing Working Capital Externally : Supplier and CustomerLinkages

This section explores if the Mother Dairy Food Processing Ltd, has properinter-firm cooperation on the primary activities on both the supplier side andthe customer side. With this objective in mind firm's financial and commercialmanager are asked if and how they co-operate with their supplier andcustomer linkages on the primary activities as well as on purchase andinventory management. Then it is asked what benefits they get as a resultof their cooperation or why they do not co-operate.

C.1. Cooperation between Firm-supplier

C.1.1 Response of the Main Firm : Mother Dairy Food ProcessingLtd.

The objective of studying firm-supplier cooperation in this section is to knowif Mother Dairy Food Processing Ltd, creates value by co-operating with itssuppliers so that it decreases costs of inter-firm transaction relation bymanaging supplier linkages. Firm's managers are asked if and how they co-operate on primary activities including purchase and materials inventorymanagement and what benefits they get as a result of their cooperation orwhy they do not co-operate.

Firm-Supplier Cooperation on Primary Activities

According to the commercial manager, the primary activities that MotherDairy Food Processing Ltd, strongly coordinates with its supplier include,inbound activities (shipment, storing and material handling), and productionoperation (product testing, facility operations and timely availability of rawmaterial). However, it has weak suppliers' cooperation with its suppliers onactivities related to marketing and sales (except value evaluation of deliveryof inputs) and after sale services (product adjustment).


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Firm-Supplier Cooperation on Purchase and Inventory Management

Mother Dairy Food Processing Ltd, coordinates its materials purchase andinventory management with suppliers by specifically agreeing on the qualityand quantity of materials to be purchased, the terms of transportation aswell as supplying the materials purchased just in time for production.However, the firm's cooperation policy is only with selective suppliers becausethe commercial manager believes it is not beneficial to co-operate with allsuppliers. In addition to this some suppliers also lack the willingness to co-operate. Moreover, the financial manager does not believe that thiscooperation reduces the cost of inventory ordering and carrying, the timeand cost of purchasing materials but it helps in creating firm-supplier trust.Moreover, according to the commercial manager, this results in a mutualbenefit and two way cooperation between Mother Dairy Food ProcessingLtd, and its suppliers. As milk suppliers of Mother Dairy Food ProcessingLtd, are cooperatives that come under the supervision of NDDB as well asMother Dairy Food Processing Ltd,. As both are linked to each other throughNDDB, it helps them in maintaining cooperation with each other.

C.1.2 Firm-Supplier Cooperation : Comparison of Private Firms

Firm-supplier cooperation on primary activities: Mother Dairy, Kwality Dairyand VRS Foods replied positively to firm-supplier cooperation on primaryactivities. They reported that they co-operate with their suppliers on inboundactivities (shipment, storing and material handling) and production operations(product testing, facility operations and timely availability of raw material).However, all private firms have weak suppliers' cooperation with its supplierson activities related to marketing and sales (except value evaluation ofdelivery of inputs) and after sale services (product adjustment).

Firm-Supplier Cooperation on Purchase and Inventory Management

Mother Dairy, Kwality Dairy and VRS Foods coordinate their materialspurchase and inventory management with suppliers by specifically agreeingon the quality and quantity of materials to be purchased as well as supplyingthe materials purchased just in time for production. Moreover, the commercialmanagers of the entire private firms also believe that the firms co-operatewith their suppliers on Quality and quantity of materials, Time (just on timebasis) and the terms of transportation. However, as a result of its cooperation

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kwality Dairy and VRS Foods replied that they gets benefits such asdecrease cost ordering materials, decrease the time needed to purchasematerials and costs of ordering and purchase as well as in creating inter-firm trust.

Where the firms are not co-operating with their suppliers they repliedthat it is because the firms themselves do not have the specific policy andtheir suppliers have not developed the business culture of co-operation. Thecommercial managers of kwality Dairy and VRS Foods reported that theyhave selective policy because they do not see the benefit of co-operatingwith all their suppliers.

Concluding remark: It is concluded from the findings of the private firms'management of working capital operations and levels that it takes time forprivate firms to fully develop the efficiency and supplier linkages exemplifiedby private firms. It is observed that all the private firms do not have anyspecific policy regarding cooperation with suppliers. Firms co-operate withthe suppliers in their transactions, but some time it is the due the nature ofoperations of dairy industry. For some specific transactions particularly incase of milk procurement firms have no option but to co-operate on certaingrounds. Firms are not experiencing large benefits of cooperation due to itsunplanned nature. But it is the feeling of all that firms can gain benefits byworking on this dimension.

C.1.3. Response of Supplier

Firm-supplier cooperation was evaluated on primary activities and on salesand inventory management as well as related benefits or the reasons fornon co-operation. Supplier evaluation of firm efficiency is also studied. So,researcher approached the commercial manager of a sugar company, whois not bound to supply to Mother Dairy Food Processing Ltd, by any contractbut by mutual concern they have agreement to supply sugar to MotherDairy Food Processing Ltd,. Study of an independent supplier is targeted toknow the actual status of cooperation with firm.

Firm-supplier cooperation on primary activities: The commercial managerof sugar company believes that the two firms do not co-operate on theprimary activities like production operations, outbound activities, marketing/sales and after sales service. But he agrees that two firms co-operate on


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order processing as a part of outbound activities. Firm-supplier cooperationis also observed product adjustment in after sale services. Moreover, thefirm manager is not satisfied with the purchasing system of Mother DairyFood Processing Ltd,. He says that: "Mother Dairy Food Processing Ltd,'sbuying price is low and does not give transportation services, like otherfirms."

Firm-supplier cooperation on sales and inventory management: Thesupplier of Mother Dairy Food Processing Ltd, does not believe that itefficiently co-operates its sales and inventory management with its customer.The only cooperation reported is on credit transactions without discount andin providing goods when just needed. The commercial manager is thereforenot satisfied with the purchase, shipment and transportation system of MotherDairy Food Processing Ltd,. The manager believes that this lack of co-ordination is mainly because Mother Dairy Food Processing Ltd, has notdeveloped the business culture of coordinating its inventory and purchaseactivities. However, he is of the opinion that, it is not because the sugarcompany does not have the specific policy on customer cooperation or thatit does not see the benefit of closely co-operating with a specific customer.Moreover, the limited cooperation helps in decreasing the time need to selland the costs of selling goods, but it does not help to minimize the costs oftransportation.

Supplier assessment of firm efficiency: The manager's opinion is thatMother Dairy Food Processing Ltd, is efficient in its payment habits.However, it is less efficient in its marketing approach and purchase orderprocessing. The Sugar Company and Mother Dairy Food Processing Ltd,exchange special services most frequently on product quality and lessfrequently on employee training. Generally, the sugar manager believes thatthe cooperation between the two firms is not good mainly because MotherDairy Food Processing Ltd, is inefficient in providing transportation, storageand customer treatment.

C.1.4. Firm-supplier Cooperation : Comparison of Suppliers ofPrivatized Firms

In order to get a comparative response of firm-supplier linkages, researcherapproached the suppliers of the Kwality Dairy and VRS Foods. Selectionof the suppliers is done with the main firm opinion but it should be independent

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in supplying and should not bind to supply by any board or law. These suppliersinclude Kwality dairy supplier - supplier of Kwality dairy and supplier ofVRS foods - supplier of VRS foods.

Firm-supplier co-ordination on primary activities: Only the supplier ofKwality Dairy replied that the two firms co-operate on outbound activitiesparticularly, order processing and delivery vehicle operations. VRS Food'ssupplier stated that two firm co-operate on order processing only. Otherwise,both suppliers replied that they do not co-operate on other primary activitiessuch as outbound activities, production operations or after sale service(Except product adjustment).

Firm-supplier cooperation on sales and inventory management: Thesuppliers of private firms do not believe that they co-operate their sales andinventory management with their customers. The only cooperation reportedis on credit transactions without discount and providing with goods whenjust needed by the customer but not on exchanging skilled staff. The suppliersbelieve that this lack of co-ordination is mainly because the private firms donot co-operate. However, their opinion is that, it is not because they do nothave the specific policy on customer cooperation or that they do not see thebenefit but each firm want to maximize own profit without considering therole of the other firm in its operations. Therefore, there are problems due tolack of co-ordination. Moreover, the limited cooperation helps them todecrease the time needed to sell and the cost of selling goods and carryinginventory as well as it assists in creating inter-firm trust.

Supplier assessment of firm efficiency: Both suppliers of Kwality Dairyand VRS Foods agree that the firms are efficient on their processing purchaseorders, bilateral communication, and payment habits. However, it is only thesupplier of Mother Dairy who believes that the firm is efficient in using thesupplier services also.

Reflections: As a result of the interviews conducted and questionnaireresponses received from the suppliers of the Kwality Dairy and VRS foods,it is concluded that the firms have differing policy on firm-supplier co-operation. Mother Dairy keeps its firm-supplier linkages using adversarialstrategy, a typical character of a government or monopoly firm. While,Kwality Dairy co-operates with its supplier on an equal footing usingcollaborative tactics. Therefore, the supplier of Kwality Dairy is much more


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satisfied and willing to co-operate in the future compared to the supplier ofMother Dairy. A clear indication is found that the firm-supplier linkage ofMother Dairy is temporary because of Mother Dairy's non cooperation onproviding transportation, storage and customer treatment.

C.2. Firm-Customer Linkages

In order to study how efficient private firms manage their customer linkagesresearcher asked their commercial managers about what and how they co-operate on primary activities, sales operations and inventory management.It was also inquired on the benefits the private firms get as result of theircooperation or why they do not co-operate and whether the firms assesstheir customers' opinion.

C.2.1. Responses of the Central Firms - Mother Dairy FoodProcessing Ltd.

This section deals with the firm-customer cooperation from the point ofview of Mother Dairy Food Processing LtdFirm-customer cooperation on primary activities: According to thecommercial manager, the primary activities that Mother Dairy FoodProcessing Ltd, strongly coordinates with its customers include, productionoperations (packaging, assembling, product testing and facility operations),outbound activities (delivery vehicle operations, materials handling and orderprocessing as well as finished goods warehousing). Its customer cooperationalso includes on marketing and sales particularly with respect to theadvertising, promotion and sales channel selection but not with respect tosales force. The factory has weak inter-firm cooperation with its customersin all activities related to after sale service (other than product adjustment).

Firm-customer cooperation on sales and inventory management:According to the commercial manager of Mother Dairy Food ProcessingLtd,, the firm coordinates its sales and inventory management with customersby specifically agreeing on the transportation terms, quality and quantity ofgoods to be produced and sold on the basis of just in time. According to thefinancial manager the benefits that the firm gets is increasing sales andcreate trust of your supplier but the cooperation does not help in minimizingthe cost of transportation or the cost of carrying inventories.Customer assessment: The firm gets the feedback of customer's opinion

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on the quality of its products and services by allowing them to return anyproduct with inferior quality and making strict quality control at the productionfloor. But it does not make periodic assessments on customer opinion.

C.2.2. Firm-Customer Cooperation : Comparison of Private Firms

Firm-customer cooperation on primary activities: The managers ofMother Dairy, Kwality Dairy and VRS Foods responded that they stronglyco-operate with customers on production operations (particularly - packaging,assembly product testing and facility operations) as well as on outboundactivities (such as materials handling, delivery vehicle operations and finishedgoods warehousing). Kwality Dairy and VRS Foods co-operates on theafter sales services particularly with respect to product adjustment. Theprivate firms have weak cooperation with customers in all activities relatedto marketing and after sale service.

Firm-customer cooperation on sales and inventory management:According to the commercial managers of Mother Dairy and Kwality Dairyand VRS Foods, they cooperate with their customers on sales and inventorymanagement. They specifically have mutual agreements on the transportationterms, quality and quantity of goods to be produced and sold on the basis ofjust in time. According to their financial managers the benefit that the firmsget is increasing sales but the cooperation does not help to minimizing thecost of transportation or the cost of carrying inventories. According to thecommercial manager of private firms the weak firm-customer co-operation,where it is, is because the firm does not have the policy and because it doesnot see any benefit in co-operating with a specific customer. In addition tothis customers have not developed the business culture of coordinating theirmanagement with suppliers.

Customer assessment: All three private firms get the feedback of theircustomers' opinion on the quality of products and services by allowing theircustomers to return any product with inferior quality and making strict qualitycontrol at the production floor. Kwality Dairy and VRS Foods reported thatthey also make periodic assessments of their customer opinion. However,none of the private firms allow its customers to pay only if the products areas per their expectation.Reflections: Comparatively, Kwality Dairy and VRS Foods have numerous


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competitors, so both have demonstrated remarkable signs of competition tosatisfy the demand of their customers by developing firm-customer linkages.The managers of both firms believe that they co-operate with their customerson the primary operations particularly, outbound activities and in some areasof production operation like packaging. However, Mother Dairy is the biggestmilk producing company in the country this has enabled it to dominate themarket as a result of which it does not bother to create strong firm-customerco-operation.

C.2.3. Response of Customer

In this section researcher study the firm-customer cooperation of MotherDairy Food Processing Ltd, from the point of view of one of its maincustomers - Wholesaler of Mother Dairy Food Processing Ltd,. Search isfor specific cooperation on the customer's primary activities, purchaseoperations and inventory management. It will also be tried to review thecustomers' opinion on the benefit that they get as a result of their cooperationwith the private firms or the reasons why they do not co-operate. Finally, itis to study the customer evaluation of firm efficiency. For detailed supportinginformation.

Firm customer cooperation on primary activities: According to theWholesaler, Mother Dairy Food Processing Ltd, co-operates only on inboundactivities particularly order processing, materials handling and delivery vehicleoperation or transportation. Moreover, there is a cooperation on advertising,and promotion, while no cooperation on after sales service (except for productadjustment).

Firm-customer cooperation on purchase and inventory management:According to the Wholesaler, the only purchase related cooperation is oncredit transaction without discount and providing goods when just needed.Hence the Wholesaler believes that there are no benefits such as thedecrease in the time and cost of purchasing or decrease in the holding costsof inventory. He also believes that this lack of inter-firm cooperation doesnot enhance the creation on inter-firm trust. According to the Wholesaler,the weak inter-firm cooperation is because Mother Dairy Food ProcessingLtd, has not developed the business culture of co-ordinating its managementpolicy with its customers. However, it is not because Customer does nothave the specific policy or that it does not see the benefit of closely working

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with a specific supplier. The owner-manager of Customer says that: "MotherDairy Food Processing Ltd, was cooperative developed by NDDB in 1974under operation flood and it has been and also presently major milk processingfirm so most of the firm dealing with milk products were/are its customer".

Customer assessment of firm-efficiency: The manager of Customer ofrates Mother Dairy Food Processing Ltd, as very efficient in its cashcollection habits, in sales processing, impartiality with other buyers,explanation to inquiries and delivery. She has also rated the factory as efficientin product quality and bilateral communication. However, the managerbelieves and that the factory is less efficient in minimizing the costs of itsproducts, in using customer services and in its marketing approach.

C.2.4. Firm-Customer Cooperation : Comparison of Customers ofPrivate irms

Firm-customer cooperation on primary activities: According to the opinionof their customers the private firms co-operate on the inbound activitiesparticularly on order processing and delivery vehicle operation. Customersof Kwality Dairy and VRS Foods stated that firm co-operate on storing alsoas inbound activities. It is only Mother Dairy, which according to the opinionof its customer, that co-operates on materials handling also. There is nocooperation on primary activities such inbound activities (other than thosementioned above), production operations (other than packaging, producttesting and facility operation). Customer of all private firms mention thecooperation marketing (Advertising, promotion and sales force) but not insales or after sales services (except product adjustment). Customer ofKwality Dairy and VRS Foods also mentioned the cooperation in Sales/purchase channel selection in marketing.

Firm-customer cooperation on purchase and inventory management:According to the opinion of the customers, the only activity related topurchases that all private firms co-operate with their customers is in grantingcredit without discount and providing goods when just needed. The customersalso believe the cause for the weak inter-firm cooperation is that the privatefirms have no policy of co-operating their management policies with that oftheir customers.Customer evaluation of firm efficiency: The customers believe that the


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firms are efficient in their cash collection (other than Kwality Dairy), delivery,product quality, impartiality with other buyers and bilateral communication.The customer of Kwality and VRS Foods also believe that the firm is efficientin sales processing and explanations to enquiries (other than VRS Foods),while the customer of Kwality Dairy believes that its supplier is efficient inits familiarity with customers' needs. However, customers agree that thefirms are less efficient in their marketing approaches (other than MotherDairy) and in using customer services.

Reflections: Overall, the customers reported that the firm-customercoordination of the private firms is limited only to the inbound activities,which includes order processing, materials handling and transportation.Moreover, the customers revealed that they are not satisfied with the waythe private firms are handling their firm-customer relations. Main reasonfound for this is that Mother Dairy has been transferred from a cooperativemonopoly to a private monopoly, which has motivated the firms not to havesufficient interest in their firm-customer linkages.

CONCLUSIONS

This paper presented the empirical data analysis of managing working capitalinternally of Mother Dairy's, its supplier linkage with supplier of MotherDairy and its customer linkage with Customer of Mother dairy. A comparativedata analysis of working capital management is also made among the threeprivate firms - Mother Dairy, Kwality Dairy and VRS Foods.

The role of working capital management: The managers of Mother Dairyand Kwality Dairy believe that managing working capital levels andoperations can have a major role in the creation of firm value. As a resultthey reported that it takes a lion share of their time for which they are fullyempowered. The private firms have more or less identified their policy onhow to manage their working capital levels and operations, which they allclaim is tailored towards generating profit by increasing sales and decreasingcosts. However, problems are still observed in the speed by which the privatefirms adapt to the culture of cooperative business management.

Working capital investment and financing: It is find that the privatefirms have no very clear and specific policy of managing the levels of workingcapital investment and financing. As a result all firms except VRS Foods

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are in a serious problem of liquidity. They all have negative net cash flowsthat they finance with a bank overdraft, the annual interest cost of which isa sizable proportion of their total costs. Given that Mother Dairy and KwalityDairy made losses and the other firms made marginal profits, it would havebeen a good signal for them to change the management of their workingcapital levels and operations, which they did not. Their level of receivablesis increasing mainly because of the slow paying related (government)enterprises, while inventory balance is increasing due to mainly low sales.The cumulative effect of this lack of policy is the increase of both bankoverdraft and creditors. Management has fewer motives for reducing theinvestments in working capital levels or minimizing the cost of short-termfinancing. This has greatly affected the efficiency of the firms in managinginternal working capital levels of investment in cash, receivables andinventories. The objective of cash management of all the private firms is totake care of routine transactions. They are not having excess liquidity(other than Mother Dairy) for working capital purposes and therefore,investment capacity is not available at large. As a result, they don't havevery large finished goods inventory in order to bother about its costs. Theycredit only to its larger customers. In the absence of financing capacity forboth working capital and fixed capital investment, managers are concentratingon controlling the costs and physical safety of their existing investments andfinancing sources.

Working capital operations: The management of the firms working capitaloperations was restricted to the application of clerical procedures ofpurchasing and selling. Analysis of purchase and sales operations howevershowed that there is no mechanism of enhancing the contact, contract andcontrol aspects of purchase and sales operations.

Evaluation of managing working capital internally: Study of performanceevaluation has indicated that most private firms evaluate their performanceby comparing their past with the present and actual with the expected.However, they neither compare their performance with their competitorsnor do they use inter-firm benchmarks to compare their performance withother firms in their industry. They apply communication based particularlyhaving the policy of fast delivery time and fast response time to satisfy theircustomers. All private firms have a policy to improve the quality of theirproducts. Kwality Dairy and VRS Foods evaluate their liquidity, workingcapital activity and investment composition as well as their profitability. All


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the firms have the policy of customer satisfaction based, accounting basedperformance evaluation and determinants of firm's performance.

Financial analysis showed that the firms have differing liquidity position.Kwality Dairy has liquidity problems; Mother Dairy is marginally liquid whileVRS Foods has no problem of liquidity. Investment in current assets ismodest for Kwality Dairy and VRS Foods, but excessive for Mother Dairy.All profitability ratios (operating profit, net profit and return on assets) forVRS Foods are positive while that of Kwality Dairy and Mother Dairyshows negative levels except for operating profit margin.

Inter-firm cooperation: The management of working capital externally ofprivate firms' on supplier linkages showed that Mother Dairy controls itssupply market and keeps its suppliers by controlling their supply line. KwalityDairy and VRS Foods have a very competitive supply market and isestablishing closer firm-supplier linkages. The private firms' customerlinkages show that Mother Dairy still dominated their local market whileKwality Dairy and VRS Foods are facing competition. All the firms havesmall customers as well as specific and big customers. While Mother Dairyalso exports.

The responses of suppliers and customers are also obtained to studyhow they perceive the private firms' management of working capitaloperations and levels externally. Mother Dairy keeps its firm-supplier linkagesusing adversarial strategy, a typical character of a government or monopolyfirm. While, Kwality Dairy co-operates with its supplier on an equal footingusing collaborative tactics. Therefore, the supplier of Kwality Dairy is muchmore satisfied and willing to co-operate in the future compared to the supplierof Mother Dairy. A clear indication is found that the firm-supplier linkage ofMother Dairy is temporary because of Mother Dairy's non cooperation onproviding transportation, storage and customer treatment.

The supplier of the Kwality Dairy reported that he is happy with regardto the inter-firm cooperation on transportation of the products but that hehad reservations on other issues such as cooperation on credit facilities andinventory storage. Researcher also approached customers and theyresponded that their inter-firm cooperation with the private firms on theirprimary operations is weak. The customers believe that the cause for notco-operating is because the private firms have not developed the business

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culture of co-ordinating their management policies with their customers.

Moreover, the empirical findings show that the business practices ofprivate firms are not completely differentiated from government firms. Theinternal management of their working capital levels and operations as wellas external management of supplier and customer linkages closely resemblethat of government firms. Main reason for this is lack of tough competitionin dairy sector so that the private firms should think on this dimension. Inaddition to this, the government policy on market liberalization has notencouraged for new entrants in the market.

The private firms' supplier and customer cooperation is veryunsatisfactory from their supplier and customer points of view. Both linkagesreported that there are few activities that the firms coordinate in their supplier-customer linkages. Moreover, the customers revealed that they are notsatisfied with the way the private firms are handling their firm-customerrelations. Main reason found for this is that Mother Dairy has beentransferred from a cooperative monopoly to a private monopoly, which hasmotivated the firms not to have sufficient interest in their firm-customerlinkages.

Overall findings reveal that the private firms are improving their workingcapital management. Employing management with academic and practicalexperience, the use of proper technology and enhancing market competitiondetermine the firms' efficiency and value creation.

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Scherr, F. C. (1989) Modern Working Capital Management, Text andCases. Englewood Cliffs, New Jersey: Prentice-Hall International Editions.

Shank, J. K. & V. Govindarajan (1993) Strategic Cost Management: The

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New Tool for Competitive Advantage. New York: The Free Press.

Van der Meer-Kooistra, J. & G.J. Vosselman (2000) "Management Controlof Inter-firm Transactional Relationships: The Case of IndustrialRenovation and Maintenance", Accounting Organizations and Society,25: 51-77.

Williamson, O. E. (1985) The Economic Institutions of Capitalism, Firms,Markets and Relational Contracting. New York, The Free Press.

ROLE OF WOMEN WRITERS

We the women writers belonging to different language groups can cometogether and exchange ideas. Gujarati-speaking women by and large,do not know who are the writers in other languages and what type ofliterature they produce. Similar may be the case with the writers of otherlanguage groups who may not know about their sister writers in lan-guages other than their own. Our first attempt will be to know each otherand to know about the literature that is being produced in every lan-guage, The next step could be to meet each other, and if this contactdevelops we may even attempt to translate good works of each other -specially the child literature. This also may result in acquainting theworld with the special point of view of women writers. Life is reflected inliterature. At the same time, literature shapes life. The refreshing, invigo-rating breeze of new ideas can only come through literature.

Ideas as well as ideologies - both good and bad - are available throughprinted words. If we women writers could be harbingers to spread ideaswhich make our children healthy and our generation hate-free, we wouldhave achieved something.

- Lilavati Munshi

Source : Bahvan's Journal, October 4, 1959.

working capital management as a key for value creation: case study

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