KIRIT Case Study

Pricing Dilemma at ABC Limited
It was the first Monday of January 2021 and Mr. Senthilkumar, MD & CEO of ABC Limited (ABC) was
preoccupied with thoughts of the heated Senior Leadership Team (SLT) meeting that took place the evening
before. The SLT was confused about the business priority at this juncture. The issues that were brought
forth during the meeting were quite disturbing.
 The CFO highlighted a 3% drop in margins during the last quarter (Sept-Dec 2020)
 The supply chain head asked for additional funds for spot buying certain commodities to maintain
sufficient buffers
 The business heads had shared feedback about unhappiness from customers on delayed deliveries in
the last month and had requested improvements
 The HR head had mentioned the resignations of top sales leaders from two business units (BUs) catering
respectively to the PGOEM & OEM customer groups
Company Background
ABC Limited makes prime movers that are used in various applications by customers, who are classified
into two major groups. The ones using prime movers for backup power generation are called PGOEMs,
while the other Original Equipment Manufacturer (OEMs) use these prime movers for manufacturing their
construction equipment. (Breakup of PGOEM & OEM mentioned in Exhibit)
The prime movers supplied by ABC make up for about 50% of the cost of the PGOEM products’ Bill of
Materials (BOM), and 10-15% of OEM products’ BOM. PGOEMs in turn cater to individual customers
through their network of about 250 dealers. ABC enjoys about 35% market share in the PGOEM segment,
and 40% in the OEM segment.
Spares and Service: The Company also handles after-sales service of these prime movers. In the
construction equipment side of the business, the usage is very high and requires replacement of spares and
consumables routinely. About 65% of the revenue of the spares business flows through the OEM-sold
products and the remaining from the prime movers sold to PGOEMs.
The onset of Covid-19 and its impact

In the Annual Operating Plan (AOP), finalized during January 2020, the company had identified several
strategic initiatives to be implemented in the financial year 2020-21. The outbreak of Covid-19 and
subsequent lockdown announced by the government forced the company to go into a crisis management
mode, putting most of its earlier plans on hold. The immediate impact of the lockdown on ABC resulted in
manufacturing and supply chain disruptions. Even after the partial lifting of the lockdown, regional
restrictions created a situation where supplies from specific supplier bases were constrained. This
eventually resulted in an unprecedented price escalation and short supplies.
Although the government started the unlock process in a phased manner, there were several restrictions
imposed on businesses. Firms could not restart operations at full capacity due to the “social distancing”
norms. Meanwhile, the pent-up demand led to increased orders from OEMs and PGOEMs as well as
industries like construction equipment, commercial vehicles, automobiles, and tractors.
© 2021 Kirloskar Institute of Advanced Management Studies (KIAMS)

Supply chain setup: ABC has about 300 suppliers supplying 3,000 different components for various
models of prime movers. 70% of this supplier-base is also common to the above mentioned 4 industries.
The production setup, the skilled manpower, and raw material capacities are used interchangeably by the
suppliers, depending upon which industry has higher demand at a particular point in time. During the last
3 months, all 4 industries have shown a high demand, thereby exposing the capacity limitations of suppliers.
This led to unprecedented price inflation of all highly-contributing commodities like pig iron, casting, steel,
copper, etc. Raw material buying organizations were required to take calls on spot buying, as commodity
prices were rising globally on a weekly basis. For ABC, 60-70% of its sales are spent on raw materials,
leading to a significant rise in its costs. The initial assessment by the management team was that this was
only a pent-up demand and would wear out in 2 months’ time.
OEM / PGOEM business sentiments: Having suffered losses during the initial lockdown period, each
player started focusing on how to recover losses and get back to normal sales. All the competitive players
faced enormous pressure on timely supplies through increased productivity with no change in price.
A planned emission change was also on the anvil, and this would affect 35% of BUs. This change was
expected to be effective from 1st April 2021 and would lead to a 20% increase in the prime mover price.
Hence, many PGOEMs and OEMs started placing a higher quantity of orders to ABC since December
2020, to avoid increased costs.
The recent trend of good grid power availability has pushed the backup power market to a primarily “stand-
by” power market. Hence, customers are very sensitive to capital cost rather than long term operational
benefits. Adding to this, the PGOEM market is very competitive, and increasing the prices may result in
loss of customers and in turn, market share. That means the customers can switch brands if the price gap is
high. On the other hand, the backend suppliers are facing huge working capital pressure due to spot-buying
as well as price inflations. There is, thus, a natural tendency to supply to the customers who are accepting
weekly price rises. PGOEMs quickly reacted and collectively communicated to Mr. Senthilkumar and his
sales team not to increase prices for them. That means ABCs sales channels will retain margins but ABC
will have to absorb the cost rise. Thus, the twin effect of rising input prices and no changes in customer
prices exerted significant pressure on ABC’s profitability and cash flows.
Long term relationship with customers is very vital to close price negotiations amicably. Post-pandemic,
the job market opened up in a big way for highly skilled managerial personnel. In December 2020, ABC’s
PGOEM sales head & OEM sales channel head left the company for another opportunity. This impacted
the price discussion process at the front end.
At the same time, the activities related to agriculture were relatively less impacted due to pandemic. ABC
witnessed a rise in the demand for its prime movers in the tractor segment, power tillers, and weeders even
as early as May and June 2020. During June and July 2020, there was a sudden spurt in the construction
activities, as a result of the government’s thrust on infrastructure. This triggered a large number of orders
for ABC. It soon became evident that the initial challenge of poor demand would soon turn into a supply-
side constraint.

This industry is characterized by a few large primary customers for both BUs. The large customers account
for a significant portion of the total business of companies like ABC. In the Industrial OEM business, the
customer acquisition cycle is relatively long. Hence, in a competitive marketplace, ensuring customer
loyalty is the key. The loss of a single customer can lead to a significant loss of revenues for a firm. Some
of the data related to ABC’s customers and markets is given below.
Industrial OEMs Customer Age

Duration Number of OEMs
Less than 2 years 2
2 to 5 years 2
5 to 10 years 12
More than 10 years 9
Backup Power Channel Customer Age

Duration Number of PGOEMs No. of Sales Dealers Service Dealers
Less than 2 years 0 36 15
2 to 5 years 0 45 10
5 to 10 years 0 30 10
More than 10 years 10 130 80
Key Industries Served by OEMs

Construction equipment Transit mixers/ self-loading mixers / Soil compactors
Earth Moving equipment Backhoe / Excavators / Loaders
Firefighting pumps All varieties
Tractor applications All varieties
Types of customers
Customer type Qty. % Distribution of Sales Revenue Generated
OEMs 25 23 % 500 Cr
PGOEMs and Sales Dealers 10 and 250 54% 1200 Cr
After Market Service Dealers 130 23% 500 Cr
Revenue & Profitability Break-up (% share)

Revenue Type % Profitability % Revenue
Product Sales 11 % 77 %
Spares and Service (AMCs etc.) 30 % 23 %
ABC was also looking at its credit and payment policy. The following Exhibits summarize the same.
Channel Credit Policy Payment Terms
OEMs Open credit 30 Days
PGOEMs Open credit 7 days
Spares Dealers Cash & carry

Supply chain Flowchart
End
PGOEMS
customers
Suppliers ABC
OEMS
The Challenge
The company is developing the AOP for the next FY 21-22 and Mr. Senthilkumar is grappling with the
questions below:
1. As a business entity, should the cost increase be passed to customers to maintain the company’s bottom
line or should it absorb this increase to maintain a loyal customer base as requested by PGOEMs?
2. As a market leader in both segments, what role should ABC play?
3. What is the short-term solution that ABC can undertake to battle this situation and what are the long-
term strategies that will help them avoid such problems in the future or mitigate the risks in the future?
4. Explain the pros and cons of your solutions.

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Pricing Dilemma at ABC Limited

The onset of Covid-19 and its impact

© 2021 Kirloskar Institute of Advanced Management Studies (KIAMS)

© 2021 Kirloskar Institute of Advanced Management Studies (KIAMS)

Industrial OEMs Customer Age

Backup Power Channel Customer Age

Key Industries Served by OEMs

Revenue & Profitability Break-up (% share)

© 2021 Kirloskar Institute of Advanced Management Studies (KIAMS)

© 2021 Kirloskar Institute of Advanced Management Studies (KIAMS)

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