Expand a Palakkad rice mill before harvest?
Before the decision
Wet deliveries arrive in clusters and the yard can hold only two days of receipts. The mill routinely takes dry paddy from several villages. Wet harvests can force it to send trucks away, even when the main milling equipment has spare capacity.
The problem
Should the team choose Add dryer or Overflow contract for the next 12 months?
Decision owner: The business unit lead.
Annual throughput hides the peak-hour constraint that determines rejection risk.
Option economics
Scroll the table to see all figures.
| Option | Volume (tonnes) | ₹ per unit | Fixed cost | Net contribution |
|---|---|---|---|---|
| Add dryer | 11,000 | 780 | ₹64 lakh | ₹21.8 lakh |
| Overflow contract | 10,200 | 520 | ₹26 lakh | ₹27.04 lakh |
Make the call
- Calculate net contribution for Add dryer and Overflow contract. Which assumption makes the comparison most fragile?
- If the leading option delivers 10% fewer tonnes, does your recommendation change?
- What evidence would you ask for before the team makes an irreversible commitment?
Reveal the worked solution
Start by validating Overflow contract. It contributes ₹27.04 lakh after fixed costs and leads by ₹5.24 lakh. Treat that gap as the amount of unmodelled cost or lost contribution the option can absorb before the ranking reverses.
- Frame the decision
Check the bottleneck at the busiest point in the operating cycle. An annual forecast can fit on paper while a peak week still breaks the service promise.
- Calculate both options
Add dryer: 11,000 tonnes × ₹780 less ₹64 lakh in fixed costs gives ₹21.8 lakh. Overflow contract: 10,200 tonnes × ₹520 less ₹26 lakh in fixed costs gives ₹27.04 lakh.
- Stress-test the forecast
Overflow contract leads by ₹5.24 lakh in the base case. If Overflow contract delivers 10% fewer tonnes (9,180) at the same margin and fixed cost, it contributes ₹21.74 lakh. Holding the other option constant, the stressed result falls behind. This isolates volume risk. Check whether both options would respond to the same change in demand.
- Set a decision threshold
Holding the other option’s result fixed, Overflow contract needs at least 9,193 tonnes to match or beat it under the model. Model arrivals on the wettest three days and test the overflow partner’s pickup time.
Annual throughput hides the peak-hour constraint that determines rejection risk. Compare the cost of a limited test with the loss the business would face if the full commitment failed. Ask the team to agree the decision criterion before collecting more evidence.
What if the whole market moves?
The worked solution tests a change to one option at a time. Here, both options gain or lose the same percentage of volume. Unit contribution and fixed costs stay constant.
| Volume scenario | Add dryer | Overflow contract | Higher contribution |
|---|---|---|---|
| Both lose 10% of volume | ₹13.22 lakh | ₹21.74 lakh | Overflow contract |
| Base assumptions | ₹21.8 lakh | ₹27.04 lakh | Overflow contract |
| Both gain 10% of volume | ₹30.38 lakh | ₹32.34 lakh | Overflow contract |
Explain which option you would take forward. Check whether capacity, price or customer mix would also change as the market moves.
Practise this case as an interview