Title: Rattan Agency
1Rattan Agency
- Analysis Tools and Supplementary Data
2Contents
3Stakeholder Analysis
Who is impacted by your business and how?
4Stakeholder Analysis
Who is impacted by your business and how?
- There are many stakeholders in SEP aside from the
obvious customers and suppliers - Some stakeholders such as customers and the
farmer suppliers have direct contact with the
company and have a high degree of influence on
the future success of the company - Others have in-direct contact and either
relatively high influence on SEP such as funders
and NGO partners, while some such as local
financial institutions are of lower importance
but still warrant consideration
5Stakeholder Analysis
How does the business impact the stakeholders?
6Stakeholder Analysis
How does the business impact the stakeholders?
7Stakeholder Analysis
How does the business impact the stakeholders?
8Stakeholder Analysis
How does the business impact the stakeholders?
- SEP is to be formed as a privately held company
with private shareholders who will be looking for
long term wealth creation and short-term dividend
cash-flows - Contract employees that will be operating the
local processing plants will benefit from
involvement in terms of cash-flow stability and
avoiding the risk of trading raw rattan - Traders that are incorporated into SEP will
benefit from stable cash-flows and low-risk
employment - Price and volume stability is critical for both
suppliers (the rattan farmers) and the buyers
the furniture and semi-finished goods customers
in Surabaya - Employees should be attracted to SEP by the
promise of stable employment and company growth
opportunities - While FSC certification value is unclear for
customers, it is a potential market access
opportunity
9Stakeholder Analysis
How does the business impact the stakeholders?
- Both suppliers and employees can benefit from
becoming shareholders in the company - The biggest risk for funders is that the SEP
concept doesnt work out and they lose
credibility in the NGO community for supporting a
commercial project - Non-financially supporting NGOs face similar
risks but will benefit from the socio-economic
activities that SEP will take-over and expand - Local and district governments are currently
oblivious to SEP plans, however they should be
supportive if long-term benefits can be provided
for rattan farmers. They have power to influence
the central government classification of East
Kalimantan rattan as a forest product.
10Stakeholder Analysis
How are you going to manage the risks?
11Stakeholder Analysis
Summary
- Stakeholders risks are many and varied
- Operationally, it will be important for SEP to
encourage transparency of operations and
facilitate regular communication sessions with
major stakeholders - Similarly, SEP should adopt a small set of
operational metrics that it will share with
suppliers and shareholders on a regular basis,
that underline the success of SEP operations - One of the biggest problems that SEP faces is its
NGO heritage and close ties with social concerns.
It should be possible for the company to operate
a triple bottom-line but it should remain aware
that its primary goal is commercial success
through which it can improve local farmer
livelihoods
12Problems and Causes
What are the root of your problems?
13Problems and Causes
What are the root of your problems?
- Problems can be categorised under the following
headings - Economic
- Environmental
- Social
- Technological
- Governmental
- Many economic problems stem from a lack of market
power and awareness of rattan quality of
individual farmers - Economic problems are also caused by a lack of
domestic and international market demand for
rattan furniture
14Problems and Causes
What are the root of your problems?
- Socially, a lack of local leadership and
uncertainty over land ownership creates further
problems - Low rattan quality is also an environmental
problem while a reliance of some upstream farmers
on river transportation limits their ability to
sell rattan in the drought seasons when water
levels are low - The biggest technological problem is probably the
cost and lack of alternative transportation
opportunities for shipping rattan downstream - In action or reticence by the government in
refusing to repeal the forest products tariff
from cultivated rattan helps to restrict demand
for the product
15SWOT Analysis
What are your strengths and weaknesses?
- STRENGTHS SEPs Advantage
- Shared costs of supplier support programs with
SHK - Strong relationship with relevant NGO and
industry bodies (ASMINDO, SHK) - Ability to harvest rattan throughout the year
- Potential to obtain FSC certification within 3
years - Capacity to produce 5000 to 10000 tonnes per year
of wet rattan (assuming 7,000 P3R membership) - Capacity to process 5000 tonnes per year of dry
rattan (assuming hiring 35 processors)?? - Crops accessibility to high quality rattan
species with greatest potential to meet consumer
demands (strong, bright in color, clean and with
a soft peel). - Strong relationships with suppliers ability to
purchase raw rattan from its members at
competitive price. - Craft-making division ability to absorb low to
medium quality rattan
- WEAKNESSES SEPs Disadvantages
- Currently only 10 P3R members (limited concrete
track record to secure commitment) - Limited transportation during dry season for some
farmers (40) who depend on river for
transportation - Limited supplier flexibility (committed to buy
only from P3R members) - Highly dependent on P3Rs success in serving its
members - Limited flexibility due to constraints imposed by
social and NGO values - Limited awareness among consumers about
sustainable production of rattan - Yet to identify niche market of its own
- Limited knowledge of customers and purchasing
habits - Quality of dry rattan perceived to be low to
medium due to poor processing - Limited data collection ability.
- Unclear management of relationship with
stakeholders within the cooperative - Currently no transportation partner?? (Reduction
in the quality of the product in transit)
16SWOT Analysis
What are the opportunities and threats?
- OPPORTUNITIES
- No-one currently serving the environmentally
sensitive rattan market - Increasing consumer awareness for sustainably
sourced rattan products - Supply chain inefficiencies due to long
distribution chain (potential to adapt middle
chains) - Eager farmers due to long experience of
powerlessness - Fragmented and uncoordinated nature of the
supply-side - No other initiatives to organize suppliers
- Some of our competitors are dependent on climate
for rattan harvesting
- THREATS
- ASMINDO is lobbying for export ban or increased
export tax on raw material rattan export - Possible retaliation by rattan traders by
undercutting prices - Skeptic farmers due to long experience of
powerlessness - Declining number of rattan producers due to
relatively low return on rattan production
(people would rather cut woods b/c price of woods
are higher than rattan or convert rattan forests
to palm oil plantation etc) - Difficulty in obtaining transport documentation
(SKSHH) due to conflict between the local
government of West Kutai and the Provincial
Government of East Kalimantan and the Department
of Forestry - Rapid changes in design and trends in furniture
products which influence the type and quality of
raw materials in demand. - Value of FSC certification unclear
- Increasing accessibility and attractiveness of
substitutes
17Marketing Strategy
How to determine a marketing strategy
- Market/Industry Trends
- Market Competitors
- Market Segmentation
- Company Strengths Weaknesses
- Volume vs. Profit
- Segmentation
- Customer Targets
- Competitor Targets
- Value Proposition
- Product
- Promotion (Communication)
- Place (Distribution)
- Price
- Cost Based
- Value Based
18Marketing Strategy
How to determine a marketing strategy
The first step in determining a marketing
strategy for your company is to analyze the
current situation in the marketplace.
- What are the important industry and market
trends? - Who are the possible competitors in this market?
- What are the possible ways to segment the market?
- Product (type of rattan, round/semi-finished,
etc.) - Channel (traders, furniture manufacturers)
- Size/volume
- Geography
- Use (furniture, baskets)
- Eco-sensitivity
- Transportation method
- Quality Requirements
- What are my companys strengths and weaknesses
(from SWOT)?
19Marketing Strategy
How to determine a marketing strategy
The second step is to determine the value
proposition for your company.
- Volume vs. Profit Do I go after a high
margin/low volume (profit) strategy or a high
volume/low margin (volume) strategy? - This decision will determine customer and
competitor targets - Segmentation Who is my specific customer target?
Who is my competition specific to that target? - Value Proposition What value (benefits costs)
can I offer my customers? - Benefits What differentiates me from my
competition in products and services? - Costs What will my products/services cost my
customers? - Consider Switching Costs What are the costs my
customer will incur by switching to me? This can
include the monetary cost of breaking a contract
or the intangible cost of breaking an existing
relationship. - Consider Acquisition Costs What are the costs to
me of acquiring a new customer?
20Marketing Strategy
How to determine a marketing strategy
The final step is to determine what tactics you
will use in the marketplace to execute your
strategy.
- Product
- What are my products and how do they fit with my
value proposition? - What are the advantages and disadvantages of my
products relative to competition? - Promotion (Communication)
- How do I get my message out to my customers?
- Sales Strategy
- Advertising
- PR
- Place (Distribution)
- What is the best way to distribute my product to
my customer targets? - This will determine supply chain and logistics
strategies
21Marketing Strategy
How to determine a marketing strategy
- Price You can use two methods to determine your
pricing strategy, but ideally, the two methods
produce the same result.
Value to Customers
Cost Based
Value Based
Mark-down
Mark-up
All benefits provided to customers (cost savings,
time savings, etc.)
Costs Mark-up Price
Benefits Mark-down Price
All costs incurred producing the product (labor,
transportation, packaging, commissions, etc.)
22Customer Screen and Selection
How attractive are different customer segments?
High
Low
How attractive are the customers quality
requirements to SEP? How unlikely is the
customer of defaulting on payments?
23Customer Screen and Selection
How attractive are different customer segments?
- IKEA is the most attractive customer due mainly
to its extreme market power but it will demand
low prices first and foremost - High quality furniture manufacturers have a high
potential for price sustenance but may not
purchase significant volume - Low quality furniture manufacturers will be a
valuable source of revenue for low quality
products - Home furniture manufacturers only buy in small
volumes but there are a large number of potential
customers and they can be served easily from a
central Cirebon or Surabaya base - Only IKEA is likely to care about eco-labelling
and social responsibility but even then, price is
more important
24Customer Screen and Selection
How easy will it be to engage customer segments?
- Customer engagement includes
- the following considerations
- Length of the sales cycle
- Purchasing decision making complexity within the
target customer - Location and geographical focus
High
Low
25Customer Screen and Selection
How easy will it be to engage customer segments?
- Due to the complexity of corporate decision
making, IKEA is a very difficult customer to
engage. It will need guarantees of supply
stability and long-term pricing - High quality manufacturers will need to have
confidence in the quality of the supply of rattan
from SEP and are most likely to be able to be
contracted over the long-term - Low quality manufacturers care only about price
and are therefore relatively easy to engage if
sufficient farm-gate volume can be achieved - Home manufacturers will not need volume
guarantees and are likely to purchase on an
ad-hoc basis. These are probably the easiest
customers to engage if SEP has a warehouse within
their easy reach
26Customer Value Proposition
Why will customer segments want to buy from us?
High
Low
27Customer Value Proposition
Why will customer segments want to buy from us?
- In terms of product attributes, customers will
find the following characteristics of value - Ikea FSC labelling, stable supply, processing
that produces low chemical residues and SEPs
stance as a legal supplier - High quality furniture manufacturers stable
supply, high quality round rattan and red pulut
and associated opportunities - Low quality furniture manufacturers value little
except price - Home-based furniture manufacturers may value
red-pulut as a way to differentiate their products
28Customer Value Proposition
Why will customer segments want to buy from us?
High
Low
29Customer Value Proposition
Why will customer segments want to buy from us?
- In terms of company service, customers will find
the following characteristics of value - Ikea Long-term stable contracts, on-time
delivery and the ability to visit and understand
the background of the SEP production area - High quality furniture manufacturers long-term
stable contracts, on-time delivery, certified and
supported rattan products and potentially pre-cut
and prepared rattan - Low quality furniture manufacturers value little
apart from on-time delivery at low prices - Home-based furniture manufacturers will value
pre-cutting and preparation highly
30Supply Chain Analysis
How to design your supply chain?
- Understand why we are holding inventory
- Enhance customer service
- Decouple supply-demand chain (so you dont have
to sell everything) - Protect against uncertainties
- Achieve economies of scale
- Who are your customers? What is the customer
service level you are trying to achieve? How
close do you need to be to your customer? - How do they order? Price negotiation and freq?
Need to check out goods? Where? When(Order
cycle)? Who? How much (max, min order qty?)? Can
they forecast their demand? - Returns allowed?
- of new customers? of repeat customers?
- Who are your suppliers? What is the flexibility
and reliability of your suppliers? How close do
you need to be to your supplier? - How can you order from your farmer? How often?
How is it packaged? Maximum transportation time? - What supply chain skills do you need and have?
- Who are your transportation partners? How
flexible are they? - Can warehouse be rented short term? How fast can
you get it up and running? - Cost consideration
- Inventory holding cost (fraction of item value)
- Warehouse cost (includes rent (if purchase then
land, building, depreciation), maintenance,
electricity) - Inventory management cost (includes labor)
- Opportunity cost of capital
31Supply Chain Analysis
Where are your suppliers and customers?
Kadang Pahu
Samarinda
customers
suppliers
32Current Distribution System
How does your product get around?
Forest Land
Garden
Resource Base
Rattan Farmer
Harvesting
Local Village Collector
Local Large Trader
Samarinda Trader
Java Trader
Processing Semi-Finished
Furniture Factory
Local Craft Maker Subsistent User
Home Industry
Manufacturing
Exporter
Rattan Product Trader
Java/Bali Product Trader (Processing)
Ikea
Distribution
End User
Overseas Consumer
Domestic Consumer
33System Constraints
What constrains your capacity or throughput?
34Warehouse Analysis
Option 1 Short term and mid-term alternative
RD
SEP WH Processing Sorting?/Inventory Round Rattan
Farmers
Raw
Dry
Dry
Furniture Makers
Core Peeled
SEP WH Processing Inventory Semi-Finished
Craft-Makers
Peeled
Kedang Pahu
SEP WH Inventory
SEP WH Inventory Retail
Craft
Dry Peeled Core Crafts
Dry Peeled Core Crafts
Farmers
Local Processing Units
Dry
Raw
Samarinda
Surabaya
Down River
Exporters/Oversea Furniture Makers
Farmers
Local Processing Units
Dry
Raw
Up River
35Warehouse Analysis
Option 2 Short-term and mid-term alternative
RD
SEP WH Processing Sorting?/Inventory Round Rattan
Farmers
Dry
Raw
Dry
Furniture Makers
Peeled Core
SEP WH Processing Inventory Semi-Finished
Craft-Makers
Peeled
Kedang Pahu
SEP WH Inventory Retail
Craft
Dry Peeled Core Crafts
Dry Peeled Core Crafts
Farmers
Local Processing Units
Dry
Raw
Surabaya
Down River
Exporters/Oversea Furniture Makers
Farmers
Local Processing Units
Dry
Raw
Up River
36Warehouse Analysis
Option 3 Long-term alternative
RD
SEP WH Processing Sorting?/Inventory Round Rattan
Farmers
Raw
Dry
Dry
Furniture Makers
SEP WH Processing Inventory Semi-Finished
Craft-Makers
Peeled
Peeled
Kedang Pahu
SEP WH Inventory Retail
Craft
Dry Peeled Crafts
Farmers
Local Processing Units
Dry
Raw
Samarinda
Down River
Exporters/Oversea Furniture Makers
Farmers
Local Processing Units
Dry
Raw
Up River
37Warehouse Analysis
Option 4 Not a viable option
Furniture Makers
Farmers
Raw
RD
SEP WH Processing Sorting?/Inventory Round Rattan
Dry
SEP WH Inventory Retail
Dry
Dry Peeled Crafts
Peeled Core
SEP WH Processing Inventory Semi-Finished
Farmers
Local Processing Units
Dry
Raw
Surabaya
Down River
Samarinda
Exporters/Oversea Furniture Makers
Farmers
Local Processing Units
Dry
Peeled
Raw
Craft-Makers
Craft
Up River
38Warehouse Analysis
Option 5 Mid-term to longterm alternative
RD
SEP WH Processing Sorting?/Inventory Round Rattan
Farmers
Dry
Raw
SEP WH Semi-Finish Process
Dry
Furniture Makers
Core Peeled
SEP WH Processing Inventory Semi-Finished
Craft-Makers
Peeled
Core Peeled
Dry
Kedang Pahu
SEP WH Inventory Retail
Craft
Dry Crafts
Dry Core Peeled Crafts
Farmers
Local Processing Units
Dry
Raw
Surabaya
Down River
Exporters/Oversea Furniture Makers
Farmers
Local Processing Units
Dry
Raw
Up River
with or without Samarinda Warehouse
39Warehouse Analysis
What are the advantages and disadvantages of each
warehouse alternative?
2
1
4
40Warehouse Analysis
What are the advantages and disadvantages of each
warehouse alternative?
N/A
3
41Warehouse Analysis
What are the major costs for each warehouse
alternatives?
42Financial Model
- SEP Penetration/Time Estimates
- Input percentage of target farmers reached at
steady state (max penetration) - Input number of months it will take from the
first farmer to reach steady state (time to reach
max penetration) - Input the month the production begins (start
time) - Input existing number of target farmers (existing
penetration), which is zero
Inputs
This generates an estimate of what percentage of
target farmers to expect every month of SEP
operation, or the S-Curve Model
Key Inputs
Outputs
- Production Estimates
- Input percentage production of K1, K2, S1, S2,
and T for sega round K1, K2, S1, S2, and T for
sega semi-finished A, B, C for sega
filtrit/core and for red pulut - Input price to pay to farmers for production for
sega and red pulut - Input kg of wet sega and red pulut required to
create dry (shrinkage) - Input kg of dry sega required to create
semi-finished (shrinkage) - Input production costs per kg for sega,
semi-finished sega, and red pulut - Input product base
- Input transportation costs
- Input machine purchase
- Supply Side Estimates
- Input number of farmers per processing unit
- Input number of farmers served at the KP
warehouse - Input the farmer capacity per month in kg of wet
rattan - Input target farmers at steady state
Sales Estimates Input percentage sales and
price/kg in Surabaya of K1, K2, S1, S2, and T for
sega round K1, K2, S1, S2, and T for sega
semi-finished A, B, C for sega filtrit/core and
for red pulut
This generates the Supply Side Forecast
Farmer/Capacity Estimates coupled with Production
Estimates generates the Production and
Transportation Cost Model
The Production and Transportation Cost Model
coupled with Sales Estimates generates the Sales
Model
43Financial Model
Sales Model
- Long Term Asset Estimates
- Input purchase prices of long-term assets
- Input years these assets will be in use (useful
life) - Input the month of purchase for these assets
- Operational Cost Estimates
- Input Variable Operation Costs
- Input percentage Discount (Cash) Back
- Input Fixed Costs
- Input percentage General Administrative Cost
- Input percentage Other Sales Marketing Expenses
The Sales Model and Operational Cost Estimates
create the Operational Cost Model
Production Transportation Cost Model
Profitability Estimates Input Annual Interest Rate
This generates the Long Term Assets Model
This generates the Profit Loss Model
Input Starting Cash Flow, Other Operational
Revenue, Sale of Assets, Donations, Equity, Debt
Financing, Debt Repayment, and Dividends
Input Starting Balances
This generates the Cash Flow Statement
This generates the Balance Sheet
44Key Assumptions
What have been the key financial assumptions?
- A. Production Sales
- All products provided to furniture, basket
lampit - No craft making division assumed
- Buying raw materials from farmers 1) Start in
Month7, 2) Increase gradually (S-curve forecast
model) until Month36, 3) Stable afterwards - Total target buying raw material amount
125,000kg (wet) in Month36 - Total target farmers served 500 in Month36
- Processing capacity (farmers) Kedang Pahu
Warehouse217, Processing Unit36 - Start with only Kedang Pahu Warehouse, Increase
Processing unit (0 8) from Month20 to Month34 - Farmers harvesting capacity 250kg/mo.(wet)
- Total target production (product) 55tons in
Month36 - Fixed production mix Sega55, RP15,
Semi-Finished Product30 - Buying price(/kg wet) Rp900(Sega), Rp6,000(Red
Pulut)
45Key Assumptions
What have been the key financial assumptions?
- A. Production Sales
- Shrinkage rate Sega53.5, Red Pulut48.5
- Waste rate of Semi-finished product 40.1
- Marginal (direct) processing/production cost raw
material, washing, drying, smoking, commission to
Processing unit, transportation (/kg product)
SegaRp2,552, Red PulutRp13,663, Semi-finished
product6,067 - Cash on Delivery for Cost of Goods Sold to
farmers - Month(n) Production Month(n1) Sales
Month(n2) Collection of sales money - Differentiated Pricing by quality/grade (kg
product _at_Surabaya) 5 for Sega (Ave. Rp.3,897), 1
for Red Pulut (Rp.19,200/kg), 8 for SFP (Ave.
Rp.11,006/kg) price slides referred - Discount Money Back Higher rates to lower graded
products (0.0-6.5) - No volume discount assumed
- Advertisement Rp350,000/quarter
- Other Marketing Sales expenses (including
entertaining expenses) 6.0 of Marketing Sales
expenses - All above prices unit costs unchanged over 5
years sensitivity analysis factor
46Key Assumptions
What have been the key financial assumptions?
- B. Operational costs
- Logistics
- Surabaya Warehouse leased Kedang Pahu Warehouse
built (capital investment financing) - Processing units paid on commission basis (per kg
produced) - Products shipped from Samarinda to Surabaya on a
per container basis - River transport cost assumed on a per kg basis
- Surabaya Warehouse annual rent Rp40,000,000
- No Samarinda Warehouse assumed
- Farmers to Kedang Pahu Warehouse or Processing
unit (/kg wet) Rp70 included in Cost of Goods
Sold - Kedang Pahu Warehouse or Processing unit to
Samarinda (/kg product) Rp200 - Samarinda to Surabaya (/container product)
Rp3,000,000 (1 container5,000kg) - Surabaya to customers (/kg product) Rp150
- Other variable operational cost insurance,
packing (/kg product) Rp40-70 - All above unit costs unchanged over 5 years
sensitivity analysis factor - Personnel other costs
- 6 Management people from Month7 (Month1-Month6 6
minus 1 sales 1 production directors) - Kedang Pahu warehouse employs contract staff paid
on a commission basis - 2 Sales Marketing directors Rp1,300,000/monthp
erson - Other 4 directors CEO, 2 production directors
administrative director Rp825,000/monthperson
47Key Assumptions
What have been the key financial assumptions?
- C. Capital investment financing
- Initial capital investment budget Rp399,500,000
(Kedang Pahu Warehouse landbuildingmachines,
vehicles, computer) paid in Month0-Month4 - 2 additional machines (Rp47,000,000) purchased as
the semi-finished products reach capacity
(7,830kg/month No downtime assumed) in Month21
Month32 - Tentative account of building during construction
(Month0-Month4) - Donation (Rp44,783,000) from DFID already paid in
- Scheduled funding from EU assumed
(Rp1,000,000,000) in Month0 - No additional funding from P3R members assumed
(Rp120,000,000) - No borrowing and credit line providing from
financial institutions assumed - Bank saving interest rate 1.0/year (real base)
- Liability is basically only tax obligations
(which happen the last month of each year and are
paid next month) - Tax rate 30.0
- Major capital investments are the Kedang Pahu
warehouse, and purchasing of vehicles and
processing machines - Start-up funds of Rp. 1bn provided by EU
- No borrowing or credit facilities from banks
48Overview of Financial Statements
- A. Cash flow statement
- Monthly typical net cash flow after sales
stabled Rp97,045,548 - Monthly net cash flow turned positive in Month22
- Ending balance bottomed in Month25 with
Rp187,827,937 - Working capital (account receivable inventory)
constantly grows as does sales - B. Income statement (Profit Loss)
- Single year before tax profit turned positive in
Month15 - Gross profit margin 36.8 after sales stabled (
Ratio of variable production costs / sales
63.2) - Net profit margin in Year45 (after sales
stabled) 13.3 - Monthly profits (losses) decreases (increases) in
6th month of each year due to payment of annual
rent for Surabaya Warehouse - C. Balance Sheet
- Total asset at end of Year3 Rp1,875,273,481
(including Rp1,616,324,025 equity) - Retained earnings (Cumulative profits) turned
positive in Month25 - Balance sheet reached double in Month42 with
Rp2,101,835,569 from starting point - Working capital (account receivable inventory)
constantly grows as does sales
49Five Year Cash-Flow Forecast
50Five Year Cash-Flow Forecast
51Income Statement
52Income Statement
Surabaya warehouse rent payments
53Balance Sheet
54Balance Sheet
Profit sharing fee paid to P3R
55Financial Risks
What are the financial risks?
- Funding risk If you are unable to fund the
projected amount (Rp.1,000,000,000) from EU, you
cannot start the business. - Cash deficiency risk As a start up company, cash
position is not affluent between Month21 and
Month26, and this period will have the strongest
impact of downsides. - Highly sensitive to market pricing of rattan
(selling prices buying prices) Cash flows are
most vulnerable to the negative changes of rattan
prices. If selling price goes down by 10, it
will take 5 more months (in Month27) to get
positive monthly cash flow, and the ending cash
position at the bottom (in Month25) will become
Rp.49,214,140. If buying price goes up by 10, it
will take 4 more months (in Month26) to get
positive monthly cash flow, and the ending cash
position at the bottom (in Month25) will become
Rp.99,410,281. - Additional personnel hiring costs If you are
required to hire more personnel
(sales/production), the impact of that fixed
costs for cash flows is so significant that it
delays one more additional month per person to
get break-even. - Delays in projected business development
Although cash flow projection has reasonably
adequate business development time, the delays in
1) acquisition of farmers supplying raw
materials 2) completion of building KPWH, and 3)
development of business relationship with
customers will have significant impacts on cash
flows. If those business development delays 6
months as projected, it will take 7 more months
(in Month32), and the ending cash position at the
bottom (in Month30) will fall until as low as
Rp.113,842,231. - Dependency on transportation (fuel) costs Due
to the long supply chain, cash flows are
dependent on transportation (fuel) costs. If the
transportation costs in all supply chains
(farmers-Kedang Pahu Warehouse (or Processing
unit)-Samarinda-Surabaya-customers) go up by 20,
the ending balance at the bottom (in Month25)
will fall until as low as Rp.132,826,195. - Customers default risk You may not be able to
collect some sales credits. If we assume 5
default rate of all sales credits, the ending
cash position will fall until as low as
Rp.85,010,344 (in Month25). - Inflation Current inflation rate in Indonesia is
approximately 10. As various prices and costs go
up, if you fail to adjust your pricing and cost
calculations, you will incur cash losses. - Multiple risks You should suppose more than one
of the above risks happens simultaneously
56Financial Summary
What are the major financial take-aways?
- Cash flows continually grow as does the
acquisition of farmers over 5 years. Break-even
(monthly positive retained earnings) requires 2
years. - Initial funding from EU (Rp.1,000,000,000)
absorbs start-up cash outflows, but the ending
cash position at the bottom is not necessarily
affluent (Rp.187,827,937). You had better develop
relationship with financial institutions taking
care of your contingent financial events. - Selling price decrease (or buying price increase)
have the strongest negative impact on cash flows.
Under the high inflation rate, adjusting prices
and costs and maintaining target margins should
be prioritized. - Due to low-levelled cash balance at the bottom
and various risks, you should postpone any
payments you can and keep more cash at hand
(while you need to balance it with the cost of
the delay). - You must always be prepared for the big chunk of
payments once in a while (corporate tax payment,
Surabaya warehouse annual rent payment profit
sharing paid to P3R), otherwise the company will
have cash short even though it basically enjoys
profits.
57Financial Sensitivity Analysis
Basic metrics used
- The basic metrics used in the financial
sensitivity analysis are - Company value
- Time (months) for the company to turn cash-flow
positive - Pay-back period (months)
- For the purposes of this study, the company value
has been assumed to be the sum of all monthly
cash-flows over the 5 year forecast period
58Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Number of farmers in supply
Nominal value 500
59Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Average farmer production per month
Nominal value 250 kg wet rattan
60Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Price paid to farmers for round Sega
Nominal value Rp. 900 per wet kg
61Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Pricing
Average product price in Surabaya
Nominal value Rp. 8,334
62Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Pricing
Round Sega price in Surabaya
Nominal value Rp. 3,897
63Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Pricing
Semi-finished product price in Surabaya
Nominal value Rp. 11,000
64Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Pricing
Red-Pulut price in Surabaya
Nominal value Rp. 19,300
65Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Sales
Delay in first sales
First sales in month 7
66Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Time to scale to full production and sales
Nominal value 36 months
67Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Kedang Pahu warehouse cost
Nominal value Rp. 135,000,000
68Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Surabaya warehouse annual rent
Nominal value Rp. 40,000,000
Assumes 1 sales agent remains in Surabaya
69Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Total transportation cost
70Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Samarinda to Surabaya transportation cost
Nominal value Rp. 3,000,000 per container
71Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Transport to Samarinda cost
Nominal value Rp. 200 per kg
72Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Processing fees
Nominal value Rp. 195 per wet kg
73Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Additional operational management (production
operations)
Baseline staff 4 additional management personnel
Assumes same cost timing as baseline schedule
Note Cost calculation only
74Financial Sensitivity Analysis
So what?
75Financial Sensitivity Analysis
So what?
76Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Additional Surabaya sales warehouse staff
Baseline staff 2 warehouse sales agents
Assumes same cost timing as baseline schedule
Note Cost calculation only
77Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Assumed benefits of additional sales headcount in
Surabaya
- Hiring additional sales and warehouse staff in
Surabaya will benefit - Customer service
- Generating more customers
- Reduce the impact of returns
- Improve ability to maintain price
- This can be modelled by assuming a larger
long-term supply volume and a shorter time to
scale to full production
78Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Additional Surabaya sales warehouse staff
Baseline staff 2 warehouse sales agents
Assumes same cost timing as baseline schedule
Note Cost and benefit calculation
79Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
- A simple cost-benefit analysis on the impact of
additional sales personnel in the Surabaya
warehouse has suggested that the cost of 2
additional sales and warehouse personnel will be
outweighed by the economic benefit that their
employment will bring - Hiring of these people can be delayed until after
18 months with approximately the same incremental
benefit to be achieved - The biggest benefits of these additional staff
will be - Improved customer service levels and a reduced
number of customers per sales employee - Better quality control
- Better customer responsiveness
- Fewer returns
- Better ability to maintain product prices
- An ability to handle greater supply-volumes in
steady-state operations
80Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Additional Samarinda warehouse and staff
Baseline No warehouse or staff
Warehouse rent utilities
Assumes same cost timing as baseline schedule
Note Cost calculation only
81Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Assumed benefits of additional warehouse and
personnel in Samarinda
- Having an additional warehouse and personnel in
Samarinda will benefit - Supply chain flexibility and hence avoid need to
dump discounted products and reduce average price - Responsiveness to customer demand
- This can be modelled by assuming a larger
long-term supply volume and a shorter time to
scale to full production since both supply-chain
flexibility and customer service will drive
faster and greater sales
82Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Additional Samarinda warehouse and staff
Baseline No warehouse or staff
Assumes same cost timing as baseline schedule
Note Cost and benefit calculation
83Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
- A simple cost-benefit analysis on the impact of
building a warehouse in Samarinda suggests that
the total costs outweigh the possible benefits if
it is secured at the same time and cost of the
Surabaya warehouse - However, using a warehouse in Samarinda is not
cost prohibitive and may be an attractive option
to isolate from supply-chain and price volatility
risk - The biggest benefits of the warehouse would be
- Improved customer responsiveness
- Greater supply-chain flexibility
- An ability to sell products from a warehouse to
clients in Samarinda - An ability to handle greater supply-volumes in
steady-state operations
84Other Information Stuff!!!!
85Compensation Strategy
How do we want to buy from the farmers?
- Empowering buy from farmers by grade when raw,
pay processors by grade - Buy by mix, pay by mix
- Bonus buy from farmers by mix pay processing
unit by mix pay bonus / increase price if grade
improves - Who purchases? SEP or processing unit?
86Other Strategies
Summary
- Consider using alliances to deal with demand and
supply mismatch/supply shortage. - Consider using pricing or discounting strategies
to incentivize FoB Samarinda. - The company will concentrate on sales at times
when competitors in Central and South Kalimantan
are experiencing seasonal flooding.
87Interview with Hartono
The furniture industry expert
- What is your business? Works with all furniture
materials including wood,rattan, metal etc. Why
rattan? rattan is sustainable. Green product.
More potential. - Furniture Market outlook? Rattan? Difficult to
protect design IP. People copy designs right
away. Rattan has lots of substitutes rattan is
better because it is easier to store in
warehouse, long lasting (dont absorb moisture as
much as long as processed) people importing more
wood, less rattan must mix rattan with other
materials - Green product demand? People are not willing to
pay more for green product. - Issues in current system? His observations? Need
to process ASAP. Need to store and smoke in airy
place under sun. (up to 1 week OK) sulfur does
not cure fungus problem transportation cost high
for Rattan need to mix with other materials in
the furniture increase relative value of rattan
(maybe SHK buy and sell basic need products such
as petroleum and rice to farmers with no profit)
transportation costs too high especially in the
villages w/ small rivers. - What does he plan to do for the furniture
industry and how SEP can help? Come up with
better designs to meet oversea customers,
engineer flat packing products engineer products
with mix materials Need mass produce to lower
cost. SEP needs to 1) information dissemination
to members 2) if buyers, association will step
in, warn members of problematic buyers. - Waste in the villages lots of waste due to lack
of machine in Jakarta, Samarinda factories are
able to use to waste (split the core further to
make peals) - What can SEP help? Steady market. (steady
production, cannot subcontract) - What is in for Hartono? If we can raise price of
rattan furniture then willing to share profit
with farmers. - Lampit ? rattan needs to be older, Basket ?
rattan needs to be younger - Rattan type (pulut v cega etc) depend on demand
and the change to - Need to be able to appeal to range of customer
(rich and poor) - Need to partner with European or American
companies for design. Difficult for locals to
design due to difference in taste. Philippine
companies as well (Philippine designs hot!) - Indonesia, Malaysia and Philippines trying to
cooperate. (need to unite to compete against
Chinas low cost mass production) 2-3 years to
form the cooperation. - Furniture making in Jakarta more efficient.
Limited market with hand-made product. - Tax re-categorize rattan as non-forest product
rather than forest product.