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Rattan Agency

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Title: Rattan Agency


1
Rattan Agency
  • Analysis Tools and Supplementary Data

2
Contents
3
Stakeholder Analysis
Who is impacted by your business and how?
4
Stakeholder 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

5
Stakeholder Analysis
How does the business impact the stakeholders?
6
Stakeholder Analysis
How does the business impact the stakeholders?
7
Stakeholder Analysis
How does the business impact the stakeholders?
8
Stakeholder 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

9
Stakeholder 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.

10
Stakeholder Analysis
How are you going to manage the risks?
11
Stakeholder 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

12
Problems and Causes
What are the root of your problems?
13
Problems 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

14
Problems 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

15
SWOT 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)

16
SWOT 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

17
Marketing 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

18
Marketing 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)?

19
Marketing 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?

20
Marketing 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

21
Marketing 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.)
22
Customer 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?
23
Customer 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

24
Customer 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
25
Customer 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

26
Customer Value Proposition
Why will customer segments want to buy from us?
High
Low
27
Customer 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

28
Customer Value Proposition
Why will customer segments want to buy from us?
High
Low
29
Customer 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

30
Supply 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

31
Supply Chain Analysis
Where are your suppliers and customers?
Kadang Pahu
Samarinda
customers
suppliers
32
Current 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
33
System Constraints
What constrains your capacity or throughput?
34
Warehouse 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
35
Warehouse 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
36
Warehouse 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
37
Warehouse 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
38
Warehouse 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
39
Warehouse Analysis
What are the advantages and disadvantages of each
warehouse alternative?
2
1
4
40
Warehouse Analysis
What are the advantages and disadvantages of each
warehouse alternative?
N/A
3
41
Warehouse Analysis
What are the major costs for each warehouse
alternatives?

42
Financial 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
43
Financial 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
44
Key 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)

45
Key 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

46
Key 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

47
Key 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

48
Overview 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

49
Five Year Cash-Flow Forecast
50
Five Year Cash-Flow Forecast
51
Income Statement
52
Income Statement
Surabaya warehouse rent payments
53
Balance Sheet
54
Balance Sheet
Profit sharing fee paid to P3R
55
Financial 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

56
Financial 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.

57
Financial 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

58
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Number of farmers in supply
Nominal value 500
59
Financial 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
60
Financial 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
61
Financial 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
62
Financial 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
63
Financial 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
64
Financial 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
65
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Sales
Delay in first sales
First sales in month 7
66
Financial 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
67
Financial 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
68
Financial 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
69
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Total transportation cost
70
Financial 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
71
Financial 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
72
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Processing fees
Nominal value Rp. 195 per wet kg
73
Financial 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
74
Financial Sensitivity Analysis
So what?
75
Financial Sensitivity Analysis
So what?
76
Financial 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
77
Financial 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

78
Financial 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
79
Financial 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

80
Financial 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
81
Financial 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

82
Financial 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
83
Financial 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

84
Other Information Stuff!!!!
85
Compensation 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?

86
Other 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.

87
Interview 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.
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