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Operations Plan. Rattan Processing Procedure. How is rattan processed?. Step 2 Sulphur smoking 2 days. Step 3 Drying 2-3 days. Step 2 & 3 Rp. 150 per kg. Step 1 Washing 100kg per day per person Rp. 150 per kg. Rattan Processing Procedure. How is rattan processed?. Rattan core.

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slide1

Operations Plan

(c) Ade Cahyat 2003

rattan processing procedure
Rattan Processing Procedure

How is rattan processed?

Step 2

Sulphur smoking

2 days

Step 3

Drying

2-3 days

Step 2 & 3

Rp. 150 per kg

Step 1

Washing

100kg per day per person

Rp. 150 per kg

(c) Ade Cahyat 2003

rattan processing procedure1
Rattan Processing Procedure

How is rattan processed?

Rattan core

Step 4

Peel and core

270 kg per day by machine

Rp. 240 per kg

Rattan peel

(c) Ade Cahyat 2003

rattan processing procedure2
Rattan Processing Procedure

How is rattan processed?

  • Farmers will supply raw rattan from their gardens on a schedule dictated by SEP customer demand and co-ordinated by P3R
  • Farmers will transport raw rattan to SEP processing units and Kedang Pahu warehouse
  • The Kedang Pahu warehouse and SEP processing units and will:
    • Wash the rattan to remove stains and blemishes
    • Smoke the rattan in sulphur fumes to cure and color the rattan
    • Dry the smoked rattan to remove excess moisture
  • The Kedang Pahu warehouse will further process the dry rattan by splitting the rattan into core and peel. As production volume of semi-finished products grows, additional investment in processing machinery at the warehouses or selected processing units will be made to maintain the optimal product mix.

(c) Ade Cahyat 2003

sep distribution chain design

Non SEP boat/truck

SEP managed Truck/boat

SEP managed Boat

SEP Distribution Chain Design

What is the flow of rattan like within the company at launch?

R&D

Processing

Sorting

Inventory

Round Rattan

Farmers

Dry

Raw

Dry

Furniture Makers

Peel

Core

Processing

Sorting

Inventory

Semi-Finished

Craft-Makers

Peel

Inventory

Retail

Kedang Pahu warehouse

Craft

Dry

Peel

Core

Crafts

Dry

Peel

Core

Crafts

Farmers

Local Processing Units

Dry

Raw

Surabaya

warehouse

Down River

Exporters/Overseas Furniture Makers

Farmers

Local Processing Units

Dry

Raw

Up River

Quality

checkpoint

Contractors

SEP operations

Suppliers

Customers

(c) Ade Cahyat 2003

sep distribution chain design1
SEP Distribution Chain Design

Warehouse Roll-out Schedule

Year 0

Year 5

Year 10

Long Term

Time

  • Build a processing and inventory holding warehouse in Kedang Pahu
  • Rent a retail warehouse in Surabaya
  • As supply grows, rent a inventory holding warehouse in Samarinda to coordinate transportation to Surabaya
  • As production volume of semi-finished products increase, add semi-finished processing machine in Surabaya warehouse to increase semi-processing capacity and to reduce per machine operation cost
  • As customer base matures and consists of large companies and the infrastructure in Samarinda is improved move retail warehouse from Surabaya to Samarinda and deliver to customers direct from Samarinda

(c) Ade Cahyat 2003

sep distribution chain design2
SEP Distribution Chain Design

What is the flow of rattan like within the company?

  • Initially processing of wet and semi-finished rattan will be performed in the Kedang Pahu warehouse. As production volume increases, processing units will be contracted in proximity to the rattan gardens to increase the processing capacity.
  • Farmers will be responsible for transporting wet rattan to the Kedang Pahu warehouse and/or SEP processing units. SEP will manage transportation of processed rattan from the Kedang Pahu warehouse as well as the SEP processing units. Rattan processed in the SEP processing units will be transported directly to the Surabaya warehouse via Samarinda.

(c) Ade Cahyat 2003

sep distribution chain design3
SEP Distribution Chain Design

What is the flow of rattan like within the company?

  • The Surabaya warehouse will manage sales inventory, the showroom, the relationships with small to medium sized furniture makers and market intelligence gathering.
  • Initially no warehouse will be set up in Samarinda. However in year 3 or 4 one may be established to better manage supply and demand and coordinate transportation.
  • In the long term, as the customer base matures (consists of large companies that have had long standing relationships with SEP) and the infrastructure in Samarinda is improved, SEP will move the retail warehouse from Surabaya to Samarinda and deliver to customers direct from Samarinda.

(c) Ade Cahyat 2003

operations plan

1,600

1,400

1,200

1,000

Volume rattan wet (tonnes)

800

600

400

200

0

Year 1

Year 2

Year 3

Year 4

Year 5

Sega Round

Red Pulut

Operations Plan

How much rattan will we be purchasing?

Volume of Wet Rattan Purchases from Farmers (tonnes)

(c) Ade Cahyat 2003

operations plan1

1,600

1,400

1,200

1,000

Volume rattan wet (tonnes)

800

600

400

200

0

Year 1

Year 2

Year 3

Year 4

Year 5

Sega Round

Red Pulut

Round Sega for Semi-Finished Products

Operations Plan

How much rattan will we be purchasing?

Volume of Wet Rattan Purchases from Farmers (tonnes)

Segmented by Final Use

(c) Ade Cahyat 2003

operations plan2

700

600

500

400

Volume dry rattan products (tonnes)

300

200

100

0

Year 1

Year 2

Year 3

Year 4

Year 5

Sega Round

Red Pulut

Semi-Finished Products

Operations Plan

How much are we going to produce?

Volume of Dry Rattan Products Production (tonnes)

(c) Ade Cahyat 2003

operations plan3
Operations Plan

How much are we going to purchase and produce?

Purchases (Wet Rattan in tonnes)

Production (Dry Rattan in tonnes)

(c) Ade Cahyat 2003

operations plan4
Operations Plan

How much of the critical resources are we going to need?

Farmers, Processing Units and Machines

Rattan Garden Required (in hectare per rotation)

Rotation (time between harvests): 36 months for Sega and 30 months for Red Pulut

(c) Ade Cahyat 2003

operation plan
Operation Plan

How much are we going to purchase and produce?

  • At company inception, the first priority is to build the Kedang Pahu warehouse and grow the local supply base.
  • As production increases, processing units will be contracted outside of the Kedang Pahu warehouse. At the end of the first year, SEP will turnover approximately 6,700kg of dry rattan per month. By the end of year 3, SEP will have contracted eight local processing units and will turnover nearly 125,000kg of dry rattan per month.
  • Semi-finished products will initially be processed exclusively at the Kedang Pahu warehouse but as production of semi-finished products grows, additional investment in processing machinery at the warehouses or local processing units will be made to maintain the optimal product mix.
  • SEP will aim to support the recruitment of 17 P3R farmers per month on average and a total of 500 P3R member farmers to be its suppliers by year 4.

(c) Ade Cahyat 2003

quality management
Quality Management

How are we going to manage quality?

  • SEP will establish Research and Development functions at the Kedang Pahu facility to improve rattan processing methods and technology
    • To reduce costs, increase quality, and decrease chemical residue
    • Materials and the production equipment will be replaced with those which do not leave a dangerous chemical residue
  • Farmers and processing units will be encouraged to process raw rattan within a day of harvest
    • Establish processing units in proximity to rattan gardens
    • Evaluate opportunities to purchase from farmers by grade
  • SEP will aggressively support P3R activities in obtaining and maintaining FSC certification (eco-label certificate)
  • Semi-finished processing will be performed using an accurate Taiwanese machine

(c) Ade Cahyat 2003

quality management1
Quality Management

How are we going to manage quality?

  • Quality control systems will be implemented throughout the operation. Check points include:
    • At the time of receipt into Kedang Pahu warehouse
    • After initial and semi-finished process (performing grading)
    • At the time of receipt into Surabaya warehouse

(c) Ade Cahyat 2003

operations summary
Operations Summary

What are the major operations take-aways?

  • The dry rattan production process involves purchasing raw rattan from farmers, washing, sulphur smoking and drying. The semi-finished production process involves splitting the dry rattan into core and peel.
  • SEP will manage transportation of rattan post processing to customer site.
  • The most critical quality checking (grading) will be performed after processing at the Kedang Pahu warehouse. SEP will also have quality control check points at the time of each warehouse receipt.
  • Semi-finished products will initially be processed exclusively at the Kedang Pahu warehouse but as volume grows, additional investment in processing machinery at the warehouses or local processing units will be made to maintain the optimal product mix.

(c) Ade Cahyat 2003

operations summary1
Operations Summary

What are the major operations take-aways?

  • SEP will establish Research and Development functions at the Kedang Pahu facility to improve rattan processing methods and technology.
  • SEP expects to reach steady-state operations by the end of year 3, representing a farmer supply base of 500, 8 local processing units and a volume turnover of around 125,000kg wet rattan supplied per month.

(c) Ade Cahyat 2003

slide19

Organizational Plan

(c) Ade Cahyat 2003

organizational structure
Organizational Structure

What does the company’s organizational structure look like?

CEO / Managing

Director

Finance Director

Sales Director

Marketing Director

Operations Director

Finance and Admin

Assistant

Contract

Sales Agents

Contract Processors

SHK Business

Development Officer

Warehouse

Employees

First 6 month

hires

18 month hires

Later hires

(if required)

NGO Partner

(c) Ade Cahyat 2003

roles and responsibilities
Roles and Responsibilities

Who does what in the company?

(c) Ade Cahyat 2003

roles and responsibilities1
Roles and Responsibilities

Who does what in the company?

(c) Ade Cahyat 2003

ngo partners
NGO Partners

Partnership among P3R, SHK and SEP

  • Organize farmers and craftsmen
  • Monitor sustainability of resources
  • Manage policy and regulation changes (advocacy and campaigns)
  • Disseminate information
  • Conduct training of farmers and craftsmen/perform technical assistance
  • Facilitate skill development
  • Develop and manage relationship to donors and institutions
  • Provide technical assistance
  • Facilitate skill development
  • Develop and manage relationship to donors and institutions

Reputation

P 3 R

SHK

E. Kalimantan

Rattan Program

Tech Assistance

Supplier Service

Tech Assistance

Profit

Sharing

(5%)

Reputation

  • Purchase, Process, make and sell raw, semi-finished and crafts
  • Develop and manage customer relationships
  • Develop and manage brand of P3R rattan
  • Conduct product development and process improvement
  • Improve livelihood of local farmers and craft makers by creating employment opportunities and providing competitive purchase prices

SEP

RATTAN MARKET

(c) Ade Cahyat 2003

ngo partners1
NGO Partners

Who are NGO partners and what are their roles?

  • SEP’s most critical NGO relationship is with P3R, the farmers collective organization based in the Mahakam watershed area. P3R’s primary roles are to:
    • Provide organizational structure for farmers & craftsmen
    • Monitor sustainability of resources
    • Policy advocacy
    • Information dissemination
    • Conduct farmer-specific training
    • Facilitate technical skill development
  • SHK, a Samarinda based NGO is a crucial partner in training, technical assistance and fund-raising activities
  • Other NGOs (the EU and DFID) are primary donors for the project

(c) Ade Cahyat 2003

key management personnel
Key Management Personnel

Who is the boss?

(c) Ade Cahyat 2003

start up advisory board
Start-up Advisory Board

Who helped develop this crazy plan?

(c) Ade Cahyat 2003

start up advisory board1
Start-up Advisory Board

Who helped develop this crazy plan?

(c) Ade Cahyat 2003

organizational summary
Organizational Summary

What are the major organizational take-aways?

  • SEP executive management will consist of a managing director, a sales director and a production director, with a marketing director and a finance director hired at a later stage if required
  • SEP will hire employees for critical processes and contract others to minimize labor costs
    • SEP will hire employees to process rattan and manage inventory at the Kedang Pahu and Surabaya warehouses
    • SEP will contract processing units in local villages and sales agents in Java
  • SEP will leverage its NGO relationships with P3R and SHK.
    • P3R will be responsible for coordinating the farmers and ensuring sustainability of the rattan resources.
    • SHK will be responsible for technology and knowledge transfer, training and policy advocacy.

(c) Ade Cahyat 2003

slide29

Timelines and Milestones

(c) Ade Cahyat 2003

timing of critical milestones
Timing of Critical Milestones

What has to be achieved and by when?

Month of operation

12

24

36

48

60

Secure P3R farmer supply

Recruit key personnel

Build first customer relationships

Secure supply-chain partners

Build Kedang Pahu warehouse

Potential additional

revenue stream

development

Develop KP warehouse operations

Trial shipments

Recruit local processing contractors

Conduct feasibility study for crafts

First production

First customer sales

25,000kg per month to Surabaya

50,000kg per month to Surabaya

Cash-flow positive

Payback period complete

(c) Ade Cahyat 2003

timing of critical milestones1
Timing of Critical Milestones

What has to be achieved and by when?

  • The most critical time for the company is in the first six months where the major tasks will be:
    • Recruit key personnel
    • Develop strong relationships with first customer targets
    • Negotiate the most efficient possible solution for supply-chain transportation over the first year of operations
    • Build the Kedang Pahu warehouse
    • Research Surabaya warehouse
    • Recruit sufficient farmers and in appropriate locations to P3R membership (a P3R task)
  • First production is expected in month 7 while first shipments to customers in Surabaya takes place in month 8
  • SEP expects to be shipping 2 containers per month by the end of the first year
  • 50,000kg dry rattan products per month is expected to be reached in month 31

(c) Ade Cahyat 2003

slide32

Risks and Contingencies

(c) Ade Cahyat 2003

major risks facing the company
Major Risks Facing the Company

What do we have to be worried about?

(c) Ade Cahyat 2003

major risks facing the company1
Major Risks Facing the Company

What do we have to be worried about?

(c) Ade Cahyat 2003

major risks facing the company2
Major Risks Facing the Company

What do we have to be worried about?

  • SEP faces several external risks.
    • Decreasing relative value of rattan and increasing accessibility and attractiveness of substitutes. To mitigate this risk, SEP will differentiate itself through superior customer service and branding activities.
    • High dependency on the strength of the furniture market and the overall economy. To mitigate this risk, SEP will establish business development functions to diversify customer mix and identify new rattan use.
    • Potential change in government policies. To mitigate this risk, SEP will support SHK advocacy activities and lobby through ASMINDO.
    • High dependency on P3R to collect supply data and to execute the resource plan. To mitigate this risk, SEP will identify service requirements and make service fee paid to P3R contingent upon their service levels.
    • Increasing transportation costs. To mitigate this risk, SEP will seek opportunities to improve supply chain effectiveness.

(c) Ade Cahyat 2003

major risks facing the company3
Major Risks Facing the Company

What do we have to be worried about?

  • SEP faces several internal risks:
    • Limited supplier flexibility. To mitigate this risk, SEP will … TBD.
    • Outsourcing processing units. To mitigate this risk, SEP will identify requirements (service, quality etc) and include them in the contracts. SEP will also develop close relationships/partnerships with processing units and provide technical assistance to the processing units.

(c) Ade Cahyat 2003

slide37

Financial Forecasts

(c) Ade Cahyat 2003

key assumptions
Key Assumptions

What have been the key financial assumptions?

  • Production and sales assumptions
    • First purchases of raw materials from farmers occur in month 7
    • First sales to customers occurs in month 8
    • First revenue collection from customers occurs in month 9
    • Purchases of raw rattan from farmers are paid on a cash-on-delivery basis
    • Steady state-operations are achieved at the end of the third year of operations
      • Kedang Pahu warehouse and processing unit is operating at full capacity
      • 8 processing units are operating on a contract basis
      • 125,000kg wet rattan purchased from farmers per month
      • SEP purchases from a total of 500 farmers
      • On average 250kg wet rattan is purchased per farmer per month
      • Wet Sega purchase price is Rp. 900 per kg
      • Wet Red-Pulut purchase price is Rp. 6,000 per kg

(c) Ade Cahyat 2003

key assumptions1
Key Assumptions

What have been the key financial assumptions?

  • Logistics
    • SEP will lease a warehouse in Surabaya and build a warehouse in Kedang Pahu
    • Contracted processing units are paid based on volume processed
    • River transport costs are paid based on volume shipped
    • Samarinda to Surabaya transport costs are paid per container shipped
      • 1 container = 5,000kg dry rattan products
  • Personnel and service costs
    • SEP will employ 4-6 management staff to oversee company operations
    • The Kedang Pahu warehouse employees and contractors are paid based on volume processed
    • Service fees are paid to P3R
      • on a monthly basis
      • calculated at 5% of the previous month’s profits

(c) Ade Cahyat 2003

key assumptions2
Key Assumptions

What have been the key financial assumptions?

  • Capital expenditure
    • The major capital investments are:
      • Kedang Pahu warehouse construction in months 1 to 3
      • Purchasing of a vehicle to transport rattans in month 4
      • Purchasing of additional processing machines to maintain constant product mix in months 21 and 32
  • Financing and funding
    • Major start-up funds are expected to be provided by the EU of Rp. 1bn
      • The company cannot start without this funding
      • The first month of operation is after this funding has been secured
    • Prior funds have been secured from DFID at Rp. 45m and have financed the first processing machine for the Kedang Pahu warehouse
    • The company makes no use of credit facilities or loans from local financial institutions
    • No other equity investments are made

(c) Ade Cahyat 2003

overview of financial metrics
Overview of Financial Metrics

How does the company perform based on the assumptions in this business plan?

(c) Ade Cahyat 2003

overview of financial metrics1

6,000

5,500

5,500

4,760

5,000

4,000

Sales revenue (m Rp.)

3,000

2,260

2,000

1,000

90

0

Year 1

Year 2

Year 3

Year 4

Year 5

Round Sega

Red-Pulut

Semi-finished products

Overview of Financial Metrics

How does the company perform based on the assumptions in this business plan?

(c) Ade Cahyat 2003

overview of financial metrics2

Warehouse Rent

In Surabaya

Discount Back

1%

Money

Sales & Marketing

Depreciation

1%

Expenses

1%

1%

Management

Other G&A Cost

2%

2%

Packing and

Round Sega

27%

Insurance Cost

3%

Red-Pulut

40%

Transportation

Semi-finished product

Round Sega

33%

12%

Raw material

purchasing cost

77%

Overview of Financial Metrics

How does the company perform based on the assumptions in this business plan?

Long-term cost-base

(c) Ade Cahyat 2003

overview of financial metrics3
Overview of Financial Metrics

How does the company perform based on the assumptions in this business plan?

(c) Ade Cahyat 2003

overview of financial metrics4
Overview of Financial Metrics

How do we perform based on the assumptions in this business plan?

  • Financial highlights
    • The five-year value of the company, assuming a 0% discount rate is Rp. 2.4 bn
    • SEP will become cash-flow positive in the month 10 of year 2 of operation (month 22)
    • SEP will reach its break-even point in themonth 1 of year 3 of operation (month 25)
  • Steady-state operations (after month 36) for the company are:
    • Annual revenue: Rp. 5.5bn
    • Annual cost-base: Rp. 4.5bn
    • Net-income: Rp. 1,040
    • Before-tax profit margin: 19%

(c) Ade Cahyat 2003

financial risks
Financial Risks

What are the major risks facing us from a financial perspective?

  • Funding
    • If the EU funding is not secured, the business cannot start
  • Cash deficiency
    • Between months 21 and 26, SEP will run low on cash balances
  • Sensitivity to the price of rattan in Surabaya
    • SEP is very sensitive to the street-price of rattan in Surabaya
    • A 10% reduction in prices across all products results in:
      • More than a 50% reduction in company value over 5 years
      • A delay of 5 months in becoming monthly cash-flow positive
      • An extension of 17 months in the pay-back period

(c) Ade Cahyat 2003

financial risks1
Financial Risks

What are the major risks facing us from a financial perspective?

  • Delays in business development and sales
    • SEP is highly sensitive to delays in first product sales and to a lesser extent, slower than predicted sales growth
    • Delaying first sales by 1 month results in
      • A reduction in 5 year company value of 15%
      • A delay of 3 months in becoming monthly cash-flow positive
      • An extension of 4 months in the pay-back period
    • A 10% increase in the time taken to scale supply and customer volume to steady-state conditions results in
      • A reduction in 5 year company value of 5%
      • A delay of 1 month in becoming monthly cash-flow positive
      • An extension of 2 months in the pay-back period

(c) Ade Cahyat 2003

financial risks2
Financial Risks

What are the major risks facing us from a financial perspective?

  • Dependency on fuel and other transportation costs
    • Due to the long supply-chain, SEP is exposed to transportation cost risk
    • A 10% increase in transportation costs across all operations results in:
      • A reduction in 5 year company value of 8%
      • A delay of 1 months in becoming monthly cash-flow positive
      • An extension of 2 months in the pay-back period
  • Customer default risk
    • Due to the nature of the rattan industry, SEP faces potentially high levels of sales default
    • If 5% of sales can not be collected, then this results in
      • A 28% reduction in company value over 5 years
      • A delay of 2 months in becoming monthly cash-flow positive
      • An extension of 5 months in the pay-back period

(c) Ade Cahyat 2003

investor relations

Year

0

Year

1

Year

2

Year

3

Year

4

Year

5

Investor Relations

Why and when do we encourage investment?

Potential investor scheduling

EU Start-up funds

P3R farmer investment

Non-P3R member investment

Potential P3R farmer ownership

opportunities

Rp. 1bn initial start-up

P3R/SHK also funded by EU

P3R members provided with exclusive “option to invest” benefits to incentivize membership and SEP sales

Potential non-P3R member ownership

opportunities

(c) Ade Cahyat 2003

investor relations1
Investor Relations

Why and when do we encourage investment?

  • Initial investment of Rp.1bn provided by the European Union
    • Finances Kedang Pahu warehouse construction
    • Funds supply-chain development
    • Supports setting up of the Surabaya warehouse and sales operation
    • Takes company through cash-flow positive and breakeven milestones
  • Long-term investment opportunity for P3R farmers is an important incentive but initial operations are too risky to encourage farmer financial involvement at the start-up phase
    • Investment should be delayed until the business model has been refined through experience and sustainability has been proven
    • A potential vehicle for maintaining farmer incentives and delaying investment is the provision of ownership options to P3R members
  • Ownership to non-P3R members will be delayed until after P3R members have had the chance to invest

(c) Ade Cahyat 2003

financial forecast summary
Financial Forecast Summary

What are the major financial take-aways?

  • Major highlights:
    • SEP will become cash-flow positive in the month 10 of year 2 of operation (month 22)
    • SEP will reach its break-even point in themonth 1 of year 3 of operation (month 25)
  • Steady-state operations (after month 36) for the company are:
    • Annual revenue: Rp. 5.5bn
    • Annual cost-base: Rp. 4.5bn
    • Net-income: Rp. 1.04bn
    • Before-tax profit margin: 19%
  • The company faces significant financial risks in terms of:
    • Sensitivity to the price of rattan and associated products in Surabaya
    • Delays in business development and sales
    • Transportation and fuel costs
    • Customer default risk

(c) Ade Cahyat 2003

slide52

Contact details:

SHK

Jalan Wijaya Kusuma No.19

Samarinda 75124

Tlp:62 541 206565

[email protected]

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