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[ Rattan Agency]. Analysis Tools and Supplementary Data. Contents. Stakeholder Analysis. Who is impacted by your business and how ?. Stakeholder Analysis. Who is impacted by your business and how ?. There are many stakeholders in SEP aside from the obvious customers and suppliers

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Rattan agency

[Rattan Agency]

Analysis Tools and Supplementary Data


Contents
Contents

(c) Ade Cahyat 2003


Stakeholder analysis
Stakeholder Analysis

Who is impacted by your business and how?

(c) Ade Cahyat 2003


Stakeholder analysis1
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

(c) Ade Cahyat 2003


Stakeholder analysis2
Stakeholder Analysis

How does the business impact the stakeholders?

(c) Ade Cahyat 2003


Stakeholder analysis3
Stakeholder Analysis

How does the business impact the stakeholders?

(c) Ade Cahyat 2003


Stakeholder analysis4
Stakeholder Analysis

How does the business impact the stakeholders?

(c) Ade Cahyat 2003


Stakeholder analysis5
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

(c) Ade Cahyat 2003


Stakeholder analysis6
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 doesn’t 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.

(c) Ade Cahyat 2003


Stakeholder analysis7
Stakeholder Analysis

How are you going to manage the risks?

(c) Ade Cahyat 2003


Stakeholder analysis8
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

(c) Ade Cahyat 2003


Problems and causes
Problems and Causes

What are the root of your problems?

(c) Ade Cahyat 2003


Problems and causes1
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

(c) Ade Cahyat 2003


Problems and causes2
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

(c) Ade Cahyat 2003


Swot analysis

STRENGTHS – SEP’s Advantage

Shared costs of supplier support programs with SHK

Strong relationship with relevant NGO and industry bodies (ASMINDO, SHK)

Ability to harvestrattan 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 – SEP’s 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 P3R’s 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)

SWOT Analysis

What are your strengths and weaknesses?

(c) Ade Cahyat 2003


Swot analysis1

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

SWOT Analysis

What are the opportunities and threats?

(c) Ade Cahyat 2003


Marketing strategy

1

3

2

Situation Analysis

Value Proposition

Market Tactics

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

(c) Ade Cahyat 2003


Marketing strategy1

Situation Analysis

1

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 company’s strengths and weaknesses (from SWOT)?

(c) Ade Cahyat 2003


Marketing strategy2

Value Proposition

2

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?

(c) Ade Cahyat 2003


Marketing strategy3

Market Tactics

3

Marketing Strategy

How to determine a marketing 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

The final step is to determine what tactics you will use in the marketplace to execute your strategy.

(c) Ade Cahyat 2003


Marketing strategy4

Market Tactics (continued)

3

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.)

(c) Ade Cahyat 2003


Customer screen and selection
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?

(c) Ade Cahyat 2003


Customer screen and selection1
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

(c) Ade Cahyat 2003


Customer screen and selection2
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

(c) Ade Cahyat 2003


Customer screen and selection3
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

(c) Ade Cahyat 2003


Customer value proposition
Customer Value Proposition

Why will customer segments want to buy from us?

High

Low

(c) Ade Cahyat 2003


Customer value proposition1
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 SEP’s 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

(c) Ade Cahyat 2003


Customer value proposition2
Customer Value Proposition

Why will customer segments want to buy from us?

High

Low

(c) Ade Cahyat 2003


Customer value proposition3
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

(c) Ade Cahyat 2003


Supply chain analysis
Supply Chain Analysis

How to design your supply chain?

  • Understand why we are holding inventory

    • Enhance customer service

    • Decouple supply-demand chain (so you don’t 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

      • Obsolescence or shrinkage, etc.

    • Transportation cost (includes rent, labor, documentation cost)

    • Shortage cost (cost of not having the inventory; includes long term loss of good will, immediate loss of profit)

(c) Ade Cahyat 2003


Supply chain analysis1
Supply Chain Analysis

Where are your suppliers and customers?

Kadang Pahu

Samarinda

customers

suppliers

(c) Ade Cahyat 2003


Current distribution system
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

Local Craft Maker

& Subsistent User

Home Industry

Furniture Factory

Manufacturing

Rattan Product Trader

Java/Bali Product Trader

(Processing)

Exporter

Ikea

Distribution

End User

Overseas Consumer

Domestic Consumer

(c) Ade Cahyat 2003


System constraints
System Constraints

What constrains your capacity or throughput?

(c) Ade Cahyat 2003


Warehouse analysis

Non SEP boat/truck

SEP managed Truck/boat

SEP managed Boat

Warehouse Analysis

Option 1: Short term and mid-term alternative

R&D

Farmers

SEP WH

Processing

Sorting?/Inventory

Round Rattan

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

(c) Ade Cahyat 2003


Warehouse analysis1

Non SEP boat/truck

SEP managed Truck/boat

SEP managed Boat

Warehouse Analysis

Option 2: Short-term and mid-term alternative

R&D

Farmers

SEP WH

Processing

Sorting?/Inventory

Round Rattan

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

(c) Ade Cahyat 2003


Warehouse analysis2

Non SEP boat/truck

SEP managed Truck/boat

SEP managed Boat

Warehouse Analysis

Option 3: Long-term alternative

R&D

Farmers

SEP WH

Processing

Sorting?/Inventory

Round Rattan

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

(c) Ade Cahyat 2003


Warehouse analysis3

Non SEP boat/truck

SEP managed Truck/boat

SEP managed Boat

Warehouse Analysis

Option 4: Not a viable option

Furniture Makers

Farmers

Raw

R&D

SEP WH

Processing

Sorting?/Inventory

Round Rattan

Dry

SEP WH

Inventory

Retail

Dry

Dry

Peeled

Crafts

Peeled

Core

Farmers

Local Processing Units

SEP WH

Processing

Inventory

Semi-Finished

Dry

Raw

Surabaya

Down River

Samarinda

Exporters/Oversea Furniture Makers

Farmers

Local Processing Units

Dry

Peeled

Raw

Craft-Makers

Craft

Up River

(c) Ade Cahyat 2003


Warehouse analysis4

Non SEP boat/truck

SEP managed Truck/boat

SEP managed Boat

Warehouse Analysis

Option 5 *: Mid-term to long–term alternative

R&D

Farmers

SEP WH

Processing

Sorting?/Inventory

Round Rattan

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

(c) Ade Cahyat 2003


Warehouse analysis5
Warehouse Analysis

What are the advantages and disadvantages of each warehouse alternative?

2

1

4

(c) Ade Cahyat 2003


Warehouse analysis6
Warehouse Analysis

What are the advantages and disadvantages of each warehouse alternative?

N/A

3

(c) Ade Cahyat 2003


Warehouse analysis7
Warehouse Analysis

What are the major costs for each warehouse alternatives?

(c) Ade Cahyat 2003


Financial model
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

The Production and Transportation Cost Model coupled with Sales Estimates generates the Sales Model

Farmer/Capacity Estimates coupled with Production Estimates generates the Production and Transportation Cost Model

(c) Ade Cahyat 2003


Financial model1
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

Profitability Estimates

Input Annual Interest Rate

Production & Transportation Cost Model

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 Balance Sheet

This generates the Cash Flow Statement

(c) Ade Cahyat 2003


Key assumptions
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 Warehouse=217, Processing Unit=36

  • 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: Sega=55%, RP=15%, Semi-Finished Product=30%

  • Buying price(/kg wet): Rp900(Sega), Rp6,000(Red Pulut)

(c) Ade Cahyat 2003


Key assumptions1
Key Assumptions

What have been the key financial assumptions?

A. Production & Sales

  • Shrinkage rate: Sega=53.5%, Red Pulut=48.5%

  • 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): Sega=Rp2,552, Red Pulut=Rp13,663, Semi-finished product=6,067

  • Cash on Delivery for Cost of Goods Sold to farmers

  • Month(n) Production => Month(n+1) Sales => Month(n+2) Collection of sales money

  • Differentiated Pricing by quality/grade (kg product @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

(c) Ade Cahyat 2003


Key assumptions2
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 container=5,000kg)

  • 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/month*person

  • Other 4 directors [CEO, 2 production directors & administrative director]: Rp825,000/month*person

  • Kedang Pahu Warehouse workers salaries included in processing cost (= Processing unit commissions)

  • Sales agents’ compensation included in sales prices and discounts

  • Service fees (profit sharing) to P3R: 5.0% of after tax annual profit paid in the first month of each year

  • Other General & Administrative costs (including cigarette costs): Rp.3,800,000/month

(c) Ade Cahyat 2003


Key assumptions3
Key Assumptions

What have been the key financial assumptions?

C. Capital investment & financing

  • Initial capital investment budget: Rp399,500,000 (Kedang Pahu Warehouse land+building+machines, 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

(c) Ade Cahyat 2003


Overview of financial statements
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 Year4&5 (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

(c) Ade Cahyat 2003


Five year cash flow forecast
Five Year Cash-Flow Forecast

(c) Ade Cahyat 2003


Five year cash flow forecast1
Five Year Cash-Flow Forecast

(c) Ade Cahyat 2003


Income statement
Income Statement

(c) Ade Cahyat 2003


Income statement1
Income Statement

Surabaya warehouse rent payments

(c) Ade Cahyat 2003


Balance sheet
Balance Sheet

(c) Ade Cahyat 2003


Balance sheet1
Balance Sheet

Profit sharing fee paid to P3R

(c) Ade Cahyat 2003


Financial risks
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 sensitiveto 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

(c) Ade Cahyat 2003


Financial summary
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.

(c) Ade Cahyat 2003


Financial sensitivity analysis

xi

Monthly cash-flow positive

Monthly cash-flow

Pay-back period

j=i

Σ xj

j=1

Cumulative cash-flow

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

(c) Ade Cahyat 2003


Financial sensitivity analysis1

Slope

0.94

Financial Sensitivity Analysis

What is the impact of changing fundamental assumptions on SEP’s financial performance?

Operations

Number of farmers in supply

Nominal value: 500

(c) Ade Cahyat 2003


Financial sensitivity analysis2

Slope

0.94

Financial Sensitivity Analysis

What is the impact of changing fundamental assumptions on SEP’s financial performance?

Operations

Average farmer production per month

Nominal value: 250 kg wet rattan

(c) Ade Cahyat 2003


Financial sensitivity analysis3

Slope

-1.28

Financial Sensitivity Analysis

What is the impact of changing fundamental assumptions on SEP’s financial performance?

Operations

Price paid to farmers for round Sega

Nominal value: Rp. 900 per wet kg

(c) Ade Cahyat 2003


Financial sensitivity analysis4

Slope

6.77

Financial Sensitivity Analysis

What is the impact of changing fundamental assumptions on SEP’s financial performance?

Pricing

Average product price in Surabaya

Nominal value: Rp. 8,334

(c) Ade Cahyat 2003


Financial sensitivity analysis5

Slope

1.43

Financial Sensitivity Analysis

What is the impact of changing fundamental assumptions on SEP’s financial performance?

Pricing

Round Sega price in Surabaya

Nominal value: Rp. 3,897

(c) Ade Cahyat 2003


Financial sensitivity analysis6

Slope

2.22

Financial Sensitivity Analysis

What is the impact of changing fundamental assumptions on SEP’s financial performance?

Pricing

Semi-finished product price in Surabaya

Nominal value: Rp. 11,000

(c) Ade Cahyat 2003


Financial sensitivity analysis7

Slope

1.93

Financial Sensitivity Analysis

What is the impact of changing fundamental assumptions on SEP’s financial performance?

Pricing

Red-Pulut price in Surabaya

Nominal value: Rp. 19,300

(c) Ade Cahyat 2003


Financial sensitivity analysis8
Financial Sensitivity Analysis

What is the impact of changing fundamental assumptions on SEP’s financial performance?

Sales

Delay in first sales

First sales in month 7

(c) Ade Cahyat 2003


Financial sensitivity analysis9

Slope

-0.50

Financial Sensitivity Analysis

What is the impact of changing fundamental assumptions on SEP’s financial performance?

Operations

Time to scale to full production and sales

Nominal value: 36 months

(c) Ade Cahyat 2003


Financial sensitivity analysis10

Slope

-0.06

Financial Sensitivity Analysis

What is the impact of changing fundamental assumptions on SEP’s financial performance?

Operations

Kedang Pahu warehouse cost

Nominal value: Rp. 135,000,000

(c) Ade Cahyat 2003


Financial sensitivity analysis11

Slope

-0.10

Financial Sensitivity Analysis

What is the impact of changing fundamental assumptions on SEP’s financial performance?

Operations

Surabaya warehouse annual rent

Nominal value: Rp. 40,000,000

(c) Ade Cahyat 2003

*Assumes 1 sales agent remains in Surabaya


Financial sensitivity analysis12

Slope

-0.79

Financial Sensitivity Analysis

What is the impact of changing fundamental assumptions on SEP’s financial performance?

Operations

Total transportation cost

(c) Ade Cahyat 2003


Financial sensitivity analysis13

Slope

-0.47

Financial Sensitivity Analysis

What is the impact of changing fundamental assumptions on SEP’s financial performance?

Operations

Samarinda to Surabaya transportation cost

Nominal value: Rp. 3,000,000

per container

(c) Ade Cahyat 2003


Financial sensitivity analysis14

Slope

-0.15

Financial Sensitivity Analysis

What is the impact of changing fundamental assumptions on SEP’s financial performance?

Operations

Transport to Samarinda cost

Nominal value: Rp. 200 per kg

(c) Ade Cahyat 2003


Financial sensitivity analysis15

Slope

-0.09

Financial Sensitivity Analysis

What is the impact of changing fundamental assumptions on SEP’s financial performance?

Operations

Processing fees

Nominal value: Rp. 195 per wet kg

(c) Ade Cahyat 2003


Financial sensitivity analysis16
Financial Sensitivity Analysis

What is the impact of changing fundamental assumptions on SEP’s 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

(c) Ade Cahyat 2003


Financial sensitivity analysis17
Financial Sensitivity Analysis

So what?

(c) Ade Cahyat 2003


Financial sensitivity analysis18
Financial Sensitivity Analysis

So what?

(c) Ade Cahyat 2003


Financial sensitivity analysis19
Financial Sensitivity Analysis

What is the impact of changing fundamental assumptions on SEP’s 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

(c) Ade Cahyat 2003


Financial sensitivity analysis20
Financial Sensitivity Analysis

What is the impact of changing fundamental assumptions on SEP’s 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

(c) Ade Cahyat 2003


Financial sensitivity analysis21
Financial Sensitivity Analysis

What is the impact of changing fundamental assumptions on SEP’s 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

(c) Ade Cahyat 2003


Financial sensitivity analysis22
Financial Sensitivity Analysis

What is the impact of changing fundamental assumptions on SEP’s 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

(c) Ade Cahyat 2003


Financial sensitivity analysis23
Financial Sensitivity Analysis

What is the impact of changing fundamental assumptions on SEP’s 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

(c) Ade Cahyat 2003


Financial sensitivity analysis24
Financial Sensitivity Analysis

What is the impact of changing fundamental assumptions on SEP’s 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

(c) Ade Cahyat 2003


Financial sensitivity analysis25
Financial Sensitivity Analysis

What is the impact of changing fundamental assumptions on SEP’s 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

(c) Ade Cahyat 2003


Financial sensitivity analysis26
Financial Sensitivity Analysis

What is the impact of changing fundamental assumptions on SEP’s 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

(c) Ade Cahyat 2003


Other Information & Stuff!!!!

(c) Ade Cahyat 2003


Compensation strategy
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?

(c) Ade Cahyat 2003


Other strategies
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.

(c) Ade Cahyat 2003


Interview with hartono
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 (don’t 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 China’s 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.

(c) Ade Cahyat 2003