[Rattan Agency] Analysis Tools and Supplementary Data.

[Rattan Agency]

Analysis Tools and Supplementary Data

(c) Ade Cahyat 2003 2

Contents

Page Contents

2 Stakeholder analysis

12 Root cause analysis

15 Strengths, weaknesses, opportunities and threats

17 Marketing strategy

22 Customer screen and selection

26 Customer value propositions

30 Supply-chain

34 Warehouse analysis

42 Financial model flow-chart

44 Details of the financial forecasts

57 Financial sensitivity analysis


Stakeholder Analysis

Stakeholder Primary Secondary

High influence Low influence

Customers X

Suppliers (farmers) X

Employees X

Shareholders X X

Contractors X

Traders X

NGO partners X X

Funders X X

Government X X

Media X

Transporters X

Financial institutions X

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

Who is impacted by your business and how?



Stakeholder Benefit Risks

Customers Supply stability FSC certified product opportunities

Company longevity Variable supply

Suppliers (farmers) Price & volume stability Technology transfer Greater market transparency FSC certification Improved cash-flow Shareholder opportunity

SEP ability to offer price stability “Cost” of P3R membership

Employees Low risk employment Salary & rewards Stable cash-flow Improved working practices and conditions Shareholder opportunity

Loss of employment Opportunity cost of employment Risk of not getting paid in early months

How does the business impact the stakeholders?




Shareholders Return Dividends Being involved

Project failure

Contractors Steady supply of business (low risk) Removal of purchasing risk Don’t buy material Better equipment/process Shareholder opportunity

Loss of Freedom Project Failure

Traders Low risk employment Salary & rewards Stable cash-flow Improved working practices and conditions Shareholder opportunity

Loss of employment Opportunity cost of employment Risk of not getting paid in early months





Funders Poverty Reduction Forest conservation International relations

Project Failure Project Objectives Change Political risk

NGO Partners Involvement Environment/Social/Economic development Income (P3R) Reputation Organized local communities

Project Failure Funding Community Influence Sustainability – mission not met Loss of income/Reduced income

Government Tax International relations Environment/Social/Economic development More foreign investment Export opportunity

Increase in farmer conflict




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




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.




Steps to mitigate risks

1 Ensure transparency of company operations and corporate governance

2 Hold regular communication sessions with major stake-holders

3 Implement and monitor relevant corporate metrics and management

4 Provide competitive salaries to employees and contract agreements to contractors

5 Investigate implementation of purchasing of rattan by grade from suppliers

6 Regularly share major market trend information with major stakeholders

7 Promote land legalisation activities

8 Chose NGO and business partners carefully – share values, goals and incentives

9 Remain clearly focused on commercial issues with social benefits, not social issues with commercial benefits

10 Clearly define and articulate the role of P3R and SEP on the supply side

How are you going to manage the risks?



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

Summary


Problems and Causes

Relative low priceof rattan

Social Economic

Technological EnvironmentalGovernment

Lack of domesticdemand

Lack of exportdemand

Design trends

Cheap foreignsubstitutes

Lack of manufacturinginvestment

High exporttariffs

Low bargainingpower

Lack of marketinformation

Individual farmervolumes too small

Have to sell everythingon a downstream trip

No warehousecapacityCash-flow

problems

Lack of productdiversification

No knowledgeof product

quality

Lack ofstandards

Time/capitalconstraints

Lack ofeducation

Don’t trackresources

Othercommitments

Increased availability ofsubstitute goods

River level

Low rattan quality

Little incentive toimprove quality

Currently paidfor rattan mix

Poor processing quality

No quality control

Lack of standards

Little dry rattanwarehouse capacity

upstream

LIFO processing

Large distances betweenfarms and processing

units

Labor intensiveprocess

Inability to tracksupply chain trends

Poor transportation

Lack of alternativeinfrastructure

Low complementaryriver-based economic

activity

Relatively highpetrol cost

Need to rent boat

Lack of capital

Insufficient scale

Land ownershipuncertainty

Lack of localleadership

Low life-cyclecost

Forest product tax

Local taxControlsystem

Regulation

What are the root of your problems?


Problems and Causes

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



Problems and Causes

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



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 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 – 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)

What are your strengths and weaknesses?


SWOT Analysis

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

What are the opportunities and threats?


Marketing StrategyHow to determine a marketing strategy

Situation Analysis Value Proposition Market Tactics

1 32

• 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


Marketing Strategy

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)?

Situation Analysis1

The first step in determining a marketing strategy for your company is to analyze the current situation in the marketplace.

How to determine a marketing strategy


Marketing Strategy

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?

Value Proposition2

The second step is to determine the value proposition for your company.



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

Market Tactics3

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



Marketing Strategy

Price: You can use two methods to determine your pricing strategy, but ideally, the two methods produce the same result.

Cost Based Value Based

All costs incurred producing the product (labor, transportation,

packaging, commissions, etc.)

Mark-up

All benefits provided to customers (cost savings, time savings, etc.)

Costs + Mark-up 　 = Price

Benefits – Mark-down

= Price

Value to Customers

Mark-down

Market Tactics (continued)3



Customer Screen and SelectionHow attractive are different customer segments?

Ikea High quality large furniture

Low quality large furniture

Home Furniture

Quality*

Volume of sale

Price

Simplicity of sale

Industry power

Frequency of Sale

Location

Like Eco Label

Social Responsibility

Sale default risk**

Overall attractiveness

High

Low

*How attractive are the customers quality requirements to SEP?** How unlikely is the customer of defaulting on payments?


Customer Screen and Selection

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

How attractive are different customer segments?


Customer Screen and SelectionHow easy will it be to engage customer segments?

High Low

Ease of customer engagement

IKEA

High quality large furniture

Low quality large furniture

Home-based furniture

Customer engagement includesthe following considerations:

• Length of the sales cycle• Purchasing decision making complexity within the target customer• Location and geographical focus


Customer Screen and Selection

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

How easy will it be to engage customer segments?


Customer Value PropositionWhy will customer segments want to buy from us?

Product benefit IKEA High quality large furniture makers

Low quality large furniture makers

Home-based furniture makers

FSC labelling

Socially responsible supplier

Volume

Stability of supply

High quality

Low chemical residue

East Kalimantan sourced

Red-Pulut promotion opps.

Legal supplier

High Low


Customer Value Proposition

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

Why will customer segments want to buy from us?


Customer Value PropositionWhy will customer segments want to buy from us?

Service benefit IKEA High quality large furniture makers

Low quality large furniture makers

Home-based furniture makers

Door to door delivery

On time delivery

Short delivery time

Long term contracts

Technical rattan assistance

Certified rattan label for furniture – co-branding

Pre-cut & prepared

Shared promotional activity

Ability to visit P3R area

Association with NGOs

High Low


Customer Value Proposition

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

Why will customer segments want to buy from us?


Supply Chain Analysis

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)

How to design your supply chain?


Supply Chain Analysis

SamarindaKadang Pahu

Where are your suppliers and customers?

customerssuppliers


Current Distribution System

Resource BaseForest Land Garden

HarvestingRattan Farmer

Local Village Collector Local Large Trader

Furniture Factory

Exporter

Samarinda Trader

Rattan Product Trader Java/Bali Product Trader

(Processing)

ProcessingSemi-Finished

Manufacturing

End User

Distribution

Java Trader

Local Craft Maker& Subsistent User

Home Industry

Ikea

Overseas Consumer Domestic Consumer

How does your product get around?


System Constraints

Capacity Constraints (how much?) Throughput Constraints (how fast?)

Resource Base Conversion of rattan gardens and forests into palm oil or other product plantation

Depletion of rattan from natural sources due to rattan exploitation

Time it takes for regeneration efforts

Harvesting Harvest volume is limited to a farmer’s capability to carry, which is around 40-50 kg

Harvesting techniques Transportation

ProcessingRound/Semi-finished

Number of machines Access to river or water

Processing technology Capital resources

Manufacturing Strength of rattan only suitable for certain use Rapid consumer taste and design change

Distribution Increasing transportation costs (petroleum costs) Law forbidding exports of raw rattan

End User

What constrains your capacity or throughput?


Warehouse Analysis

SEP WHProcessing

Sorting?/InventoryRound Rattan

SEP WHProcessingInventory

Semi-Finished

Kedang Pahu

SEP WHInventory

Samarinda

SEP WHInventory

Retail

Raw

FarmersLocal

Processing Units

FarmersLocal

Processing Units

FarmersRaw

Dry

Craft-Makers

CorePeeled

Craft

Peeled

Raw

Dry

Surabaya

Up River

Down River

Dry

Dry

DryPeeledCore

Crafts

Furniture Makers

Exporters/Oversea Furniture Makers

DryPeeledCore

Crafts

Option 1: Short term and mid-term alternative

R&D

Non SEP boat/truck

SEP managed Truck/boat

SEP managed Boat


Warehouse Analysis

SEP WHProcessing



Semi-Finished

Kedang Pahu

SEP WHInventory

Retail

Raw

FarmersLocal

Processing Units

FarmersLocal

Processing Units

FarmersRaw

Dry

Craft-Makers

PeeledCore

Craft

Peeled

Raw

Dry

Surabaya

Up River

Down River

Dry

Dry

DryPeeledCore

Crafts

Furniture Makers


Option 2: Short-term and mid-term alternative

R&D

Non SEP boat/truck


SEP managed Boat

DryPeeledCore

Crafts


Warehouse Analysis

SEP WHProcessing



Semi-Finished

Kedang Pahu

SEP WHInventory

Retail

Samarinda

Raw

FarmersLocal

Processing Units

FarmersLocal

Processing Units

FarmersRaw

Dry

Craft-Makers

Peeled

Craft

Peeled

Raw

Dry

Up River

Down River

Dry

Dry

DryPeeledCrafts

Furniture Makers


Option 3: Long-term alternative

R&D

Non SEP boat/truck


SEP managed Boat


Warehouse Analysis

SEP WHProcessing



Semi-Finished

Samarinda

SEP WHInventory

Retail

Raw

FarmersLocal

Processing Units

FarmersLocal

Processing Units

FarmersRaw

Dry

Craft-Makers

PeeledCore

Craft

Peeled

RawSurabaya

Up River

Down River

Dry

Dry

Dry

Furniture Makers


DryPeeledCrafts

Option 4: Not a viable option

R&D

Non SEP boat/truck


SEP managed Boat


Warehouse Analysis

SEP WHProcessing



Semi-Finished

Kedang Pahu

SEP WHInventory

Retail

Raw

FarmersLocal

Processing Units

FarmersLocal

Processing Units

FarmersRaw

Dry

Craft-Makers

CorePeeled

Craft

Peeled

Raw

Dry

Surabaya

Up River

Down River

Dry

Dry

DryCrafts

Furniture Makers


DryCore

PeeledCrafts

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

R&D

SEP WHSemi-Finish

Process

DryCore

Peeled

Non SEP boat/truck


SEP managed Boat* with or without Samarinda Warehouse


Warehouse Analysis

Advantages Disadvantages Critical Factor Desirability

Option 1

Surabaya

Samarinda

Kedang Pahu

More flexibility/buffer in managing inventory RWH closer to customer - better customer service (able

to handle returns, shorter delivery time, customers can see the product)

Sales team can be based in warehouse HQ closer to supplier – better supplier assistance,

better relationship with farmers Possible R&D Benefits Local Employment opportunities

Warehouse Cost More in-house transportation coordination

required Limited energy source in KP Limited maintenance parts and skill in KP and

SM

Option 2

Surabaya

Kedang Pahu

Reduce warehousing cost HQ closer to supplier – better supplier assistance,

better relationship with farmers

Much more management of transportation (more coordination of inventory in SM port)

More in-house transportation coordination required

Less flexibility Unclear aggregation at port

Arrangement with transportation partner at port

Ability to coordinate shipment from farmer

Option 3

Samarinda

Kedang Pahu

Reduce warehousing cost Cost/warehouse is lower

RWH further from customer – need more distribution skill and coordination to achieve level of customer service, much more difficult to sell to small customers

Limited processing skilled labor in SM Need customer & supplier forecast Need large customers More difficult to expand geographically

Consistent quality product

Large proportion of large customers

Customers & suppliers must be able to forecast

What are the advantages and disadvantages of each warehouse alternative?

1

2

4


Warehouse Analysis

Advantages Disadvantages Critical Factor Desirability

Option 4

Surabaya

Samarinda

Reduce warehousing cost Less investment cost (don’t have to build in

KP and can rent in SM and SB) Cost/warehouse is lower

Less garden coverage by SEP processing (R&D costs high)

Delay of processing No social employment

Being able to do R&D at processing units

Option 5

KP – Process Round and Semi

for crafts

SB – Process Semi for Furniture

Readily available M&O parts Sufficient energy Cheaper labor (for 2) compared to KP Mass production of crafts

Less Uniform product shipping

3

N/A

What are the advantages and disadvantages of each warehouse alternative?


Warehouse AnalysisKedang Pahu only

(Base case)

Surabaya

(plus Kedang Pahu)

Samarinda

(plus Kedang Pahu)

Surabaya

Samarinda

(plus Kedang Pahu)

Major Benefits

(relative to base case)

Improved sales growth/market intelligence

Increased customer service (closer to customer)

Able to take returns Able to protect margin (by not

having to sell everything) Able to showcase products Shorter delivery time Improved transportation

coordination at Surabaya

Improved transportation coordination at Samarinda

Shorter delivery time

Improved sales growth/market intelligence

Increased customer service (closer to customer)

Improved transportation coordination at SM and SB

Shorter delivery time Able to take returns Able to protect margin (by not

having to sell everything) Able to showcase products

Major Problems

(relative to base case)

No facility to coordinate inventory and transportation at Samarinda

Long internal transportation time (KP-SB)

No facility to showcase products /need ordering in advance

Unable to accept returns Unable to protect margin (have to

sell everything at SB)

Two additional warehouses

Delivery Time (SEP-customer) 7d .5d 3d .5d

Risk of shortage High Risk Medium Risk Medium High Risk Low Risk

Average transportation costs at launch

Rp 964 / kg Rp 1,118 / kg Rp 1,085 / kg Rp 1,450/ kg

Transportation costs / sales price at launch (%)

25% 29% 28% 37%

Average transportation costs at steady state

Rp 1,014 /kg Rp 934 /kg Rp 1,022 /kg Rp 933 /kg

Transportation costs / sales price at steady state (%)

26% 24% 26% 24%

What are the major costs for each warehouse alternatives?


Financial ModelSEP Penetration/Time Estimates1. Input percentage of target farmers reached at steady

state (max penetration) 2. Input number of months it will take from the first

farmer to reach steady state (time to reach max penetration)

3. Input the month the production begins (start time)4. Input existing number of target farmers (existing

penetration), which is zero

This generates an estimate of what percentage of target farmers to

expect every month of SEP operation, or the S-Curve Model

Farmer/Capacity Estimates coupled with Production Estimates generates the

Production and Transportation Cost Model

Supply Side Estimates1. Input number of farmers

per processing unit2. Input number of farmers

served at the KP warehouse

3. Input the farmer capacity per month in kg of wet rattan

4. Input target farmers at steady state

Production Estimates1. 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

2. Input price to pay to farmers for production for sega and red pulut

3. Input kg of wet sega and red pulut required to create dry (shrinkage)

4. Input kg of dry sega required to create semi-finished (shrinkage)

5. Input production costs per kg for sega, semi-finished sega, and red pulut

6. Input product base 7. Input transportation costs8. Input machine purchase

Sales EstimatesInput 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

The Production and Transportation Cost Model coupled with Sales Estimates

generates the Sales Model

Inputs

Key Inputs

Outputs

This generates the Supply Side Forecast


Financial Model

Long Term Asset Estimates

1. Input purchase prices of long-term assets

2. Input years these assets will be in use (useful life)

3. Input the month of purchase for these assets

This generates the Long Term Assets Model

Production & Transportation Cost

Model

Profitability EstimatesInput Annual Interest Rate

This generates the Profit & Loss Model

This generates the Cash Flow Statement

This generates the Balance Sheet

Input Starting Cash Flow, Other Operational Revenue, Sale of Assets, Donations, Equity, Debt Financing, Debt Repayment, and Dividends

Input Starting Balances

The Sales Model and Operational Cost Estimates

create the Operational Cost Model

Sales Model

Operational Cost Estimates1. Input Variable Operation Costs2. Input percentage Discount (Cash) Back3. Input Fixed Costs4. Input percentage General & Administrative Cost5. Input percentage Other Sales & Marketing

Expenses


Key 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)

What have been the key financial assumptions?


Key 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



Key Assumptions

B. Operational costsLogistics 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 factorPersonnel & 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



Key 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



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


Five Year Cash-Flow ForecastYear-0 Year-1 Year-2 Year-3 Year-4 Year-5

Starting Cash Position Rp0 Rp934,533,000 Rp434,408,655 Rp231,744,357 Rp772,503,842 Rp1,609,908,248Operational Cashflow Rp0 -Rp217,248,750 -Rp158,588,209 Rp643,831,467 Rp1,085,867,959 Rp1,084,044,257

Operational Cash Inflow Rp0 Rp54,089,401 Rp1,713,442,199 Rp4,585,681,049 Rp5,496,033,164 Rp5,500,617,012Sales Cash Inflow Rp0 Rp54,089,401 Rp1,713,442,199 Rp4,585,681,049 Rp5,496,033,164 Rp5,500,617,012Other Operational Revenues Rp0 Rp0 Rp0 Rp0 Rp0 Rp0

Operational Cash Outflow Rp0 Rp271,338,150 Rp1,872,030,408 Rp3,941,849,582 Rp4,410,165,205 Rp4,416,572,755Cost of Goods Sold Rp0 Rp59,123,022 Rp1,237,526,001 Rp3,007,159,200 Rp3,477,824,826 Rp3,477,824,826Other Operational Expenses Rp0 Rp178,016,518 Rp475,683,741 Rp837,890,925 Rp932,340,379 Rp938,747,929Δinventory Rp0 Rp34,198,611 Rp158,820,667 Rp96,799,458 Rp0 Rp0Tax Rp0 Rp0 Rp0 Rp0 Rp0 Rp0

Investment Cashflow -Rp110,250,000 -Rp289,250,000 -Rp47,000,000 -Rp47,000,000 Rp0 Rp0Sale of Assets Rp0 Rp0 Rp0 Rp0 Rp0 Rp0Purchase of Assets Rp110,250,000 Rp289,250,000 Rp47,000,000 Rp47,000,000 Rp0 Rp0

Financing Cashflow Rp1,044,783,000 Rp0 Rp0 Rp0 Rp0 Rp0Financial Cash Inflow Rp1,044,783,000 Rp0 Rp0 Rp0 Rp0 Rp0

Donation Rp44,783,000 Rp0 Rp0 Rp0 Rp0 Rp0Non-P3R Members' Equity Rp1,000,000,000 Rp0 Rp0 Rp0 Rp0 Rp0P3R Members' Equity Rp0 Rp0 Rp0 Rp0 Rp0 Rp0Debt or Other Financing Rp0 Rp0 Rp0 Rp0 Rp0 Rp0

Financial Cash Outflow Rp0 Rp0 Rp0 Rp0 Rp0 Rp0Dividends (and/or Equity Payback) Rp0 Rp0 Rp0 Rp0 Rp0 Rp0Debt Repayment and/or Interest PaymentRp0 Rp0 Rp0 Rp0 Rp0 Rp0

(Before Interest Revenue) Net Cashflow Rp934,533,000 -Rp506,498,750 -Rp205,588,209 Rp536,786,350 Rp826,918,503 Rp770,172,944Net Cashflow Rp934,533,000 -Rp500,124,345 -Rp202,664,298 Rp540,759,485 Rp837,404,405 Rp788,489,187(Before Interest Revenue) Ending Cash PositionRp934,533,000 Rp434,037,615 Rp231,558,871 Rp771,900,793 Rp1,608,614,092 Rp2,396,449,740Ending Cash Position Rp934,533,000 Rp434,408,655 Rp231,744,357 Rp772,503,842 Rp1,609,908,248 Rp2,398,397,435


Ending Cash Position

Rp0

Rp500,000,000

Rp1,000,000,000

Rp1,500,000,000

Rp2,000,000,000

Rp2,500,000,000

Rp3,000,000,000

1 6 11 16 21 26 31 36 41 46 51 56 61

Time (Month)

Endin

g C

ash P

osi

tion

Five Year Cash-Flow Forecast


Income StatementYear-0 Year-1 Year-2 Year-3 Year-4 Year-5

Revenue Sales Rp93,510,489 Rp1,957,302,887 Rp4,756,200,176 Rp5,500,617,012 Rp5,500,617,012

Interest Rp6,374,405 Rp2,923,911 Rp3,973,136 Rp10,485,902 Rp18,316,243

Total Rp99,884,894 Rp1,960,226,798 Rp4,760,173,311 Rp5,511,102,914 Rp5,518,933,254

Cost Variable Production Cost Rp59,123,022 Rp1,237,526,001 Rp3,007,159,200 Rp3,477,824,826 Rp3,477,824,826

% of Sales 63% 63% 63% 63% 63%

Variable Operational Cost Rp2,231,167 Rp46,701,394 Rp113,483,294 Rp131,245,136 Rp131,245,136

% of Sales 2% 2% 2% 2% 2%

Discount Back Money Rp788,247 Rp16,499,097 Rp40,092,419 Rp46,367,485 Rp46,367,485

% of Sales 1% 1% 1% 1% 1%

Depreciation Rp35,525,000 Rp46,866,667 Rp51,958,333 Rp54,700,000 Rp54,700,000

% of Sales 38% 2% 1% 1% 1%

Transportation Rp24,539,442 Rp232,959,721 Rp483,724,908 Rp527,904,659 Rp527,904,659

% of Sales 26% 12% 10% 10% 10%

Warehouse Rent @Surabaya Rp40,000,000 Rp40,000,000 Rp40,000,000 Rp40,000,000 Rp40,000,000

% of Sales 43% 2% 1% 1% 1%

Advertisement Rp1,400,000 Rp1,400,000 Rp1,400,000 Rp1,400,000 Rp1,400,000

% of Sales 1% 0% 0% 0% 0%

Personnel Rp58,050,000 Rp70,800,000 Rp70,800,000 Rp70,800,000 Rp70,800,000

% of Sales 62% 4% 1% 1% 1%

Sales&Marketing Expenses Rp5,407,661 Rp21,723,529 Rp35,785,040 Rp38,812,329 Rp38,812,329

% of Sales 6% 1% 1% 1% 1%

Other G&A Cost Rp45,600,000 Rp45,600,000 Rp52,605,264 Rp75,810,770 Rp82,218,320

% of Sales 49% 2% 1% 1% 1%

Total Rp272,664,540 Rp1,760,076,408 Rp3,897,008,458 Rp4,464,865,205 Rp4,471,272,755

% of Sales 292% 90% 82% 81% 81%

Before Tax Profit -Rp172,779,645 Rp200,150,390 Rp863,164,854 Rp1,046,237,709 Rp1,047,660,500

Tax Rp0 Rp60,045,117 Rp258,949,456 Rp313,871,313 Rp314,298,150

After Tax Profit -Rp172,779,645 Rp140,105,273 Rp604,215,398 Rp732,366,396 Rp733,362,350


Income Statement

Before tax monthly profit

- Rp80,000,000

- Rp60,000,000

- Rp40,000,000

- Rp20,000,000

Rp0

Rp20,000,000

Rp40,000,000

Rp60,000,000

Rp80,000,000

Rp100,000,000

Rp120,000,000

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58

Time (Month)

BTM

P

Surabaya warehouse rent payments


Balance SheetYear-0 Year-1 Year-2 Year-3 Year-4 Year-5

Assets Rp1,044,783,000 Rp872,003,355 Rp1,072,153,744 Rp1,875,273,481 Rp2,662,561,734 Rp3,396,350,921Current Assets Rp934,533,000 Rp508,028,355 Rp708,045,411 Rp1,516,123,481 Rp2,358,111,734 Rp3,146,600,921

Cash Rp934,533,000 Rp434,408,655 Rp231,744,357 Rp772,503,842 Rp1,609,908,248 Rp2,398,397,435Accounts Receivable Rp0 Rp39,421,089 Rp283,281,776 Rp453,800,903 Rp458,384,751 Rp458,384,751

Inventory Rp0 Rp34,198,611 Rp193,019,278 Rp289,818,736 Rp289,818,736 Rp289,818,736Long-term Assets Rp110,250,000 Rp363,975,000 Rp364,108,333 Rp359,150,000 Rp304,450,000 Rp249,750,000

Land Rp22,000,000 Rp22,000,000 Rp22,000,000 Rp22,000,000 Rp22,000,000 Rp22,000,000Building Rp0 Rp131,625,000 Rp127,125,000 Rp122,625,000 Rp118,125,000 Rp113,625,000Rattan Machines Rp47,000,000 Rp42,300,000 Rp83,033,333 Rp118,675,000 Rp104,575,000 Rp90,475,000Vehicles Rp0 Rp134,300,000 Rp102,700,000 Rp71,100,000 Rp39,500,000 Rp7,900,000Generator Rp0 Rp27,750,000 Rp24,750,000 Rp21,750,000 Rp18,750,000 Rp15,750,000Computer Rp7,500,000 Rp6,000,000 Rp4,500,000 Rp3,000,000 Rp1,500,000 Rp0

Tentative Account ofbuilding duringconstruction

Rp33,750,000 Rp0 Rp0 Rp0 Rp0 Rp0

Liabilities and Equities Rp1,044,783,000 Rp872,003,355 Rp1,072,153,744 Rp1,875,273,481 Rp2,662,561,734 Rp3,396,350,921Liabilities Rp0 Rp0 Rp60,045,117 Rp258,949,456 Rp313,871,313 Rp314,298,150

Current Liabilities Rp0 Rp0 Rp60,045,117 Rp258,949,456 Rp313,871,313 Rp314,298,150Tax Obligation Rp0 Rp0 Rp60,045,117 Rp258,949,456 Rp313,871,313 Rp314,298,150

Long-term Liabilities Rp0 Rp0 Rp0 Rp0 Rp0 Rp0Equity Rp1,044,783,000 Rp872,003,355 Rp1,012,108,627 Rp1,616,324,025 Rp2,348,690,421 Rp3,082,052,771

Stock and Paid-in Capital Rp1,000,000,000 Rp1,000,000,000 Rp1,000,000,000 Rp1,000,000,000 Rp1,000,000,000 Rp1,000,000,000Donation Rp44,783,000 Rp44,783,000 Rp44,783,000 Rp44,783,000 Rp44,783,000 Rp44,783,000Retained Earnings Rp0 -Rp172,779,645 -Rp32,674,373 Rp571,541,025 Rp1,303,907,421 Rp2,037,269,771


Balance Sheet

Retained Earnings (Cumulative profits/ losses)

- Rp500,000,000

Rp0

Rp500,000,000

Rp1,000,000,000

Rp1,500,000,000

Rp2,000,000,000

Rp2,500,000,000

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61

Time (Month)

RE

Profit sharing fee paid to P3R


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

What are the financial risks?


Financial Summary

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.

What are the major financial take-aways?


Financial Sensitivity AnalysisBasic metrics used

Monthly cash-flow

Cumulative cash-flow

Monthly cash-flow positive

Pay-back period

xi

Σ xjj=1

j=i

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


-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

-30% -20% -10% 0% 10% 20% 30%

Variable % change

Imp

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

Number of farmers in supply

Nominal value: 500

Operations

No. of farmers in supply

Impact on company

value

Cash-flow positive Payback period

(months)Year Month

+20% 18.3% 1 9 40

+15% 14.4% 1 9 40

+10% 7.8% 1 10 41

+5% 3.7% 1 10 41

Baseline - 1 10 41

-5% -6.6% 1 10 42

-10% -8.7% 1 11 42

-15% -15.4% 1 11 43

-20% -19.4% 1 12 43

0.94

Slope

Financial Sensitivity Analysis


-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

-30% -20% -10% 0% 10% 20% 30%

Variable % change

Imp

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Average farmer production per month

Nominal value: 250 kg wet rattan Farmer productivity

Impact on company

value

Cash-flow positive

Payback period

(months)Year Month

+20% 18.3% 1 9 40

+15% 14.6% 1 9 40

+10% 7.8% 1 10 41

+5% 4.0% 1 10 41

Baseline - 1 10 41

-5% -6.3% 1 10 42

-10% -8.7% 1 11 42

-15% -15.1% 1 11 43

-20% -19.4% 1 12 43

Operations

0.94

Slope



-30%

-20%

-10%

0%

10%

20%

30%

-30% -20% -10% 0% 10% 20% 30%

Variable % change

Imp

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Sega price to farmers

Impact on company

value


(months)Year Month

+20% -25.6% 1 12 46

+15% -19.2% 1 11 44

+10% -12.8% 1 11 43

+5% -6.4% 1 10 42

Baseline - 1 10 41

-5% 6.4% 1 10 40

-10% 12.8% 1 10 40

-15% 19.2% 1 8 38

-20% 25.6% 1 8 37

Price paid to farmers for round Sega

Nominal value: Rp. 900 per wet kg

Operations

-1.28

Slope



-250%

-200%

-150%

-100%

-50%

0%

50%

100%

150%

-30% -20% -10% 0% 10% 20% 30%

Variable % change

Imp

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Average product price in Surabaya

Nominal value: Rp. 8,334 Average product price

Impact on company

value


(months)Year Month

+20% 111.7% 1 5 30

+15% 83.8% 1 7 31

+10% 55.8% 1 7 33

+5% 27.9% 1 8 37

Baseline - 1 10 41

-5% -27.9% 1 12 46

-10% -55.8% 2 3 58

-15% -84.9% 2 7 >60

-20% -199.6% 5 1 >60

Pricing

6.77

Slope



-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

-30% -20% -10% 0% 10% 20% 30%

Variable % change

Imp

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Round Sega price in Surabaya

Nominal value: Rp. 3,897 Round Sega price

Impact on company

value


(months)Year Month

+20% 28.6% 1 8 37

+15% 21.5% 1 8 38

+10% 14.3% 1 10 40

+5% 7.2% 1 10 40

Baseline - 1 10 41

-5% -7.2% 1 10 43

-10% -14.3% 1 11 44

-15% -21.5% 1 11 45

-20% -28.6% 1 12 47

Pricing

1.43

Slope



-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-30% -20% -10% 0% 10% 20% 30%

Variable % change

Imp

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Semi-finished product price in Surabaya

Nominal value: Rp. 11,000 Semi-finished price

Impact on company

value


(months)Year Month

+20% 44.4% 1 7 34

+15% 33.3% 1 8 36

+10% 22.2% 1 8 38

+5% 11.1% 1 10 40

Baseline - 1 10 41

-5% -11.1% 1 11 43

-10% -22.2% 1 11 45

-15% -33.3% 1 12 49

-20% -44.4% 2 2 53

Pricing

2.22

Slope



-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-30% -20% -10% 0% 10% 20% 30%

Variable % change

Imp

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Red-Pulut price in Surabaya

Nominal value: Rp. 19,300 Red-Pulut price

Impact on company

value


(months)Year Month

+20% 38.7% 1 7 36

+15% 29.0% 1 8 36

+10% 19.3% 1 10 38

+5% 9.7% 1 10 40

Baseline - 1 10 41

-5% -9.7% 1 11 43

-10% -19.3% 1 11 44

-15% -29.0% 1 12 47

-20% -38.7% 2 2 51

Pricing

1.93

Slope



-160%

-140%

-120%

-100%

-80%

-60%

-40%

-20%

0%

0 2 4 6 8

First sales delay (months)

Imp

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Delay in first salesFirst sales delay (months)

Impact on company

value


(months)Year Month

Baseline - 1 10 41

1 -14% 2 1 45

2 -30% 2 4 52

3 -46% 2 7 57

4 -61% 2 9 60

5 -77% 2 10 >60

6 -95% 2 11 >60

7 -112% 2 12 >60

8 -130% 3 1 >60

9 -147% 3 1 >60

Sales

First sales in month 7



-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

-30% -20% -10% 0% 10% 20% 30%

Variable % change

Imp

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Time to scale to full production and sales

Nominal value: 36 months Kedang Pahu warehouse cost

Impact on company

value


(months)Year Month

+20% -9.9% 1 11 44

+15% -7.6% 1 12 43

+10% -5.1% 1 11 43

+5% -2.4% 1 10 42

Baseline - 1 10 41

-5% 2.4% 1 10 41

-10% 5.0% 1 9 40

-15% 7.7% 1 8 38

-20% 10.1% 1 8 37

Operations

-0.50

Slope



-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

-30% -20% -10% 0% 10% 20% 30%

Variable % change

Imp

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Kedang Pahu warehouse cost

Nominal value: Rp. 135,000,000 Kedang Pahu warehouse cost

Impact on company

value


(months)Year Month

+20% -1.1% 1 10 41

+15% -0.8% 1 10 41

+10% -0.6% 1 10 41

+5% -0.3% 1 10 41

Baseline - 1 10 41

-5% 0.3% 1 10 41

-10% 0.6% 1 10 41

-15% 0.8% 1 10 41

-20% 1.1% 1 10 41

Operations

-0.06

Slope



-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

-30% -20% -10% 0% 10% 20% 30%

Variable % change

Imp

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Surabaya warehouse annual rent

Nominal value: Rp. 40,000,000Surabaya warehouse annual rent

Impact on company

value

Cash-flow positive

Payback period

(months)Year Month

+20% -1.5% 1 10 41

+15% -1.1% 1 10 41

+10% -0.7% 1 10 41

+5% -0.4% 1 10 41

Baseline - 1 10 41

-5% 0.4% 1 10 41

-10% 0.7% 1 10 41

-15% 1.1% 1 10 41

-20% 1.5% 1 10 41

-100%* 10% 1 10 40

Operations

*Assumes 1 sales agent remains in Surabaya

-0.10

Slope



-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

-30% -20% -10% 0% 10% 20% 30%

Variable % change

Imp

act

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Total transportation costAverage transport cost

Impact on company

value


(months)Year Month

+20% -15.8% 1 11 44

+15% -11.8% 1 11 43

+10% -7.9% 1 11 43

+5% -3.9% 1 10 42

Baseline - 1 10 41

-5% 3.9% 1 10 41

-10% 7.9% 1 10 40

-15% 11.8% 1 10 40

-20% 15.8% 1 10 38

Operations

-0.79

Slope



-15%

-10%

-5%

0%

5%

10%

15%

-30% -20% -10% 0% 10% 20% 30%

Variable % change

Imp

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Samarinda to Surabaya transportation cost

Nominal value: Rp. 3,000,000 per container Samarinda

to Surabaya transport

Impact on company

value

Cash-flow positive

Payback period

(months)Year Month

+20% -9.4% 1 11 43

+15% -7.1% 1 10 43

+10% -4.7% 1 10 42

+5% -2.4% 1 10 41

Baseline - 1 10 41

-5% 2.4% 1 10 41

-10% 4.7% 1 10 41

-15% 7.1% 1 10 40

-20% 9.4% 1 10 40

Operations

-0.47

Slope



-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

-30% -20% -10% 0% 10% 20% 30%

Variable % change

Imp

act

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Transport to Samarinda cost

Nominal value: Rp. 200 per kg To Samarinda transport

Impact on company

value

Cash-flow positive

Payback period

(months)Year Month

+20% -3.0% 1 10 42

+15% -2.3% 1 10 41

+10% -1.5% 1 10 41

+5% -0.8% 1 10 41

Baseline - 1 10 41

-5% 0.8% 1 10 41

-10% 1.5% 1 10 41

-15% 2.3% 1 10 41

-20% 3.0% 1 10 41

Operations

-0.15

Slope



-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

-30% -20% -10% 0% 10% 20% 30%

Variable % change

Imp

act

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Processing fees

Nominal value: Rp. 195 per wet kg Process fees

Impact on company

value


(months)Year Month

+20% -3.4% 1 10 42

+15% -2.5% 1 10 41

+10% -1.7% 1 10 41

+5% -0.8% 1 10 41

Baseline - 1 10 41

-5% 0.8% 1 10 41

-10% 1.7% 1 10 41

-15% 2.5% 1 10 41

-20% 3.4% 1 10 41

Operations

-0.09

Slope



-30%

-25%

-20%

-15%

-10%

-5%

0%

0 1 2 3 4 5

Additional headcount

Imp

act

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Additional operational management(production & operations)

Sales agents & warehouse staff

Impact on company

value

Cash-flow positive

Payback period

(months)Year Month

Baseline - 1 10 41

1 -1.6% 1 10 41

2 -4.9% 1 10 42

3 -9.8% 1 11 43

4 -16.4% 1 11 45

5 -24.6% 1 12 47

Operations

Assumes same cost timing as baseline scheduleNote: Cost calculation only

Baseline staff: 4 additional management personnel



Variable Sensitivity to assumption

So what?

Number of farmers 0.94 If the company is not gaining sales and profitability momentum as planned then there is room to lower the price paid to farmers and sacrifice the number of farmers served

Price paid to farmers -1.28 Try and pay as little as possible to the farmers for their rattan and investigate the suitability of a bonus system that links the final bonus level to the price of rattan in Surabaya.

Average product price in Surabaya

Round Sega

Semi-finished products

Red-Pulut

6.77

1.43

2.22

1.93

1. Do whatever possible, even if it appears to have negative impacts on the business, to support the price of your products in Surabaya

2. Make sure that “book” prices for SEP rattan products are high enough to support the discounting to ensure that the average product price doesn’t fall

3. Build supply-chain capacity to reduce need to dump unsold products

4. Try and secure long-term stable price contracts with customers

5. Look at building excess inventory capability in the supply chain to help isolate the company from short-term price volatility

Delay in first sales month -15% per month

Avoid all potential problems that will delay initial sales. The only exception would be massive price discounting


-0.5 The relative cost of hiring additional sales staff compared to the cost of slower sales growth suggests that an additional sales people should be hired

So what?Financial Sensitivity Analysis


Variable Sensitivity to assumption

So what?

Kedang Pahu warehouse cost

-0.06 1. Be prepared to pay handsomely to ensure the Kedang Pahu warehouse is completed on time so that first sales are not delayed

2. The cost of excess capacity at the Kedang Pahu warehouse is relatively cheap so think about scaling up its size to give additional inventory flexibility in the supply chain

Surabaya warehouse rent -0.1 Surabaya warehouse costs are more important to reduce than those at Kedang Pahu so think about first renting a small warehouse in Surabaya and then scaling up if needed

Transportation -0.79 Overall transportation costs have a large impact on the business. Incremental rises in the cost of fuel and other transport costs will be a major risk and long-term contracts may be the best way to mitigate these risks

Samarinda to Surabaya transport

-0.47 This is the most sensitive transport cost and sufficient time should be spent at the early stages of the company to secure the most efficient transportation partner

Transport to Samarinda -0.15 Down-river transport costs are less important than Samarinda to Surabaya costs but the sensitivity is still high. Given the low marginal cost of hiring an additional operations / production employee it may be beneficial to dedicate one person to optimising up-to-down river transportation

Processing fees -0.09 Relative to the cost of transport, processing fees are relatively insignificant which suggests that choice of warehouse and processing unit location should be influenced more by transportation considerations

So what?Financial Sensitivity Analysis


-45%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

0 1 2 3 4 5


Imp

act

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Additional Surabaya sales &warehouse staff


Impact on company

value

Cash-flow positive

Payback period

(months)Year Month

Baseline - 1 10 41

1 -3% 1 10 42

2 -8% 1 11 43

3 -16% 1 11 44

4 -26% 1 12 48

5 -40% 2 1 54

Operations

Assumes same cost timing as baseline scheduleNote: Cost calculation only

Baseline staff: 2 warehouse & sales agents



-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

0 1 2 3 4 5


Ch

an

ge

in v

aria

ble

Long-term supply volume



Assumed benefits of additional sales headcount in Surabaya



Time to full production and

sales

0 - -

1 +10% -10%

2 +17% -15%

3 +21% -18%

4 +24% -19%

5 +25% -20%

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



-10%

-5%

0%

5%

10%

15%

20%

0 1 2 3 4 5


Imp

act

on

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Additional Surabaya sales &warehouse staff


Impact on company

value

Cash-flow positive

Payback period

(months)Year Month

Baseline - 1 10 41

1 6% 1 9 40

2 14% 1 9 39

3 9% 1 9 41

4 4% 1 9 41

5 -7% 1 11 44

Operations

Assumes same cost timing as baseline scheduleNote: Cost and benefit calculation

Baseline staff: 2 warehouse & sales agents



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




-45%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

0 1 2 3 4 5


Imp

act

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Additional Samarinda warehouse and staff

Samarinda Warehouse & staff

Impact on company

value


(months)Year Month

Baseline - 1 10 41

No staff -11% 1 10 44

1 -13% 1 10 44

2 -17% 1 11 45

3 -23% 1 11 46

4 -31% 1 12 50

5 -42% 2 1 55

Operations

Assumes same cost timing as baseline schedule

Warehouse rent & utilities

Note: Cost calculation only

Baseline: No warehouse or staff



-15%

-10%

-5%

0%

5%

10%

15%

0 1 2 3 4 5


Ch

an

ge

in v

aria

ble




Assumed benefits of additional warehouse and personnel in

Samarinda



Time to full production and

sales

0 - -

1 +5.0% -5.0%

2 +8.5% -7.5%

3 +10.5% -9.0%

4 +12.0% -9.5%

5 +12.5% -10.0%

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



-30%

-25%

-20%

-15%

-10%

-5%

0%

0 1 2 3 4 5


Imp

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Additional Samarinda warehouse and staff

Samarinda Warehouse & staff

Impact on company

value


(months)Year Month

Baseline - 1 10 41

No staff -11% 1 10 44

1 -2% 1 9 42

2 -6% 1 9 43

3 -10% 1 10 44

4 -17% 1 11 45

5 -27% 1 12 49

Operations

Assumes same cost timing as baseline schedule

Baseline: No warehouse or staff

Note: Cost and benefit calculation



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




Other Information & Stuff!!!!


Compensation Strategy

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?

How do we want to buy from the farmers?


Other Strategies

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.

Summary


Interview with Hartono

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.

The furniture industry expert

Date post:	18-Dec-2015
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[Rattan Agency] Analysis Tools and Supplementary Data.

Documents