Rattan Agency

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Rattan Agency

• Analysis Tools and Supplementary Data

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

• There are many stakeholders in SEP aside from the
  obvious customers and suppliers
• Some stakeholders such as customers and the
  farmer suppliers have direct contact with the
  company and have a high degree of influence on
  the future success of the company
• Others have in-direct contact and either
  relatively high influence on SEP such as funders
  and NGO partners, while some such as local
  financial institutions are of lower importance
  but still warrant consideration

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Stakeholder Analysis
How does the business impact the stakeholders?
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Stakeholder Analysis
How does the business impact the stakeholders?
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Stakeholder Analysis
How does the business impact the stakeholders?
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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

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Stakeholder Analysis
How does the business impact the stakeholders?

• Both suppliers and employees can benefit from
  becoming shareholders in the company
• The biggest risk for funders is that the SEP
  concept doesnt work out and they lose
  credibility in the NGO community for supporting a
  commercial project
• Non-financially supporting NGOs face similar
  risks but will benefit from the socio-economic
  activities that SEP will take-over and expand
• Local and district governments are currently
  oblivious to SEP plans, however they should be
  supportive if long-term benefits can be provided
  for rattan farmers. They have power to influence
  the central government classification of East
  Kalimantan rattan as a forest product.

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Stakeholder Analysis
How are you going to manage the risks?
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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

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Problems and Causes
What are the root of your problems?
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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

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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

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SWOT Analysis
What are your strengths and weaknesses?

• STRENGTHS SEPs Advantage
• Shared costs of supplier support programs with
  SHK
• Strong relationship with relevant NGO and
  industry bodies (ASMINDO, SHK)
• Ability to harvest rattan throughout the year
• Potential to obtain FSC certification within 3
  years
• Capacity to produce 5000 to 10000 tonnes per year
  of wet rattan (assuming 7,000 P3R membership)
• Capacity to process 5000 tonnes per year of dry
  rattan (assuming hiring 35 processors)??
• Crops accessibility to high quality rattan
  species with greatest potential to meet consumer
  demands (strong, bright in color, clean and with
  a soft peel).
• Strong relationships with suppliers ability to
  purchase raw rattan from its members at
  competitive price.
• Craft-making division ability to absorb low to
  medium quality rattan

• WEAKNESSES SEPs Disadvantages
• Currently only 10 P3R members (limited concrete
  track record to secure commitment)
• Limited transportation during dry season for some
  farmers (40) who depend on river for
  transportation
• Limited supplier flexibility (committed to buy
  only from P3R members)
• Highly dependent on P3Rs success in serving its
  members
• Limited flexibility due to constraints imposed by
  social and NGO values
• Limited awareness among consumers about
  sustainable production of rattan
• Yet to identify niche market of its own
• Limited knowledge of customers and purchasing
  habits
• Quality of dry rattan perceived to be low to
  medium due to poor processing
• Limited data collection ability.
• Unclear management of relationship with
  stakeholders within the cooperative
• Currently no transportation partner?? (Reduction
  in the quality of the product in transit)

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SWOT Analysis
What are the opportunities and threats?

• OPPORTUNITIES
• No-one currently serving the environmentally
  sensitive rattan market
• Increasing consumer awareness for sustainably
  sourced rattan products
• Supply chain inefficiencies due to long
  distribution chain (potential to adapt middle
  chains)
• Eager farmers due to long experience of
  powerlessness
• Fragmented and uncoordinated nature of the
  supply-side
• No other initiatives to organize suppliers
• Some of our competitors are dependent on climate
  for rattan harvesting

• THREATS
• ASMINDO is lobbying for export ban or increased
  export tax on raw material rattan export
• Possible retaliation by rattan traders by
  undercutting prices
• Skeptic farmers due to long experience of
  powerlessness
• Declining number of rattan producers due to
  relatively low return on rattan production
  (people would rather cut woods b/c price of woods
  are higher than rattan or convert rattan forests
  to palm oil plantation etc)
• Difficulty in obtaining transport documentation
  (SKSHH) due to conflict between the local
  government of West Kutai and the Provincial
  Government of East Kalimantan and the Department
  of Forestry
• Rapid changes in design and trends in furniture
  products which influence the type and quality of
  raw materials in demand.
• Value of FSC certification unclear
• Increasing accessibility and attractiveness of
  substitutes

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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

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

• What are the important industry and market
  trends?
• Who are the possible competitors in this market?
• What are the possible ways to segment the market?
• Product (type of rattan, round/semi-finished,
  etc.)
• Channel (traders, furniture manufacturers)
• Size/volume
• Geography
• Use (furniture, baskets)
• Eco-sensitivity
• Transportation method
• Quality Requirements
• What are my companys strengths and weaknesses
  (from SWOT)?

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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?

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Marketing Strategy
How to determine a marketing strategy
The final step is to determine what tactics you
will use in the marketplace to execute your
strategy.

• Product
• What are my products and how do they fit with my
  value proposition?
• What are the advantages and disadvantages of my
  products relative to competition?
• Promotion (Communication)
• How do I get my message out to my customers?
• Sales Strategy
• Advertising
• PR
• Place (Distribution)
• What is the best way to distribute my product to
  my customer targets?
• This will determine supply chain and logistics
  strategies

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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.)
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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?
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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

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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
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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

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

• In terms of product attributes, customers will
  find the following characteristics of value
• Ikea FSC labelling, stable supply, processing
  that produces low chemical residues and SEPs
  stance as a legal supplier
• High quality furniture manufacturers stable
  supply, high quality round rattan and red pulut
  and associated opportunities
• Low quality furniture manufacturers value little
  except price
• Home-based furniture manufacturers may value
  red-pulut as a way to differentiate their products

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

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Supply Chain Analysis
How to design your supply chain?

• Understand why we are holding inventory
• Enhance customer service
• Decouple supply-demand chain (so you dont have
  to sell everything)
• Protect against uncertainties
• Achieve economies of scale
• Who are your customers? What is the customer
  service level you are trying to achieve? How
  close do you need to be to your customer?
• How do they order? Price negotiation and freq?
  Need to check out goods? Where? When(Order
  cycle)? Who? How much (max, min order qty?)? Can
  they forecast their demand?
• Returns allowed?
• of new customers? of repeat customers?
• Who are your suppliers? What is the flexibility
  and reliability of your suppliers? How close do
  you need to be to your supplier?
• How can you order from your farmer? How often?
  How is it packaged? Maximum transportation time?
• What supply chain skills do you need and have?
• Who are your transportation partners? How
  flexible are they?
• Can warehouse be rented short term? How fast can
  you get it up and running?
• Cost consideration
• Inventory holding cost (fraction of item value)
• Warehouse cost (includes rent (if purchase then
  land, building, depreciation), maintenance,
  electricity)
• Inventory management cost (includes labor)
• Opportunity cost of capital

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Supply Chain Analysis
Where are your suppliers and customers?
Kadang Pahu
Samarinda
customers
suppliers
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Current Distribution System
How does your product get around?
Forest Land
Garden
Resource Base
Rattan Farmer
Harvesting
Local Village Collector
Local Large Trader
Samarinda Trader
Java Trader
Processing Semi-Finished
Furniture Factory
Local Craft Maker Subsistent User
Home Industry
Manufacturing
Exporter
Rattan Product Trader
Java/Bali Product Trader (Processing)
Ikea
Distribution
End User
Overseas Consumer
Domestic Consumer
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System Constraints
What constrains your capacity or throughput?
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Warehouse Analysis
Option 1 Short term and mid-term alternative
RD
SEP WH Processing Sorting?/Inventory Round Rattan
Farmers
Raw
Dry
Dry
Furniture Makers
Core Peeled
SEP WH Processing Inventory Semi-Finished
Craft-Makers
Peeled
Kedang Pahu
SEP WH Inventory
SEP WH Inventory Retail
Craft
Dry Peeled Core Crafts
Dry Peeled Core Crafts
Farmers
Local Processing Units
Dry
Raw
Samarinda
Surabaya
Down River
Exporters/Oversea Furniture Makers
Farmers
Local Processing Units
Dry
Raw
Up River
35
Warehouse Analysis
Option 2 Short-term and mid-term alternative
RD
SEP WH Processing Sorting?/Inventory Round Rattan
Farmers
Dry
Raw
Dry
Furniture Makers
Peeled Core
SEP WH Processing Inventory Semi-Finished
Craft-Makers
Peeled
Kedang Pahu
SEP WH Inventory Retail
Craft
Dry Peeled Core Crafts
Dry Peeled Core Crafts
Farmers
Local Processing Units
Dry
Raw
Surabaya
Down River
Exporters/Oversea Furniture Makers
Farmers
Local Processing Units
Dry
Raw
Up River
36
Warehouse Analysis
Option 3 Long-term alternative
RD
SEP WH Processing Sorting?/Inventory Round Rattan
Farmers
Raw
Dry
Dry
Furniture Makers
SEP WH Processing Inventory Semi-Finished
Craft-Makers
Peeled
Peeled
Kedang Pahu
SEP WH Inventory Retail
Craft
Dry Peeled Crafts
Farmers
Local Processing Units
Dry
Raw
Samarinda
Down River
Exporters/Oversea Furniture Makers
Farmers
Local Processing Units
Dry
Raw
Up River
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Warehouse Analysis
Option 4 Not a viable option
Furniture Makers
Farmers
Raw
RD
SEP WH Processing Sorting?/Inventory Round Rattan
Dry
SEP WH Inventory Retail
Dry
Dry Peeled Crafts
Peeled Core
SEP WH Processing Inventory Semi-Finished
Farmers
Local Processing Units
Dry
Raw
Surabaya
Down River
Samarinda
Exporters/Oversea Furniture Makers
Farmers
Local Processing Units
Dry
Peeled
Raw
Craft-Makers
Craft
Up River
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Warehouse Analysis
Option 5 Mid-term to longterm alternative
RD
SEP WH Processing Sorting?/Inventory Round Rattan
Farmers
Dry
Raw
SEP WH Semi-Finish Process
Dry
Furniture Makers
Core Peeled
SEP WH Processing Inventory Semi-Finished
Craft-Makers
Peeled
Core Peeled
Dry
Kedang Pahu
SEP WH Inventory Retail
Craft
Dry Crafts
Dry Core Peeled Crafts
Farmers
Local Processing Units
Dry
Raw
Surabaya
Down River
Exporters/Oversea Furniture Makers
Farmers
Local Processing Units
Dry
Raw
Up River
with or without Samarinda Warehouse
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Warehouse Analysis
What are the advantages and disadvantages of each
warehouse alternative?
2
1
4
40
Warehouse Analysis
What are the advantages and disadvantages of each
warehouse alternative?
N/A
3
41
Warehouse Analysis
What are the major costs for each warehouse
alternatives?

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Financial Model

• SEP Penetration/Time Estimates
• Input percentage of target farmers reached at
  steady state (max penetration)
• Input number of months it will take from the
  first farmer to reach steady state (time to reach
  max penetration)
• Input the month the production begins (start
  time)
• Input existing number of target farmers (existing
  penetration), which is zero

Inputs
This generates an estimate of what percentage of
target farmers to expect every month of SEP
operation, or the S-Curve Model
Key Inputs
Outputs

• Production Estimates
• Input percentage production of K1, K2, S1, S2,
  and T for sega round K1, K2, S1, S2, and T for
  sega semi-finished A, B, C for sega
  filtrit/core and for red pulut
• Input price to pay to farmers for production for
  sega and red pulut
• Input kg of wet sega and red pulut required to
  create dry (shrinkage)
• Input kg of dry sega required to create
  semi-finished (shrinkage)
• Input production costs per kg for sega,
  semi-finished sega, and red pulut
• Input product base
• Input transportation costs
• Input machine purchase

• Supply Side Estimates
• Input number of farmers per processing unit
• Input number of farmers served at the KP
  warehouse
• Input the farmer capacity per month in kg of wet
  rattan
• Input target farmers at steady state

Sales Estimates Input percentage sales and
price/kg in Surabaya of K1, K2, S1, S2, and T for
sega round K1, K2, S1, S2, and T for sega
semi-finished A, B, C for sega filtrit/core and
for red pulut
This generates the Supply Side Forecast
Farmer/Capacity Estimates coupled with Production
Estimates generates the Production and
Transportation Cost Model
The Production and Transportation Cost Model
coupled with Sales Estimates generates the Sales
Model
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Financial Model
Sales Model

• Long Term Asset Estimates
• Input purchase prices of long-term assets
• Input years these assets will be in use (useful
  life)
• Input the month of purchase for these assets

• Operational Cost Estimates
• Input Variable Operation Costs
• Input percentage Discount (Cash) Back
• Input Fixed Costs
• Input percentage General Administrative Cost
• Input percentage Other Sales Marketing Expenses

The Sales Model and Operational Cost Estimates
create the Operational Cost Model
Production Transportation Cost Model
Profitability Estimates Input Annual Interest Rate
This generates the Long Term Assets Model
This generates the Profit Loss Model
Input Starting Cash Flow, Other Operational
Revenue, Sale of Assets, Donations, Equity, Debt
Financing, Debt Repayment, and Dividends
Input Starting Balances
This generates the Cash Flow Statement
This generates the Balance Sheet
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Key Assumptions
What have been the key financial assumptions?

• A. Production Sales
• All products provided to furniture, basket
  lampit
• No craft making division assumed
• Buying raw materials from farmers 1) Start in
  Month7, 2) Increase gradually (S-curve forecast
  model) until Month36, 3) Stable afterwards
• Total target buying raw material amount
  125,000kg (wet) in Month36
• Total target farmers served 500 in Month36
• Processing capacity (farmers) Kedang Pahu
  Warehouse217, Processing Unit36
• Start with only Kedang Pahu Warehouse, Increase
  Processing unit (0 8) from Month20 to Month34
• Farmers harvesting capacity 250kg/mo.(wet)
• Total target production (product) 55tons in
  Month36
• Fixed production mix Sega55, RP15,
  Semi-Finished Product30
• Buying price(/kg wet) Rp900(Sega), Rp6,000(Red
  Pulut)

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Key Assumptions
What have been the key financial assumptions?

• A. Production Sales
• Shrinkage rate Sega53.5, Red Pulut48.5
• Waste rate of Semi-finished product 40.1
• Marginal (direct) processing/production cost raw
  material, washing, drying, smoking, commission to
  Processing unit, transportation (/kg product)
  SegaRp2,552, Red PulutRp13,663, Semi-finished
  product6,067
• Cash on Delivery for Cost of Goods Sold to
  farmers
• Month(n) Production Month(n1) Sales
  Month(n2) Collection of sales money
• Differentiated Pricing by quality/grade (kg
  product _at_Surabaya) 5 for Sega (Ave. Rp.3,897), 1
  for Red Pulut (Rp.19,200/kg), 8 for SFP (Ave.
  Rp.11,006/kg) price slides referred
• Discount Money Back Higher rates to lower graded
  products (0.0-6.5)
• No volume discount assumed
• Advertisement Rp350,000/quarter
• Other Marketing Sales expenses (including
  entertaining expenses) 6.0 of Marketing Sales
  expenses
• All above prices unit costs unchanged over 5
  years sensitivity analysis factor

46
Key Assumptions
What have been the key financial assumptions?

• B. Operational costs
• Logistics
• Surabaya Warehouse leased Kedang Pahu Warehouse
  built (capital investment financing)
• Processing units paid on commission basis (per kg
  produced)
• Products shipped from Samarinda to Surabaya on a
  per container basis
• River transport cost assumed on a per kg basis
• Surabaya Warehouse annual rent Rp40,000,000
• No Samarinda Warehouse assumed
• Farmers to Kedang Pahu Warehouse or Processing
  unit (/kg wet) Rp70 included in Cost of Goods
  Sold
• Kedang Pahu Warehouse or Processing unit to
  Samarinda (/kg product) Rp200
• Samarinda to Surabaya (/container product)
  Rp3,000,000 (1 container5,000kg)
• Surabaya to customers (/kg product) Rp150
• Other variable operational cost insurance,
  packing (/kg product) Rp40-70
• All above unit costs unchanged over 5 years
  sensitivity analysis factor
• Personnel other costs
• 6 Management people from Month7 (Month1-Month6 6
  minus 1 sales 1 production directors)
• Kedang Pahu warehouse employs contract staff paid
  on a commission basis
• 2 Sales Marketing directors Rp1,300,000/monthp
  erson
• Other 4 directors CEO, 2 production directors
  administrative director Rp825,000/monthperson

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Key Assumptions
What have been the key financial assumptions?

• C. Capital investment financing
• Initial capital investment budget Rp399,500,000
  (Kedang Pahu Warehouse landbuildingmachines,
  vehicles, computer) paid in Month0-Month4
• 2 additional machines (Rp47,000,000) purchased as
  the semi-finished products reach capacity
  (7,830kg/month No downtime assumed) in Month21
  Month32
• Tentative account of building during construction
  (Month0-Month4)
• Donation (Rp44,783,000) from DFID already paid in
• Scheduled funding from EU assumed
  (Rp1,000,000,000) in Month0
• No additional funding from P3R members assumed
  (Rp120,000,000)
• No borrowing and credit line providing from
  financial institutions assumed
• Bank saving interest rate 1.0/year (real base)
• Liability is basically only tax obligations
  (which happen the last month of each year and are
  paid next month)
• Tax rate 30.0
• Major capital investments are the Kedang Pahu
  warehouse, and purchasing of vehicles and
  processing machines
• Start-up funds of Rp. 1bn provided by EU
• No borrowing or credit facilities from banks

48
Overview of Financial Statements

• A. Cash flow statement
• Monthly typical net cash flow after sales
  stabled Rp97,045,548
• Monthly net cash flow turned positive in Month22
• Ending balance bottomed in Month25 with
  Rp187,827,937
• Working capital (account receivable inventory)
  constantly grows as does sales
• B. Income statement (Profit Loss)
• Single year before tax profit turned positive in
  Month15
• Gross profit margin 36.8 after sales stabled (
  Ratio of variable production costs / sales
  63.2)
• Net profit margin in Year45 (after sales
  stabled) 13.3
• Monthly profits (losses) decreases (increases) in
  6th month of each year due to payment of annual
  rent for Surabaya Warehouse
• C. Balance Sheet
• Total asset at end of Year3 Rp1,875,273,481
  (including Rp1,616,324,025 equity)
• Retained earnings (Cumulative profits) turned
  positive in Month25
• Balance sheet reached double in Month42 with
  Rp2,101,835,569 from starting point
• Working capital (account receivable inventory)
  constantly grows as does sales

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

• Funding risk If you are unable to fund the
  projected amount (Rp.1,000,000,000) from EU, you
  cannot start the business.
• Cash deficiency risk As a start up company, cash
  position is not affluent between Month21 and
  Month26, and this period will have the strongest
  impact of downsides.
• Highly sensitive to market pricing of rattan
  (selling prices buying prices) Cash flows are
  most vulnerable to the negative changes of rattan
  prices. If selling price goes down by 10, it
  will take 5 more months (in Month27) to get
  positive monthly cash flow, and the ending cash
  position at the bottom (in Month25) will become
  Rp.49,214,140. If buying price goes up by 10, it
  will take 4 more months (in Month26) to get
  positive monthly cash flow, and the ending cash
  position at the bottom (in Month25) will become
  Rp.99,410,281.
• Additional personnel hiring costs If you are
  required to hire more personnel
  (sales/production), the impact of that fixed
  costs for cash flows is so significant that it
  delays one more additional month per person to
  get break-even.
• Delays in projected business development
  Although cash flow projection has reasonably
  adequate business development time, the delays in
  1) acquisition of farmers supplying raw
  materials 2) completion of building KPWH, and 3)
  development of business relationship with
  customers will have significant impacts on cash
  flows. If those business development delays 6
  months as projected, it will take 7 more months
  (in Month32), and the ending cash position at the
  bottom (in Month30) will fall until as low as
  Rp.113,842,231.
• Dependency on transportation (fuel) costs Due
  to the long supply chain, cash flows are
  dependent on transportation (fuel) costs. If the
  transportation costs in all supply chains
  (farmers-Kedang Pahu Warehouse (or Processing
  unit)-Samarinda-Surabaya-customers) go up by 20,
  the ending balance at the bottom (in Month25)
  will fall until as low as Rp.132,826,195.
• Customers default risk You may not be able to
  collect some sales credits. If we assume 5
  default rate of all sales credits, the ending
  cash position will fall until as low as
  Rp.85,010,344 (in Month25).
• Inflation Current inflation rate in Indonesia is
  approximately 10. As various prices and costs go
  up, if you fail to adjust your pricing and cost
  calculations, you will incur cash losses.
• Multiple risks You should suppose more than one
  of the above risks happens simultaneously

56
Financial Summary
What are the major financial take-aways?

• Cash flows continually grow as does the
  acquisition of farmers over 5 years. Break-even
  (monthly positive retained earnings) requires 2
  years.
• Initial funding from EU (Rp.1,000,000,000)
  absorbs start-up cash outflows, but the ending
  cash position at the bottom is not necessarily
  affluent (Rp.187,827,937). You had better develop
  relationship with financial institutions taking
  care of your contingent financial events.
• Selling price decrease (or buying price increase)
  have the strongest negative impact on cash flows.
  Under the high inflation rate, adjusting prices
  and costs and maintaining target margins should
  be prioritized.
• Due to low-levelled cash balance at the bottom
  and various risks, you should postpone any
  payments you can and keep more cash at hand
  (while you need to balance it with the cost of
  the delay).
• You must always be prepared for the big chunk of
  payments once in a while (corporate tax payment,
  Surabaya warehouse annual rent payment profit
  sharing paid to P3R), otherwise the company will
  have cash short even though it basically enjoys
  profits.

57
Financial Sensitivity Analysis
Basic metrics used

• The basic metrics used in the financial
  sensitivity analysis are
• Company value
• Time (months) for the company to turn cash-flow
  positive
• Pay-back period (months)
• For the purposes of this study, the company value
  has been assumed to be the sum of all monthly
  cash-flows over the 5 year forecast period

58
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Number of farmers in supply
Nominal value 500
59
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Average farmer production per month
Nominal value 250 kg wet rattan
60
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Price paid to farmers for round Sega
Nominal value Rp. 900 per wet kg
61
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Pricing
Average product price in Surabaya
Nominal value Rp. 8,334
62
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Pricing
Round Sega price in Surabaya
Nominal value Rp. 3,897
63
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Pricing
Semi-finished product price in Surabaya
Nominal value Rp. 11,000
64
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Pricing
Red-Pulut price in Surabaya
Nominal value Rp. 19,300
65
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Sales
Delay in first sales
First sales in month 7
66
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Time to scale to full production and sales
Nominal value 36 months
67
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Kedang Pahu warehouse cost
Nominal value Rp. 135,000,000
68
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Surabaya warehouse annual rent
Nominal value Rp. 40,000,000
Assumes 1 sales agent remains in Surabaya
69
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Total transportation cost
70
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Samarinda to Surabaya transportation cost
Nominal value Rp. 3,000,000 per container
71
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Transport to Samarinda cost
Nominal value Rp. 200 per kg
72
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Processing fees
Nominal value Rp. 195 per wet kg
73
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Additional operational management (production
operations)
Baseline staff 4 additional management personnel
Assumes same cost timing as baseline schedule
Note Cost calculation only
74
Financial Sensitivity Analysis
So what?
75
Financial Sensitivity Analysis
So what?
76
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Additional Surabaya sales warehouse staff
Baseline staff 2 warehouse sales agents
Assumes same cost timing as baseline schedule
Note Cost calculation only
77
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Assumed benefits of additional sales headcount in
Surabaya

• Hiring additional sales and warehouse staff in
  Surabaya will benefit
• Customer service
• Generating more customers
• Reduce the impact of returns
• Improve ability to maintain price
• This can be modelled by assuming a larger
  long-term supply volume and a shorter time to
  scale to full production

78
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Additional Surabaya sales warehouse staff
Baseline staff 2 warehouse sales agents
Assumes same cost timing as baseline schedule
Note Cost and benefit calculation
79
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?

• A simple cost-benefit analysis on the impact of
  additional sales personnel in the Surabaya
  warehouse has suggested that the cost of 2
  additional sales and warehouse personnel will be
  outweighed by the economic benefit that their
  employment will bring
• Hiring of these people can be delayed until after
  18 months with approximately the same incremental
  benefit to be achieved
• The biggest benefits of these additional staff
  will be
• Improved customer service levels and a reduced
  number of customers per sales employee
• Better quality control
• Better customer responsiveness
• Fewer returns
• Better ability to maintain product prices
• An ability to handle greater supply-volumes in
  steady-state operations

80
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Additional Samarinda warehouse and staff
Baseline No warehouse or staff
Warehouse rent utilities
Assumes same cost timing as baseline schedule
Note Cost calculation only
81
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Assumed benefits of additional warehouse and
personnel in Samarinda

• Having an additional warehouse and personnel in
  Samarinda will benefit
• Supply chain flexibility and hence avoid need to
  dump discounted products and reduce average price
• Responsiveness to customer demand
• This can be modelled by assuming a larger
  long-term supply volume and a shorter time to
  scale to full production since both supply-chain
  flexibility and customer service will drive
  faster and greater sales

82
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?
Operations
Additional Samarinda warehouse and staff
Baseline No warehouse or staff
Assumes same cost timing as baseline schedule
Note Cost and benefit calculation
83
Financial Sensitivity Analysis
What is the impact of changing fundamental
assumptions on SEPs financial performance?

• A simple cost-benefit analysis on the impact of
  building a warehouse in Samarinda suggests that
  the total costs outweigh the possible benefits if
  it is secured at the same time and cost of the
  Surabaya warehouse
• However, using a warehouse in Samarinda is not
  cost prohibitive and may be an attractive option
  to isolate from supply-chain and price volatility
  risk
• The biggest benefits of the warehouse would be
• Improved customer responsiveness
• Greater supply-chain flexibility
• An ability to sell products from a warehouse to
  clients in Samarinda
• An ability to handle greater supply-volumes in
  steady-state operations

84
Other Information Stuff!!!!
85
Compensation Strategy
How do we want to buy from the farmers?

• Empowering buy from farmers by grade when raw,
  pay processors by grade
• Buy by mix, pay by mix
• Bonus buy from farmers by mix pay processing
  unit by mix pay bonus / increase price if grade
  improves
• Who purchases? SEP or processing unit?

86
Other Strategies
Summary

• Consider using alliances to deal with demand and
  supply mismatch/supply shortage.
• Consider using pricing or discounting strategies
  to incentivize FoB Samarinda.
• The company will concentrate on sales at times
  when competitors in Central and South Kalimantan
  are experiencing seasonal flooding.

87
Interview with Hartono
The furniture industry expert

• What is your business? Works with all furniture
  materials including wood,rattan, metal etc. Why
  rattan? rattan is sustainable. Green product.
  More potential.
• Furniture Market outlook? Rattan? Difficult to
  protect design IP. People copy designs right
  away. Rattan has lots of substitutes rattan is
  better because it is easier to store in
  warehouse, long lasting (dont absorb moisture as
  much as long as processed) people importing more
  wood, less rattan must mix rattan with other
  materials
• Green product demand? People are not willing to
  pay more for green product.
• Issues in current system? His observations? Need
  to process ASAP. Need to store and smoke in airy
  place under sun. (up to 1 week OK) sulfur does
  not cure fungus problem transportation cost high
  for Rattan need to mix with other materials in
  the furniture increase relative value of rattan
  (maybe SHK buy and sell basic need products such
  as petroleum and rice to farmers with no profit)
  transportation costs too high especially in the
  villages w/ small rivers.
• What does he plan to do for the furniture
  industry and how SEP can help? Come up with
  better designs to meet oversea customers,
  engineer flat packing products engineer products
  with mix materials Need mass produce to lower
  cost. SEP needs to 1) information dissemination
  to members 2) if buyers, association will step
  in, warn members of problematic buyers.
• Waste in the villages lots of waste due to lack
  of machine in Jakarta, Samarinda factories are
  able to use to waste (split the core further to
  make peals)
• What can SEP help? Steady market. (steady
  production, cannot subcontract)
• What is in for Hartono? If we can raise price of
  rattan furniture then willing to share profit
  with farmers.
• Lampit ? rattan needs to be older, Basket ?
  rattan needs to be younger
• Rattan type (pulut v cega etc) depend on demand
  and the change to
• Need to be able to appeal to range of customer
  (rich and poor)
• Need to partner with European or American
  companies for design. Difficult for locals to
  design due to difference in taste. Philippine
  companies as well (Philippine designs hot!)
• Indonesia, Malaysia and Philippines trying to
  cooperate. (need to unite to compete against
  Chinas low cost mass production) 2-3 years to
  form the cooperation.
• Furniture making in Jakarta more efficient.
  Limited market with hand-made product.
• Tax re-categorize rattan as non-forest product
  rather than forest product.