(c) Ade Cahyat 20031 Operations Plan. (c) Ade Cahyat 20032 Rattan Processing Procedure How is rattan processed? Step 1 Washing 100kg per day per person.

(c) Ade Cahyat 2003 1

Operations Plan


Rattan Processing ProcedureHow is rattan processed?

Step 1Washing

100kg per day per personRp. 150 per kg

Step 2Sulphur smoking

2 days

Step 3Drying

2-3 days

Step 2 & 3Rp. 150 per kg


Rattan Processing ProcedureHow is rattan processed?

Step 4Peel and core

270 kg per day by machineRp. 240 per kg

Rattan core

Rattan peel


Farmers will supply raw rattan from their gardens on a schedule dictated by SEP customer demand and co-ordinated by P3R

Farmers will transport raw rattan to SEP processing units and Kedang Pahu warehouse

The Kedang Pahu warehouse and SEP processing units and will: Wash the rattan to remove stains and blemishes Smoke the rattan in sulphur fumes to cure and color the rattan Dry the smoked rattan to remove excess moisture

The Kedang Pahu warehouse will further process the dry rattan by splitting the rattan into core and peel. As production volume of semi-finished products grows, additional investment in processing machinery at the warehouses or selected processing units will be made to maintain the optimal product mix.

How is rattan processed?Rattan Processing Procedure


SEP Distribution Chain DesignWhat is the flow of rattan like within the company at launch?

Kedang Pahu warehouse

Raw

Raw

Dry

PeelCore

Craft

Peel

Raw

Dry

Surabayawarehouse

Up River

Down River

Dry

Dry

DryPeelCore

Crafts

R&D

Non SEP boat/truck

SEP managed Truck/boat

SEP managed Boat

DryPeelCore

Crafts

ProcessingSorting

InventorySemi-Finished

FarmersLocal

Processing Units

FarmersLocal

Processing Units

Farmers

Craft-Makers

Furniture Makers

Exporters/Overseas Furniture Makers

ProcessingSorting

InventoryRound Rattan

Inventory Retail

Contractors

Suppliers

SEP operations

Customers

Qualitycheckpoint


• Build a processing and inventory holding warehouse in Kedang Pahu

• Rent a retail warehouse in Surabaya

• As production volume of semi-finished products increase, add semi-finished processing machine in Surabaya warehouse to increase semi-processing capacity and to reduce per machine operation cost

• As customer base matures and consists of large companies and the infrastructure in Samarinda is improved move retail warehouse from Surabaya to Samarinda and deliver to customers direct from Samarinda

TimeYear 0 Year 5 Long Term

Warehouse Roll-out ScheduleSEP Distribution Chain Design

Year 10

• As supply grows, rent a inventory holding warehouse in Samarinda to coordinate transportation to Surabaya


Initially processing of wet and semi-finished rattan will be performed in the Kedang Pahu warehouse. As production volume increases, processing units will be contracted in proximity to the rattan gardens to increase the processing capacity.

Farmers will be responsible for transporting wet rattan to the Kedang Pahu warehouse and/or SEP processing units. SEP will manage transportation of processed rattan from the Kedang Pahu warehouse as well as the SEP processing units. Rattan processed in the SEP processing units will be transported directly to the Surabaya warehouse via Samarinda.

What is the flow of rattan like within the company?SEP Distribution Chain Design


The Surabaya warehouse will manage sales inventory, the showroom, the relationships with small to medium sized furniture makers and market intelligence gathering.

Initially no warehouse will be set up in Samarinda. However in year 3 or 4 one may be established to better manage supply and demand and coordinate transportation.

In the long term, as the customer base matures (consists of large companies that have had long standing relationships with SEP) and the infrastructure in Samarinda is improved, SEP will move the retail warehouse from Surabaya to Samarinda and deliver to customers direct from Samarinda.

What is the flow of rattan like within the company?SEP Distribution Chain Design


Operations PlanHow much rattan will we be purchasing?

Volume of Wet Rattan Purchases from Farmers (tonnes)

0

200

400

600

800

1,000

1,200

1,400

1,600

Year 1 Year 2 Year 3 Year 4 Year 5

Vol

ume

ratta

n w

et (

tonn

es)

Sega Round Red Pulut


How much rattan will we be purchasing?

Volume of Wet Rattan Purchases from Farmers (tonnes)Segmented by Final Use

0

200

400

600

800

1,000

1,200

1,400

1,600


Vol

ume

ratta

n w

et (

tonn

es)

Sega Round Red Pulut Round Sega for Semi-Finished Products

Operations Plan


Operations PlanHow much are we going to produce?

Volume of Dry Rattan Products Production (tonnes)

0

100

200

300

400

500

600

700


Vol

ume

dry

ratta

n pr

oduc

ts (

tonn

es)

Sega Round Red Pulut Semi-Finished Products


Operations Plan

Wet volume (tonnes) Year 1 Year 2 Year 3 Year 4 Year 5

Round Sega 18 272 605 678 678

Semi Finished 5 82 182 204 204

Red Pulut 17 248 551 618 618

Total 40 602 1,339 1,500 1,500

Purchases (Wet Rattan in tonnes)

How much are we going to purchase and produce?

Product dry volume (tonnes)


Round Sega 10 146 324 363 363

Semi Finished 3 40 88 99 99

Red Pulut 5 79 177 198 198

Total 18 265 589 660 660

Production (Dry Rattan in tonnes)


Operations PlanHow much of the critical resources are we going to need?

Area required (ha/rotation)


Sega 244 3665 8145 9122 9122

Red Pulut 239 1912 4301 4779 4779

Total 483 5577 12446 13901 13901


Farmers 59 333 500 500 500

Processing units 0 3 8 8 8

Semi-finished processing machines

1 2 3 3 3

Farmers, Processing Units and Machines

Rattan Garden Required (in hectare per rotation)

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


Operation Plan

At company inception, the first priority is to build the Kedang Pahu warehouse and grow the local supply base.

As production increases, processing units will be contracted outside of the Kedang Pahu warehouse. At the end of the first year, SEP will turnover approximately 6,700kg of dry rattan per month. By the end of year 3, SEP will have contracted eight local processing units and will turnover nearly 125,000kg of dry rattan per month.

Semi-finished products will initially be processed exclusively at the Kedang Pahu warehouse but as production of semi-finished products grows, additional investment in processing machinery at the warehouses or local processing units will be made to maintain the optimal product mix.

SEP will aim to support the recruitment of 17 P3R farmers per month on average and a total of 500 P3R member farmers to be its suppliers by year 4.

How much are we going to purchase and produce?


Quality Management

SEP will establish Research and Development functions at the Kedang Pahu facility to improve rattan processing methods and technology To reduce costs, increase quality, and decrease chemical residue Materials and the production equipment will be replaced with those

which do not leave a dangerous chemical residue

Farmers and processing units will be encouraged to process raw rattan within a day of harvest Establish processing units in proximity to rattan gardens Evaluate opportunities to purchase from farmers by grade

SEP will aggressively support P3R activities in obtaining and maintaining FSC certification (eco-label certificate)

Semi-finished processing will be performed using an accurate Taiwanese machine

How are we going to manage quality?


Quality Management

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

How are we going to manage quality?


Operations Summary

The dry rattan production process involves purchasing raw rattan from farmers, washing, sulphur smoking and drying. The semi-finished production process involves splitting the dry rattan into core and peel.

SEP will manage transportation of rattan post processing to customer site.

The most critical quality checking (grading) will be performed after processing at the Kedang Pahu warehouse. SEP will also have quality control check points at the time of each warehouse receipt.

Semi-finished products will initially be processed exclusively at the Kedang Pahu warehouse but as volume grows, additional investment in processing machinery at the warehouses or local processing units will be made to maintain the optimal product mix.

What are the major operations take-aways?


Operations Summary

SEP will establish Research and Development functions at the Kedang Pahu facility to improve rattan processing methods and technology.

SEP expects to reach steady-state operations by the end of year 3, representing a farmer supply base of 500, 8 local processing units and a volume turnover of around 125,000kg wet rattan supplied per month.

What are the major operations take-aways?


Organizational Plan


Organizational StructureWhat does the company’s organizational structure look like?

CEO / Managing Director

Finance Director Sales Director Marketing Director

Finance and AdminAssistant

Operations Director

Contract Processors

WarehouseEmployees

First 6 month hires

18 month hires

ContractSales Agents

SHK Business Development Officer

NGO PartnerLater hires(if required)


Roles and ResponsibilitiesWho does what in the company?

CEO Sales Director Operations Director Responsible for the total

operation of the company Develop and implement

corporate strategy Responsible to the Meeting

of Share Holders

Acquire customers Manage sales planning, order

processing and distribution Manage inventory of

Surabaya warehouse Manage quality control

Manage contractor Manage inventory of Kedang

Pahu warehouse (and Samarinda warehouse?)

Manage procurement Manage packing and

transportation Manage R&D Manage quality control Develop product

requirements plan

Finance Director Marketing Director Financial Administrator(Initially role of the CEO) Responsible for managing

corporate finances including debt and credit agreements

(Initially a role of the CEO) Develop marketing strategy Plan and implement

promotional activities Manage public relations

Responsible for all forms of administrative tasks

Book-keeping of company

finances


Roles and ResponsibilitiesWho does what in the company?

Contracted Sales Agents Warehouse Employees Processing Contractors Generate and expand volume

sales in low and high quality furniture manufacturers

Process and manage orders Promote key market

messages

Manage and operate machinery

Make semi-finished product Manage quality of semi-

finished product Manage warehouse inventory

Purchase rattan from farmers Wash, smoke and dry rattan Coordinate transportation to

SEP


NGO PartnersPartnership among P3R, SHK and SEP

SHK E. Kalimantan

Rattan Program

SEP

P 3 R

RATTAN MARKET

• Provide technical assistance• Facilitate skill development

• Develop and manage relationship to donors and institutions

• Purchase, Process, make and sell raw, semi-finished and crafts

• Develop and manage customer relationships

• Develop and manage brand of P3R rattan

• Conduct product development and process improvement

• Improve livelihood of local farmers and craft makers by creating employment

opportunities and providing competitive purchase prices

• Organize farmers and craftsmen

• Monitor sustainability of resources

• Manage policy and regulation changes

(advocacy and campaigns)• Disseminate information

• Conduct training of farmers and craftsmen/perform

technical assistance• Facilitate skill development

• Develop and manage relationship to donors and

institutionsProfit Sharing (5%)

Supplier Service

Tech Assistance

Reputation

Reputation

Tech Assistance


NGO PartnersWho are NGO partners and what are their roles?

SEP’s most critical NGO relationship is with P3R, the farmers collective organization based in the Mahakam watershed area. P3R’s primary roles are to: Provide organizational structure for farmers & craftsmen Monitor sustainability of resources Policy advocacy Information dissemination Conduct farmer-specific training Facilitate technical skill development

SHK, a Samarinda based NGO is a crucial partner in training, technical assistance and fund-raising activities

Other NGOs (the EU and DFID) are primary donors for the project


Key Management PersonnelWho is the boss?


Start-up Advisory BoardWho helped develop this crazy plan?


Start-up Advisory BoardWho helped develop this crazy plan?


Organizational Summary

SEP executive management will consist of a managing director, a sales director and a production director, with a marketing director and a finance director hired at a later stage if required

SEP will hire employees for critical processes and contract others to minimize labor costs

SEP will hire employees to process rattan and manage inventory at the Kedang Pahu and Surabaya warehouses

SEP will contract processing units in local villages and sales agents in Java

SEP will leverage its NGO relationships with P3R and SHK. P3R will be responsible for coordinating the farmers and

ensuring sustainability of the rattan resources. SHK will be responsible for technology and knowledge transfer,

training and policy advocacy.

What are the major organizational take-aways?


Timelines and Milestones


Timing of Critical MilestonesWhat has to be achieved and by when?

Recruit key personnel

Secure P3R farmer supply

Secure supply-chain partners

Build first customer relationships

Develop KP warehouse operations

Build Kedang Pahu warehouse

Conduct feasibility study for crafts

Recruit local processing contractors

First customer sales

First production

50,000kg per month to Surabaya

25,000kg per month to Surabaya

Cash-flow positive

Payback period complete

12 24 36 48 60Month of operation

Potential additionalrevenue stream

developmentTrial shipments


The most critical time for the company is in the first six months where the major tasks will be:

1. Recruit key personnel2. Develop strong relationships with first customer targets3. Negotiate the most efficient possible solution for supply-chain

transportation over the first year of operations4. Build the Kedang Pahu warehouse5. Research Surabaya warehouse6. Recruit sufficient farmers and in appropriate locations to P3R

membership (a P3R task)

First production is expected in month 7 while first shipments to customers in Surabaya takes place in month 8

SEP expects to be shipping 2 containers per month by the end of the first year

50,000kg dry rattan products per month is expected to be reached in month 31

What has to be achieved and by when?Timing of Critical Milestones


Risks and Contingencies


Major Risks Facing the CompanyWhat do we have to be worried about?

Risk Mitigating Strategy

External

Decreasing relative value/price of rattan (increasing accessibility and attractiveness of substitutes)

Differentiate SEP with superior customer service Develop SEP brand (eg SEP eco-label sticker for customers’

products as fruit companies brand their products) Be prepared to incur additional costs in less sensitive areas (eg

more frequent transport) that will help support product pricing

Changing government policy Support SHK advocacy activities Lobby through ASMINDO

High dependence on furniture industry and strength of economy

Identify new opportunities for rattan Diversify customer mix (eg. geography, products etc)

High dependence on P3R (supply-side data collection, execution the resource plan)

Scale sales efforts in tandem with supply-side production forecasts Identify service requirements and include them in contracts Pay P3R monthly

Increasing transportation (fuel) price

Improve supply chain efficiency and effectiveness Perform processing close to supply to minimize transporting waste Identify non-transportation related costs to cut


Major Risks Facing the CompanyWhat do we have to be worried about?

Risk Mitigating Strategy

Internal

Limited supplier flexibility (single supplier dependence)

TBD – P3R, SHK and SEP to discuss

Outsourcing processing functions (processing units)

Identify requirements and include them in contracts Develop close relationships/partnerships with processing units Provide technical assistance and training to contractors


SEP faces several external risks. Decreasing relative value of rattan and increasing accessibility and

attractiveness of substitutes. To mitigate this risk, SEP will differentiate itself through superior customer service and branding activities.

High dependency on the strength of the furniture market and the overall economy. To mitigate this risk, SEP will establish business development functions to diversify customer mix and identify new rattan use.

Potential change in government policies. To mitigate this risk, SEP will support SHK advocacy activities and lobby through ASMINDO.

High dependency on P3R to collect supply data and to execute the resource plan. To mitigate this risk, SEP will identify service requirements and make service fee paid to P3R contingent upon their service levels.

Increasing transportation costs. To mitigate this risk, SEP will seek opportunities to improve supply chain effectiveness.

What do we have to be worried about?Major Risks Facing the Company


SEP faces several internal risks: Limited supplier flexibility. To mitigate this risk, SEP will … TBD. Outsourcing processing units. To mitigate this risk, SEP will identify

requirements (service, quality etc) and include them in the contracts. SEP will also develop close relationships/partnerships with processing units and provide technical assistance to the processing units.

What do we have to be worried about?Major Risks Facing the Company


Financial Forecasts


Key Assumptions

Production and sales assumptions First purchases of raw materials from farmers occur in month 7 First sales to customers occurs in month 8 First revenue collection from customers occurs in month 9 Purchases of raw rattan from farmers are paid on a cash-on-delivery

basis Steady state-operations are achieved at the end of the third year of

operations Kedang Pahu warehouse and processing unit is operating at full capacity 8 processing units are operating on a contract basis 125,000kg wet rattan purchased from farmers per month SEP purchases from a total of 500 farmers On average 250kg wet rattan is purchased per farmer per month Wet Sega purchase price is Rp. 900 per kg Wet Red-Pulut purchase price is Rp. 6,000 per kg

What have been the key financial assumptions?


Key Assumptions

Logistics SEP will lease a warehouse in Surabaya and build a warehouse in

Kedang Pahu Contracted processing units are paid based on volume processed River transport costs are paid based on volume shipped Samarinda to Surabaya transport costs are paid per container shipped

1 container = 5,000kg dry rattan products

Personnel and service costs SEP will employ 4-6 management staff to oversee company operations The Kedang Pahu warehouse employees and contractors are paid

based on volume processed Service fees are paid to P3R

on a monthly basis calculated at 5% of the previous month’s profits



Key Assumptions

Capital expenditure The major capital investments are:

Kedang Pahu warehouse construction in months 1 to 3 Purchasing of a vehicle to transport rattans in month 4 Purchasing of additional processing machines to maintain constant

product mix in months 21 and 32

Financing and funding Major start-up funds are expected to be provided by the EU of Rp. 1bn

The company cannot start without this funding The first month of operation is after this funding has been secured

Prior funds have been secured from DFID at Rp. 45m and have financed the first processing machine for the Kedang Pahu warehouse

The company makes no use of credit facilities or loans from local financial institutions

No other equity investments are made



Overview of Financial MetricsHow does the company perform based on the assumptions in this business plan?

Million Rp. Year of operation

0 1 2 3 4 5

Funds provided 1,050 - - - - -

Total revenue - 100 1,960 4,760 5,500 5,500

Total cost - 270 1,760 3,900 4,460 4,460

Net income (before tax) - -170 200 860 1,040 1,040

Before tax profit margin - - 10% 18% 19% 19%

Net cash-flow -120 -500 -200 540 840 790

Closing cash position 930 430 230 770 1,610 2,400

Total assets 1,050 870 1,070 1,880 2,660 3,400

Total liabilities - - 60 260 310 310

Total owner’s equity 1,050 870 1,010 1,620 2,350 3,090



0

1,000

2,000

3,000

4,000

5,000

6,000


Sal

es r

even

ue (

m R

p.)

Round Sega Red-Pulut Semi-finished products

90

2,260

4,760

5,500 5,500



Long-term cost-base

Raw materialpurchasing cost

77%

Management2%

Depreciation1%

Warehouse Rent In Surabaya

1%

Other G&A Cost2%

Discount Back Money

1%Sales & Marketing

Expenses1%

Packing and Insurance Cost

3%

Transportation12% Semi-finished product

Round Sega33%

Red-Pulut40%

Round Sega27%



Long Term Cost Break-down (at Steady State)

Direct Material54%

DirectOperation

24%

Sales Expense3%

Management1%Depreciation

1%

Supply Chain17% Note

• Direct material costs include raw material and P3R service fees

• Direct operation costs include salary and fees paid to the Kedang Pahu processing employees and the local processing units

• Management costs include salary paid to executive management

• Supply chain costs include transportation costs, warehouse rents etc

• Sales expense includes salary paid to sales agents, discount cash backs, advertising, marketing etc.

• Depreciation includes depreciation expense for the Kedang Pahu building, machinery, trucks and computers

Long Term Cost Break-down (at Steady State)

Direct Material54%

DirectOperation

24%

Sales Expense3%

Management1%Depreciation

1%

Supply Chain17% Note

• Direct material costs include raw material and P3R service fees

• Direct operation costs include salary and fees paid to the Kedang Pahu processing employees and the local processing units

• Management costs include salary paid to executive management

• Supply chain costs include transportation costs, warehouse rents etc

• Sales expense includes salary paid to sales agents, discount cash backs, advertising, marketing etc.

• Depreciation includes depreciation expense for the Kedang Pahu building, machinery, trucks and computers


Overview of Financial Metrics

Financial highlights1. The five-year value of the company, assuming a 0% discount rate is Rp.

2.4 bn

2. SEP will become cash-flow positive in the month 10 of year 2 of operation (month 22)

3. SEP will reach its break-even point in the month 1 of year 3 of operation (month 25)

Steady-state operations (after month 36) for the company are:1. Annual revenue: Rp. 5.5bn

2. Annual cost-base: Rp. 4.5bn

3. Net-income: Rp. 1,040

4. Before-tax profit margin: 19%

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


Financial Risks

Funding If the EU funding is not secured, the business cannot start

Cash deficiency Between months 21 and 26, SEP will run low on cash balances

Sensitivity to the price of rattan in Surabaya SEP is very sensitive to the street-price of rattan in Surabaya A 10% reduction in prices across all products results in:

More than a 50% reduction in company value over 5 years A delay of 5 months in becoming monthly cash-flow positive An extension of 17 months in the pay-back period

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


Financial Risks

Delays in business development and sales SEP is highly sensitive to delays in first product sales and to a lesser

extent, slower than predicted sales growth Delaying first sales by 1 month results in

A reduction in 5 year company value of 15% A delay of 3 months in becoming monthly cash-flow positive An extension of 4 months in the pay-back period

A 10% increase in the time taken to scale supply and customer volume to steady-state conditions results in A reduction in 5 year company value of 5% A delay of 1 month in becoming monthly cash-flow positive An extension of 2 months in the pay-back period



Financial Risks

Dependency on fuel and other transportation costs Due to the long supply-chain, SEP is exposed to transportation cost risk A 10% increase in transportation costs across all operations results in:

A reduction in 5 year company value of 8% A delay of 1 months in becoming monthly cash-flow positive An extension of 2 months in the pay-back period

Customer default risk Due to the nature of the rattan industry, SEP faces potentially high levels

of sales default If 5% of sales can not be collected, then this results in

A 28% reduction in company value over 5 years A delay of 2 months in becoming monthly cash-flow positive An extension of 5 months in the pay-back period



Investor RelationsWhy and when do we encourage investment?

Potential investor scheduling

Year0

Year1

Year2

Year3

Year4

Year5

EU Start-up funds

P3R farmer investment

Non-P3R member investment

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

Rp. 1bn initial start-upP3R/SHK also funded by EU

Potential P3R farmer ownership

opportunities

Potential non-P3R member ownership

opportunities


Investor Relations

Initial investment of Rp.1bn provided by the European Union1. Finances Kedang Pahu warehouse construction2. Funds supply-chain development3. Supports setting up of the Surabaya warehouse and sales operation4. Takes company through cash-flow positive and breakeven milestones

Long-term investment opportunity for P3R farmers is an important incentive but initial operations are too risky to encourage farmer financial involvement at the start-up phase

Investment should be delayed until the business model has been refined through experience and sustainability has been proven

A potential vehicle for maintaining farmer incentives and delaying investment is the provision of ownership options to P3R members

Ownership to non-P3R members will be delayed until after P3R members have had the chance to invest

Why and when do we encourage investment?


Financial Forecast Summary

Major highlights:1. SEP will become cash-flow positive in the month 10 of year 2 of

operation (month 22)2. SEP will reach its break-even point in the month 1 of year 3 of operation

(month 25)

Steady-state operations (after month 36) for the company are:1. Annual revenue: Rp. 5.5bn2. Annual cost-base: Rp. 4.5bn3. Net-income: Rp. 1.04bn4. Before-tax profit margin: 19%

The company faces significant financial risks in terms of:1. Sensitivity to the price of rattan and associated products in Surabaya2. Delays in business development and sales3. Transportation and fuel costs4. Customer default risk

What are the major financial take-aways?

Contact details:

SHK Jalan Wijaya Kusuma No.19 Samarinda 75124

Tlp:62 541 206565 [email protected]

(c) Ade Cahyat 20031 Operations Plan. (c) Ade Cahyat 20032 Rattan Processing Procedure How is rattan processed? Step 1 Washing 100kg per day per person.

Documents

rattan core rattan

dry rattan

raw rattan

wet rattan

rattan gardens

flow of rattan

smoked rattan

semifinished rattan