Operations Plan (c) Ade Cahyat 2003.

Operations Plan (c) Ade Cahyat 2003

Rattan Processing Procedure
How is rattan processed? Step 2 Sulphur smoking 2 days Step 3 Drying 2-3 days Step 2 & 3 Rp. 150 per kg Step 1 Washing 100kg per day per person Rp. 150 per kg (c) Ade Cahyat 2003

How is rattan processed? Rattan core Step 4 Peel and core 270 kg per day by machine Rp. 240 per kg Rattan peel (c) Ade Cahyat 2003

How is rattan processed? Farmers will supply raw rattan from their gardens on a schedule dictated by SEP customer demand and co-ordinated by P3R Farmers will transport raw rattan to SEP processing units and Kedang Pahu warehouse The Kedang Pahu warehouse and SEP processing units and will: Wash the rattan to remove stains and blemishes Smoke the rattan in sulphur fumes to cure and color the rattan Dry the smoked rattan to remove excess moisture The Kedang Pahu warehouse will further process the dry rattan by splitting the rattan into core and peel. As production volume of semi-finished products grows, additional investment in processing machinery at the warehouses or selected processing units will be made to maintain the optimal product mix. (c) Ade Cahyat 2003

SEP Distribution Chain Design
What is the flow of rattan like within the company at launch? R&D Farmers Processing Sorting Inventory Round Rattan Dry Raw Dry Furniture Makers Craft-Makers Processing Sorting Inventory Semi-Finished Peel Core Peel Inventory Retail Kedang Pahu warehouse Craft Dry Peel Core Crafts Dry Peel Core Crafts Farmers Local Processing Units Dry Raw Surabaya warehouse Down River Exporters/Overseas Furniture Makers Farmers Local Processing Units Dry Raw Up River Quality checkpoint Non SEP boat/truck SEP managed Truck/boat SEP managed Boat Contractors SEP operations Suppliers Customers (c) Ade Cahyat 2003

Warehouse Roll-out Schedule Year 0 Year 5 Year 10 Long Term Time Build a processing and inventory holding warehouse in Kedang Pahu Rent a retail warehouse in Surabaya As supply grows, rent a inventory holding warehouse in Samarinda to coordinate transportation to Surabaya As production volume of semi-finished products increase, add semi-finished processing machine in Surabaya warehouse to increase semi-processing capacity and to reduce per machine operation cost As customer base matures and consists of large companies and the infrastructure in Samarinda is improved move retail warehouse from Surabaya to Samarinda and deliver to customers direct from Samarinda (c) Ade Cahyat 2003

What is the flow of rattan like within the company? Initially processing of wet and semi-finished rattan will be performed in the Kedang Pahu warehouse. As production volume increases, processing units will be contracted in proximity to the rattan gardens to increase the processing capacity. Farmers will be responsible for transporting wet rattan to the Kedang Pahu warehouse and/or SEP processing units. SEP will manage transportation of processed rattan from the Kedang Pahu warehouse as well as the SEP processing units. Rattan processed in the SEP processing units will be transported directly to the Surabaya warehouse via Samarinda. (c) Ade Cahyat 2003

What is the flow of rattan like within the company? The Surabaya warehouse will manage sales inventory, the showroom, the relationships with small to medium sized furniture makers and market intelligence gathering. Initially no warehouse will be set up in Samarinda. However in year 3 or 4 one may be established to better manage supply and demand and coordinate transportation. In the long term, as the customer base matures (consists of large companies that have had long standing relationships with SEP) and the infrastructure in Samarinda is improved, SEP will move the retail warehouse from Surabaya to Samarinda and deliver to customers direct from Samarinda. (c) Ade Cahyat 2003

Operations Plan How much rattan will we be purchasing?
Volume of Wet Rattan Purchases from Farmers (tonnes) 200 400 600 800 1,000 1,200 1,400 1,600 Year 1 Year 2 Year 3 Year 4 Year 5 Volume rattan wet (tonnes) Sega Round Red Pulut (c) Ade Cahyat 2003

Volume of Wet Rattan Purchases from Farmers (tonnes)
Operations Plan How much rattan will we be purchasing? Volume of Wet Rattan Purchases from Farmers (tonnes) Segmented by Final Use 200 400 600 800 1,000 1,200 1,400 1,600 Year 1 Year 2 Year 3 Year 4 Year 5 Volume rattan wet (tonnes) Sega Round Red Pulut Round Sega for Semi-Finished Products (c) Ade Cahyat 2003

Volume of Dry Rattan Products Production (tonnes)
Operations Plan How much are we going to produce? Volume of Dry Rattan Products Production (tonnes) 100 200 300 400 500 600 700 Year 1 Year 2 Year 3 Year 4 Year 5 Volume dry rattan products (tonnes) Sega Round Red Pulut Semi-Finished Products (c) Ade Cahyat 2003

Operations Plan How much are we going to purchase and produce?
Purchases (Wet Rattan in tonnes) Wet volume (tonnes) Year 1 Year 2 Year 3 Year 4 Year 5 Round Sega 18 272 605 678 Semi Finished 5 82 182 204 Red Pulut 17 248 551 618 Total 40 602 1,339 1,500 Production (Dry Rattan in tonnes) Product dry volume (tonnes) Year 1 Year 2 Year 3 Year 4 Year 5 Round Sega 10 146 324 363 Semi Finished 3 40 88 99 Red Pulut 5 79 177 198 Total 18 265 589 660 (c) Ade Cahyat 2003

Operations Plan How much of the critical resources are we going to need? Farmers, Processing Units and Machines Year 1 Year 2 Year 3 Year 4 Year 5 Farmers 59 333 500 Processing units 3 8 Semi-finished processing machines 1 2 Rattan Garden Required (in hectare per rotation) Area required (ha/rotation) Year 1 Year 2 Year 3 Year 4 Year 5 Sega 244 3665 8145 9122 Red Pulut 239 1912 4301 4779 Total 483 5577 12446 13901 Rotation (time between harvests): 36 months for Sega and 30 months for Red Pulut (c) Ade Cahyat 2003

Operation Plan How much are we going to purchase and produce?
At company inception, the first priority is to build the Kedang Pahu warehouse and grow the local supply base. As production increases, processing units will be contracted outside of the Kedang Pahu warehouse. At the end of the first year, SEP will turnover approximately 6,700kg of dry rattan per month. By the end of year 3, SEP will have contracted eight local processing units and will turnover nearly 125,000kg of dry rattan per month. Semi-finished products will initially be processed exclusively at the Kedang Pahu warehouse but as production of semi-finished products grows, additional investment in processing machinery at the warehouses or local processing units will be made to maintain the optimal product mix. SEP will aim to support the recruitment of 17 P3R farmers per month on average and a total of 500 P3R member farmers to be its suppliers by year 4. (c) Ade Cahyat 2003

Quality Management How are we going to manage quality?
SEP will establish Research and Development functions at the Kedang Pahu facility to improve rattan processing methods and technology To reduce costs, increase quality, and decrease chemical residue Materials and the production equipment will be replaced with those which do not leave a dangerous chemical residue Farmers and processing units will be encouraged to process raw rattan within a day of harvest Establish processing units in proximity to rattan gardens Evaluate opportunities to purchase from farmers by grade SEP will aggressively support P3R activities in obtaining and maintaining FSC certification (eco-label certificate) Semi-finished processing will be performed using an accurate Taiwanese machine (c) Ade Cahyat 2003

Quality Management How are we going to manage quality?
Quality control systems will be implemented throughout the operation. Check points include: At the time of receipt into Kedang Pahu warehouse After initial and semi-finished process (performing grading) At the time of receipt into Surabaya warehouse (c) Ade Cahyat 2003

Operations Summary What are the major operations take-aways?
The dry rattan production process involves purchasing raw rattan from farmers, washing, sulphur smoking and drying. The semi-finished production process involves splitting the dry rattan into core and peel. SEP will manage transportation of rattan post processing to customer site. The most critical quality checking (grading) will be performed after processing at the Kedang Pahu warehouse. SEP will also have quality control check points at the time of each warehouse receipt. Semi-finished products will initially be processed exclusively at the Kedang Pahu warehouse but as volume grows, additional investment in processing machinery at the warehouses or local processing units will be made to maintain the optimal product mix. (c) Ade Cahyat 2003

Operations Summary What are the major operations take-aways?
SEP will establish Research and Development functions at the Kedang Pahu facility to improve rattan processing methods and technology. SEP expects to reach steady-state operations by the end of year 3, representing a farmer supply base of 500, 8 local processing units and a volume turnover of around 125,000kg wet rattan supplied per month. (c) Ade Cahyat 2003

Organizational Plan (c) Ade Cahyat 2003

Organizational Structure
What does the company’s organizational structure look like? CEO / Managing Director Finance Director Sales Director Marketing Director Operations Director Finance and Admin Assistant Contract Sales Agents Contract Processors SHK Business Development Officer Warehouse Employees First 6 month hires 18 month hires Later hires (if required) NGO Partner (c) Ade Cahyat 2003

Roles and Responsibilities
Who 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 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 (c) Ade Cahyat 2003

Roles and Responsibilities
Who 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 (c) Ade Cahyat 2003

NGO Partners Partnership among P3R, SHK and SEP RATTAN MARKET P 3 R
Organize farmers and craftsmen Monitor sustainability of resources Manage policy and regulation changes (advocacy and campaigns) Disseminate information Conduct training of farmers and craftsmen/perform technical assistance Facilitate skill development Develop and manage relationship to donors and institutions Provide technical assistance Facilitate skill development Develop and manage relationship to donors and institutions P 3 R Reputation SHK E. Kalimantan Rattan Program Tech Assistance Supplier Service Tech Assistance Profit Sharing (5%) Reputation Purchase, Process, make and sell raw, semi-finished and crafts Develop and manage customer relationships Develop and manage brand of P3R rattan Conduct product development and process improvement Improve livelihood of local farmers and craft makers by creating employment opportunities and providing competitive purchase prices SEP RATTAN MARKET (c) Ade Cahyat 2003

NGO Partners Who are NGO partners and what are their roles?
SEP’s most critical NGO relationship is with P3R, the farmers collective organization based in the Mahakam watershed area. P3R’s primary roles are to: Provide organizational structure for farmers & craftsmen Monitor sustainability of resources Policy advocacy Information dissemination Conduct farmer-specific training Facilitate technical skill development SHK, a Samarinda based NGO is a crucial partner in training, technical assistance and fund-raising activities Other NGOs (the EU and DFID) are primary donors for the project (c) Ade Cahyat 2003

Key Management Personnel
Who is the boss? (c) Ade Cahyat 2003

Start-up Advisory Board
Who helped develop this crazy plan? (c) Ade Cahyat 2003

Organizational Summary
What are the major organizational take-aways? SEP executive management will consist of a managing director, a sales director and a production director, with a marketing director and a finance director hired at a later stage if required SEP will hire employees for critical processes and contract others to minimize labor costs SEP will hire employees to process rattan and manage inventory at the Kedang Pahu and Surabaya warehouses SEP will contract processing units in local villages and sales agents in Java SEP will leverage its NGO relationships with P3R and SHK. P3R will be responsible for coordinating the farmers and ensuring sustainability of the rattan resources. SHK will be responsible for technology and knowledge transfer, training and policy advocacy. (c) Ade Cahyat 2003

Timelines and Milestones
(c) Ade Cahyat 2003

Timing of Critical Milestones
What has to be achieved and by when? Month of operation 12 24 36 48 60 Secure P3R farmer supply Recruit key personnel Build first customer relationships Secure supply-chain partners Build Kedang Pahu warehouse Potential additional revenue stream development Develop KP warehouse operations Trial shipments Recruit local processing contractors Conduct feasibility study for crafts First production First customer sales 25,000kg per month to Surabaya 50,000kg per month to Surabaya Cash-flow positive Payback period complete (c) Ade Cahyat 2003

Timing of Critical Milestones
What has to be achieved and by when? The most critical time for the company is in the first six months where the major tasks will be: Recruit key personnel Develop strong relationships with first customer targets Negotiate the most efficient possible solution for supply-chain transportation over the first year of operations Build the Kedang Pahu warehouse Research Surabaya warehouse Recruit sufficient farmers and in appropriate locations to P3R membership (a P3R task) First production is expected in month 7 while first shipments to customers in Surabaya takes place in month 8 SEP expects to be shipping 2 containers per month by the end of the first year 50,000kg dry rattan products per month is expected to be reached in month 31 (c) Ade Cahyat 2003

Risks and Contingencies
(c) Ade Cahyat 2003

Major Risks Facing the Company
What 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 (c) Ade Cahyat 2003

What 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 (c) Ade Cahyat 2003

What do we have to be worried about? SEP faces several external risks. Decreasing relative value of rattan and increasing accessibility and attractiveness of substitutes. To mitigate this risk, SEP will differentiate itself through superior customer service and branding activities. High dependency on the strength of the furniture market and the overall economy. To mitigate this risk, SEP will establish business development functions to diversify customer mix and identify new rattan use. Potential change in government policies. To mitigate this risk, SEP will support SHK advocacy activities and lobby through ASMINDO. High dependency on P3R to collect supply data and to execute the resource plan. To mitigate this risk, SEP will identify service requirements and make service fee paid to P3R contingent upon their service levels. Increasing transportation costs. To mitigate this risk, SEP will seek opportunities to improve supply chain effectiveness. (c) Ade Cahyat 2003

What do we have to be worried about? SEP faces several internal risks: Limited supplier flexibility. To mitigate this risk, SEP will … TBD. Outsourcing processing units. To mitigate this risk, SEP will identify requirements (service, quality etc) and include them in the contracts. SEP will also develop close relationships/partnerships with processing units and provide technical assistance to the processing units. (c) Ade Cahyat 2003

Financial Forecasts (c) Ade Cahyat 2003

Key Assumptions What have been the key financial assumptions?
Production and sales assumptions First purchases of raw materials from farmers occur in month 7 First sales to customers occurs in month 8 First revenue collection from customers occurs in month 9 Purchases of raw rattan from farmers are paid on a cash-on-delivery basis Steady state-operations are achieved at the end of the third year of operations Kedang Pahu warehouse and processing unit is operating at full capacity 8 processing units are operating on a contract basis 125,000kg wet rattan purchased from farmers per month SEP purchases from a total of 500 farmers On average 250kg wet rattan is purchased per farmer per month Wet Sega purchase price is Rp. 900 per kg Wet Red-Pulut purchase price is Rp. 6,000 per kg (c) Ade Cahyat 2003

Logistics SEP will lease a warehouse in Surabaya and build a warehouse in Kedang Pahu Contracted processing units are paid based on volume processed River transport costs are paid based on volume shipped Samarinda to Surabaya transport costs are paid per container shipped 1 container = 5,000kg dry rattan products Personnel and service costs SEP will employ 4-6 management staff to oversee company operations The Kedang Pahu warehouse employees and contractors are paid based on volume processed Service fees are paid to P3R on a monthly basis calculated at 5% of the previous month’s profits (c) Ade Cahyat 2003

Capital expenditure The major capital investments are: Kedang Pahu warehouse construction in months 1 to 3 Purchasing of a vehicle to transport rattans in month 4 Purchasing of additional processing machines to maintain constant product mix in months 21 and 32 Financing and funding Major start-up funds are expected to be provided by the EU of Rp. 1bn The company cannot start without this funding The first month of operation is after this funding has been secured Prior funds have been secured from DFID at Rp. 45m and have financed the first processing machine for the Kedang Pahu warehouse The company makes no use of credit facilities or loans from local financial institutions No other equity investments are made (c) Ade Cahyat 2003

Overview of Financial Metrics
How does the company perform based on the assumptions in this business plan? Million Rp. Year of operation 1 2 3 4 5 Funds provided 1,050 - Total revenue 100 1,960 4,760 5,500 Total cost 270 1,760 3,900 4,460 Net income (before tax) -170 200 860 1,040 Before tax profit margin 10% 18% 19% Net cash-flow -120 -500 -200 540 840 790 Closing cash position 930 430 230 770 1,610 2,400 Total assets 870 1,070 1,880 2,660 3,400 Total liabilities 60 260 310 Total owner’s equity 1,010 1,620 2,350 3,090 (c) Ade Cahyat 2003

How does the company perform based on the assumptions in this business plan? 1,000 2,000 3,000 4,000 5,000 6,000 Year 1 Year 2 Year 3 Year 4 Year 5 Sales revenue (m Rp.) Round Sega Red-Pulut Semi-finished products 90 2,260 4,760 5,500 (c) Ade Cahyat 2003

How does the company perform based on the assumptions in this business plan? Long-term cost-base Raw material purchasing cost 77% Management 2% Depreciation 1% Warehouse Rent In Surabaya Other G&A Cost Discount Back Money Sales & Marketing Expenses Packing and Insurance Cost 3% Transportation 12% Semi-finished product Round Sega 33% Red-Pulut 40% 27% (c) Ade Cahyat 2003

How does the company perform based on the assumptions in this business plan? (c) Ade Cahyat 2003

How do we perform based on the assumptions in this business plan? Financial highlights The five-year value of the company, assuming a 0% discount rate is Rp. 2.4 bn SEP will become cash-flow positive in the month 10 of year 2 of operation (month 22) SEP will reach its break-even point in the month 1 of year 3 of operation (month 25) Steady-state operations (after month 36) for the company are: Annual revenue: Rp. 5.5bn Annual cost-base: Rp. 4.5bn Net-income: Rp. 1,040 Before-tax profit margin: 19% (c) Ade Cahyat 2003

Financial Risks What are the major risks facing us from a financial perspective? Funding If the EU funding is not secured, the business cannot start Cash deficiency Between months 21 and 26, SEP will run low on cash balances Sensitivity to the price of rattan in Surabaya SEP is very sensitive to the street-price of rattan in Surabaya A 10% reduction in prices across all products results in: More than a 50% reduction in company value over 5 years A delay of 5 months in becoming monthly cash-flow positive An extension of 17 months in the pay-back period (c) Ade Cahyat 2003

Financial Risks What are the major risks facing us from a financial perspective? Delays in business development and sales SEP is highly sensitive to delays in first product sales and to a lesser extent, slower than predicted sales growth Delaying first sales by 1 month results in A reduction in 5 year company value of 15% A delay of 3 months in becoming monthly cash-flow positive An extension of 4 months in the pay-back period A 10% increase in the time taken to scale supply and customer volume to steady-state conditions results in A reduction in 5 year company value of 5% A delay of 1 month in becoming monthly cash-flow positive An extension of 2 months in the pay-back period (c) Ade Cahyat 2003

Financial Risks What are the major risks facing us from a financial perspective? Dependency on fuel and other transportation costs Due to the long supply-chain, SEP is exposed to transportation cost risk A 10% increase in transportation costs across all operations results in: A reduction in 5 year company value of 8% A delay of 1 months in becoming monthly cash-flow positive An extension of 2 months in the pay-back period Customer default risk Due to the nature of the rattan industry, SEP faces potentially high levels of sales default If 5% of sales can not be collected, then this results in A 28% reduction in company value over 5 years A delay of 2 months in becoming monthly cash-flow positive An extension of 5 months in the pay-back period (c) Ade Cahyat 2003

Investor Relations Why and when do we encourage investment?
Potential investor scheduling Year 1 2 3 4 5 EU Start-up funds P3R farmer investment Non-P3R member investment Potential P3R farmer ownership opportunities Rp. 1bn initial start-up P3R/SHK also funded by EU P3R members provided with exclusive “option to invest” benefits to incentivize membership and SEP sales Potential non-P3R member ownership opportunities (c) Ade Cahyat 2003

Investor Relations Why and when do we encourage investment?
Initial investment of Rp.1bn provided by the European Union Finances Kedang Pahu warehouse construction Funds supply-chain development Supports setting up of the Surabaya warehouse and sales operation Takes company through cash-flow positive and breakeven milestones Long-term investment opportunity for P3R farmers is an important incentive but initial operations are too risky to encourage farmer financial involvement at the start-up phase Investment should be delayed until the business model has been refined through experience and sustainability has been proven A potential vehicle for maintaining farmer incentives and delaying investment is the provision of ownership options to P3R members Ownership to non-P3R members will be delayed until after P3R members have had the chance to invest (c) Ade Cahyat 2003

Financial Forecast Summary
What are the major financial take-aways? Major highlights: SEP will become cash-flow positive in the month 10 of year 2 of operation (month 22) SEP will reach its break-even point in the month 1 of year 3 of operation (month 25) Steady-state operations (after month 36) for the company are: Annual revenue: Rp. 5.5bn Annual cost-base: Rp. 4.5bn Net-income: Rp. 1.04bn Before-tax profit margin: 19% The company faces significant financial risks in terms of: Sensitivity to the price of rattan and associated products in Surabaya Delays in business development and sales Transportation and fuel costs Customer default risk (c) Ade Cahyat 2003

Contact details: SHK Jalan Wijaya Kusuma No.19 Samarinda 75124 Tlp:

Operations Plan (c) Ade Cahyat 2003.

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