Main points in Chapter 7
Are your
agroprocessing plans feasible?
Prior to making expensive investments agroprocessors
need to research not only the market but also all aspects of their production
process.
The chapter briefly reviews ...
Delays in completing a factory can make the difference between success and failure.
Inputs and utility supply need to be researched before investments are made.
CAN YOU MANUFACTURE?
By now you have completed your market research and have a good idea about the potential markets for your products and the prices at which you can sell them. Before being able to calculate whether you can supply those markets profitably (see Chapter 8) you need to do a different kind of research. You must examine whether it is possible to manufacture your products on a commercial scale and what the costs of this will be. This research is just as important as the market research described in the earlier chapters and involves looking at the supply and cost of everything you require for the manufacturing process.
Some of the items that must be considered include the following:
Raw materials
A common mistake is for agroprocessing facilities to be constructed because there is a surplus of raw materials. For example, someone might decide to build a tomato-paste factory because farmers are producing too many tomatoes. The opposite also occurs: factories are built when there is insufficient raw material, on the assumption (which is often faulty) that the existence of the factory will encourage farmers to produce. An important issue, which frequently receives inadequate attention, is the subject of seasonality. If tomatoes are only available for three months of the year, what is the factory going to do for the rest of the year? If you make sizeable investments in equipment you will want those investments to be earning you money throughout the year, and not just for a few months.
The importance of the availability of raw materials does, of course, vary according to the size of your processing plant. A very small operation may consider processing activities a part-time operation to be done when supplies of raw materials are available. However, organizations that have a factory, special equipment and permanent staff need to be very concerned about whether they will be able to buy sufficient raw materials. They need to research the availability of fruits and vegetables, milk, meat, poultry, etc. and relate this availability to the size of their planned processing operations. Even if a market for the finished product were available, it would make little sense to buy a piece of equipment capable of processing one tonne a day if the maximum availability of the raw material was likely to be half a tonne a day.
For the raw materials you want to process you therefore need to research the following:
Production and seasonality. Possible sources of information include the local agricultural extension service and local retail or assembly markets. Local offices of the Ministry of Agriculture may not have detailed information about production levels but should be able to tell you where the most important farmers are to be found. A crop calendar, which shows the seasonality of production, may be available. Larger retail markets may keep records of how much of each product is sold, although this is unlikely. The best way of getting information is probably by talking to the farmers and retailers who are selling in local markets. When are the products you are interested in considered to be abundant and when are there shortages?
Existing markets, farmer locations and buying costs.
Where do farmers presently sell their produce? Do traders visit them at their farms or do the farmers visit local markets to sell their products to consumers or to retailers? This is important information. Will you have to visit farmers in their fields to obtain your raw materials or would farmers deliver directly to your factory? What is the location of the farmers presently producing the crops that you need? How often do you need to visit them (some products may require processing almost immediately after harvest) and what are the transport and other buying costs?[12]
Raw material prices. Where countries have national or local market information services you can use these to get information about the prices you may have to pay, particularly when they publish annual reports that can give you price trends over several years. If such information is not available, you should use your own knowledge of local market conditions, and supplement this with visits to markets to talk to the farmers and traders. One thing you may need to consider carefully is the impact your purchases could have on the market price. If your processing venture is only going to buy one or two percent of production in your area there is no need to worry. If, on the other hand, you expect to buy something like 20 percent of the crop, your purchases will almost certainly push up the price farmers expect, so increasing your costs.
Raw material quality. You will not get a high-quality product if you do not start with a high-quality raw material. When you plan your business you need to have a clear idea of the variety, size and other characteristics of the products you plan to process. You must then make sure that the available raw material matches these characteristics.
Price seasonality. Seasonal production results in seasonal prices. At the peak of production prices can be very low; when production goes down prices can rise to much higher levels. You need to work out in advance the likely periods when you can buy produce at prices that are profitable for your venture. This means that you have to carry out detailed calculations of the profitability of your factory’s processing operations at different buying and selling price levels (called a “sensitivity analysis” - see Chapter 8). For much of the year there may be no produce available or the price may be so high that you cannot process it profitably. The operations of your factory will depend on how much you can buy when prices are low and on how long you can store it properly before processing, as well as on the range of raw materials you are processing (particularly if they have different seasonal production patterns).
The scope for farmers to increase production. Your investigations may lead to the conclusion that, at existing production levels, you may not be able to purchase sufficient quantities of a product for your planned operations, at prices that will be profitable. One way round this problem may be to work with local farmers, possibly through the extension services, to ensure that they produce adequate quantities. This may require some kind of contractual arrangement with the farmers, as they are unlikely to increase production without a guarantee that they can sell the output. Clearly, very small processors cannot consider such an arrangement, but larger companies may find that it is in their interests to reach agreement with farmers.[13]
Other processing inputs
Agroprocessing requires more than the basic raw materials such as fruits and vegetables. You may need products such as cooking oil, flavourings, vinegar, sugar, salt, citric acid or other preservatives, gelatine, yeasts, pectin and baking powder. While some of these may be easily available in rural areas, others may be more difficult to obtain. Before you start processing you have to identify sources for such inputs and be sure that the inputs will be easily available when you require them. Failure to do this could be disastrous. For example, you may buy a large amount of fruit only to find that you cannot process it because you have run out of sugar. Consumers are often very sensitive to the taste of a product. Once you have developed a product it needs to remain consistent if you are to keep the loyalty of your customers. This means that you have to use ingredients of equivalent characteristics and quality. If, for example, you make chips it could be disastrous to change the type of cooking oil and the brand of flavouring that you use, as customers would soon notice. This means that you have to be sure you will not run out of your preferred ingredients.
Make sure that you have a reliable supply of all ingredients.
Customers will soon realize if you have to change the formulation.
In addition to identifying sources of processing inputs, you need to find out how much they cost, in order to calculate the viability of your planned production. You should also find out what the payment terms of the suppliers are. Do you have to pay cash? What are the minimum quantities they supply? Do they give discounts for larger quantities?
Packaging and labelling requirements
Your market research should have given you a good idea of the packaging you need and the sizes required. As with other inputs, you need to make sure that these are easily available. In many countries, and in remote areas of all countries, this may not be the case and considerable effort may be necessary to identify potential suppliers. Many smaller countries may have to import glass jars and bottles, plastic containers for yoghurt, and bags suitable for snack foods, for example. In such circumstances you would be taking a big risk to rely on such essential items arriving at the last moment and it is best to ensure that you have them in stock before you start processing your raw materials.
Packaging can be a major cost. In some cases the packaging may cost more than the cost of the raw materials. You therefore have to pay close attention to your packaging purchases. The quality must, of course, be good enough to protect your product but you should not buy a higher quality than you need as this will put up costs. You need to identify all suppliers, learn about the qualities of packaging they can offer, the sizes they can supply and their unit prices for different quantities. You should also check how long it takes them to deliver.
Where you plan to use labels these need to be designed. Many countries have legal requirements regarding the information that should be presented on labels and you need to find out what these are. In the same way as you try out the taste of your products on consumers before finalizing the recipe, you should also test the appearance of your labels with consumers. Labels then have to be printed. Finding a supplier of suitable labels, working out an acceptable design and getting the labels printed can take much longer than you might expect. You must be certain that the labels will be ready before you start to process and, again, you need to know the costs of label purchase, design and printing in advance, as these will form part of the calculations of profitability.
Equipment
Agroprocessors often have to buy specialized processing equipment. This can be difficult to find and, because demand for such equipment is limited, can be very expensive. Except for the largest countries, much of this type of equipment is not manufactured locally and has to be imported. Costs can be considerable and would-be processors need to have full information about them. In order to work out the profitability of the planned venture it is also useful to have an idea of how long each piece of equipment can be expected to last. This can have a big impact on profitability. A piece of equipment costing $10 000 and lasting ten years costs $1 000 a year. If it only lasts five years it costs $2 000 a year. You also need to estimate the annual servicing, maintenance and running costs.
Buildings and utilities
You will, of course, have to decide on the size and capacity of the equipment to be purchased. You certainly do not want to buy costly equipment that is much bigger than you need. On the other hand you can’t afford to buy equipment that is too small. Just one piece of equipment that is too small for your processing line can cause major bottlenecks.
Processing has to be carried out somewhere. Except for the smallest ventures, agroprocessors will have to either build or rent a building or use an existing one that they own. It can be difficult to work out the cost of a new building without a detailed design and, therefore, the annual rent of similar buildings is often used when doing feasibility studies. You need to find out the cost per square meter of renting similar buildings in your area. You also need to estimate how much it would cost to get a building ready for your operations, such as installing the equipment and connecting the utilities.
Water drainage, electricity, gas for cooking (piped or in cylinders) and telephone, must be available and connections should be easy to arrange with a minimal delay. An adequate supply of water is essential for many types of processing and the quantities that you require may be considerable. You need to be sure that the flow and pressure of water is suitable for your needs. You may need to install water purification equipment. Similarly, in many areas electricity supply is very basic and/or unreliable and you may need to install a small generator. All of these aspects have to be researched and costs identified for the solutions you arrive at.
Labour
How many employees will you require to ensure that your new production line will function at maximum efficiency? You need to give considerable thought to this. You don’t want to employ people to sit around doing nothing but, on the other hand, you do want to ensure that your production process won’t break down because of inadequate staff.
Are workers of a suitable calibre available in your area? How much does it cost to employ them and what other terms and conditions of employment will you have to meet? Will you have to spend anything on staff training? You also need to look closely at your country’s labour regulations. You may want to employ people on a seasonal basis but in some countries it may be difficult to hire and fire short-term staff. Many countries require the employer to make social service contributions and even pay the employee’s tax. Some countries require the employer to pay a “thirteenth” or even a “fourteenth” months salary, and this also has to be included in your calculations.
Distribution and promotion
Earlier chapters looked in detail at the kind of information you need in order to decide what products to sell, where and to whom to sell them, in what quantities and how often. You should also have considered how to promote your products. With this information you should now be able to develop a plan for the distribution of your products to wholesalers, retailers or consumers and a promotion plan. It is then necessary to work out the costs of implementing these two plans and also to make sure that they are consistent with your processing capabilities.
The main distribution cost will be transport. Do you need to buy a vehicle? If so, how much will it cost to buy, run and service? Alternatively, if you plan to hire transport, how many vehicle-days do you need per week or month to carry out your deliveries? How much will that cost?
Chapter 6 discussed the types of promotion that you could consider. You need to work out the costs of advertisements, posters, leaflets, in-store display, free gifts, etc. Contact radio stations and newspapers to find out their advertising rates. These may vary according to the time of day, as may the type of person listening. Try to find out when the people you expect to buy your product are most likely to be listening. Don’t make the mistake of thinking that you only need to do promotion when you introduce your product onto the market. Although this is the time when you want to make the biggest promotional effort, you should consider promotion as an ongoing activity which needs to be done more or less all the time.
If you decide to give out free samples of your products, you need to take account of the cost of this. Such costs could include the cost of packaging, the cost of plastic cups for samples of drinks, and the cost of employing people to hand out samples and leaflets. With regard to the cost of the products you give out for free, this is perhaps better taken into account when you do a feasibility study, as discussed in Chapter 8. For example, if in the first month of your operations you produce 1 000 litres of juice and use 100 litres for free samples, then you are only able to earn revenue on 900 litres.
Other requirements and costs
You need to research all legal requirements associated with running a business in your country. Food processing facilities are normally governed by regulations to ensure hygienic practices, and you will have to observe these. National and local licences may be required for a variety of reasons and their cost needs to be incorporated into your feasibility calculations.
There may also be regulations relating to the product you plan to produce. For example, the alcohol content of beer may be specified by law, as may the fruit and sugar content of jam.
At the start of your operations you may need to identify specialist help with, for example, setting up and operating your factory. Larger companies will require accountants. All such costs need to be worked out in advance and incorporated in your feasibility calculations, as must the cost of the market research you carry out.
Taxation is something that entrepreneurs often overlook until they are presented with a bill that they cannot pay. In addition to Income Tax, many countries have a system of Value Added Tax (VAT). You need to incorporate that in your price calculations and register to pay the tax before you commence operations.
REACHING CONCLUSIONS
Earlier research indicated that you had a good product that could be marketed successfully. The research in this chapter should have enabled you to identify:
whether sufficient raw materials will be available, when and at what cost;
how easy it will be to obtain supplies of processing inputs such as flavourings, preservatives, yeasts and pectin as well as packaging and labels;
what equipment you need and whether it is easily available, and at what cost;
whether suitable buildings are available for your factory and whether utilities are easily available.
On the basis of this you should then be able to reach conclusions, such as:
although apricots and peaches for drying are only available for three months of the year, my fixed costs (see Chapter 8) are low and I should still be able to run a profitable business;
the equipment I need to produce peach juice is very expensive. Peaches are only available for three months of the year and I will not be able to cover my costs. Are there other juices I could produce from fruits with different seasons?
I need to buy about 50 percent of the tomatoes produced in my area if I am to have enough for my planned factory. That would put up the price of tomatoes to a level higher than I can afford. I have to consider giving farmers a contract to grow for me;
there is no suitable building for me to rent for my factory. I may be able to get a bank loan to build a factory but that would increase the financial risk to me if the venture does not succeed. I need to examine the economics very carefully.
|
[12] See Shepherd, Andrew W.,
“A guide to marketing costs and how to calculate them”. [13] For more information see, for example, Eaton, C.E. and Shepherd, A.W., “Contract farming - Partnerships for growth,” (details in “Further reading”). |
