1

Cassava Grater and Press – Business Model Primarily Ashanti Region, Ghana, May 11, 2014

Jianhan Wang and Nicolo Catto

Introduction:

Cassava is a staple starchy crop in Ghana, similar to wheat, rice, and corn in other major countries. In the cassava growing part of the country, there are two seasons every year: the wet season (May to November) when cassava can be grown and the dry season (December to April) when cassava cannot be grown. Naturally, there is a higher supply of cassava during the wet season compared to the dry season. Price of cassava changes accordingly, being more expensive with higher gross margins during the dry season and cheaper during the wet season. Even though prices are slightly higher during the dry season, the supply of cassava is much smaller, so gari-producing women make most of their income during the wet season.

Cassava is often made into gari, a popular West African dish. To process uprooted cassava into gari, rural women peel the cassava, wash it, grate it using hand graters, put the grated cassava into bags, ask men to lift heavy rocks to press the water out of the grated cassava, and then frying the pressed cassava. Grating and pressing are the two most hazardous processes and put heavy strain on the gari producers’ backs. We based our venture around those two processes to deliver social value by helping them increase production by reducing production cycle time and physical pains while increasing their income and free time.

Currently, the grater is in the deployment phase of the ADE pipeline while the press is in the development phase. Fortunately, they are in similar markets, so the business models for each will be similar

as well. Since our grater project is more developed, we have a better understanding of our business model on the grater rather than the press. We have been selling the grater for around ₵300 (Ghana cedi), but we are planning to set the final price to be ₵350. Customers will be given the option of financing at the inflation rate over one year so that the grater is more affordable.

The economic conditions in Ghana have been experiencing high volatility. Currently, the Ghana cedi (GHS or ₵) is decreasing in value on the currency exchange market, with the power of the US dollar increasing from 1.94 to 2.77 cedis within the last year (Exhibit 1). In 2013, Ghana had an estimated inflation rate of 11% while the estimate for 2012 was 9.2% (Exhibit 2) [1]. Given this financially unstable environment, we created a pro forma income statement that could be updated easily given these changes, and other general assumptions (Exhibit 3) for other factors in the value chain. We based the pro forma from when the venture will be operating at full capacity (Exhibit 12).

This report will focus on the business model component. At the beginning of the semester, it was was marked as yellow, being in the development phase. Since then, we have updated the situation on importing components, obtained several quotes on transportation and storage, further developed the entire value chain, and projected financials for deploying the grater at different levels of output. To summarize it, we have constructed a business model canvas (Exhibit 4). Since we are setting up a new supply chain in the country, our business model will start

2

out with the direct sales model but move onto either value added resellers or franchise models as sales grow and the venture becomes bigger (Exhibit 5). It would be best to outsource selling to those who are more knowledgeable about where the end customers are and have the cultural background in the area.

The next steps would be to update quotes, test our distribution and revenue collection models for the grater, and create more detailed models for the press. Value Chain:

Our value chain is made up of suppliers, manufacturers, shippers and distributors, warehouses owners, and sellers. The revenue breakdown of one grater is shown in Exhibit 11. Most of the value chain will overlap between the grater and the press due to similar target markets. The business model will be a B2B2C (Business to Business to Consumer). With the sale of each grater, we are giving the gari producing women the option to either pay up-front or over a season of gari with 0% interest, but increasing at the inflation rate.

Since this is a social venture addressing a market of low income customers, we prefer not paying for import duties and VAT in order to lower our costs and the price we charge to gari producing women. We made an assumption that we would be able to remove most if not all of these taxes. The elimination of the value added tax would also benefit the press project as well.

After a $5 test of phone calls and online research on import duties and Value Added Tax (VAT), we found out that if we register as a non-profit in Ghana, we would be able to import those components duty-free as well as not being subject to the VAT. This is critical to the

success of establishing a sustainable venture given the venture’s thin margins, as you can see from the financial projections of our pro forma (Exhibit 7).

In a for profit model, the accounts receivables would shift down to the direct seller from the manufacturer, and the payables would shift in the opposite direction as soon as the sale is made, in turn mitigating the risk along the value chain. Since this social venture will provide financing to consumers however, we have to consider the willingness of the direct sellers and the franchisees to sell the machines on credit to the women. We assume that these direct sellers and franchisees will not be willing to even partially take on the risk and the burden of collecting payments from the rural gari producing women. Though this is an assumption that we still need to test, inductive logic tells us that it is because direct sellers cannot afford to and the franchisees are separate business entities that operate for profit. Hence, ADE would have to incur all the risk by extending its receivables until all the following value chain members get paid, and ultimately rely on the good will of the consumers (Exhibit 6.b).

Sourcing and Shipping

The start of our supply chain starts with the suppliers of parts for both machines. See Exhibit 8 for the full supply chain. We are aiming to fully source all parts of the grater except the 4 electrical components from Ghana. For our grater project, we have determined a need to import electrical components, especially a specified motor, which are not readily available in Ghana for us to buy and use. We found that the duty for motors for agricultural purposes is 5% of their value. For the electrical subsystem of the grater, we are now outsourcing the motor from China as well as a few other electrical components. We needed to find motors

3

that met our technical specifications and cost less than $50 USD per unit at high volumes to make our target price point of ₵350 GHS viable. Our previous motors have been sourced from the US for design prototypes, but this semester, we were able to find the lowest motor quotes from China and purchased 3 samples at $62.11 per unit. See Figure 1 and Figure 2 below for comparison of quotes from US suppliers compared to Chinese. For more details about the motor, see the motor component report.

Figure 1:

Number of Motor packages 10 50 100 500

Volume (m^3) 0.28 1.41 2.81 14.05

Weight (lbs) 250 1250 2500 12500

Total cost $664 $791 $1,098 $4,224

Cost per package $66.40 $15.82 $10.98 $8.45

Keuhne Nagel Quotes on Shipping from Atlanta, GA to Tema, Ghana

Figure 2:

At 33 m3

Shipping $2,000 USD

THC ¥1,230 RMB

DOC ¥450 RMB

Other fees ¥1,350 RMB

¥500 RMB

¥250 RMB

Total $2,607.72 USD

Volume (motors)

Unit Costs Currency

900 $2.90 USD

Maximum Limit 957 $2.73 USD

Shenzhen Guan Yu International Freight Forwarders, Ltd. Quotes on Shipping from Guangzhou, China to Tema

As for the rest of the components for the grater, we are currently sourcing them from the US, whereas all the non-electrical components, we plan, will be directly sourced from suppliers in Tema, Ghana, and have obtained quotes (Exhibit 9).

Manufacturing and Internal Distribution

Aside from motors, we will be sourcing the switches and cables internationally as well due to a lack of lasting quality from those parts on Ghana. These parts will all meet at a fabrication facility proposed to be in Tema due to the concentration of manufacturing facilities and importing activities there. In case that the manufacturer may not be able to hold inventory for us, we have obtained from Asante a quote for a space of 24’x14’x8’ at ₵200 per month, which is enough to store 2016 motor packages for ₵0.10 per month per motor package.

From Tema, we plan on establishing 3 hubs to serve the targeted regions within the cassava growing band south of the Northern region. We hope to reach optimal economies of scale in transporting to the 3 hubs to lower costs. The proposed locations are Takoradi for the Western region, Ashanti for the Central regions, and Kpong for the Eastern regions (Exhibit 10). Distribution from Tema to the hubs will be outsourced to a third party logistics company, and will be a semi-variable cost made up of a fixed minimum plus a per-unit cost. This is because buying our own trucks would require too high of a starting capital commitment, and the quantities forecasted by our market segmentation are not substantial enough to scale to the extent of adopting vertical integration. Also, we are not in the business of transporting goods.

Selling and End Distribution

4

For end distribution and selling, we have considered two models of franchising and direct selling to reach customers. As the franchisor, we will provide franchisees the right to buy and sell our graters and repair parts, our data on end-customers, and repairs and sales training. Franchisees would handle sales, distribution, and repairs from the hubs onward to the gari women. In the past we tested agricultural shops and determined that they are not a great sales option, or at least not without a big amount of marketing and radio ads to get them to come to the location (radio is the most used medium by people to stay on page with media and to listen to music or other programs). Hence we decided that distributing the graters to the costumers would be a more efficient strategy than to have them come get it. Regarding the direct selling, previous costumers could be the ones doing part of the direct selling and would be working on commission, and from the hubs

franchisees would organize more decentralized distribution to get to the more remote customers within their assigned region. This is because they can deploy a less expensive approach, they know the distribution channels, and they are familiar working in their region. We assume they will distribute at a fixed commission rate of between 12% and 18% of sales based on existing sales markups and commissions for similar products, which can then get split between the franchisee and independent direct sellers that would be working on commission.

Due to the two seasons based on cassava production, we expect to take seasonality into account in making sales. For rural women who are not able to produce enough cassava to last them into the dry season, it would be best to sell our machines to them during the beginning of the wet season. As for the women who are able to harvest cassava during the dry

season and sell it, it would be better to sell to them during the dry season. However, since most production occurs during the wet season, we expect to sell more machines during the wet season than the dry season (for the grater, we assumed 400 per month during the wet season and 100 per month during the dry season). As for chop bars, our new market segment for the grater, we expect to have similar sales times because cassava is not as widely available for consumption during the dry season.

Repairs and Replacements Parts The flow model for the repairs and replacements parts would follow the same lines of the flow model for the inventory itself (Exhibit 5.a). From the suppliers in Tema, the shippers pick up the parts and transport them by truck to the hubs, from which the franchisees or resellers collect them and distribute them to the customers. The cash flow for this operation should be similar to that of the inventory, but this assumption will have to be tested. The assumptions sheet will be updated after our trip to Ghana. With the new data we are confident that next semester’s team will be able to complete the cash cycle for the spare and repairs parts. Another process of the repairs and spare parts model is the employment of skilled labor. Our current assumption, which needs to be tested, is that the franchisees or VARs will incur this expense, and it is a process outside of the parent franchisor. The revenue segmentation will also need to be tested, for example car dealerships make the most net income on the service and repairs section of their business, and not on the sales of their cars. A way to monetize our repairs and spare parts model, and how it will be monetized, is something that will need to be tested and looked more into in the semesters to come.

5

Concerns

The first concern is the high cash conversion cycle for most members of the value chain for the grater. The cash conversion cycle is one of the most important aspects of a startup. The higher this ratio is, the higher the funding is required to start and sustain operations and sales. A long time passes from when we pay our suppliers to when we receive money from the women. We decrease the cycle for example by paying the fabricators 50% after fabrication, and 50% after the sale is made. Franchisees also assume some risk for accounts receivable because they anticipate the collection costs, and do not receive any income until much later due to the long accounts receivable days outstanding and high cost of revenue collection from the women. The franchisor is highly dependent on the behavior of the other stakeholders in the value chain

The second concern is the materials sourcing for the grater. The high number of parts (77) to assemble into one grater makes it more difficult for inventory management; 30 of the parts are mechanical fasteners like nuts, bolts, and washers. Fortunately, the electrical subsystem is only made up of 4 parts. Secondly, we need to find cheaper sources.

The third and last major concern is women’s ability and good will to pay. Since they get the graters mostly on credit without ability to find the women accurately, there is no guarantee that the women will make their payments. However, there is record that shows that women are able to pay and follow through with the payment plans based on our assumption tests.

Assumptions and Testing We tested 3 main assumptions this semester to determine if this business

would be financially sustainable while making the grater affordable for gari women. Our second assumption is that it would be best for to outsource sales and last mile distribution to other parties. We explored possible end parties and conducted $500 tests with using Seth’s agricultural shop and Auntie Akosua, an existing customer, to see if either would be able to sell a grater for us. We found that people who visited Seth’s agricultural shop thought our grater was nice, but they were not interested in buying it. We also found that Auntie Akosua would be willing to sell graters for us with about 10% commission in return, so this could work with other customers. The last parties that we explored were franchisees and VARs. Qualitatively, we thought that they would be take longer to set up, but more ideal in the long run in terms of management and ability to provide better services. Our third assumption is that offering the financing option to women with no interest rate would not cost the selling parties to deter them from willing to work with us. There is the cost of extending the cash conversion cycle by up to one year. From our tests of implementing the financing option, we have found that the gari women have been making payments on time. However, a pro forma and negotiations with potential franchisees and VARs would be needed to fully test this assumption. Mobile payments should also be looked into because they could significantly lower receivable collection costs and save the selling parties the trouble of going to customers and collecting cash. Our fourth assumption is that there are businesses or individuals who are willing to become franchisees or VARs for our venture.

6

The fifth assumption is that Takoradi and Kpong would be the ideal places for the Western and Eastern hubs. Conclusion

While the business model is more developed in theory, it has to be continually tested. Due to the fragile nature of the social venture business from thin margins, almost every, if not all, component is critical to our success in creating a sustainable social venture.

The business model relies significantly on the market segmentation, because it determines the forecasted sales, which determines our best options for each part of the value chain and financial projections.

This semester we significantly decreased the projections of the cost of the motor and other direct materials thanks to the new quotes that the technical subteam obtained, and went to have a negative net

income to a positive 8.5% net income margin on sales. Adding to the to-do-tasks for the next semester previously mentioned, we add the need to calculate the break-even point (Exhibit 12) and the exact cash conversion cycle, which will be need to know the amount of funding needed to start scaling the venture to full capacity.

On our next trip we will test the final assumptions to test the logistics of our business models and the packaging assumptions, as explained in the report. Decreasing the cash conversion cycle is something that will be difficult to attain, but can be fueled by a high starting grant. During the trip we will consolidate ideal stakeholders of our value chain by coming up with a list of requisites and specifications for each position of the chain and test them on specific individuals or business in the villages and around Kumasi.

7

References

1. "Africa: Ghana." The World Factbook. CIA, 2013. Web. <https://www.cia.gov/library/publications/the-world-factbook/geos/gh.html>.

2. “XE Currency Charts (USD/GHS).” XE.com. Forex, April 12, 2014. Web. <http://www.xe.com/currencycharts/?from=USD&to=GHS&view=1Y>

3. Kuehne + Nagel. 4. EDGAR. 5. Asante Johnson. 6. Shenzhen Guan Yu International Freight Forwarders, Ltd.

8

Appendix Exhibit 1: GHS to USD Exchange Rate History

Exhibit 2: Ghana Inflation Rate

9

Exhibit 3: Assumptions for the Grater Pro Forma

10

Exhibit 4: Business Model Canvas

Key Partners - Motor Supplier - Ghanaian

Suppliers - Direct Sellers - VARs /

Franchisees - Distributors - Fabricators - Ghanaian

Government - KNUST

Key Activities - Coordinating the

supply chain - Ensuring quality

customer service - Development of

affordable grater and press designs

Value Propositions - Lower physical

burden for gari producing women

- Lower time spent on grating and pressing

- Allow for increase in production

- Increase women’s disposable income and free time

Relationships - Open and

sharing (information and feedback) with partners and customers

Customer Segments - Gari Women

- With access to electricity for grater

- All of them can use the press

- Chop Bars with access to electricity

Key Resources - Intellectual Property

(Trademarks) - Access to Capital - Initial Capital - Product Designs and

Documented Development Materials

Channels - Direct sellers - Value Added Resellers or Franchisees

Cost Structure - Motor and other machine parts - Manufacturing - Shipping, packaging, and distribution - Selling and receivables collection - Research and Development - - Marketing and Administrative

Revenue Streams - Non-financed sales (grater and press) - ₵350 per grater - Financed sales (grater)

- Down Payment of 20% - Later Payments scale with Inflation Rate

- Spare parts for repairs

11

Exhibit 5: Selling Model: 2 Options

Exhibit 6.a: Value Chain

12

Exhibit 6.b: Flow order for the value chain Inventory and cash flow:

1. ADE pays suppliers (international and local) 2. ADE pays shipper and distributor (from Ghanaian suppliers in Tema to the

fabricator(s) in Tema 3. Shipper ships from international supplier to fabricator in Tema, and the logistics

company from Ghanaian supplier to fabricator 4. ADE pays 50% to Fabricator 5. Franchisees or VARs collect 20% down payment from costumers 6. ADE pays costs related to Hubs 7. ADE pays 50% to Distributor 8. Distributor transport goods from the fabricator to the hubs 9. ADE pays the remaining 50% to distributor upon delivery 10. Franchisees or VARS pay ADE the 20% down payment from customers 11. Franchisees or VARS collect goods from respective hubs 12. Franchisees or VARS distribute goods to customers 13. ADE pays the remaining 50% to the fabricators upon receival of proof of payment

from franchisees/VARS to customers 14. Customers pay the remaining 80% to Franchisees/VARS 15. Franchisees/VARs pay the keep 15% commission and pay the remaining 65% to

ADE 16. ADE pays back loan, pays for interests, administrative costs related to ADE, and

uses remaining to finance the cash conversion cycle Feedback flow:

2. Customers give feedback to Franchisees/VARs 3. Franchisees/VARs report to hubs 4. Hubs report to ADE 5. ADE reports to fabricators. If problem is from fabrication, go to step 7. If the problem

is from the suppliers, go to step 5 6. Fabricators report problem to ADE 7. ADE reports problem/feedback to suppliers 8. Fabricators update / educate franchisees/VARs on changes 9. Franchisees/VARs update Customers on fixed problems / updates

Spare parts flow:

1. Suppliers to shipper and logistics company 2. Shipper and logistics company to fabricator 3. Fabricator to distributor 4. Distributor to hubs 5. Hubs to franchisees/VARs 6. Franchisees/VARs to Customers

13

Exhibit 7: Pro Forma (Extended) Income Statements for the Grater

Revenue Wet Season Dry Season Annual Commonsized

Annual

Western Region hub 80 20 600 Ashanti Region hub 160 40 1200 Eastern Region hub 160 40 1200

Total Sales Units 400 100 3000

Total Revenue ₵ 140,000 ₵ 35,000 ₵ 1,050,000 100.0%

Cost of Goods Sold

Direct Materials ₵ 59,888 ₵ 14,972 ₵ 449,164 42.8%

Shipping and Transportation

Freight-in ₵ 2,000 ₵ 500 ₵ 15,000 1.4%

To Western region - Takoradi ₵ 880 ₵ 20 ₵ 5,944 0.6%

To Ashanti region - Kumasi ₵ 2,000 ₵ 40 ₵ 13,334 1.3%

To Eastern region - Kpong ₵ 439 ₵ 40 ₵ 3,217 0.3%

Total Shipping and Transportation ₵ 5,318 ₵ 600 ₵ 37,495 3.6%

Packaging ₵ 4,000 ₵ 1,000 ₵ 30,000 2.9%

Manufacturing ₵ 28,000 ₵ 7,000 ₵ 210,000 20.0%

Total COGS ₵ 97,207 ₵ 23,572 ₵ 726,658 69.2%

Gross Margin ₵ 42,793 ₵ 11,428 ₵ 323,342 30.8%

Operating Expenses

Hub Warehouse Rent ₵ 430 ₵ 430 ₵ 5,160 0.5%

Selling Expenses ₵ 21,000 ₵ 5,250 ₵ 157,500 15.0%

Admin Expenses ₵ 9,222 ₵ 2,306 ₵ 69,167 6.6%

Total Operating Expenses ₵ 30,652 ₵ 7,986 ₵ 231,827 22.1%

Operating Income ₵ 12,141 ₵ 3,442 ₵ 91,514 8.7%

Interest Expense ? ? ? ?

Earnings Before Tax ₵ 12,141 ₵ 3,442 ₵ 91,514 8.7%

Income Tax ₵ 364 ₵ 93 ₵ 2,745 0.3%

Net Income ₵ 11,777 ₵ 3,349 ₵ 88,769 8.5%

14

Exhibit 8: Supply chain

15

Exhibit 9: Number of Parts and Parts Cost Summary

Subsystem Part Quantity Total Material

Cost

% of Total Material

Cost Source

Chute Front U 1 ₵ 13.28 9.05% Yarde Metals

Chute Back Plate 1 1 ₵ 4.17 2.84% Yarde Metals

Chute Back Plate 2 1 ₵ 1.48 1.01% Chute Chute Tube Attachment Plate 1 ₵ 0.00 0.00% Yarde Metals

Chute Tube Attachment 2 ₵ 0.09 0.06% McMaster

Chute Top Corner Stiffeners 4 ₵ 0.24 0.16% Chute Bottom Corner Stiffeners 4 ₵ 0.25 0.17% Anvil Cutter 1 ₵ 0.42 0.29% McMaster

Anvil Bracket 1 ₵ 0.73 0.50% Yarde Metals

Anvil Cutter Bolt 2 ₵ 0.20 0.14% McMaster

Frame Handle 1 ₵ 1.32 0.90% McMaster

Frame Chute-Handle Tube Attachment 2 ₵ 0.35 0.24% Frame Motor Mount Plate 1 ₵ 1.95 1.33% *Yarde Metals

Frame Handle Support Tab 1 ₵ 0.10 0.07% *Yarde Metals

Frame Motor Plate-Leg Tube Attachment 1 ₵ 0.13 0.09% McMaster

Frame Tube Attachment Bolt 4 ₵ 0.00 0.00% Frame Tube Attachment Nut 4 ₵ 0.00 0.00% Frame Motor Mount Bolt 4 ₵ 0.40 0.27% McMaster

Frame Motor Mount Nut 4 ₵ 0.40 0.27% McMaster

Frame Motor Mount Lockwasher 4 ₵ 0.40 0.27% McMaster

Frame Motor Mount Flat Washer 8 ₵ 0.80 0.55% McMaster

Legs Vertical Leg 1 ₵ 0.49 0.33% McMaster

Legs Tube Attachment 1 ₵ 0.04 0.03% McMaster

Legs Leg Tube Attachment Plate 1 ₵ 0.22 0.15% *Yarde Metals

Legs Horizontal Leg Top Notch 1 ₵ 1.28 0.87% *McMaster

Legs Horizontal Leg Bottom Notch 1 ₵ 1.28 0.87% *McMaster

Legs Foot 4 ₵ 0.39 0.27% *McMaster

Motor Motor 1 ₵ 100.00 68.13% Eastern Industrial

Motor Electrical Cord 1 ₵ 2.00 1.36% McMaster

Motor Cord Relief/Seal 1 ₵ 1.00 0.68% McMaster

Motor Power Switch 1 ₵ 2.00 1.36% McMaster

Plunger Plate 1 ₵ 1.76 1.20% Yarde Metals

Plunger Vertical 2 ₵ 0.59 0.40% Yarde Metals

Plunger Cross Rod 1 ₵ 0.49 0.33% Yarde Metals

Head Tube Attachment 1 ₵ 3.75 2.55% *McMaster

Head Plates 3 ₵ 2.32 1.58% Yarde Metals

Head Key Plate 1 ₵ 0.60 0.41% Head Teeth 1 ₵ 1.66 1.13% Yarde Metals

Head Teeth Rivet 2 ₵ 0.20 0.14% McMaster

Totals 77 ₵ 146.79 100.00%

16

Exhibit 10: Distribution to Hubs Overlaid on a Map of Ghana

17

Exhibit 11: Revenue Breakdown of 1 Grater

18

Exhibit 12: Venture Development and Growth Timeline