COMMERCIAL STARCH PRODUCTION FOR PHARMACEUTICAL INDUSTRY
Prepared For
Md.Shahid Uddin Ahmed Professor, Department of Management Studies Faculty of Business Studies University of Dhaka
Date of submission: December 15, 2011
Authorization Letter
I was assigned to submit a business plan on Commercial starch production for
pharmaceutical industry. We have given our maximum effort to prepare the business plan with relevant topic that was assigned by our honorable course teacher Professor Md.Shahid Uddin Ahmed. But there are some limitations that we had to face during making
it. We got relevant time t o prepare the assignment but we couldn’t make our report thoroughly.
In spite of having some limitations, we were sedulous to prepare the report fairly. We hope that we will get your clemency.
December 15, 2011 Sohid Uddin Ahmed Professor, Department of Management Studies Faculty of Business Studies University of Dhaka Subject: Submission of business plan on Commercial starch production for pharmaceutical industry. Dear Sir, We are very happy to state that the report on Commercial starch production for pharmaceutical industry asked by you to prepare, is completed and ready for your viewing. We are glad to submit it as part of completion of the requirements for our Entrepreneurship Development (MGT-307) course with you.
Table of Contents
Chapter
Particulars
Page no
1.0
Executive Summary
5
2.0
Company Overview
6
3.0
Product Offered
6
4.0 4.1 4.2 4.3 4.4
Market Analysis Demand Competition Marketing Strategy SWOT Analysis
7
5.0 5.1 5.2
Business Structure Management & Ownership Key objectives
9
6.0 6.1
Operations Plan Production and Processing
10 10
7 7 8 9 9 10
1.0 EXECUTIVE SUMMARY
R-Tech, the first large scale pharmaceutical grade starch producer, aims to utilize a widely available agro crop of Bangladesh, potato in order to establish a backward linkage element of the expanding pharmaceutical industry. A major portion of the products in this sector is in the form of tablets. And about 45%-80% of material used in tablets is starch. A market of BDT 40.4 crore exists in Bangladesh, where there are no domestic suppliers present. For a developing country like Bangladesh, this results in a huge import burden. Furthermore, high price in the international arena and transport costs cause the pharmaceutical industry to lose on the grounds of cost. Potato is a widely grown vegetable in the country with very high starch content. Specially the breeds grown in Bangladesh are known to have less protein and more starch making them ideal for starch production. A starch production facility built on this will most definitely enjoy benefits in terms of cost and quality. R-Tech will establish a state of the art manufacturing plant at Rajshahi, one of the districts where highest quality potato is grown in mass. The company will enter contractual farming with farmers of the area to ensure a smooth supply of raw materials. In addition, bulk of the required potato will be collected during the peak season when the cost is lowest. With 920 tons of initial production, the company plans to supply 15 pharmaceutical companies with
2.0 COMPANY OVERVIEW
Name
R-Tech Public Limited
Vision
To develop the backward linkage sector based on potato starch
Mission
Provide high quality pharmaceutical grade potato starch at a competitive price to the pharmaceutical companies of Bangladesh
Location
Rajshahi
Products
1. Pharmaceutical Grade Potato Starch 2. Animal Feed
As the country’s first commercial pharmaceutical grade starch producer, R -Tech Public Ltd. will produce pharmaceutical grade starch in a controlled process with all the necessary certification for use in pharmaceutical companies in Bangladesh. The company will be using fully automated machinery with high grade potatoes. Full control over every step of the process will ensure production of high grade starch and cost effective production. R-Tech will only target the domestic market consisting of 240 pharmaceutical companies.
R-Tech is starting operations with a production of 960 tons of starch using 4800 tons of potatoes every year and within 5 years of operations, is aiming to capture 25% of the domestic market that stands at 4000 tons per year (2010). The company will reach this goal
4.0 MARKET ANALYSIS
4.1 DEMAND In 2010, the total demand of pharmaceutical grade starch in Bangladesh was 4000 tons. All of this was imported from countries like China, France, and South Korea. The use of starch around the world is growing at a rapid rate. In today’s world, starch is one of the premier binding and dissolving medium as well as an expedient in tablets. It constitutes about 45% to 80% of the weight of tablets. Currently, there are 240 pharmaceutical companies operating in Bangladesh. All of them need a substantial amount of starch every month. Square Pharmaceuticals, the leading pharmaceutical company in Bangladesh, alone uses about 150 tons of starch every month. Furthermore, the industry is expanding at a rate of 13%to take the advantage of patent protection by LDCs. Consequently, the industry has a projected demand of about 4500 tons in the year 2012. This clearly shows that there is an established market of starch in Bangladesh. In fact, the Bangladesh starch market is worth about TK 40.8 crore per year. R-Tech is not intending to reach the global starch market as a whole, but rather the markets that offer the greatest value in return. That is why the company is offering only one product. It is targeted towards the domestic pharmaceutical companies of Bangladesh. R-Tech will not face any domestic competitors but foreign competitors. Currently, the average price of imported pharma grade starch is TK 102,000 per ton. Addition of import duty of 15% and other charges results in an increase in 40% over initial pricing. Consequently, the pharmaceutical companies are importing starch at TK 102 per kg. On the other hand, R-Tech will supply starch at TK 95 per kg. Considering a pharmaceutical company that uses 100 ton starch annually, it is seen that the company can save TK 700,000
price of raw material together with the availability of cheap labor will enable R-Tech to produce starch at a lower cost. Therefore, R-tech will enjoy a huge advantage in final cost of product. Consequently, R-Tech will be able to supply high quality starch at a lower price to the pharmaceutical industry.
4.3 MARKETING STRATEGY 4.3.1
Market Segmentation
R-Tech will follow demographic segmentation and focus only the pharmaceutical industry of Bangladesh. The registered 240 pharmaceutical companies operating in Bangladesh will be the target market of the company. Nevertheless, R-Tech will initially target the smaller pharmaceutical companies so that it can supply them efficiently. Later, with the increase of production capacity, R-Tech will target the bigger companies in the industry. As pharmacy grade starch is a standardized ingredient by all the pharmaceutical companies, R-Tech will prude only one widely used variant. However, as the production increases, the company will supply its customers with specified variants in bulk (order of over 50 tons a month). 4.3.2
Pricing Approach
Potato starch will be priced based on cost based pricing approach. The company will charge 37% mark up on the cost price to sell the starch at BDT 95 per kg. The customers will be willing to buy the product as it offers higher value in terms of cost and quality. This in fact is
4.3.4
BRANDING
Branding will be an important element in sales promotion. As the first mover in the industry, the company will capitalize on a brand image of consistent quality which will help R-Tech retain its market share. 4.4 SWOT Analysis Strength
State of the art production facility Continual supply of raw materials through contractual farming Strict quality control. Availability of cheap raw materials and labor Head start Shorter Lead time
Threats
Weakness
Limited production capability. Starch production is completely dependent on the local harvest of potato
Opportunities Low entry barrier Natural disasters
Opportunity to expand into the domestic food and textile industry Opportunity for export Enter modified starch market Incorporating newer and better technologies in our processes
5.2 KEY OBJECTIVES Department
Production
Objective
Increase production from 920 tons per year with an annual sales growth of 15%. Reach annual production of 1600 tons by the end of year 5.
Sales and marketing
To start selling at the end of the gestation period To achieve sales in the third quarter of TK 75,00,000 To achieve 25% market share in the th domestic market at the end of the 5 year
6.0 OPERATIONS PLAN
Business process is comprised of three basic components including production, processing and sales and promotion.
grades can be achieved to suit individual purposes. The specifications for the pharmaceutical grade starch will be programmed to achieve high quality product. The potato pulp, a highly produced byproduct is vastly used in animal feed production. It is collected during the production process and stored for the animal feed company under contract to collect at their convenience.
7.0 SALES AND PROMOTION
As mentioned earlier, both personal selling and direct marketing will be used as modes of selling under the marketing department. By undertaking direct marketing channel that eliminates all the intermediaries, R-Tech will enjoy a competitive edge. Trucks will be used to transport the starch directly to the pharmaceutical companies by road. On the other hand, the animal feed companies will send their trucks to procure the by-product of starch.
8.0 OTHER FUNCTIONAL PLANS
8.1 PERSONNEL PLAN There will be two departments working in R-Tech: Production Department and Sales and Promotion Department. The CEO is the one who manages both the departments. Under the production manager, there will also be the engineering and accounting department. The floor manager will be in charge of the labors. The labors have to be hard-working. Similarly, under the sales and promotion manager, there will be another accounts department.
Position
Number
Position
CEO Production Dept
Sales & Promotion Dept
Number
sustainable, R-Tech will provide upto 25% of the price of the potatoes in advance. This will not only help farmers buy the necessary seed and fertilizers but also help create a loyal supplier base for R-Tech.
8.3 INVENTORY MANAGEMENT PROCEDURE R-Tech will construct a cold storage facility and a warehouse beside the production plant for raw material storage. All the acquired potatoes will be stored here and they will leave for the plant in a FIFO basis for optimal quality. An emergency stock of 60 days will always be ensured. The inventory management module of the IT solution will enhance inventory management procedure of the company. The packed starch will be stored in the warehouse beside the production plant. The cold storage, production plant, and the warehouse will be situated in this sequence to ensure efficient flow of materials from cold storage to production plant and then to the warehouse.
8.4 QUALITY MANAGEMENT PROCEDURE Strict steps are taken to ensure highest possible quality of the product every step of the process. 15 Technicians working under the Chief Engineer and his 2 assistants will be in charge of constantly monitoring quality. The size of starch granules, moisture content, viscosity, color, and other aspects will be maintained carefully. Samples will be taken at random from batches and tested. If any inconsistency is found, the entire batch will be subjected to re-processing. These measures will ensure a consistent production of high quality starch.
Sales & Marketing
Inauguration of promotional activities Buyer contact & quotation Receive orders from buyer Stock ready for delivery
Day 110 Day 110140 Day 120160 Day 190
9.0 CONTINGENCY PLAN & RISK MANAGEMENT
The major risk associated with the R-Tech is the seasonal variability of potato prices. If the starch production is completely dependent on the availability of potatoes in the market, it will be impossible to maintain a constant price level. In order to minimize this risk and to ensure a consistent supply of raw material, R-Tech will practice contractual farming with the potato growers. And a major portion of the years raw materials will be acquired during the harvesting season. Another major risk involved is inflation. The price at which an agreement has been signed may change over time due to inflation. To counter this risk, a provision will be placed in the contracts stating ranges and terms.
In case of dissolution of R-Tech, a valuation of the business will be carried out by calculating the market price of the assets. The payables will be resolved and the resulting gains or losses will be shared among the stockholders. 10.0
FINANCIAL PROJECTIONS
10.1
START UP COSTS
A total of BDT 170,600,000 is required to start the business. BDT 1,930,000 of this amount is the start up expenses and BDT 168,670,000 account for the total required asset:
10.3
CAPITAL BUDGETING INDICATORS Capital Budgeting Indicators Initial Investment WAAC NPV
(170,000,000.00) 16.48% 31,882,065.31
The current ratio shows that R-Tech will be successfully able to meet the short-term obligations. Exclusion of inventories will slightly decrease the quick ratio and this may convince the short-term creditors to provide short-term loans. R-Tech will make a profit of 37% over 1 year of operation. The debt to asset ratio shows 33% of the investment is financed by debt, and this will have a positive image in the minds of the creditors. High accounts receivable turnover reflects R- Tech’s stri ct credit policies. The high value of ROA reflects a very efficient use of assets to generate sales. The interest coverage ratio implies that R-Tech has a good margin of safety. For detailed financial references please refer to appendix.
11.0
FUTURE PLANS
13.0
APPENDIX
INDEX 13.1 13.2 13.3 13.4 13.5 13.6 13.7 13.8 13.9 13.10 13.11
ASSUMPTIONS PERSONNEL SALES FORECAST COST OF GOODS SOLD INCOME STATEMENT BALANCE SHEET CASH FLOW STATEMENT DEPRICIATION LOAN AMMORTIZATION SHEDULE RAW MATERIALS RATIOS
13.1
ASSUMPTIONS
Market Growth (in KG) Market Share Growth (initially 20% of the Market Tax Holiday (7 years) Salary Growth Wastage (Optimum 7%)
13% 15%
Inflation (Assumed to Be Steady) Interest Rate Change in Currency Exchange Rate Change In Price By Product (Almost Equal to Mainstream Product)
Year 1
Year 2
Year 3
Year 4
Year 5
4,000,000.00
4,520,000.00
5,107,600.00
5,771,588.00
6,521,894.44
920,000.00
1,058,000.00
1,216,700.00
1,399,205.00
1,609,085.75
0.00% 11.00% 10.00%
0.00% 11.00% 9.00%
0.00% 11.00% 8.00%
0.00% 11.00% 7.00%
0.00% 11.00% 7.00%
10.00%
10.00%
10.00%
10.00%
10.00%
15.00%
15.00%
15.00%
15.00%
15.00%
4.76% 4.00%
4.76% 4.00%
4.76% 4.00%
4.76% 4.00%
4.76% 4.00%
80.00%
85.00%
87.00%
90.00%
90.00%
13.2
PERSONNEL REQUIREMENTS
Position
Number
Salary
Total
1
30,000.00
30,000.00
Production Manager
1
25,000.00
25,000.00
Chief Engineer
1
20,000.00
20,000.00
Assistant Engineer
2
15,000.00
30,000.00
Technician
15
10,000.00
150,000.00
Floor Manager
1
10,000.00
10,000.00
Labor
50
50.00
Security
8
2,500.00
Sub Total
29
CEO Production Dept
2500.00 20,000.00
287,500.00
13.3
SALES FORECAST
13.4
COST OF GOODS SOLD
13.5
INCOME STATEMENT
13.6
BALANCE SHEET
13.7
WAAC CALCULATION
13.8
RAW MATERIAL ESTIMATION
13.9
CASH FLOW STATEMENT
13.10 LOAN REPAYMENT
