Organic Oat
Conrad Schiestel
Organic Oat Processors
Business Plan
2007
Prepared by:
Jesse Coleman
Cody Hansen
Megan Hall
Rachel Li
AgEc 75.5 Agribusiness Capstone – Preparation of a Business Plan
College of Agriculture
University Of Saskatchewan
Table Of Contents
Table Of Contents ............................................................................................................ i
List of Figures ................................................................................................................ iii
List Of Tables ................................................................................................................ iv
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Executive Summary: ....................................................................................................... v
Module 1 Introduction .............................................................................................. 1
1.1 Introduction ............................................................................................................... 2
1.2 Industry Overview .................................................................................................... 2
1.3 Mission Statement..................................................................................................... 3
Module 2 Operations Plan ....................................................................................... 4
2.1 Organizational Structure ........................................................................................... 5
2.2 Site Plan .................................................................................................................... 6
2.3 Building and Floor Plan ............................................................................................ 7
2.4 Work Plan and Flow of Work ................................................................................... 7
2.4.1 Technical Processes ............................................................................................... 7
2.4.2 Physical Product Flow ........................................................................................... 8
2.4.3 Average Day, Week, Year ..................................................................................... 8
2.4.4 Regulatory Systems and Standards ........................................................................ 9
2.4.4.1 Hazard Analysis of Critical Control Points ........................................................ 9
2.4.4.2 Saskatchewan Organic Certification Agency ..................................................... 9
2.4.5 Supply Service Analysis ........................................................................................ 9
2.5 Cash Management ................................................................................................... 10
2.6 Inventories............................................................................................................... 10
2.7 Capital Budget ........................................................................................................ 10
Table 2.1 Capital Budget .............................................................................................. 11
2.8 Working Capital Planning and Management .......................................................... 12
2.8.1 Cost of Goods Sold for Manufacturing ................................................................ 12
Table 2.2 Cost of Goods Manufactured Calculation in the First Year of Operation .... 12
2.9 Cash Conversion Cycle ........................................................................................... 12
Module 3 Human Resource Plan ........................................................................... 14
3.1 Employee Qualifications ......................................................................................... 15
3.2 Job Descriptions ...................................................................................................... 15
3.2.1 General Manager .................................................................................................. 15
3.2.2 Head Miller .......................................................................................................... 16
3.2.3 Administration ..................................................................................................... 16
3.2.4 Quality Assurance ................................................................................................ 16
3.2.5 Grain Manager ..................................................................................................... 17
3.2.6 Assistant Head Miller .......................................................................................... 17
3.2.7 General Labor ...................................................................................................... 17
3.3 Training ................................................................................................................... 17
3.4 Human Resources Strategy ..................................................................................... 18
Table 3.1 Employment at ORGANIC OAT ................................................................. 18
Module 4 Marketing Plan ...................................................................................... 19
4.1 The Marketing Mix (four P’s)................................................................................. 20
4.1.1 Products and Services .......................................................................................... 20
4.1.2 Pricing .................................................................................................................. 20
4.1.3 Promotion............................................................................................................. 20
4.1.4 Place ..................................................................................................................... 21
4.2 Segmentation, Targeting, Positioning ..................................................................... 21
4.2.1 Segmentation........................................................................................................ 21
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4.2.2 Targeting .............................................................................................................. 21
4.2.3 Positioning ........................................................................................................... 22
4.3 SWOT Analysis ...................................................................................................... 22
4.3.1 Internal Strengths and Weaknesses ...................................................................... 22
4.3.1.1 Human Resources ............................................................................................. 22
Table 4.1- Strengths and Weaknesses ........................................................................... 22
Table 4.2- Opportunities and Threats ........................................................................... 23
4.4 Market Analysis ...................................................................................................... 23
4.4.1 The Market ........................................................................................................... 23
Table 4.3 All numbers in tonnes ................................................................................... 24
4.4.2 Competition.......................................................................................................... 24
4.4.3 Target Markets ..................................................................................................... 25
4.4.4 Marketing byproducts .......................................................................................... 25
4.4.5 Product Features................................................................................................... 26
4.5 Marketing Strategies ............................................................................................... 26
4.5.1 Sales and Profit Objectives .................................................................................. 26
4.5.2 Channels of Distribution ...................................................................................... 27
4.5.3 Pricing Policy ....................................................................................................... 27
4.5.4 Selecting Markets................................................................................................. 28
4.5.5 Selling and Advertising........................................................................................ 29
4.5.6 Marketing Budget ................................................................................................ 29
Table 4.4 Marketing Budget ......................................................................................... 30
Module 5 Financial Plan ......................................................................................... 31
Table 5.1 Summary Of Financial Results ..................................................................... 32
5.1 Financial Plan.......................................................................................................... 32
5.2 Dividend Policy ...................................................................................................... 33
5.3 Economic Forecast .................................................................................................. 33
5.4 Sensitivity Analysis ................................................................................................ 33
When looking at the critical variables, we tested price of the finished goods, quantity
of product, and price of raw products. Tests concluded that the price of the finished
goods were the most critical. With a base sale price of $650.00 per tonne, it was found
that if prices fell to $559.13/tonne, internal rate of return would become zero. This is a
change in the sale price of 14%. ................................................................................... 33
Table 5.4 Critical Variable ............................................................................................ 33
5.5 Best and Worst Case Scenario ................................................................................ 34
Table 5.5 Best and Worst Case Scenario ...................................................................... 34
Module 6 Conclusion .............................................................................................. 35
6.1 Conclusion .............................................................................................................. 36
Module 7 References ............................................................................................... 37
7.1 References ............................................................................................................... 38
Appendix A Financial Projections ......................................................................... 39
List of Figures
Figure 2.1 Organization Structure....................................................................................... 5
Figure 2.2 Site Plan ............................................................................................................. 6
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Figure 2.3 Floor Plan .......................................................................................................... 7
List Of Tables
Table 2.1 Capital Budget .................................................................................................. 11
Table 2.2 Cost of Goods Manufactured Calculation in the First Year of Operation ........ 12
Table 3.1 Employment at ORGANIC OAT ..................................................................... 18
Table 4.1- Strengths and Weaknesses ............................................................................... 22
Table 4.2- Opportunities and Threats ............................................................................... 23
Table 4.3 All numbers in tonnes ....................................................................................... 24
Table 4.4 Marketing Budget ............................................................................................. 30
Table 5.1 Summary Of Financial Results ......................................................................... 32
Table 5.4 Critical Variable ................................................................................................ 33
Table 5.5 Best and Worst Case Scenario .......................................................................... 34
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Executive Summary:
ORGANIC OAT is a new and exiting opportunity in the ever growing organic industry.
This proposed business is an organic oats mill that will help add value to the local organic
oat industry along with the creation of new jobs in a small community.
ORGANIC OAT will be using locally grown organic oats to make top quality natural
foods for the organic food industry. The mill will be full modern using the latest
technology and ideas to help insure high quality product and maximum returns on their
investment.
The mill plans on starting out producing 7,000 tonnes of finished product in its first year.
With good management and hard work it is hoped that the mill will reach its full capacity
of 11,048 tonnes within 5 years.
This mill will employ nine full time workers. These workers not only insure the smooth
running and operations of the plant but also create jobs in rural Saskatchewan, something
that means a lot to the ORGANIC OAT. This positions include, General Manager- to
overlook all aspects of the mill and its sales, Plant Manager- to maintain all aspects of
production and receiving at optimum levels of efficiency, Administrative Manager- to be
responsible for accounting, administration, and logistical functions of the plant, Quality
Assurance Manger- to look over all aspects of quality control, Assistant Head Miller- to
help head miller and assist in every day operations, Grain Buyer- to purchase and sell
product, 3 General Duties- to work in the plant and carry out all daily aspects of the mill.
ORGANIC OAT will be targeting larger companies with a demand for organic product.
There will be a large amount of product going into the United States. The estimated total
capital requirement for this plant will be $3,408,688 with an internal rate of return of
28.1%. The external rate of return is 24.0%. These numbers show a healthy and
productive future for the ORGANIC OAT.
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Module 1 Introduction
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1.1 Introduction
The organic market is a market that is quickly expanding, due to the growing health trend
sweeping the nation. A number of organic grain producers decided to get into this
booming market. Farms along with some potential investors were interested in starting
Organic Oat Processors (ORGANIC OAT), which would purchase raw organic oats and
process them further, into a raw commodity that can be added to other products. Some of
these include cookies, breakfast cereals, breads and muffins, crackers and snacks, meat
extenders, and pet and animal foods. A farm that started as an organic farm has been
producing organic crops for years, and then became interested in diversifying and adding
value to their product. Other organic producers in the area agreed that ORGANIC OAT
would open up the market for their product, and a way to sell their oats locally. A
number of investors have shown interest in the business. The objective of these investors
is to establish a financially sound business venture that would not only provide a good
return on investment but also provide an outlet for organic oats in the province.
1.2 Industry Overview
As previously stated the organic food industry is quickly expanding due to the increasing
health craze, as well as the aging population. In 2003 organic oats made up 48,707 acres
(Organic Stats.2003) of prairie farmland, with a combined worth of approximately 8.5
million dollars. The market for organic foods is increasing by almost 20% every year,
ORGANIC OAT are entering the market at a time when it is doing the best and will
continue to grow at a rapid pace. The major competitor in the industry is Grain Millers,
who make up 80% of oat milling production in North America (Feasability Study). They
now own a larger competitor in Saskatchewan, which is Popowich Milling out of
Yorkton. Popowich Milling now produces approximately 60,000 tonnes of milled oats
per year (Popowich,2007).
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1.3 Mission Statement
“ORGANIC OAT are looking to become a well recognized and trusted name in the
organic oat milling market, as well as providing investors with a good return on
investment and to provide an outlet for oats in the province.”
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Module 2 Operations Plan
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2.1 Organizational Structure
ORGANIC OAT consists of a group of investors. As investors in the business they will
not receive a paid salary, but dividends, depending on the income that the company
makes. These investors will elect a board of directors that will have a president or a
general manager that will be in charge of overseeing how the plant is run, and any new
ideas that may come in the future. The general manager will have responsibility for the
whole operation; sales, marketing, operations, financial and administrative functions.
The plant manager or head miller will oversee production in the plant. There will be a
full time administrative manager who will be responsible for accounting, invoicing and
purchasing, as well as a full time secretary in the front office of the plant.
Investors
Board of Directors
General
Manager
Secretary
Head Miller
Assistant Head
Miller
Quality
Assurance
Grain manager
3 Laborers
Figure 2.1 Organization Structure
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2.2 Site Plan
This structure is set up to keep the investors involved, since they have invested their
money into the company and can see how their money is being used as well as their
return on investment. The general manager is in charge of all decision making, as
previously stated, and must report back to the board of directors.
Figure 2.2 Site Plan
ORGANIC OAT is located along the highway. It covers 10 acres of land; there will be
1 main entrance and public parking in front of the office. The building is located in the
center of the lot for easier access for trucks. The company has purchased gravel to cover
the parking lot and roadway, and may consider re-graveling it in 5 years. Keeping the
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yard and surrounding area clean and respectable is important to attract new clients and
keeping existing ones.
2.3 Building and Floor Plan
The building will be 160ft X 80ft, this is not including the office. The building will be an
insulated, wood frame with metal sheet covering.
Figure 2.3 Floor Plan
2.4 Work Plan and Flow of Work
2.4.1 Technical Processes
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The technical processes at ORGANIC OAT is the milling (cleaning, dehulling, cutting
and rolling) and packaging the final product. The head miller and the assistant miller will
be in charge making sure that everything is running properly and that the product will be
produced correctly. The second process is package and loading, which the labour
workers would be responsible for.
2.4.2 Physical Product Flow
Step A. Whole unprocessed organic oats are brought into storage bins through portable
augers.
Step B. Oats are augured from storage bins into cleaning plant. There broken oats or
weeds/unwanted materials will be screened from the grain.
Step C. Cleaned grain is then sent over a gravity table to remove all stones and
lighter/marginal seeds.
Step D. The cleaned material is sent through the dehuller where the oat hulls are
removed from the oat seed.
Step E. Now that the hulls have been removed the oat groats can be graded and put
through the kiln.
Step F. The groats are then sent through a polisher which cleans them and increases
visual appeal.
Step G. Since the oats have been cleaned they can now be sent into the steamer which
conditions the oats by increasing their temperature. This process also makes them
process through the cutting stage with fewer fines.
Step H. The groats are now ready to be cut and rolled. The product is now to be bagged.
Step I. Oats are bagged and the stacked in piles ready to be shipped out.
2.4.3 Average Day, Week, Year
ORGANIC OAT will operate on an 8 hour day, 5 day week cycle. Employees will work
for 8 hours a day, with a one hour diner break, and two fifteen minute coffe breaks.
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ORGANIC OAT will be operating 49 weeks per year at a constant rate. This would
allow all employees 3 weeks off per year for holidays.
2.4.4 Regulatory Systems and Standards
As an organic producer, ORGANIC OAT has a number of standards that they must meet
in order to be certified and remain operating. As well as the milling facilities will have
safety requirements.
2.4.4.1 Hazard Analysis of Critical Control Points
Hazard Analysis of Critical Control Points (HACCP) is a system that controls the
production of food products, the plant and employees. There are seven steps in HACCP
and they will help to control any problems that may arise in the future. A HACCP
coordinator will visit the plant two times a year to make sure that the plant is meeting
expectations. There will be a fee, which is about $2000, plus the initial fee of $45,000.
2.4.4.2 Saskatchewan Organic Certification Agency
When producing an organic product there are many requirements that must be met.
ORGANIC OAT is certified by the Saskatchewan Organic Certification Agency. An
organic inspector will visit the plant and make sure that there is not a possibility of the
product being contaminated. They will also inspect the equipment. There will be a cost
involved with this, but it is not known at this time.
2.4.5 Supply Service Analysis
ORGANIC OAT’s only raw materials are oats. They will get the oats from organic
producers in the area.
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2.5 Cash Management
ORGANIC OAT will invest all cash flow that isn’t being used to cover day to day
operations into paying down their long term debt. This will reduce the amount of debt
that the company is carrying and possible reduce the interest that would normally be paid.
2.6 Inventories
ORGANIC OAT is plan on having 37,116 bushels of raw inventory. It is felt that this
number will give enough capacity to carry out normal production, without having to refill
bins all the time. For finished product the company is considering keeping 6,510 bushels
of rolled oats on hand. This should be enough to meet customer demands and create a
buffer incase of a factory shutdown for any given reason. Alameda Oats may end up
keeping their finished inventory on hand for around five days. This will allow an
adequate amount of product to build up and then be shipped out. This will also ensure
that the consumers of these organic oats will have a steady flow of product into their
businesses.
Raw oats will be trucked to the plant as often as needed keeping in mind the large storage
capacity and the fluctuations of price. As for inventories in progress, it is expected that
the product that is started in a day will also be completed in that day.
2.7 Capital Budget
The capital budget for ORGANIC OAT covers the total cost of land, building
construction, equipment, and working capital.
The cost of the land has been broken down into cost of land, and site planning. The
estimated cost of a quarter section in the Alameda area is $20,000. Being as purchasing
the land is relatively inexpensive; the whole quarter will be purchased, giving lots of
room for construction. The remaining land can then be sold to someone after
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construction is completed, or rented out. The connection of 3 phase power is only 1 mile
away, making the cost of this utility a lot cheaper then first expected. A local company
will do the leveling and site planning for the site.
Building costs are projected to run around $525,000. This would include the cost of steel
girders, insulation, and cement.
Through the feasibility study Buhler has supplied ORGANIC OAT with, a complete
equipment list for the plant. They provided a parts number and the final cost of all the
equipment which equals out to $3,253,687.
Working capital was calculated using employee salaries and the benefits that they will
receive. This would mean that the working capital budget for ORGANIC OAT is
$275,728.
Table 2.1 Capital Budget
Desription
Land
Estimated Cost
$20,000
Source
SAMA- Land Assessment/quarter
Site Enhancements:
3 Phase power
$100,000
SaskPower
Water Installation
$25,000
SaskWater
Landscaping
$10,000
Local Private Company
Total Land cost
$155,000
160ft/80ft plant and 40ft/30ft office
Building Costs
and staff area (ABE 61,2006)
Main Plant 160ft/80ft
Office area
Total Building Cost
$500,000
Professional Estimate
$25,000
Professional Estimate
$525,000
Equipment:
Total Equipment Cost
$3,253,687
Buhler
Total Capital
Requirement
$3,418,688
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Total Working
Capital
$238,089
2.8 Working Capital Planning and Management
2.8.1 Cost of Goods Sold for Manufacturing
Table 2.2 Cost of Goods Manufactured Calculation in the First Year of Operation
Cost of Goods Sold Manufactured Calculations for First Year Average
Total Costs
Cost/Tonne
Direct Materials
Whole Oats
Bags and Pallets
$
3,001,250
$
210,000
30
$
Direct Labour
245
3,212,250
$84,000
$
$
275
$
12
12
$84,000
Variable Overhead
Freight
Telephone
$ 807,692
$
115
24,000
3
Salaries
259,000
39
Benefits
3,584
0.50
72,000
10
184,800
26
Supplies
21,600
3
Computers
24,000
3
Maintenance
Marketing @3%
2.9 Cash Conversion Cycle
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The cash conversion cycle for ORGANIC OAT is as follows: the average days that
inventory will be on hand will be 15. It will take on average of 15 days to collect and is
an industry practice to allow an average 15 day payable. This means that our cash
conversion cycle would be a positive 14. This falls within the acceptable range for other
comparable companies.
Average Days Inventory: 21
Average Collection Period: 15
Average Days Payable: 15
CCC: Average Days Inventory + Average Collection Period - Average Days Payables
:
15
+
15
-
15
: 15
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Module 3 Human Resource Plan
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The human resources plan outlines the general job descriptions and the outlay of the
entitled work, carried out by the employees at ORGANIC OAT.
3.1 Employee Qualifications
ORGANIC OAT requires an educated, hardworking, and knowledgeable workforce.
ORGANIC OAT’s recruiting policy will be based on education/diploma level completed,
skills, past work experiences, and expected wage and benefits. ORGANIC OAT will be
advertising the available positions through advertising in the local newspapers. This will
include the Star Phoenix in Saskatoon, the Leader Post in Regina, as well as the Canadian
Organic Growers and Western Producer. Successful applicants should meet the strict
employment criteria. The board of directors will appoint the general manager, while
he/she will hire all the other staff.
3.2 Job Descriptions
3.2.1 General Manager
The General Manager (GM) position will be filled before the completion of the facility,
which will allow the GM to look for potential employees to fill available job positions.
The GM will report directly to the Board of Directors, which ensures that the Board of
Directors is aware of the position of the company. The GM position will require an
individual with excellent numerical and analytical skills. Also, a strong sales and
marketing background is essential in order to deal directly with customers and the broker
to set up the company. Other criteria including a strong finance and administrative
background and experience in distribution logistics is also a necessity. Duties of the GM
will have overall responsibility for all aspects of the operation including operations, sales,
and marketing, logistics, quality assurance, and quality control as well as financial and
administrative functions. Moreover, this position will be responsible for giving direction
of the purchasing of the key raw materials, such as when to buy and what to buy.
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3.2.2 Head Miller
A significant experience in operating any kinds of oat milling equipment is required,
especially in the processing of human food consumption. Also, this position will be
responsible to maintain all aspects of production, shipping and receiving at optimum
levels of efficiency. Training new and inexperienced employees is also an important
function of this position and as such the individual must have strong interpersonal skills
exhibiting a strong ability to work with other individuals.
3.2.3 Administration
The position will be responsible for the accounting and administrative functions,
invoicing, purchasing and the traffic or logistical function of the plant. Also, as a back up
to the GM, this position will be responsible for receiving orders and setting up shipment.
This position will also be in charge of setting up financial reports, and maintaining all
operational records.
3.2.4 Quality Assurance
The position will be responsible for all aspects of quality control and quality assurance.
The quality assurance is setting procedures in place so that production is on kept on track.
This would include specifications for grain production and products specifications. The
quality control is the day to day analytical analysis of the product produced to insure that
each batch is on specifications. The individual must have experience in performing
technical service and support for the customer base. The knowledge of oats and their
functionality is required. Also, this individual should be also to conduct new product
analysis as well as be current on trends and new products entering the market.
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3.2.5 Grain Manager
An experienced grain buyer who is very familiar with the raw grain and can easily
recognize the grain quality and milling characteristics that is required such as grade,
acceptable dockage etc. Also, this individual must have experience in dealing with
producers, incoming freight, contracting and rules and regulations associated with the
purchase and transport of grains slated for human consumption. Handling inbound grain
and outbound mill feeds is sometimes required.
3.2.6 Assistant Head Miller
Individuals capable for running evening or night shifts on their own after training, as a
back up to the Head Miller .
3.2.7 General Labor
A maximum of up to three hard labour workers are needed to fill positions. The prime
functions for these positions would be bagging, warehousing and outbound shipments of
grain. A valid driver’s license is required. Depending on the running times and
production season, three full time positions may not be necessary.
3.3 Training
There will be training provided for the employees upon joining the ORGANIC OAT
staff. There will be certain courses which will have to be taken to work at certain jobs in
the facility.
All general laborers will be required to take the following training at the expense of
ORGANIC OAT:
WHMIS- Workplace Hazardous Material Information System
First Aid
HACCP
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3.4 Human Resources Strategy
ORGANIC OAT plans to offer above average salaries in order to find loyal employees.
Also, the salaries of all employment will increase with inflation and the possibility of
bonuses base on company profits. The salaries paid ensure a lower turnover ratio of
skilled employees resulting in lower training costs. ORGANIC OAT plans to hold some
events, such as Christmas parties and staff BBQ’s to ensure high company morale. Also,
everyone who works for ORGANIC OAT will get an ORGANIC OAT’s jacket. The cost
of these activities will be come out of miscellaneous expenses.
Table 3.1 Employment at ORGANIC OAT
Staff
General
Head
position
manager
miller
Secretary
Quality
Grain
Assistant
assurance
manager
head
Labor
miller
Number
1
1
1
1
1
1
3
Annual
65000
55000
35000
40000
40000
40000
84000
salary
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Module 4 Marketing Plan
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4.1 The Marketing Mix (four P’s)
4.1.1 Products and Services
ORGANIC OAT is in the business of selling a ready to use milled organic oat product, to
sell to large companies that distribute cookies, cereals, breads and muffins, baby foods
and pet and animal foods. ORGANIC OAT is also offering a service to organic oat
producers in the Alameda area, by taking the oats that they produce, processing (milling)
them and selling them. In the long run ORGANIC OAT is providing the producer with a
larger profit than he would have received selling it on his own. ORGANIC OAT’S
product is meeting consumer’s wants with the new organic trend, as well as society
eating healthier foods and products.
4.1.2 Pricing
ORGANIC OAT will be pricing their product at competitive prices in order to compete
with the other organic oat producers in the province. Some of the companies are
currently purchasing their product at $245/tonne. Because of that we have adjusted our
cost to be the same. In order for ORGANIC OAT to break into the market they are going
to have to set the product at the same price or just below it to gain some cliental. Setting
their price higher would reduce the chance of any of those large companies purchasing
their product. With that in mind the sale price for the finished product has been set at
$650.00/tonne.
4.1.3 Promotion
ORGANIC OAT will be marketing their product to larger companies that are not in the
area, or in the province. Local media ads will not be needed; the company will hire an
advertising company to be sure that their target customers are informed of their product,
how to contact them and how to get the product.
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4.1.4 Place
The market for organic oats is a very small one in Saskatchewan and ORGANIC OAT
will be marketing to large companies, areas such as Michigan (Kellogg’s), and Chicago
(Kraft) as well as Robin Hood are a few potential customers on the market. To move
product into those areas or to grocery stories across Western Canada, trucking will be the
main mode of transportation. There are a few different companies that were contacted
including Weymore, Willow Creek, and Vitran. All of these companies run into the areas
listed above.
4.2 Segmentation, Targeting, Positioning
4.2.1 Segmentation
Prospective buyers could be arranged into several categories. First of all would be the
large retailers like Kellogg’s, Robin Hood, or Kraft. All of these companies are looking
for approximately the same thing, which is another source to purchase their processed
oats and more supply.
It may be possible to target the individual consumer; however it would be difficult to
reach many different people and groups, especially when marketing a new product out of
a new business.
4.2.2 Targeting
ORGANIC OAT’s target market would be the large retail consumers. These groups
would purchase the most amount of product. They would consistently need large
volumes of processed oats and may be interested in another group to select organic oats
from. Kellogg’s, Kraft and Robin Hood are large target markets as they would be
purchasing large quantities throughout the whole year. However, two very well known
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companies Quaker and General Mills are not considered to be potential clients, as they
purchase their own raw product and mill it on location.
4.2.3 Positioning
ORGANIC OAT’s product will be marketed as a product of very high quality. Also
promoting the health and consistency of the product, as setting it above the competition.
This will allow ORGANIC OAT to bring a premium and make the consumer feel more at
ease about buying the product, especially seeing as it is a new product. This will make
the product stand out against the more seasoned name brands.
4.3 SWOT Analysis
4.3.1 Internal Strengths and Weaknesses
4.3.1.1 Human Resources
Table 4.1- Strengths and Weaknesses
Strengths
Weaknesses
Human Resources
1.Very limited number of competitors in the industry
1.There is not a strong background in the Food Processing,
2. The investors have a strong background and experience in
marketing and Distribution areas within the investors group
production of the raw grain
2. The number of qualified millers is limited and attracting
3. Many labor workers in the area
qualified millers may be a concern
4. Conventional processors are facing full running times
Physical Resources
1. The Organic Market Sector is growing by over 20% per year
1. Do not currently have a building
and the growth is going to continue
2. Do not currently have any of the machinery
2. The Canadian raw grain is referred raw material
3. The production of the raw material, while growing, may not
3. The proposed location is located with competing facilities
be able to keep up with demand
and would have an advantage in both sourcing and
4. The location is not as optimum as locations at major centers
redistribution when compared to U.S. competitors
of distribution
Financial Resources
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2. Investors have not yet confirmed that they will be joining
1. Large number of investors already interested
the company
Table 4.2- Opportunities and Threats
Opportunities
Threats

An opportunity to expand production of Organic Oats

Expanded production by existing competitors

Local employment and growth and wealth in the area

Rising energy prices particularly in the transport area

The Canadian Dollar increasing strength against its

Long term- the development of new product lines

An opportunity to fill a current gap in demand and

Timing- Needs to be fast
therefore grow within the industry

European Supply

Potential to very quickly maximize production

Lack of investment dollars

Increased returns for producers with a more local

Timing- the need is to act fast
outlet for their production
U.S. counterpart
4.4 Market Analysis
4.4.1 The Market
Organic foods are a growing industry allover the world and the oats sector is no
exception. Organic oats can be made into many different food products. Some of these
products include cookies, breakfast cereals, snack foods, and various other baked goods.
With so many products that oats are used in it would seem that the possibilities are
endless for this product if properly marketed.
Although Saskatchewan is one of the world’s largest organic oat producers it is not likely
that there will be much of a market demand for organic oats here at home. Most of the
North American demand for organic foods is on the East Coast and the Pacific Coast.
Also there’s a strong demand for organic foods in Europe which opens up a large new
market for organic oats. Higher standards of living seem to be a trend that goes along
with organic food consumption. Organic customers are people that have extra money, or
a higher income and are willing to pay more for what they believe is a healthier, safer
product. The main marketing focus is on large cities, with large average incomes, as
these are the places that organic food has been found most popular.
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The following chart is been taken from the feasibility study for this for this project. It
states that the current market for organic oats for human consumption is 25,000 tonnes
(Feasibility Study). This chart will show the numbers from 2005 through two 2010 if the
market continues to grow at an increase of either 10, 15, or 20%.
Table 4.3 All numbers in tonnes
Rate of
Total increase
increase
2005
10%
2006
2007
2008
2009
2010
over five years
25,000 27500
30250
33275
36602
40262
15,263
15%
25,000 28750
33062
38021
43725
50283
25,284
20%
25,000 30,000 36,000 43,200 51,840 62,208 37,208
The two largest organic oat miller’s in North America are Grain Millers and LaCrosse
Milling. These two companies make up a large portion of the organic oat milling
industry with the Grain Miller’s Co having five plants across North America, one of
which is located in Yorkton Saskatchewan. With both these companies already pushed a
limited production it is realistic to say that there will be a need for another major plant in
North America, especially Canada within the next five years.
4.4.2 Competition
As mentioned earlier the two major companies involved with the milling of organic oats
in North America are Grain Millers and LaCrosse Milling. Grain Millers as recently
purchased the old Popowich mill located in Yorkton. Locally this will be the only
competition here in Saskatchewan.
Other large milling companies include Quaker Oats, General Mills, ConAgra Grain
Processing Group, and Can Oat Milling Product Inc. These companies do not pose as
direct competition because they are not in the organic oats market. These companies
however can drive up the cost of oats in their own market therefore affecting the organic
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oat market. Also these companies could become more direct competition if they choose
to get into the organic oat milling market.
With the increased demand for organic oats it is not likely that these companies will
become a serious threat to this company because these companies are already running at
full capacity and cannot meet the future demand for the product. Therefore the
competition will not be a serious factor at least in the short.
4.4.3 Target Markets
ORGANIC OAT will be targeting the health food industry. These include large
companies such as Kellogg’s, Robin Hood and Kraft. These companies are large enough
that they will need a constant supply of product. This is something that would help
stabilize ORGANIC OAT and give the company a constant flow of both product and
money. Other markets that may open in the future may include bakeries in the province
or other provinces. With the health food market continuing to grow, more markets will
continue to open in the future, making it possible to expand to companies producing
products such as meat extenders, cosmetics, and beverages. This may also be viewed as a
risk, as the organic food industry is a brand new trend (trends rise and fall), but it is
steadily moving towards mainstream.
4.4.4 Marketing byproducts
The milling process for human consumption makes for a lot of unused material from the
initial oats. Processes such as cleaning, de-hauling, and rolling leaves the plant with a lot
of byproduct material that can be marketed as a secondary income. These byproducts
will still have a certain level of nutritional value as a livestock feed. By selling the
screenings from the plant to local livestock producers or feed lots, such as Pound Maker,
the plant will become more efficient and have fewer waste products. With rising grain
prices ranchers will be looking for alternative feed sources such as the old streams
produced at this plant. Screenings will be sold at feed.
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4.4.5 Product Features
When buyers and consumers look at the product is important but they see that the
company is producing a high quality product. Quality is one of the most important things
to look at when it comes to the food industry. People today need to be insured that what
they are eating is safe and healthy. It will be the goal of ORGANIC OAT to make sure
that all their product is of the highest quality in the industry.
Reliability is also extremely important. Buyers need to know that there manufacturing
process will not be slow down because they cannot get enough product on time. By
striving for long-term consistency the plant should always have enough products on hand
to meet the demands of their buyers and customers.
4.5 Marketing Strategies
4.5.1 Sales and Profit Objectives
The main goal for ORGANIC OAT will be to start manufacturing of their product and
reach full capacity of the plant within five years. This is so plant efficiency is maximized
and therefore maximum profits can be achieved. The goal in the first year is to sell 64%
of the plants production capacity.
Marketing the product will be mainly through networking at various organic trade shows
throughout North America. Establishing good clientele and keeping customers happy
with both quality and reliability will be a major goal for this company. Once production
is established, distribution to the large companies will be possible. The large companies
that are being focused on are Robin Hood Flour, and Kellogg’s. ORGANIC OAT should
sell their product to large companies like Kellogs. We assessed the area and Chicago
seems to have a number of manufactures that may be of interest. So trucking has been
averaged to that location. Trucking costs are as follows; it is roughly 1000 miles from
Alameda to Chicago. Shipping costs are $3.00 per mile for a loaded truck. Total costs
would be $3000 to send the milled oats from Alameda to the customer in Chicago per
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truck. This is calculated as each truck hauling 26 tonnes (tridem). This would work out
to 269 loads per year with a total of $807.692.
4.5.2 Channels of Distribution
Product will be shipped primarily through trucking. Due to location and overall
convenience, trucking products from the plant to the buyer seems to be the quickest and
easiest method of distributing the product. Other methods such as rail lines up and
proven to be unreliable and untimely. In order to ensure product gets where it is going on
time it would seem that the trucking industry is by far the most reliable. Another
advantage of the trucking industry is the ability to go anywhere in North America.
Increasing costs of fuel and skilled drivers are a problem in the trucking industry, but for
the time being it will be the main source of transporting finished product. Once the
company is established and has a good customer relationship with its buyers, they may
then look into alternative sources of transportation.
4.5.3 Pricing Policy
The ORGANIC OAT base their product price on a market-based approach. This is the
industry-standard and can be affected by demand for raw product, demand for finished
product, and competitors. The ORGANIC OAT, though a large plant will have very little
influence on market price for rolled oats. But the play a factor in the price of local
organic oat’s in the area. The company may be able to purchase local product for a
cheaper price due to very little local competition and a guarantee of delivery. With a
market based system the price of the product can be directly influenced by the volume a
product on the market. This will be important for the ORGANIC OAT to carefully watch
world organic oat levels and markets. World demand for oats can be strongly influenced
by weather. This could be one way at the company can monitor the potential change in
world volume of organic oat’s and therefore predict price changes.
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Part of becoming a reliable sales company is establishing a good relationship with the
retailer and the buyer. One way the company can do this may be to price discounts to
larger or preferred customers. This will ensure that that customer feels that he/she has
been treated fairly and may also ensure further business with that company.
The price of organic oat’s can be directly influenced by the non-organic oats industry.
Large numbers of non-organic oats will drive the price down in both markets as they are
directly related. It will be important to watch both markets to be prepared for any major
price change in product.
Prices can be maintained over the short-term. But organic foods become more and more
of a common thing in today’s world prices may be driven down by a flood in the market.
This is a long ways off but is worth mentioning as part of an industry overview and a
price overview for the long-term.
4.5.4 Selecting Markets
When looking for markets it is important to have a number of different buyers. This will
help ensure that the company is receiving the maximum amount of money for the
product.
In the overall industry the ORGANIC OAT will play a small role in the overall organic
oat industry. Their plant will be large enough that they can meet the demands of both
large companies that will need bulk amounts of a product and yet they are small enough
that they can help meet the demands for smaller companies.
Being located in South East Saskatchewan will have both advantages and disadvantages
in the marketing of organic oats. Some advantages include being close to a large amount
of raw product making it cheaper to bring in oats. Another advantage may be to
capitalize on an organic market that may not have been fully explored yet. Western
Canada is low on population and demand for organic products may not be a potential area
of sales. With the proper advertising it may be made possible to draw more people into
the products ORGANIC OAT are producing.
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The main disadvantage of location is that ORGANIC OAT is a long ways away from
many of the large companies that buy rolled organic oats. This will make it hard to
establish a good working relationship with these companies.
4.5.5 Selling and Advertising
The selling and advertising for the product will be done mostly through networking.
Becoming a member in such organic groups as The Natural Foods Association, organic
food groups, and various other identities in North America will be extremely important in
finding people to purchase the product. Attending numerous conventions that connect
both retailers and consumers will be the most important form of advertising. One of the
largest conventions in North America is called the Natural Product Expo West. It is held
yearly in Anaheim, California in early March and brings together thousands of potential
buyers for the product. Everyone from large companies like Quaker Oats and Kellogg’s
to smaller retailers will be there. This is where other large old milling company’s goal.
Companies like Grain Millers, and LaCorross Millers all go there and is their major
source of advertising.
Setting up a web page should also be done. This is a great way for people to find out
about a business and keep in touch on what the business is currently doing. Having
things like market updates and contact information will give customers a way other than
face-to-face contact or the telephone to communicate with ORGANIC OAT.
It is very important to have an experienced, down to earth salesperson helping with
advertising. Advertising will become a major cost for the company especially in the
beginning as customer and market relations are established. When looking for someone
to hire in a sales position it will be important to find someone with good people skills,
commute occasion skills, and experience in marketing. Having the right person can make
all the difference when trying to establish good relations with customers.
4.5.6 Marketing Budget
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When preparing a budget for advertising it will be important to leave a significant amount
of money aside for travel. Travel will be the largest expense because of all the traveling
to conventions held all over the United States. Initial set up costs for web site can also
add up but once established can be maintained relatively cheap.
Table 4.4 Marketing Budget
Travel
Business Cards
Trade Shows
Membership Fees
Web Page Construction
Yearly Web Page Maintenance and
Updates
Total Cost of Advertising:
$10,000
$250
$1,000
$2,000
$1,000
$300
$14,550
Brokerage Fees
$136,500
Total Cost:
$151,050
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Module 5 Financial Plan
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Table 5.1 Summary Of Financial Results
Year:
2008
2009
2010
2011
2012
Sales
4,550,000
5,197,920
5,938,104
6,783,690
7,749,687
COGS
5,029,890
5,805,090
6,063,882
6,419,885
6,870,855
Gross Margin
(479,890)
(607,170)
(125,778)
363,805
Total Expenses
3,211,250
3,642,828
4,058,547
4,523,725
Net Income Before Tax
(453,876.37)
(521,388.25)
28,590.73
596,822.57
1,201,979.25
-
198,244.77
Income Tax
-
-
-
878,833
5,044,286
Net Income After Tax
(453,876.37)
(521,388.25)
28,590.73
596,822.57
1,003,734.47
Net Cash Flow To Equity
(137,713.34)
81,498.90
439,113.44
857,724.31
1,152,889.87
Year:
2013
2014
2015
2016
2017
Sales
7,904,681
8,062,775
8,224,030
8,388,511
8,556,281
COGS
6,841,917
6,826,264
6,825,319
6,835,097
6,852,786
Gross Margin
1,062,764
1,236,511
1,398,711
1,553,413
1,703,495
Total Expenses
5,048,832
5,053,470
5,058,199
5,063,024
5,067,945
1,401,579.19
1,593,387.46
1,772,834.20
1,945,608.30
2,114,642.63
390,552.72
457,685.61
520,491.97
580,962.90
640,124.92
Net Income After Tax
1,011,026.48
1,135,701.85
1,252,342.23
1,364,645.39
1,474,517.71
Net Cash Flow To Equity
1,126,838.60
1,192,195.42
1,263,057.88
1,338,874.12
1,369,329.05
Net Income Before Tax
Income Tax
Net Present Value (NPV)
$806,413
Internal Rate Of Return On Equity Investment
27.5%
External Rate Of Return On Equity Investment
23.6%
5.1 Financial Plan
ORGANIC OAT will have a long term debt of 1,714,344, and a owner equity of
1,704,344. This will ensure that the business maintains a positive cash flow in the first
years of business. The debt will be financed through a lending institution with the most
favorable rates.
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5.2 Dividend Policy
Dividends will be paid out to investors when cash flow and profits increase in several
years. The company should hold off distributing such dividends until the company is
getting to a sound financial status, ensuring there will be adequate amounts left over to
maintain a positive cash flow.
5.3 Economic Forecast
A projection based on a 2% inflation rate has been put into place. This inflation was
takes into account labour, supplies and expenses.
5.4 Sensitivity Analysis
When looking at the critical variables, we tested price of the finished goods, quantity of
product, and price of raw products. Tests concluded that the price of the finished goods
were the most critical. With a base sale price of $650.00 per tonne, it was found that if
prices fell to $559.13/tonne, internal rate of return would become zero. This is a change
in the sale price of 14%.
Table 5.4 Critical Variable
Critical Variable: ORGANIC OAT (per tonne)
Critical Value
Selling Price
Base Case
IRR =0%
Allowable % Change
$650
$559
14%
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5.5 Best and Worst Case Scenario
Table 5.5 Best and Worst Case Scenario
Year
Net Income/Loss
IRR
Year
Net Income/Loss
IRR
Year
Net Income/Loss
IRR
Best Case
2008
(4,083)
Worst Case
2008
(886,783)
Base Case
2008
(445,433)
2012
2017
1,382,834
47.6%
2,024,480
2012
2017
453,204
9.10%
2012
993,479
28.8%
933,370
2017
1,478,925
The Best and Worst case scenario in this project is shown above. You can see that the
IRR fluctuates from 45.7% down to 8.40%. ORGANIC OAT Best and Worst Case
Scenarios are based on a 10% rise and 10% decrease in the sales price of the finished
product. The base sale of the organic oats is $650/tonne. With a 10% increase in price
making it $715/tonne or a decrease in price making it $585/tonne.
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Module 6 Conclusion
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6.1 Conclusion
After completing the business plan for ORGANIC OAT it has become evident that the
business would be a viable source of income. From the current financial model, you can
see that the company is going to make an internal rate of return of 28.8%. This is based
on prices, sales and volume staying true to speculation. The company has to focus on
getting an agreement with a large company which consumes the finished organic grains.
Then the desired sales volumes, and prices will become more evident and achievable.
The price of processed organic oats (per tonne) was a difficult number to find. The
$650.00/tonne that is recorded in the financial plan is a number that was roughly
suggested by people within the industry. Overall the company has an abundant supply of
locally grown oats, and a great chance to develop a strong return on investment.
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Module 7 References
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7.1 References
Organic Statistics 2003
http://www.certifiedorganic.bc.ca/pdf/StatsSK2003.pdf
Popowich Organic Mills 2007
http://www.popowichmilling.com/
Feasibility Study
Ken Evans along with Saskatchewan Council For Community Development (SCCD)
Brad, Robert, ABE 61 Lecture Notes, 2005
North American Millers Association, http://www.namamillers.org/prd_o_mill.html
Agriculture and Agri-Food Canada, http://sci.agr.ca/winnipeg/co1_e.htm
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Appendix A Financial Projections
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