DAIRYPAKCASE ANALYSIS

VALUE CHAIN OF COSTS AND PROFITS

VALUE CHAIN @ DAIRY PAK

Paper Mill

Extrusion Plant

Processor

Regional Diary Mfg

Orange Juice Mfg

Supermarkets Distribution

Customer

COMPUTING THE MARGINS

Milk Orange Juice Minutemaid TropicanaPrice 1.16 1.50 1.89 2.26Cost of Goods Sold 1.04 1.20 1.42 1.79Distributor Margin 0.12 0.30 0.47 0.47Margin % 10.34 20.00 24.87 20.80Cost of Goods Sold 1.04 1.20 1.42 1.79Manufacturing Costs 0.75 0.80 0.64 ?

0.08 0.08 0.06 ?0.06 0.06 0.00 ?

Distributing Costs 0.06 0.06 0.11?Selling Cost - - 0.36 ?Manufacturers Margin 0.09 0.20 0.25 ?Margin % 8.65 16.67 17.61?

COMPUTING THE MARGIN IN VALUE CHAIN

Milk Orange JuiceManufacturer's Margin 8 6For 14400 tons (1) 1152 864

Cost of Transport 10 10Splicing & Printing 231 231Cost of Buying Roller 663 663Total Processing Cost (2) 904 904Margin Processing (2-1) 248 -40Margin Processing % 22 -5

Price of Rolls (3) 663 663Transport Costs 35 35Cover Rolls 94 94Cost of buying Rolls naked 530 530Total Cost of Rolls (4) 659 659Margin Extrusion Plant (4-3) 4 4Margin Extrusion Plant % 1 1

Processing Costs

Extrusion Costs

Milk Orange Juice

Price of Rolls Naked (5) 530 530Transport Costs 3 3Costs paper Machine 105 105Cost "Pulp" 319 319Total Cost of Rolls Naked (6) 427 427Margin Stationery (6-5) 103 103Margin Stationery % 19 19

Total Dairy Pack 355 67Total Dairy Pack in % 31 8

Printing Costs

Total Margin

THE VALUE CHAIN - INSIGHTS FOR THE BUSINESS

SYNTHESIS OF VALUE CHAIN MARGIN

 

Dairy Areas Orange Juice Brands

Milk Orange Juice  

Supermarket Distributor14400*0.12 = 1728 14400*0.3 = 4320 14400*0.47 = 6768

Manufacturer/ dairy 14400*0.09 = 1296 14400*0.2 = 2880 14400*0.25 = 3600Transformation 248 248 (40)Extrusion 4 4 4Paper 103 103 103       Total Champion 355 355 67

% of total margin realized on the value

chain by :      Champion 10.5% 4.7% 0.6%Distributor 51% 57% 65%Manufacturer/ dairy 38% 38% 34.5%

(Margins per ton of carton)

WHEN ASSET DATA IS INCLUDED, WHAT INFERENCES CAN WE DRAW ABOUT ROA FOR CHAMPION, THE JUICE PROCESSOR AND THE RETAILER ?

INFERENCES DRAWN ABOUT ROA FOR CHAMPION, THE JUICE PROCESSOR & THE RETAILER

ROA per tonne of Cardboards        Regional Dairies Branded Orange JUICE        Milk Orange juice        Cost SP Marging/ .5 gallon Margin Assets ROA Margin Assets ROA Margin Assets ROA

Store1.041.20

1.161.50

0.12.30.47 1728.00 1800.00 96.00 4320.00 1800.00 240.00 6768.00 1800.00 376.00

Dairy Manufacturer0.951

1.041.20

.09'.20 1296.00 5400.00 24.00 2880.00 2890.00 99.65 3600.00 2890.00 124.57

Converter       248.00 830.00 29.88 248.00 830.00 29.88 -40.00 830.00 -4.82Extrusion       4.00 190.00 2.11 4.00 190.00 2.11 4.00 190.00 2.11Mill       103.00 2800.00 3.68 103.00 2800.00 3.68 103.00 2800.00 3.68

Total       355.00 3820.00 35.66 355.00 3820.00 35.66 67.00 3820.00 1.75

  Per ton cost

Pulp Mill 1600

Paper machine 1200

Extruder 190

Converting plants 830

Juice processor 2890

Small Dairy 5,400

Super market space 1,800

THE VALUE CHAIN ANALYSIS

DIARY

Overall Size of the Market     -         375,000 tonsOur Market Share                   -         40%New Volume in 1988              -         Nil. Stable MarketOpportunities Uncertain supply of plastics. This is a by-product for the oil

companies. Environmental indignation over plastics. Nutritionally, paper is better than plastics. Potential to realize price premium for cartons by working with dairies

to create differentiated milk, just like the branded Orange Juice.

BRANDED ORANGE JUICE

Necessary investment:Technological (paperboard)                        43,000 000New equipment (extrusion)                       17,000 000Rotogravure printing                                   15,00000Total 61,500000

Market sizeTropicana (15,000) + MM (10,000) + H (7,000) = 32,000 tonsAnnual growth: 10 %

EXPORT SEGMENT

Overall Size of the Market            1,112,000 tonsAnnual Growth                               16%New Volume in 1988                     180,000 tons

How about spending $1.75 million to participate in this one million tons market that is growing rapidly??

INVESTMENT NEEDS BY MARKET SEGMENTS

1) Branded OJ SegmentCapital Benefits Costa) Rebuild #19Phase I Rebuild "wet end” Improve Board Strength $16 Million Improve PrintabilityPhase II Rebuild "dry end” Improve Board Smoothness $27 Million Better Print Qualityb) Third Extruder Multilayered Polymer Coating $17 Millionc) Rotogravure High Quality Printing $1.5 Million Printingd) Any additional investments for Tropicana Nil

Total. $61.5 Million

INVESTMENT NEEDS BY MARKET SEGMENTS

2) Export Segment

Roll Wrapping Equipment $1.75 Million

3) Regional Dairy Segment None

ANALYSIS OF BUYER POWER

How much leverage do we have over the dairy? Over the Branded OJ producers?

Who is relatively more powerful—Dairy or Branded OJ producers?

BUYER POWER ANALYSIS

Dairy Branded OJ Producers

Number of Buyers 1,000 3(buyer concentration)Size of the Buyer Relatively Small Same size as the

paperboard manufacturersAverage Order Size 375 Tons Tropicana 15,000 tons(buyer volume) [ 375,000 tons ] M/M 10,000 tons

1,000 C-H 7,000 tonsBuyer Switching Costs Low. Buy High. Buy

commodity board differentiated boardCost of Carton/Total Cost 8.5% (8¢/95¢) 5% (6¢/117¢)Buyers’ Margin 8.6% (9¢ /104¢) 17.6% (25 ¢/142¢)

Value Extracted by SegmentsChampion’s share of margins as % ofTotal Margins 10.5% 0.6%Champion’s ROA 9.3% 1.8%

“Traditional”Cost Systems

“Value Chain”Analysis

Focus Internal External

Perspective Value-Added Entire link from suppliers to end use customers

Cost DriveConcept

Simplistic• Single Driver (“Volume”)• Applies at the overall firm level

Comprehensive• Multiple• Applies at the individual value activity level(“different cost drivers for different value activities”)

CostContainmentPhilosophy

Simplistic• “Across-the-Board” costreductions

Refined• “Spend to Save”• Exploit linkages with Suppliers• Exploit linkages with customers• Exploit linkages across valueActivities

THREE APPROACHES FOR A STRATEGIC ANALYSIS OF INVESTMENTS AND TARGET SEGMENTS Investment Choice

◦ V.A.N of projects◦ Remark : Acceptable result (= 13%) for 61,500,000 of

investments in the differentiated marketBCG analysis

◦ “Harvest” the “Cow’s milk” (Dairy)◦ Develop a part of market and invest in the

differentiated market (OJ & Export)Value Chain

◦ Restart to invest for the interest cause for Champion in the differentiated market Report of suppliers/buyers force in their disfavor

THANK YOU