Session 8 ic2011 dadzie

VALUE ADDITION TO WOOD RESOURCES,

THE CASE OF GARDEN FURNITURE PRODUCTION

AND EXPORT IN GHANA-STUDY OF A LOCAL FIRM

BY

DADZIE PETER KESSELS

LECTURER:FURNITURE DESIGN AND PRODUCTION DEPT.KUMASI POLYTECHNIC, GHANA. WEST AFRICA

Email; [email protected] 1

OUTLINE OF PRESENTATION

Introduction

Objectives

Materials and methods

Results and discussions

Conclusions

Recommendations

Acknowledgement

OUTLINE OF PRESENTATION

2

Ghana used to have 8.13Million hectares ofhigh forest (Forestry Department, 1995; Asumadu, 1997)

This has dwindled due to over-exploitationfor mainly log and lumber export to meethigh demand(World Bank, 1988)

Deforestation - 750km2/year ≡1million Ghana Cedis-€877,346.903 loss, (World Bank, 1988)

INTRODUCTION

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To control deforestation and encourage tertiary

processing of wood, Ghana collaborated with United

Kingdom, through Overseas Development

Administration, to;

strengthen regulations and

stopped export of logs in the 1990s (Pleydell et al, 2002)

All these efforts- not yielding needed results, as

Ghana is still ranked low, relative to some ITTO

countries, in terms of further processing (Johnson, 1997)

Garden Furniture- made with wood is an outdoor type,

used in gardens, at beaches, in porches, etc for people

who want to enjoy fresh air (Plow and Hearth, 2006)

INTRODUCTION

4

Meanwhile, whiles a M3 of kiln-dried (KD) lumber is

about €377.172, a M3 of garden furniture parts is

€1,677.850 showing a value difference of €1,300.717(TIDD,2005a)

this represents 344.85% in value increase

An indication that, further processing lumber to garden furniture for export may be a very profitable venture,

that can yield better economic gains,

and ensure sustainable use of wood resources.

INTRODUCTION

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However, no organised information has been sighted on;

recovery rate of converting lumber (KD) to garden furniture, and

the processing costs involved,

• To make any meaningful assessment.

INTRODUCTION

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The question is;

do these factors make garden furniture production

for export economically unprofitable, for which

reason, Ghanaian firms seem not to be interested?

INTRODUCTION

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OBJECTIVES To estimate the recovery rate of converting

lumber (KD) to garden furniture.

To ascertain the economic viability or otherwise in further processing lumber to garden furniture, in Ghana, for export.

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Study coverage- three-year period from January 2003 to December 2005

Materials and equipment; Wood, Tape Measure, various records/reports and Vernier Callipers

Data collection process;

In-factory study, Observations, Interviews and Records Reviews

Exchange rate;

€1Gh¢1.139-May 2005 was used

MATERIALS AND METHODS

9

PROCESSED

TO FURNITURE

INCOME (A)

LUMBER (KD)

EXPORT

OTHER/BY-PRODUCT’S

INCOME (D)

-Firewood & Others

EXPORT

INCOME (C)

TOTAL INCOME:(E) ={D+C}

TOTAL COST. (B):

-MAT. COST Raw material

Other materials

differential

-LABOUR COST processing

-OTHER EXPENSES cost

-DIFFERENTIAL SELLING & DIST. COSTS

AND TAXES

RESIDUAL

INCOME

F= (E-B)

(Additional

profit/loss)

COMPARED

WITH A

A model for the study S

plit

–o

ff-p

oin

t

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Recovery rates of converting lumber (KD) to garden furniture

Eleven (11) wood species were selected based on

availability of both, their lumber and furniture values,

• Included, Odum (Milicia excelsa), Mixed Redwoods,

Mahogany (Khaya spp.), Teak (Tectona grandis), Dahoma

(Piptadeniastrum africanum), Albizia (Albizia ferruginea),

Akasaa (Chrysophyllum spp.), Afromosia (Pericopsis elata),

Avodire (Turraeanthus africanus), Hyedua (Guibourtia ehie),

and Emire (Terminalia ivorensis).


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Three replicates of three different garden furniture

types made from each species were used.

Equations 1 and 2 were used for the calculations,

• Equation 1 → Recovery Rate of each garden furniture (RR)

= Output lumber volume X 100%

Input lumber volume

• Equation 2 → Average Recovery Rate for Species and general

= RR1 +RR2+RR3…RRn/N

• where, RR= recovery rates of furniture piece or species and N=

Total no. of furniture pieces or Total no. of species


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Income or values of garden furniture and

lumber/m3 {income after further processing-Free-on-Board (FOB) +

‘Other Income’, and raw material cost}

Values of garden furniture;

• Free-on-Board (FOB) values of garden furniture -From

Timber Industries Development Division (TIDD’S) export

reports on wood products

• Values of by-products (‘other income’), -From study

company’s financial statements

FOB values of lumber, - From TIDD’S export reports on

wood products ≡ Raw material cost.


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Costs of further processing kiln-dried lumber to garden furniture

Material costs (Raw and ‘other materials’);

•Raw material- export(FOB) value of lumber (KD); found by reviewing TIDD export reports,

• Equation 3-for volume used for 1m3 of furniture,

Equation 3→ Raw material volume = Finished/planed lumber volume X 100%Recovery rate

• Answer multiplied by FOB value of lumber gives value of lumber needed for furniture in €.


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• ‘Other materials’ cost

• 10 different furniture pieces and equation 4 were used to find % in a furniture piece, -

Equation 4

• answer X annual average value of furniture sold (export + local) = total monetary value,

• total monetary value ÷ annual volume= cost/m3

Differential Processing, and Marketing Costs and Taxes

• interviews and review of study company’s financial statements were used to obtain them.


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• Costs and ‘other income’ apportionment-to Garden Furniture and Parquet Flooring

• two bases used;

• percentage of average number of workers, -for

labour costs

• percentage annual volume of each product

produced and sold, –for other expenses and

‘other income’

Scenario analyses of Costs and Benefits;

• Five (5) Scenarios based on a cost-volume-profit equation

Required Volume X Unit Price = Total Cost + Targeted Net Profit

(Garrison, 1991; Hilton et al, 2000)


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• Scenario 1- (Base Case) (S1); costs + ‘other income’ ÷ company’s two

products

• Scenario 2(S2); total labour given to only garden furniture, other

variables remained at Scenario 1 levels

• Scenario 3 (S3); total other expenses given to only garden furniture,

other variables remained at Scenario 1 levels

• Scenario 4(S4); total labour + other expenses given to only garden

furniture, volume remained at Scenario 1 level

• Scenario 5 (S5)- if company produced only furniture (total volume =

furniture + parquet flooring), all costs remained at base (Scenario 1)

levels

• Economics Analyses’ Computation

• Accounting procedure for ‘sell or further process at the split-off-point’ was used for the calculations (Garrison, 1991).


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Table 1: Recovery Rates (%) of Eleven (11) Wood Species

• From GDV, (2005)

• ODUM/IROKO has very good durability, fungus resistance, very minimal insectinfestation and reasonably termite-resistance, and

• AVODIRE has Low durability and high susceptibility to fungal and insect attack

RESULTS AND DISCUSSIONS

Wood SpeciesSpecies Average

Recovery Rates Wood Species

Species Average

Recovery Rates

ODUM/IROKO 65.97 AVODIRE 51.60

MIXED REDWOOD 60.90 DAHOMA 57.35

TEAK 56.10 ALBIZIA 57.23

MAHOGANY 63.78 AKASAA 61.69

AFROMOSIA 55.87 EMIRE 55.28

HYEDUA 63.97

GENERAL AVERAGE RECOVERY RATE = 59.07

RECOVERY RATE OF CONVERTING LUMBER TO GARDEN

FURNITURE

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Values/m3 of Lumber (Raw material costs) and Garden Furniture (Income after further processing)

• Free-on-Board (FOB) Values/m3 of Lumber (Table 2)

Table 2: Annual Cumulative Average FOB Values of Lumber and Garden Furniture


Product Type

Yearly Values/m3 (€) of Products

2003 2004 2005 Average Value/m3

Lumber (KD)

Garden Furniture

352.980 363.910 387.100 367.997

1,917.800 2,086.330 1,996.030 2,000.050

SOURCE: TIDD Export Report-2003 to 2005

•Lumber = €367.997 is the raw material cost/m3 for the production of garden

furniture, in general

• with Average Recovery Rate of 59.07%, implies that 1.693m3 is needed for 1m3 of

garden furniture, 19

• Hence FOB value of lumber (KD) for 1m3 of garden furniture

(€367.997 x 1.693m3) = €623.019

• Generally, garden furniture has an average value (FOB) = €2,000.050/m3

• By Products’ income/value= €73.078/m3 ≡ 3.65% of FOB

•Total income from garden furniture =€2,073.128/m3

However, the FOB values of different wood species are different - Table 3


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Species of Wood Annual Average

Values/m3 of Lumber

Annual Average Value/m3 of

Garden Furniture Value Difference

Percentage of Difference over

lumber

Odum/Iroko 657.26 2,473.27 1,816.01 276.30

Dahoma 323.05 1,033.42 710.37 219.89

Emire 391.92 961.26 569.34 145.51

Teak 624.68 2,530.18 1,905.50 305.04

M. Redwood 252.95 1,939.32 1,686.37 666.68

Mahogany 605.16 1,722.89 1,117.73 184.70

Avodire 355.87 1,625.58 1,269.71 356.79

Albizia 414.31 792.95 378.64 91.39

Akasaa 525.24 1,179.91 654.67 124.64

Hyedua 511.18 2,283.34 1,772.16 346.70

Otie 333.10 1,598.12* ---------- ---------

Afromosia --------- 2,946.93 ---------- ----------

Papao/Apa 613.71 1,613.54* ---------- ----------

Danta 394.44 1,524.90* ---------- ----------

Walnut 376.74 1,840.68* ---------- ---------

Sapele 548.18 1,328.43* ---------- ---------

RESULTS AND DISCUSSIONS Table 3: Annual Average Values (FOB) /m3 of Lumber (KD) and Garden Furniture from

Different Wood Species (€)

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Table 4: Average Total Differential/Incremental Costs Due to Conversion of Lumber to

Garden Furniture.


Cost Item

Amount involved (€)

Lumber (KD)(value of volume for

1m3 furniture-€623.019)

1m3 Garden Furniture

(€2,000.050)Differential/Incremental

Costs & Their Percentages in Furniture Value

Marketing and Taxes

Labour

Other Expenses

Other Materials Total differential cost

Raw material (lumber)

Total Product Cost

14.42% = 89.839

(623.019-89.839)

13.42% =268.407 178.568 (8.93)

328.298 (16.41)

505.284 (25.26)

323 .808 (16.19)1,335.958 (66.79)

533.180 (26.66)

1,869.138 (93.45)

Source: Study Company and Internal Revenue Service

• Thus, €130.912 ≡ 6.55% of the FOB value of garden

furniture is left as profit

Cost of converting lumber to garden furniture for sale - Table 4

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Scenarios indicate that costs range from €1,750.805

(Gh¢2,451.127) S(5) to €2,007.051 (Gh¢2,809.871) S(4),

S(4) is higher than FOB value (€ 2,000.050) of furniture.

This seem to agree with literature that,

Africa’s poor export performance is mainly from

high production costs and unfavourable policies of

governments(Amjadi and Yeast, 1995).

However, costs differ from one species to another due to

differences in values of lumber and furniture as in Table 3.


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Scenario Analysis of Costs and Benefits of Garden

Furniture (in general)

• Additional incomes,-Table 5

Table 5: Additional Income after Producing and Selling Garden Furniture (€/m3) and their Percentages, in

relation to Average FOB Value (after marketing cost & Taxes) of lumber needed (€ 533.180)


ScenariosAdditional income

(€)Percentage

increase

Scenario1(Base case- Vol.=2001.532m3) 203.990 38.25

Scenario 2 (Vol. =2001.532m3) 149.674 28.07

Scenario 3 (Vol. =2001.532m3) 120.393 22.58

Scenario 4 (Vol. =2001.532m3) 66.077 12.39

Scenario 5 (Vol. = 2332.685m3) 334.414 62.72

• Additional incomes range from €66.077/m3 ≡Gh¢75.314, (Scenario 4) to €334.414/m3

≡Gh¢381.163, (Scenario 5),

•represent12.39% and 62.72% value increase respectively, on every 1.693m3 of

lumber used to produce and export 1m3 of garden furniture.

•All are opportunity costs of lumber export24

Scenario Analysis of Costs and Benefits of Garden Furniture from Different Wood Species

Applying the five (5) scenarios, on nine (9) selected wood species,

only three (3) were profitable under all the five scenarios -(Table 6).

Table 6: Profitability (%) of Nine (9) Wood Species in Relation to the Income obtained

from Export of their Lumber Volumes used to Produce 1m3 of Garden Furniture

* Species found profitable and therefore viable for specialization, should the need be.


Wood Species Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5

*Odum/Iroko 33.38 26.94 23.46 17.02 48.86

*M. Redwood 86.94 71.66 63.42 48.14 123.63

*Teak 23.91 18.21 15.14 9.44 37.59

Avodire -18.13 -29.03 -32.29 -41.50 3.96*

Mahogany -44.31 -51.00 -54.60 -61.29 -28.25

Albizia -115.85 -124.63 -129.37 -138.14 -94.77

Akasaa -90.39 -97.84 -101.86 -109.32 -27.51

Emire -113.80 -122.74 -127.56 -136.50 -92.34

Dahoma -90.01 -101.28 -107.35 -118.62 - 62.96

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Losses of the six wood species is attributable to;

• low recovery rates,

• inadequate value difference between their lumber andgarden furniture.

• But effect of inadequate value differences is morepronounced;

• since conversion process requires about €1,335.958 tocancel all differential processing costs (Table 4),

• and value differences for such species range from highest of €1,269.710 for Avodire, to lowest of €378.640 for Albizia (Table 3).

Hence with even 100% recovery rate, these species may stillnot be profitable.


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Generally, recovery rate from kiln-dried lumber to garden furniture is about 59.07%, different wood species have different, 51.60% to 65.95%.

by-products’ income is vital in aiding either profit making or losses reduction.

Producing 1m3 of garden furniture costs about €1,750.805 (Gh¢2,451.127) to €2,007.051 (Gh¢2,809.871) , in total

However, 1m3 of garden furniture yields additional income in percentage range of 12.39% and 62.72% increase in value, of the total volume of lumber used.

Converting kiln dried lumber to garden furniture is generally profitable, but focus should be on Odum (Milicia excelsa), Mixed Redwood, and Teak (Tectona grandis).

CONCLUSIONS

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Conversion of lumber to garden furniture should be encouraged

to generate more income and employment for the growth of the

Ghanaian economy.

Odum, Mixed Redwoods and Teak are more profitable species

and should be giving priority in reforestation and other

plantation efforts.

Efforts should always be made to market and sell all

by-products of the production process to improve on profits or

reduce losses.

Tax reductions and other incentives should be used to attract

investors into further processing lumber to garden furniture

before exports.

RECOMMENDATIONS

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Sincere appreciation is owed to; Management of Kumasi Polytechnic

Management and Staff of the study company

Dr. N. A. Darkwa of the Faculty of Renewable Natural Resources

KNUST-Kumasi

Mr. Albert Zanu- Deputy Chief Accountant of the study company

Messrs, Emmanuel Ben Quansah of Standard Chartered Bank,

Ghana Ltd.-Kumasi; Haruna Alhasan, Ecobank Ghana Ltd.-Kumasi

Messrs Kingsford E. Anane and Albert Offei-Nyarko of Timber

Industry Development Division (TIDD)- Kumasi; and

Messrs Tuffour Walter and James D.D.T. Dogoli of the Internal

Revenue Service in Kumasi.

• May all be blessed accordingly!

ACKNOWLEDGEMENT

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THANK YOU ALL

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Business

Session 8 ic2011 dadzie