Prospect of Establishing a Micro Industry of Ginger Coffee
Production
Fithria Novianti, Febtri Wijayanti, Carolina Carolina, Mirwan A Karim, and Arie Sudaryanto
Center for Appropriate Technology Development - Indonesian Institute of Sciences
Keywords: Sumba Barat Daya, Sustainabilty, Ginger Coffee Microenterprise.
Abstract: Low value add gained by farmers of Sumba Barat Daya (Southwest fo Sumba) as they sell coffee as beans
rather than processed product. We conducted a research to explore opportunity to develop microenterprise
based on ready to consume processed coffee production. A case study was implemented through direct
observation to activities of a micro industry producing ginger coffee in Wewewa Tengah SubDistrict of Sumba
Barat Daya District of East Nusa Tenggara Province. In-depth interview was used for data collection in order
to gain quantitative depiction of the business. The data was inserted in financial calculation to find out business
feasibility. Financial analysis reveals a positive Net Present Value of IDR109,696,529 and Internal Rate of
Return of 5.76% assuming that the interest rate of Credit for Bussines (KUR) ia 9,0%. It also shows 3.05
Probability Index which indicate the prospect of developing the business sustainable in micro scale providing
that 1) they acquire continuous assistance of technology as well as business management 2) the business is
managed based on socio-business system accommodating sosio-economic condition of the locals 3) the
business is managed as a community owned cooperative in which fair share system is applied. To conclude,
this could be a feasible business system to achieve prosperity for rural.
1 INTRODUCTION
Coffee is one of plantation main commodities in
Indonesia. There are several cultivated common kinds
of coffee, such as arabica coffee, robusta coffee,
liberica coffee and so on. There are also various kinds
of Indonesian coffee famous internationally and
become source of pride in Indonesian archipelago,
namely, Luwak coffee, Jawa coffee, Toraja coffee,
Sumatera coffee, Kintamani coffee, Lanang coffee,
Wamena coffee, Gayo coffee, Jember coffee, etc.
(Neilson.J, 2013)
According to Coffee Commodity Tree Crop
Estate Statistics of Indonesia (2014), the coffee plants
are mostly spread in Sumatera, Java, Nusa Tenggara
and Bali, and Sulawesi. Indonesian coffee production
in 2015 increased approximately 739,005 tons per
year from the total plantation area of 1,254,382 Ha.
The production, mainly derived from public
plantation sector was by 706,770 tons (95.64%), and
the rest was derived from Indonesia state plantation
by 14,690 tons (1.99%) and private plantation by
17,545 tons (2.3%). Robusta coffee is the most kind
planted with quantity production 559,058 tons
(75.65%) then Arabica coffee of which the
production was 179,947 tons (24.35%).
In Sumba Barat Daya District in 2013, it was
produced 3,521 tons or 23,06% of Nusa Tenggara
Timur total production. This product was obtained
from 10,197 Ha area of planting (Tree Crop Estate
Statistics of Indonesia, 2014). Coffee is a potential
plantation commodity that becomes the source of the
livelihood of most people in Sumba Barat Daya.
Although, the coffee plantation dominates the public
plantation in some areas, particularly in Wewewa
Tengah, in contrary, the society income from this
plantation is low. It is because of the low added value
that can be obtained as a result of the low skills in
processing coffee commodities. Whereas, the
increase of value added in coffee commodity can
contribute to regional economic development through
the establishment of coffee processing business unit
which does not only produce dry coffee beans, but
also in the form of processed products (dried green
coffee beans, coffee powder) which has added value
(Haryati, 2008).
The coffee processing into worth-selling coffee
powder is a relatively new idea for Sumba Barat
Daya. Most of the total coffee production is traded in
the form of coffee beans so that the added value
obtained by farmers is very limited. In other words,
234
Novianti, F., Wijayanti, F., Carolina, C., Karim, M. and Sudaryanto, A.
Prospect of Establishing a Micro Industry of Ginger Coffee Production.
In Proceedings of the 2nd International Conference on Economic Education and Entrepreneurship (ICEEE 2017), pages 234-239
ISBN: 978-989-758-308-7
Copyright © 2017 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
there is an opportunity to increase the added value
through the introduction of appropriate technology,
especially in coffee processing. There are two
business units that recently begins to process dried
green coffee beans into coffee powder. This case take
the only one legally registered business unit in Sumba
Barat Daya.
As a start-up business unit in coffee processing,
several constraints and weakness are found in this
coffee processing related to limited fund, human
resources, and not intensified marketing (promotion)
and limited supporting production tools (Supriatna
and Aminah, 2014). Actually, this business has the
potential to be developed due to its variations in
accordance with local tastes (ginger coffee), and the
business competition is low and there is government
support such as training, exhibition and capital
assistance.
According to the explanations above, the author
conducts this research to analyze the business of
small-scale ginger coffee processing in Wewewa
Tengah of Sumba Barat Daya. It aims to recognize the
opportunity of the added value gain for those who
process the coffee and sell it in the local market.
Using the financial feasibility analysis on this ginger
coffee production, it is expected to provide input for
the people coffee business in order to become a
sustainable micro business activities.
2 METHODS
2.1 Research Place and Time
This research was conducted in the business unit of
ginger coffee processing in Omba Rade Village,
Wewewa Tengah, Sumba Barat Daya District, Nusa
Tenggara Timur. The research period was September
until December 2015.
2.2 Research Method
This research used a case study method. By using this
method, it is expected to learn the complex
phenomena in the limited opportunity to organize the
activity observed (Baxter and Jack, 2008). To obtain
the accurate data, we conducted direct observation
towards processing of coffee beans into ginger coffee
powder in the business unit of coffee production so,
therefore, it was collected information about
equipment investment capital, working capital,
production cost, variable cost, fixed cost, labor cost
and other data related to this study. An in-depth
interview was used as data and information collecting
technique to obtain quantitative description for the
financial analysis. The descriptive analysis was used
to depict phenomena found in organization process of
business unit as the subject of this research.
2.3 Data Processing Method
According to Chauhan. (2014), to explore financial
feasibility in agro-industry business, financial
analysis method can be applied. Therefore, the data
were processed in the form of tabulation to apply R/C
Ratio analysis, Net Present Value (NPV), Internal
Rate of Return (IRR), Profitability Index, and
Payback Period. The total cost of production (Total
Cost = TC) is calculated through variable cost
indicator (Variable Cost = VC) and Fixed Cost (FC)
as follows:
(1)
Calculation of R/C Ratio (Revenue Cost Ratio) is
business efficiency that is comparison size between
Revenue (R) and Total Cost (TC). By R/C value, it
can be known whether a business is a profitable or
not. The business will be appointed as a profitable
business if the value of R/C > 1.
(2)
An analysis of NPV (Net Present Value) is
applied to see how high the investment value by
considering the value of currency. NPV is a criterion
of business feasibility that can be defined as a recent
net−the result of the difference between Benefit (B)
and Cost (C). A business is feasible to run if the value
of NPV is > 0.
(3)
Bt = Gross Benefit in year –t
n = Economic age
Ct = Gross cost in year –t
i = Interest rate
IRR (Internal Rate of Return) is used to know how
high the fund of a planned business which allow the
business to cover back the capital and interest issued.
The business is feasible to run if the value of IRR is
> applicable interest rate. Generally, the formula of
IRR:
(4)
i1 = discount factor that still contributes NPV
to be positive
Prospect of Establishing a Micro Industry of Ginger Coffee Production
235
I2 = the lowest discount fator that contributes
NPV to be negative
NPV1 = Positive Net Present Value
NPV2 = Negative Net Present Value
Profitability Index (PI) is a comparison of the
present value of future cash inflows to the value of the
proposed investment. Through Profitability Index, it
can be calculated the amount of value created per unit
of invested investments. An investment is feasible to
run if the value of PI is > 1. In general, the
Profitability formula is:
(5)
Payback Index (PI) is used to estimate the
duration of a business investment refund. Payback
Period is the minimum time to return the initial
investment in the form of cash flow based on total
receipts minus all costs.
(6)
The processing of coffee bean into coffee powder
is conducted by limited technology support. The
specific tools, such as drying rack, tray, pan, stoves,
crockery, coffee grinder, and tilting sealer have
become the main capital of this business. Other tools
are needed such as outer skin peeler machine, peeler
machine through rent tool system in coffee harvest
season.
3 RESULTS AND DISCUSSION
The costs included into investment cost in the unit of
ginger coffee processing are cost capital for 5 years
consisting of fixed cost and variable cost. Investment
costs consist of machine and tools purchasing cost
with the total amount of IDR. 4,500,000 is used
during the investment period with the details shown
in table 1. The purchase of this machine and
equipment is only once at the beginning of investment
for subsequent replacement of equipment according
to tool age with depreciation value by IDR. 88,194.
Table 1: Equipment Investment on Ginger Coffee Processing Unit
No.
Tools
Qty (unit)
Total Price (IDR)
Tool age
(month)
Depreciation (IDR)
1
Drying rack
2
400,000
36
11,111
2
Tray
20
400,000
24
16,667
3
Pan
2
300,000
60
5,000
4
Stove
3
450,000
60
7,500
5
Coffee Grinder
1
2,100,000
60
35,000
6
Tilting sealer
1
250,000
24
10,417
7
Crockery
1
150,000
60
2,500
Total
4,050,000
88,194
The variable cost is the cost incurred by the
business unit in each production process cost that
includes the cost of purchasing raw materials of
coffee and non-coffee, fuel costs, packaging costs,
equipment rental costs, and labor costs (daily) with
the proportion of expenditures (See Figure 1).
Variable costs (VC) spent by this coffee processing
business unit worth IDR 10,522,195/month. Fixed
costs (FC) include equipment depreciation cost,
transportation and communications costs, promotion
and administration costs, and general costs
(electricity, water and sanitation) of IDR
398,194/month. Therefore, the total production cost
(TC) required by this business unit is IDR 10,910,389
each month.
Figure 1. Variable Cost Proportion in the Process of Ginger
Coffee Processing
ICEEE 2017 - 2nd International Conference on Economic Education and Entrepreneurship
236
To know the feasibility of an agroindustry
business, it can be seen from the aspect of financial
feasibility which includes the determination of R/C
Ratio, Net Present Value (NPV), Profitability Index
(PI), Internal Return Rate (IRR), and Payback Period
(PBP).
The frequency of the production process
performed by the coffee processing business unit in
the first year ranges around 6 times a month, each
processing produces 15 kg of coffee beans and 3 kg
of local ginger becomes 17.5 kg of ginger coffee
powder. Ginger coffee powder is sold in 2 types of
packaging namely, pure ginger coffee with the
contents of 50 grams and 100 grams as the main
product, and a 20 grams of ginger coffee as a
promotional product.
In this calculation, it is used the increase of ginger
coffee production assumption and due to the limited
ability of the business unit in terms of technology
procurement and business management. The business
is assumed to increase its production slowly by
increasing the production time to 8 times a month in
the 2nd year and 10 times a month in the 3rd year and
beyond.
Table 2: Cash Flow in Ginger Coffee Production Process
Every Month (IDR)
Unit Description
Year 1
Year 2
Year 3
Year 4
Year 5
Ginger Coffee
Production (kg/month)
84
140
166
169
175
Total Production Cost
(IDR1000/month)
6,183
10,073
11,922
12,101
12,477
Sales of Packaging
Ginger Coffee 50 gr
(IDR1000/month)
7,059
11,704
13,899
14,142
14,630
Sales of Packaging
Ginger Coffee 100gr
(IDR1000/month)
1,604
2,660
3,159
3,214
3,325
Total Sale
(IDR1000/month)
8,663
14,364
17,057
17,356
17,955
R/C Ratio
1.40
1.43
1.43
1.43
1.44
Based on the calculation results, it is obtained that
R/C Ratio is more than one, so the business is
considered profitable. The ginger coffee sales
increase every month (See Table 2). Although the
production of ginger coffee is increasing every year
but R/C Ratio tends to be stagnant, which ranges from
1.40 to 1.44 (See Table 2).
The NPV value is used to see whether a business
is feasible or not. The positive NPV value indicates
that the effort is feasible to implement, whereas if the
NPV is negative then it means the business is not
feasible to implement. From the calculation results, it
is obtained the value of NPV ginger coffee production
with a positive value, amounted to IDR 134,173,933
in the period of business for five years which means
that the business is feasible to do.
The value of Profitability Index (PI) is more than
one, indicating that the business is feasible to run.
Based on the calculation with initial capital worth
IDR 36.000.000, ginger coffee business has a value
of PI= 3.73, so, the business is considered feasible to
run. This means that in 5 years this business has a cash
flow of 3.73 times of the value of initial investments.
The IRR value is used to see whether or not a
business is worth developing. If the IRR value is
higher than the prevailing interest rate then the
business is feasible to develop. In this business
calculation this bussines use Credit for Bussiness
(KUR) with 9.0% annual, where the ginger coffee
processing business is a micro business that needs
support from the government. From the calculation
results, it is obtained IRR value of ginger coffee
business worth 6.66%. The IRR value which is only
slightly larger than the interest rate indicates that the
business is feasible to develop but has a slight profit.
Oppong, et al. (2014) study recommend re-
introduction of soft loans for small and medium
business by the government and financial institutions
as a solution to develop micro-business
entrepreneurship (Zabaznova, 2014).
A business is considered feasible if Payback
Period value is smaller or equal than the age of
business investment. From the calculation results, it
is obtained Payback Period for 19 months with the
assumption of borrowing funds for 3 years for
business age for 5 years, therefore, ginger coffee
processing business can be considered feasible to do.
Based on the results of financial analysis, ginger
coffee production increases every year from the sales
value of IDR 8,663,287/month in the first year,
increasing to IDR 17,955,000/month in the fifth year.
However, this business has R/C Ratio that tend to be
stagnant, which ranges from 1.40 to 1.44. Several
possible causes are (1) production of ginger coffee
using simple technology; and (2) a traditionally sales
pattern, where the ginger powder coffee market is
limited to the Waikabubak market (8 km far from the
production house), and one outlet in the district town.
According to the research results of Radam, et al.
(2008), in order to sustain operations and growth of
SMEs, efforts should be taken to assist SMEs to
develop their managerial and technical skills
especially in creating innovations and generating
economic value from knowledge. Existing training
and outreach programs should aim at enhancing
entrepreneurial skills and capabilities in the area of
business planning, marketing and financial
management among the owners/managers. Although
market expansion could be a solution to stangnant
business performance, being a micro small
enterprises the effort cannot be performed easily. It
Prospect of Establishing a Micro Industry of Ginger Coffee Production
237
should always start with skill development and
capability to adopt market access (Githaiga et al.
2016).
From the positive NPV value, which has the
amount of IDR 134,173,933 with initial investment of
IDR 36.000.000 it is obtained the value of
Profitability Index of 3,73. Both points show that the
business is feasible and can be developed, but the
value of IRR coffee processing business is likely to
be low, at 6.66% and only slightly higher than the
interest rate with Payback Period for 19 months.
Therefore, the profit earned by this business is quite
low. Therefore, in the coffee processing business in
Sumba Barat Daya, it is necessary to intervene local
government to protect the coffee processing business
through any program such as Credit for Bussiness
(KUR) program or other similar program that gives
low interest to business actor, technical assistance for
SMEs, and help the SMEs to market penetration.
General challenge faced by micro-small enterprise is
their slow growth, and idea of inducing venture
capital to boost the growth as found in a study to
creative SMEs in Makasar (Heslina, 2016) could be
accommodated. It is recommended that SMEs
operators should be educated on how to plan,
organize, direct and control their businesses (Oppong,
et al.2014).
As the results of in-depth interview to business
owner, it is obtained that the business nature of this
coffee processing business unit is more directed to the
creation of employment for the community around
the production house. While the product is sold at a
price that does not give burden buyer who is a
community with low purchasing power. Based on the
proportion of variable costs in the process of ginger
coffee production, it can be seen that the highest cost
is the cost of purchasing raw material coffee (47.84%)
and labor costs (33.78%). This indicates that the
ginger coffee processing business is trying to provide
the greatest benefit for local economic development.
According to the research results of Atmaja, et al.
(2015), coffee farmers can increase their income,
apart from the coffee harvest, through increasing the
added value of coffee by processing coffee powder.
Powder coffee processing business can be improved
by promotional efforts and expansion of marketing
area.
If the coffee processing business uses the
cooperative system, the profits collected can be
directed to improve the welfare of its members
through the fair annual benefits (SHU) and the
establishment of new business units that can expand
employment. Based on this, the role of the
government is very significant in developing and
expanding of public-based coffee processing business
where this business can expand employment need and
provide benefits for the community of cultivators and
coffee processors in Sumba Barat Daya. Oppong, et
al. (2014) study recommend that government should
re-introduce the small business credit scheme so that
beneficiaries can use them to run the micro, small and
medium enterprises.
4 CONCLUSIONS
The coffee business unit may become a sustainable
micro-enterprise activity if (1) a consistent mentoring
is performed both for the technology and
management sides of the business; (2) the business is
a social business that concerns the low purchasing
power of local society and it does not harm the
business itself; (3) the business is conducted in groups
through cooperatives where the remaining results can
be used to improve the welfare of the community
members.
The results of this research can be used as a source
of information to build community empowerment
roadmap through coffee processing business with
specific character in Sumba Barat Daya.
ACKNOWLEDGEMENTS
The author thanks the Center for Appropriate
Technology Development of LIPI (Indonesian Scince
Agency) in Sumba Barat Daya, as well as to the
Regional Government of Sumba Barat Daya that has
provided support so that this activity can be
implemented. Special thanks are given to Hari
Siswoyo, Dominggus Bula, Elizabeth Malo, Merry,
and Johanis Pageru who have helped us in reading the
socio-economic potentials of coffee producers in
Sumba Barat Daya.
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