Lumec recently conducted a market and viability assessment for Green Corridors’ KwaMashu Beneficiation Centre (KMBC). The purpose of the study was to determine the market potential of 5 green products that have been prototyped at the KMBC and to assess the viability of each based on current alternatives in the market.
Green Corridors is doing some amazing work at their KMBC, prototyping a range of products made from materials that are not easily or commonly recycled. Using materials such as Spanish Reed (an alien invasive plant) and spent grain from a local brewery (my personal favourite – That Brewing Co), they are making bokashi compost; they are also using non-recyclable plastic, crushed glass, street-swept sand and building waste to make green pavers.
Green Corridors have recently launched a Backabuddy campaign to raise funds to install 200 pavers at a school in KwaMashu, so please do support this great initiative!
The ultimate goal of the study was to determine if an SMME could viably produce any/all of the 5 products. This was done by comparing the market price of current alternatives to the cost at which these products can be manufactured and sold. To determine the latter, we developed a viability model that calculates the cost to produce each product using current KMBC processes as a baseline. Since they are testing a range of processes and using almost 30 materials as inputs into the 5 products, it was a really interesting process that required a unique approach.
As a starting point, the value chain of each material was mapped to understand the unique process related to this, from source through to being in a state that can be input into the production process (i.e pre-processed). The model then calculated a cost per unit (either kilogram or litre) of each material based on sourcing costs, transport costs, and pre-processing costs. Pre-processing includes manual sorting processes (labour only) as well as machine-driven processes such as shredding, granulating, chipping, and crushing (labour and electricity).
The cost of the specific processes that each material undergoes was calculated (e.g. R1 per kilogram to manually sort and then R0,5 to crush a single material). By adding the cost of each pre-processed material that goes into each product, this yielded a material input cost per product. For example, it costs R1.5 for one material and R2 for the second material, which results in a total material input cost of R3.5 for the product.
Thereafter, the cost of manufacturing each product was calculated by determining the cost of operating each machine required to produce the product (again, both labour and electricity costs), and adding this to the total material input cost to result in a total production cost. An average cost was calculated for overheads, as well as interest repayments and depreciation on equipment and machinery depending on each product, which resulted in an average cost per unit (e.g. R5 per product is overheads, R2.5 is interest repayment and R1.5 is depreciation).
Adding these all together, and then adding a profit margin, the retail cost of each product was calculated. This was then compared with the retail price of current market alternatives to answer the question of whether or not an SMME could viably produce these products. A few products were considered viable, while a few were not – this is mainly given that alternative products on the market, using virgin materials only, are significantly cheaper. In addition, products such as polystyrene are expensive to transport and process given their light weight, and push up the cost of each product.
This process assisted Green Corridors (a) to understand the cost of producing recyclable materials as inputs into their various products, (b), to adjust the specific mix of recyclable materials to optimise viability, and (c) to determine which products have the greatest market potential.
From the process, the following learnings can be shared with other SMMEs in the recycling industry:
- It is very important to have a good understanding of the entire value chain of your business and the factors that influence the cost at each point of the value chain. This includes the cost of sourcing and transporting your materials and the cost of operating your machinery (especially labour and electricity costs).
- Most recycling business models fall short due to the cost of transport, so sourcing materials as locally as possible is the key. Companies such as Ocean Plastic Technologies are looking at localised pre-processing solutions where plastic can be shredded on site to increase the viability of transporting plastic.
- Developing a strong model based on a detailed value chain analysis will allow you to test the viability of different business models and approaches, which will support development of a rigorous financial model. Knowing the processes within a certain value chain where costs are too high, or which materials are pushing the price of your product out of the market, are essential in building a stronger business model.
- Doing some economic market research, even at a high level, will assist to build a robust business case for your business or product/s and boost your financial model. In our experience, most funders want to see a financial model that is supported by economic market research. Ultimately, if you can show that there is potential in your target market to sell X units per year and you can produce each product at Y rands, you can be fairly confident that your revenue projections are accurate and funders will be more likely to buy into your business model.
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