Tasko Pal
Heron Corporation
   |
Posted - 2008.02.03 03:55:00 -
[1]
 Originally by: cosmoray
This very interesting. Your business examples of Raven production and the printing ink business are classic types of case studies from most MBA programs in the USA and probably all over the world.
FACT: Your OVERALL profit maybe 10% on each production run
FACT: Your production profit from each run is much less if you could sell the minerals at a profit
The real point here is that you are segmenting your business, and each unit is making a different level of profit. If your mineral reselling makes 7% and your production makes 3% why invest so much capital in the production side with such a small return. You would be better re-selling minerals and using the capital (900 mill+ for Raven BPO) to invest in other things.
Same in RL for the printing company. If the company can make a large return re-selling ink, they can reinvest the capital in new higher returning projects.
An example of this is from the 1980's when some energy intensive using manufacturing companies in California had a contract to sell their electricity back to the generators at a fixed price. When the cost of the electricity dropped beneath the re-sale value most of the companies stopped manufacturing anything as they made a higher return reselling the electricity back to the suppliers.
Two things. First, using Danari's figures, Danari claims he gets around $160 million per week from turning those minerals into Ravens rather than selling the minerals directly. Second, $260 million divided by 8 is a bit over 30 ravens a week, which adds up to more than 120 a month. Sounds doable and means the BPO is probably almost always in the factory. Even if we use your guess that only 30% of his profit is due to the BPO and the effort of manufacture, that's still a bit shy of 80 mil isk a week or $300 million as Danari points out. Frankly, I'm on Danari's side. Maybe the numbers are wrong, but if they aren't, then Danari has a compelling case.
A second thing, the more recent California energy crisis is a better example. For a time, west cost manufacturers from British Columbia all the way down to Mexico had incentive to resell their power (obtained through old fixed rate contracts) rather than continue to run the plant. I know virtually all aluminum smelting (which takes a lot of electricity) stopped in the Northwest US for a couple of months. And I know of a copper mine in New Mexico that not only shutdown to resell their electricity, but it started running its emergency backup generators in order to sell that power as well.
|