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PostPosted: Thu Nov 08, 2012 7:34 pm 

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User avatarShadow Raven Industries
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First off I want to be clear that this is not a challenge to the suggestions made by Professor in this thread regarding optimal use of high QA extraction tools and size of raw material sites to run. I agree wholeheartedly with his general findings and I believe they will apply to a vast majority of circumstances that businesses will find themselves in.

That being said, as a manufacturing focused company making very high QA products I wondered if I was actually giving up profitability by losing the land slots needed for factories to raw materials sites so that I could work within the suggestion made by Professor. This is a study of how I arrived at the answer to that question and its implications for other companies that may find themselves in a similar situation.

The first question to be answered is how much value should be assigned to a land slot that would support a raw materials site instead of a factory. Because I have a developed manufacturing business the value I use is not the standard that would be assigned as an opportunity cost for contract expansion, but the net income that an additional factory would produce.

The second question is given the inefficiencies of what I will hereafter refer to as an “absurd” site, can the net income from one absurd site combined with the net income of factories on the remaining land slots in question surpass the net income of “reasonable” sites on said land slots.

For this illustration I will use a comparison between a single 10 million ft. site and an equivalent number of 1 million ft. sites as these sizes were what I used real data to experiment with.

Output of a 1 million ft. site at 13% efficiency : 162,716,627 units/day (reasonable site)
Output of a 10 million ft. site at 10.5% efficiency: 1,307,739,969 units/day (absurd site)

(Both sites were run at the same salaries for the sake of simplicity, optimizing the respective efficiencies when dealing with a ratio in the range of seven or eight to one doesn’t seem to produce meaningful differences from my initial testing, I welcome anyone to challenge that if I am wrong).

Given the above, we can see that one absurd site outputs the same amount of materials as eight reasonable sites. Now let’s add some money to the calculations, using the following assumptions:

1). All products and additional products created are assumed to be sold at IMU prices
2). Factory net income is based on the median profitability of current factories
3). Raw Material costs are figured using the current market price of the highest QA tools
4). Raw Material costs are figured using a site with one week supply. I realize this isn’t the most realistic of assumptions, but I contend that a larger supply would be neutral to the overall discussion, and one week is what I had the data for.

Net income of one absurd site per day: $745,871,776
Net income of one reasonable site per day: $146,436,657
Net income of one factory per day: $82,665,773

Our second question from above translated into an equation form then becomes:

Is $745,871,776 + (7 * $82,665,773) > (8 * $146,436,657) ?

Answer: $1,324,532,185 > $1,178,096,511

I have purposely not factored in the building and time costs for creating additional factories because this model is more suited to already matured companies and not so much for developing companies. In my personal case, the decision here isn’t to build new factories, but to maintain existing ones instead of selling them to replace with raw material sites . That said, I would contend that even considering actual and opportunity costs of building additional factories, there is enough of a profitability buffer in these findings to still come out on the side of the absurd site.

Lastly, there are some limitations to this approach that may make it unsuitable for some companies.

1). Dependence on a reliable tool supplier or adequate supply on the market.
2). Extremely high upfront capital costs.
3). Ability to sustain expanded sales of factory products(or maintain current levels if not building new ones).

I would argue that one and three are going to be present in any strategy that is used. Number two can be a barrier but if the capital is available I believe it is well spent to produce additional returns.

I have a spreadsheet created that will run these calculations for any situation with the provided inputs. I would be curious how this would hold up given different scenarios, I don’t have the free time to do a lot of theoretical analysis with this so I offer it up freely to anyone who wishes to tinker and expand on it. All calculated spreadsheet totals are on a per day basis.

Spreadsheet link

I am continuing to modify the original spreadsheet to try to make it suitable for general use and in more scenarios, right now it can be used to compare the profitability of one large raw site and corresponding factories vs. smaller raw sites on the same amount of land slots. All calculations are run automatically based on information entered under the user input box. If anyone is interested in the excel file message me in game and I would be happy to send it, I just did a quick import into google docs for ease of sharing to the public.

I apologize that this isn't in more traditional guide format, this was all rather spur of the moment based on my recent foray into the raw material business. I would be happy to rework the formatting to keep it in this section if that is necessary.

Finally, thanks to Professor for the feedback on my findings and encouragement to share it with others.


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PostPosted: Fri Nov 09, 2012 3:55 am 

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One thought, some of the return from the large factories should be attributed not just to the land, but also to the capital invested.

If you use a fairly neutral capital value per day of 0.4%, and apply that to the two different scenarios in terms of the loss of interest value for additional factories less the savings on investing in smaller mines, my guess is large factories will cost much more than large mines and some of the benefit of using an absurd mine plus more factories might actually just be a return on investment of capital which might be realized as well in other ways.

If you have more cash than you need (as I do), then you might use a lower interest rate as the implied loss of income from larger capital invested in buildings, so maybe 0.15% per day (bond investment rate). On the other hand, if you are always short of cash you need, thne you might use a higher rate of 0.65% per day (bond borrowing rate). Either way, SOME value for the difference in investment between the two scenarios should be used to make the comparison more fair.


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PostPosted: Fri Nov 09, 2012 4:20 am 

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This is very interesting, thank you for the time and effort you put in for these calculations.
This could make self-sustaining companies much more profitabke if large enough


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PostPosted: Fri Nov 09, 2012 4:25 am 

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It would make them profitable, hypothetically. The problem is that increasing the size of raw sites decreases the margin significantly of raw materials. The only way to profit is through bulk at high quality.

High quality is hard to achieve when you don't have that many slots to dedicate to one product.

The obvious exception would be water for a farmer, for instance. Or Iron ore for a steel producer. Gold for a jewelry producer, etc. If you produce something and use a large percentage of a huge mine (10mft2 or so), then you might be able to produce it yourself very profitably.

Another thing to keep in mind is that at 10mft2 DMR is essentially ended. The final stage of DMR is about 10%, and buildings remain 10% efficient through until infinite sizes. This means, by induction, that if a 10mft2 Raw site makes 1 billion per day, for instance, then a 100mft2 raw site makes 10 billion per day.

The problem - selling the materials that come out of a 100mft2 raw site. Its a lot. Not to mention the 1m tools it uses per day.

APCE

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PostPosted: Fri Nov 09, 2012 5:10 am 

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Professor wrote:
One thought, some of the return from the large factories should be attributed not just to the land, but also to the capital invested.

If you use a fairly neutral capital value per day of 0.4%, and apply that to the two different scenarios in terms of the loss of interest value for additional factories less the savings on investing in smaller mines, my guess is large factories will cost much more than large mines and some of the benefit of using an absurd mine plus more factories might actually just be a return on investment of capital which might be realized as well in other ways.

If you have more cash than you need (as I do), then you might use a lower interest rate as the implied loss of income from larger capital invested in buildings, so maybe 0.15% per day (bond investment rate). On the other hand, if you are always short of cash you need, thne you might use a higher rate of 0.65% per day (bond borrowing rate). Either way, SOME value for the difference in investment between the two scenarios should be used to make the comparison more fair.


Thank you for pointing that out, I had thought that the increase in profits would be enough to still be a net positive even after figuring capital costs but I could surely be wrong. I will do the math for the example I've given then work on implementing it into the model.

Cost of building eight reasonable size raw sites: $4,201,805,400
Cost of building one absurd size raw site: $5,085,758,722

That gives us an immediate excess of $883,953,322 in costs

For the factories I'll use 100k size at 3x speed in Abalesk as that is what I used in the initial example.

Cost of building seven factories: $8,168,977,768
Time to build seven factories: 56 days

That gives us $9,052,931,090 of costs over 56 days. At the 3 different interest rates Professor mentioned that gives a capital cost of:

0.15% - $9,845,609,753, or $14,154,976 per day
0.4% - $11,320,800,362, or $40,497,666 per day
0.65% - $13,012,503,255, or $70,706,646 per day

Thus even in the most optimistic interest rate scenario, the absurd mine and factories still produces an excess of $76 million in profits. Of course this is using quite a few assumptions that will not always apply, I will try to work on a way to get this convertible to a more general calculation that can be applied easily.


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PostPosted: Fri Nov 09, 2012 5:29 am 

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User avatarShadow Raven Industries
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APCE Production wrote:
It would make them profitable, hypothetically. The problem is that increasing the size of raw sites decreases the margin significantly of raw materials. The only way to profit is through bulk at high quality.

High quality is hard to achieve when you don't have that many slots to dedicate to one product.

The obvious exception would be water for a farmer, for instance. Or Iron ore for a steel producer. Gold for a jewelry producer, etc. If you produce something and use a large percentage of a huge mine (10mft2 or so), then you might be able to produce it yourself very profitably.

Another thing to keep in mind is that at 10mft2 DMR is essentially ended. The final stage of DMR is about 10%, and buildings remain 10% efficient through until infinite sizes. This means, by induction, that if a 10mft2 Raw site makes 1 billion per day, for instance, then a 100mft2 raw site makes 10 billion per day.

The problem - selling the materials that come out of a 100mft2 raw site. Its a lot. Not to mention the 1m tools it uses per day.

APCE


I agree that there are limitations, it's my goal with exploring this to find them and push the boundary of what had been the common wisdom so to speak. I surely don't advocate getting a 100mft2 raw site, but I do believe that for some companies there is a better middle ground for profitability between the 10 million size and what the currently used strategies are.


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PostPosted: Fri Nov 09, 2012 5:47 am 

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This is essentially the same issue as factories have, which is big factories are less efficient than smaller ones, like big mines are less efficient than smaller ones. The power of using high quality inputs and high quality research is also the same. Raw materials research only contributes 34% to quality, but that is not that different from the percentage contribution of research to many factory products as well. With high research levels and high QA inputs, it may well be possible to make more profit overall from very large mines just as it is with really large factories if you have high research and high QA inputs. Thus, raw materials sites may scale as well as big factories do.

It is worth noting that this player making this post has purchased top research for three of the products that I bought from GPH and resold to him (aluminum, minerals, and water). He is making a huge investment in raw materials production, at least for these three products.

It is nice to see him taking a new look at the economics of the raw materials business.


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PostPosted: Fri Nov 09, 2012 6:31 am 

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This has forced me to do some thinking and analysis of the raw materials business. As a result, and partly due to my annoyance with being forced to pay prices for wood that I view as being outrageously high for QA0 wood, I have now build an "absurdly large raw materials site".

Timber Land
Land ID: 155361
Size: 250,000,000 ft2.
Book Value: β 377,045,765,989.81

Supply Left: 89,156,748,164
(700 days)

Extraction Cost: β 15.000 each

Cost per unit for the wood in this mine of 100 weeks duration = 4.23
Value of interest cost for this insanely large mine at 0.15% per unit of wood made per day = 4.63
Cost of extraction for this insanely large mine = 15 bucks per unit
Cost of tools used for this insanely large mine at 1400 bucks each for QA0 tools = 28.66
Value of land slot used for this one mine at 25 million per day per unit of wood made = 0.21
Total cost of production for this mine, including capital costs (at 0.15%) and land value = 52.72 each

It is my intention to use the output of this mine to supply every city in the game with all the QA0 wod that is needed for construction at a price of 110 bucks per unit for wood, which is still double my total cost of production, so not bad at all in terms of profits, and it sitll leaves me with a lot of room to come down in price if necessary for competitive reasons. Never again do I expect to be forced to pay 180 per unit or more for buying QA0 wood because of lack of alternatives. I now will have a cheap wood supply, and with output of 120+ million units of wood produced per day, I suspect there will be more than enough capacity to supply anyone who might need wood for a long time.

I also assume I will be storing a lot of the surplus wood for a very long time, but that is fine, because I won't have any QA decbe okay for QA0 wood used for construction. There will be some implied cost of interest for storing inventory, but I'm okay with that as long as QA does not matter. And, if the economy in Canjara ever recovers, it might be possible to even sell this insanely huge mine someday at profit, as the value of the wood in the mine might someday be worth more in a positive economy than the price I paid for it.

It also gives me the highest score in the game and the largest mine in the game, which might possibly have had something to do with deciding on the appropriate size for the mine.


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PostPosted: Fri Nov 09, 2012 6:33 am 

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Using my own calculations, I have even found using 10mft2 mines better to own than 100kft2 mines for making QA0 goods using QA0 tools for 1400. That is, assuming that the raw materials producer has some research (QA50+) that is used for speed.

The only problem with big mines is demand. A 10mft2 iron ore mine makes 11 million iron per day. That is enough to feed 5.5 million steel per day, which is enough to feed about 65 500kft2 steel factories. This means that, in all reality, the 10mft2 mine wouldn't be able to be run every day, but rather on a more reasonable pace (every other day, every third day, etc).

In goods where the demand is there (water, oil, and sometimes iron ore, depending on the market and your uses), then it is a great investment. To the furniture manufacturer, great investment. To the raw material producer without a lot of contracts (market sales), I don't know it.

I suppose it remains to be seen.

APCE

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PostPosted: Fri Nov 09, 2012 7:04 am 

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For making QA0 wood, when my options right now are to get ripped off by people charging 160, 180, or even more than 200 bucks each for wood to be used in construction, I am happy to have a lot of inventory in storage. QA loss won't be an issue. Inventory holding cost is low for me since I have a lot of cash and I am not buying bonds with it since returns are not very exciting to me from bonds, but that is my best use for the cash surplus right now. Thus, cost of holding inventory of QA0 wood (or bricks, or pipes) is very low for me.

I believe there is systematic speculation going on in building materials right now that is resulting in prices that are higher than is reasonable, and I am going to at least go after the wood market to get prices under control for QA0 wood. I will not be held hostage by producers who want to make huge profits from this commodity product. I won't price so low that smaller producers who just want to make a few bucks selling wood can not survive, but it won't be a huge source of extreme profits for anyone in the future.

If brick prices stay as high as they are now, that will be my next target to address. Pipes and glass are under control, but wood and bricks were starting to get very expensive. Boston even had some low QA wood listed at 300 bucks in Abalesk, and it was the cheapest on the market when I went to expand some buildings there. Not likely! I found enough to expand for one day, while I shipped in wood from Canara for day two and beyond expansions. I want the high prices for builders to stop, because it hurts me directly, but even more importantly, it is bad for other people who are building stuff for me and who sometimes have to either delay expansions waiting for me to invoice them products, or they end up paying a lot higher prices than I have built into my building pricing models.


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PostPosted: Fri Nov 09, 2012 7:18 am 

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Looks like this one big wood site will make about six times as much wood as all the wood producers in the game are currently making, in this one absurdly huge timber land. That is fine, as I am definitely in need of some serious inventory of wood for building. It is also possible that I will only end up running this mine for four months, and will need to keep the wood produced to use over the next few years. If the economy in Canjara turns around and booms, this huge mine with 100 weeks of inventory will be sold, at a profit. So, my goal is to make a lot of wood while the economy is weak and then live off and sell off the inventory from that huge mine for a long time after that.


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PostPosted: Sat Nov 10, 2012 1:03 am 

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The problem with the building materials market is that most building materials are far undervalued. That is, for a large company to make them.

Most people seem to feel that, for bricks, for instance, a price of around 130 is appropriate. But here is the reality.

When bricks sell for 130, a producer using moderated sized (100kft2) factories, has this to look at.

Cost of Clay - 10.5 (min now adays)
Cost of Water - .50
Total Input Cost - 26
Cost of Factory/Day - 8.75m
Production/Day - 170k
Price/Unit - 51.47
Total Price - 77.47
Profit - 52.53
Profit/Day - 8.9 million.

That is with no research. With a QA50 R&D in bricks, which is quite reasonable to obtain...

Production/Day - 221k
Price/Unit - 39.59
Total Price - 65.59
Profit - 64.41
Profit/Day - 14,234,610

A 100kft2 factory costs about 4 billion now adays, so this is a 10.6% return on assets. That is horrible - most producers can easily achieve 25%+.

If we set return to 25%, then the factory needs to make about 33.3 million per day. This means profit has to be 150.68. Price = 216.27.

Using this same pattern of estimation, I would recommend the following prices as being reasonable for building materials.

Bricks - 220-250
Wood - W/E you want to set it to, professor :)
Glass - 800
Pipes - 14500-15000

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PostPosted: Sat Nov 10, 2012 4:27 am 

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But that is how a public market works, the Bricks market is oversupplied (not surprising) and thus we see prices drop, that is when there is incentive to leave that area of expertise (opportunity cost of being in that market and not another).

Want to fix it, get people out of the brick Focus and into another focus.

Let supply and demand meet up at a better price.

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PostPosted: Sat Nov 10, 2012 4:34 am 

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What I am explaining is that the current prices of bricks are more accurately reflecting market value of factories than in the past.

Basically, bricks are better now than they were before. I doubt any attempt to push them down will be very profitable or successful.

APCE

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PostPosted: Sat Nov 10, 2012 5:27 am 

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Okay, I'll buy the concept that prices are not likely to go back to a level of 100 or 120 each anytime soon.

I don't agree, however, that prices of 220 to 250 each for bricks are reasonable. I suspect that there are few products that will make the kind of return with IMU prices that bricks would make with QA50 research in 100k factories. I'm open to being persuaded otherwise, but I would prefer to start with the assumption that there is no right to some specific ROE for factory value, but instead, that it is reasonable for a brick maker with a factory of 100k sq ft in Canjara to make as much profit per day as a building expander would make taking that same factory and expanding it by 50k in size over 21 days.

That is, start with assuming 25 million per day and 0.4% interest. Yes, I know it is also possible to justify higher daily prices and higher interest rates, but there are still people willing to build for the prices given, so I'd prefer to stick with those for this analysis.

On another point - why is clay priced so high? Is QA0 clay like QA0 wood? Just too few people making it, so prices are high? Should I make a second mine of 250 million sq ft to make QA0 clay, so we will have enough cheap clay to be able to make cheaper bricks? I don't like the idea that I am forced to pay more for bricks because clay prices are too high now.


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