Integrating Backward: How Much Plant to Build, and What You Must Sell to Strangers

How to read this sheet

Two inputs decide this and both are habitually flattered. The price you could charge others is not the price you pay: you would be a newcomer selling a commodity conversion against houses that have been doing it for thirty years, and the discount is real. And the share of the surplus you could place is not a hundred per cent - a plant sized above its parent needs a sales function, a reputation and a shade library it does not have on day one. Put honest numbers in both and most oversized projects fail on this sheet before the bad year is even tested. The capacity that will not sell is charged its full capital and that is deliberate. A half-empty dyehouse does not cost half a dyehouse; it costs a whole one and runs at half. Any sizing method that spreads capital over nameplate capacity rather than over saleable output will recommend building too large, which is why these projects are so often built too large. Read the bad year as the real test rather than as a sensitivity. Buying a conversion is a variable cost that goes away when volumes fall; owning one is a fixed cost that does not, so integration always raises operating leverage and always looks better in the year it is approved than in the year it is commissioned. A size that only pays at today's volume is not a project, it is a bet on the order book. What is not modelled. Every benefit here is a cost saving, and integration is often justified on lead time, on shade control, on being able to take a repeat in ten days - all real, all worth money, none of it computable from these inputs; add it as a lower conversion charge only if you can say what it is worth. Nothing prices the management attention a new business consumes, which for a first integration is the largest hidden cost there is. The plant is assumed available and utilised from year one, when a dyehouse takes two seasons to run properly. And selling to strangers who are also your competitors changes what they will pay you and what they will tell your customers, which is a strategic question this sheet cannot answer.