CASE 8.4 CONTINUATION OF THE TEXAGO CASE STUDY
Reconsider the case study presented in the supplement to Chap. 8 (on the CD-ROM) involving the Texago Corp. site selection problem. Texago management has tentatively chosen St. Louis as the site of the new refinery. However, management now is addressing the question of whether the capacity of the new refinery should be made somewhat larger than originally planned. While analyzing the site selection problem, the task force had been told to assume that the new refinery would have the capacity to process 120 million barrels of crude oil per year. As indicated in Table 3, this then would increase the total capacity of all the corporation’s refineries from 240 million barrels to 360 million barrels. According to marketing forecasts, Texago would be able to sell all its finished product once this new capacity becomes available, but no more. Therefore, the choice of 120 million barrels as the capacity of the new refinery would enable all the corporation’s refineries to operate at full capacity while also fully meeting the forecasted demand for Texago’s products. However, to prepare for possible future increases in demand beyond the current forecasts, management now wants to also consider the option of enlarging the plans for the new refinery so that it would have the capacity to process 150 million barrels of crude oil annually. Although this would force the corporation’s refineries collectively to operate below full capacity by 30 million barrels for awhile, the extra capacity then would be available later if Texago continues to increase its market share. This might well be worthwhile since the capital and operating costs incurred by enlarging the plans for the new refinery would be far less (perhaps 40 percent less) than constructing and operating another refinery later to process only 30 million barrels of crude oil per year. Furthermore, management feels that this extra capacity might be needed within a few years. The extra capital needed to increase the capacity of the new refinery by 30 million barrels is estimated to be $1.2 billion. The cost of carrying this extra capital would be $100 million per year, although this figure could change depending on future interest rates. If some of this extra capacity is used at the new refinery, the total operating cost for the refinery would be somewhat larger than the amount shown in Table 6, but decreasing the production rate by the same amount at another refinery would decrease its total operating cost by a comparable amount. Since the operating cost per million barrels of crude oil processed is roughly the same at all the refineries, including the new one, the total operating cost for processing 360 million barrels should not be substantially affected by the allocation of this work to the refineries. However, management feels that having some flexibility for where to allocate this work might enable substantially reducing the cost of shipping crude oil and finished product. Since Table 7 indicates that the total annual shipping cost for crude oil and finished product would be $2.92 billion with St. Louis as the site for the refinery, management hopes that substantial reductions can be achieved in this way. Figures 4 and 8 show the optimal shipping plans for crude oil and finished product, respectively, when the new refinery is in St. Louis and has a capacity of processing 120 million barrels of crude oil per year. Management now is asking the task force to analyze the situation under the option of increasing this capacity to 150 million barrels. In particular, management wants the following questions addressed. Under the new option, how should the shipping plan for crude oil in Fig. 4 change, and how much reduction in the total shipping cost would be achieved? How should the shipping plan for finished product in Fig. 8 change, and how much reduction in the total shipping cost would be achieved? Finally, assuming...
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