Superior Grain

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Superior Grain Elevator
Superior Grain Elevator

SUPERIOR GRAIN ELEVATOR, INC.

EXECUTIVE SUMMARY

Superior Grain Elevator was located at Thunder Bay, Ontario, Canada’s third busiest port. With 14 giant grain elevators, Superior was able to load ships constantly sending grain to all parts of Eastern Canada and the globe. The ships were contracted for by agents who lined up the required tonnage of shipping capacity to fulfill the various contracts held with Superior. Although the agents tried to arrange for ships to arrive at Thunder Bay in a steady stream, the vagaries of lockage transfer times in the Seaway resulted in quite variable arrival times, at times forcing arriving ships to anchor when both wharfs were busy. This resulted in SGE having to incur demurrage charges at a rate of $2000 per day. Mike Armstrong, manager of port facilities for SGE, had just learned that the Canadian Government had negotiated a 5-year contract with Poland, and that Superior had been allocated some of the shipments. However, the two wharfs Superior currently had might not be enough to carry out the contract efficiently, and building a third wharf was being considered. The third wharf was estimated to cost $1,500,000. Superior Grain Elevator needs to consider the pros and cons of building a third wharf and decide if the benefits & savings will offset the cost of the investment.

After careful consideration and analysis, using the ROI, NPV, FV formulas and @Risk, we do not recommend for SGE to build a third wharf. Even though the construction of the third wharf will provide the company a mean of savings of $230,115 per season, or $1,150,575 in five years, it does not offset the cost of building the new wharf ($1,500,000).

BACKGROUND

Superior Grain Elevator’s 14 giant grain elevators gave it a prominent position on the Thunder Bay waterfront in Ontario, Canada. Thunder Bay was Canada’s third busiest port and was very important for the shipment of grain. Superior’s operations centered around the railroads and the Seaway. Trains of specially built railcars carried the grain to Thunder Bay where the grain was stored in lakefront elevators for loading into the freighters.

Apart from the four months of winter when the Seaway was closed because of ice, Superior loaded ships constantly sending grain to all parts of Eastern Canada and the globe. The ships were contracted for by agents who lined up the required tonnage of shipping capacity to fulfill the various contracts held with Superior. Although the agents tried to arrange for ships to arrive at Thunder Bay in a steady stream, the vagaries of lockage transfer times in the Seaway resulted in quite variable arrival times. If Superior’s two wharfs were both busy, the arriving ships had to anchor in the lake, and Superior had to pay a standard demurrage charge at a rate of $2000 per day.

Mike Armstrong, manager of port facilities for SGE, had just learned that the Canadian Government had negotiated a five-year, 8 million tonne grain deal with Poland, and that Superior had been allocated 20 shipments to Poland for each year of the 5 years of the contract. This new contract might be the opportunity SGE had been waiting for to consider building a third wharf.

PROBLEM STATEMENT

For some time, Superior had thought of adding a third wharf and the Polish contract could make the third wharf a profitable option. The third wharf was estimated to cost $1,500,000 and needed a 20% return on investment. Superior Grain Elevator needs to consider the pros and cons of building a third wharf and decide if the benefits & savings will offset the cost of the investment.

CASE QUESTIONS

1. How much can they save if the third wharf is build?

If Superior Grain Elevator Inc. decides to build the third wharf, the company will save $224,481 per season in demurrage charges.

2. Will construction of the third wharf reduce ship waiting time sufficiently for the savings in demurrage to “pay for”...
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