A Case Study with Many
The Texago Corporation is a large, fully integrated petroleum company based in the United States. The company produces most of its oil in its own oil fields and then imports the rest of what it needs from the Middle East. An extensive distribution network is used to transport the oil to the company’s refineries and then to transport the petroleum products from the refineries to Texago’s distribution centers. The locations of these various facilities are given in Table 1. Texago is continuing to increase market share for several of its major products. Therefore, management has made the decision to expand output by building an additional refinery and increasing imports of crude oil from the Middle East. The crucial remaining decision is where to locate the new refinery.
The addition of the new refinery will have a great impact on the operation of the entire distribution system, including decisions on how much crude oil to transport from each of its sources to each refinery (including the new one) and how much finished product to ship from each refinery to each distribution center. Therefore, the three key factors for management’s decision on the location of the new refinery are 1. The cost of transporting the oil from its sources to all the refineries, including the new one.
2. The cost of transporting finished product from all the refineries, including the new one, to the distribution centers.
3. Operating costs for the new refinery, including labor costs, taxes, the cost of needed supplies (other than crude oil), energy costs, the cost of insurance, the effect of financial incentives provided by the state or city, and so forth. (Capitol costs are not a factor since they would be essentially the same at any of the potential sites.) Management has set up a task force to study the issue of where to locate the new refinery. After considerable investigation, the task force has determined that there are three attractive potential sites. These sites and the main advantages of each are spelled out in Table 2. Other relevant factors, such as standard-of-living considerations for management and employees, are considered reasonably comparable at these sites. 8S-1
SUPPLEMENT TO CHAPTER 8
A CASE STUDY
I TABLE 1 Location of Texago’s current facilities
Type of Facility
1. Near New Orleans, Louisiana
2. Near Charleston, South Carolina
3. Near Seattle, Washington
Kansas City, Missouri
San Francisco, California
I TABLE 2 Potential sites for Texago’s new refineries and their main advantages Potential Site
Near Los Angeles, California
1. Near California oil fields
2. Ready access from Alaska oil fields
3. Fairly near San Francisco distribution center
Near Galveston, Texas
1. Near Texas oil fields
2. Ready access from Middle East imports
3. Near corporate headquarters
Near St. Louis, Missouri
1. Low operating costs
2. Centrally located for distribution centers
3. Ready access to crude oil via Mississippi River
I TABLE 3 Production data for Texago Corp.
Crude Oil Needed
Gathering the Necessary Data
The task force needs to gather a large amount of data, some of which requires considerable digging, in order to perform the analysis requested by management. Management wants all the refineries, including the...