Hutchinsons Gas Company - Essay Example

IE 405 Hutchinson’s Gas Company Case Study By Kuan Alkeyev. 11/16 IE 405 Summary: Hutchinson Gas Company is in the business of providing compressed gas services to its customers. The company has many well established and fully functional gas treatment facilities which process compressed gas. The company also deals with the delivery of compressed gas to its customers throughout the region. Its operation’s are spread across a very wide area of Indiana. It provides services to twelve different customers through its four servicing facilities.

Despite smooth functioning of the company and its transportation department, a few recent events have brought into focus the issue of efficiency of the company’s plants. This is because of the recent purchase of a new servicing facility. Mr. Hutchinson, the owner of the company bought the new servicing facility in Marion, Indiana. But there are doubts about the profitability of immediate opening of the plant. There is also a dilemma about the choice of facility to be closed if such a decision is made for the purpose of cost reduction.

The decision to close one of the facilities is not easy as there are numerous calculations involved. Each servicing facility is different from other with respect to tank-filling capacity and tank handling costs. The distribution costs also vary with each facility. Over the past few years, the company had developed a framework for its distribution schedule. This framework or model was prepared on the basis of calculating unit costs, demand and supply in the market. The purpose of this study is to evaluate whether any improvement can be suggested to the current schedule model of the company.

But the more specific questions that will be answered are about the possibility of keeping facilities operational in their current state. Should they be closed or should the company focus on improving the capacities of the plants. The usefulness of the service facility in Terre Haute will also be considered and commented upon. Introduction No two servicing facilities of the company are same. They vary in many departments of the gas production process. But the major differences can be assigned to the category of capacities and the costs.

Variations in tank handling costs contribute to the widening of spectrum of per unit costs. In order to choose the best methods for increasing the company’s efficiency various suggestions are made regarding improvement of current distribution plan. The other school of thought advocates the utilization and optimization of various tank servicing facilities. It is also observed that changes in the permutations of the facility locations can also reduce costs. Amidst all these options, Mr. Hutchinson believes that he can succeed in reducing costs if every shipping facility operates within their capacity and the local demand is met through these facilities.

He subsequently wants to reduce the cost of shipping goods as they increase burden on the company’s finances. For the present study a comparison is necessary between the shipping schedules and weekly costs for the Alternative 1 which is about maintaining status quo. The comparison is also useful to assess the viability of Alterative 3 which recommends closure of the Terre Haute service facility. Both Alternative 1 and Alternative 3 are analyzed by performing a series of linear programming operations in LINDO.

The results achieved are then used to recommend the better among the two options. The study begins with solving the transportation problems against the background of the alternatives mentioned above. This can be achieved by analysis of the data provided in the tables of Variable Tank Processing Costs and Capacities, Current Distribution Plans and the Total Variable Costs for Transportation and Tank Servicing. The purpose of the transportation model is to find the least cost means of shipping supplies from origins to their destinations located throughout the Indiana State.

By using LINDO software we solve for the optimal distribution schedule for the two alternatives mentioned above. After that we have to look at the obtained results, discuss the differences between them and see which alternative will be more economical for the Hutchinson’s company. The other goal for this case study is to calculate the present values of the two alternatives within a span of three years by using the initial fixed costs and revenues for buying or selling facilities and the weekly costs, considering the MARR of 10% and that a year is divided into 52 weeks.

After doing all the calculations we have to compare the present values for given alternatives and give a valuable recommendation for the company. Problem Statement: Mr. Hutchinson is considering the opening of the newly acquired facility in Marion. The engineers have come up with the conclusion that new facility will solve the purpose of reducing costs and they opine that this option is much better than current tank servicing facilities. But Mr. Hutchinson wants to weight all the options as opening new facility may require closing of any one of the current facility locations.

In such a case, Mr. Hutchinson feels that he should be sure that new facility will definitely prove to be superior over its older counterpart. For the purpose of shedding more light on this issue, an economic analysis has to be made of the following alternatives: · Alternative 1 – As is (Keep all four facilities) · Alternative 2 – Close Lafayette · Alternative 3 – Close Terre Haute · Alternative 4 - Keep all five facilities and open up a new facility in Marion · Alternative 5 - Close Lafayette, but open up a new facility in Marion · Alternative 6 - Close Terre Haute, but open up a new facility in Marion · Alternative 7 - Close Lafayette and Terre Haute, but open up a new facility in Marion.

Here are the Exhibits we need throughout our case study: Exhibit 2 Variable Tank Processing Costs and Capacities Tank Servicing Facility Variable cost per tank Weekly capacity-Tanks Indianapolis $2.65 500 Lafayette $2.80 100 South Bend $2.50 500 Terre Haute $2.95 100 Marion $2.25 300 Exhibit 3 Current Distribution Plan N BNB Tank Filling Facility Customer Wee Weekly Quantity (Tanks) Indianapolis I Indianapolis 312 Anderson 65 Muncie 53 Richmond 37 Lafayette Lafayette 34 Kokomo 25 Marion 38 South Bend South Bend 135 Fort Wayne 86 Gary 39 Terre Haute Terre Haute 46 Bloomington 39 Exhibit 4 Total Variable Costs for Transportation and Tank Servicing Indianapolis Lafayette South Bend Terre Haute Anderson 3.55 4.05 4.30 4.55 Bloomington 3.65 4.30 4.85 4.05 Fort Wayne 4.35 4.45 3.80 5.35 Gary 4.80 4.30 3.65 5.10 Indianapolis 3.15 3.90 4.35 4.15 Kokomo 3.65 3.80 3.85 4.70 Lafayette 3.75 3.30 4.05 4.30 Marion 3.80 4.05 4.00 4.85 Muncie 3.70 4.20 4.35 4.70 Richmond 3.80 4.50 4.75 4.85 South Bend 4.50 4.35 3.00 5.35 Terre Haute 3.85 4.15 4.90 3.45 In our case we have to perform operations and analyze Alternative 1 and Alternative 3.

In order to figure out the weekly distribution plans for these two alternatives we need to use following function: Objective Function = Z = Min total costs = Variable Cost + Transportation Cost. Input variables used for the function of Alternative 1 are: From Indianapolis: Ij= # of tanks shipped from Indianapolis to the customer j From Lafayette: Lj = # of tanks shipped from Lafayette to the customer j From South Bend: SBj= # of tanks shipped from South Bend to the customer j From Terre Haute: THj= # of tanks shipped from Indianapolis to the customer j Input variables used for the function of Alternative 3 are: From Indianapolis: Ij= # of tanks shipped from Indianapolis to the customer j From Lafayette: Lj = # of tanks shipped from Lafayette to the customer j From South Bend: SBj= # of tanks shipped from South Bend to the customer j j= Anderson, Bloomington, Fort Wayne, Gary, Indianapolis, Kokomo, Lafayette, Marion, Muncie, Richmond, South Bend, Terre Haute For the constraints we used the data of the Weekly Capacity provided in the Exhibit 2, which is represented as ∑Tank serviced at Facility(j)