MSCI103: Introduction to OR and MS
MSCI103: Introduction to OR and MS
COURSEWORK EXERCISE 2
This is an individual exercise and is worth 20% of the module.
Submit your work as a Microsoft Word document, by 4pm on Friday 12th May 2017:
– Electronically to MOODLE (no declaration form is required).
Late work or evidence of collusion will be penalised, as specified in the department’s undergraduate handbook, which is available on the department’s FAQ site on MOODLE.
Consolidated Pulp and Paper Ltd.
Desmond O’Hara wiped the perspiration from his forehead, looked out of his window at the green countryside on this the first warm day of early summer and thought how the cold of the northern Quebec winters seemed always to affect his world. Today with the temperature in the high eighties he was worrying about the river freezing over and its effect on planning for his mill at Ste. Josette.
Supplying Wood to the Mill
The paper mill of Consolidated Pulp And Paper Ltd. located in Ste. Josette Québec was the largest of the company’s seven mills. It produced newsprint operating continuously throughout a seven-day week. It had an annual capacity of 250,000 tons.
Wood to supply the mill was cut 120 miles north of the mill in the Company’s timber holdings or purchased from owners of timber lands near those of Consolidated. After the trees were felled they were cut in to 4 foot lengths and floated down the Moneskeg River to the mill. During the open season on the river, logs were caught in a boom and moved directly into the mill as needed. The location of the timber lands and the mill made this an extremely efficient form of transportation. Recent studies had indicated that the transportation was performed at a variable cost of $80 per cunit1.
The problems with this form of supplying the mill began when the river froze over in the fall and did not end until the spring thaw. To supply the mill during that freeze period an inventory of wood – The Block Pile – has to be built up before the freeze to last until the regular flow resumed. Every year it seemed there was extended and sometimes heated discussions of how big The Block Pile should be. He sat thinking through what his position would be at tomorrow’s meeting when this would again be the topic for discussion.
The Meeting – June 28
Desmond as the mill manager at Ste. Josette held this year’s meeting in his office at the mill. The other participants in the meeting were Jacques Leveque of the Woodlands division and Harvey Wilson an assistant treasurer from the home office in Montreal. Each participant had before him the information contained in Table 1. This indicated the size of The Block Pile at the beginning of the freeze in each of the last six years and the size of the pile, if any, at the time the River opened again in the spring (this automatically became the start of the pile to be built for the following winter). Desmond began the discussion.
“You both remember, I am sure, the terrible problems we had six years ago when we exhausted The Block Pile and had to buy wood locally to keep the mill operating. The same factors which caused us to run out – high paper demand and a long freeze, affected a number of other mills the same way. With that demand our local farmers were able to charge us an effective price of about twice what it costs to buy and ship logs from the North Country – and we had no alternative but to pay or shut down the mill. In fact, that’s no alternative at all because the cost of stopping our operation and then restarting makes even purchase at these costs more attractive. But the point is this; increased cost of wood wiped out all of the mill’s profit contribution that year
1 A cunit is a unit of measurement corresponding to one hundred solid cubic feet of wood.
2
and in fact made the mill a drain on the Company. I hope we can all agree at the outset that we will build The Block Pile big enough this year that we won’t have a repetition of that fiasco.
Harvey Wilson frowned, tugged at his moustache and finally said,
“We all recognise the problem and in fact sympathise with you on it Desmond, but remember there is another side to the coin too. This winter was really bad luck. Not only did we pick up much more newsprint business than we had forecasted but it was a devilishly long winter. It’s not likely we’ll run into that combination again. Certainly we can’t do all of our planning protecting against every extreme contingency. Don’t forget that The Block Pile really costs big money and we’re not the old cash-cow we used to be. Our current diversification and expansion program has turned up a number of good opportunities that will yield about 20% after taxes on our investments. Every extra dollar you tie up in The Block Pile is one less we can use for these programs.
“I’m not quite sure what you’re driving at Harvey, surely the costs of making the woodpile an adequate one is very small.”
Desmond paused to make a few quick calculations and then continued. “We can always use any wood left over early the next winter. There would only be a cost for the added bleaching chemicals for the older wood of about $10 per cunit and I suppose you fellows would want interest on the money tied up in shipping the wood a year too early. Since I remember the Woodlands people always have cut logs they haven’t shipped at the end of the season. I know you wouldn’t want to charge me on the cutting costs.”
Harvey broke in and said, “That’s not really the point Desmond. It’s not whether there is still cut lumber lying on the ground in the North during the winter but whether Woodlands cuts more because of our decision on The Block Pile. Not only that, but my boss has told me that when he was involved in this he used to argue that if we cut a year too early not only have we lost the use of those funds but we give up a year’s growth on the tree, probably somewhere between a 5% to 10% increase in wood. And don’t forget, for every additional $10000 value of The Block Pile our fire insurance cost2 goes up by $75. By the way Jacques, what kind of costs are we looking at in Woodlands now?”
“Well, we feel pretty comfortable with evaluating our full cost for cutting a cunit at $275; about $230 of that is variable cost. The variable shipping cost when the log goes directly into the mill run about $80. Of course when you have to put a log on the top of the pile and then later send it into the mill by conveyor from the bottom it adds about $20 per cunit to the cost.”
After examining some notes Jacques finally added,
“The only other factor I might point out is that for the last few years Woodlands has been operating full out, cutting all we can and even buying from the land owners near us. Our plans for the next few years call for the same all out operations. In fact we have already agreed to a three-year contract with some of our regular suppliers to buy as much of their wood as we need cut into four foot lengths at the river for $350 per cunit. No matter what decision we make, here we will need to buy some wood from them this year. By the way, what kind of demand does you fellows at Ste. Josette plan to place on us this year?
“Demand is a bit uncertain again this year I’m afraid. We shall certainly keep all 5 production units on full output until the end of the year, and each unit requires 150 cunits per day. But for the first quarter of next year we may have to stop one unit. If I was forced to estimate, I would say the chances were about even on our having to cut production for the first quarter – and we won’t reduce it for any shorter period because of the high costs of altering production levels. In any case, we will be on full production again from April 1 onwards.”
”The thing that bothers me is that how much wood I will need in The Block Pile depends not only on my rate of consumption of wood but on how long the river will stay frozen. Even the Farmers’ Almanac doesn’t give me the answer to that one and it really makes a difference.”
“When I looked back in our files I was able to piece together the length of the freeze in each of the past ten years. For each of the years I was able to get a good fix on the last day in the fall when we moved logs
2 For insurance purposes The Block Pile was valued at $400 per cunit.
3
directly from the boom into the mill. From our operating records I could also learn the earliest date in each year on which logs from the river were again used in production.”
As he passed a sheet to each of the others (see Table 2) he added: “Here is the record I was able to come up with. As you can see there are tremendous differences from year to year.”
Year
Size of Pile in Fall
(×1000 of cunits)
Size of Pile in Spring
(×1000 of cunits)
2011-12
100
12
2012-13
100
– 3
2013-14
125
40
2014-15
113
27
2015-16
110
28
2016-17
110
28
Table 1: Size of Block Pile at the beginning and end of freeze by year
Winter
Last Date for Log Arrivals
First Date for Log Arrivals
2007-08
December 15
May 6
2008-09
December 16
May 17
2009-10
December 23
April 23
2010-11
December 14
May 12
2011-12
December 12
May 5
2012-13
November 26
May 16
2013-14
December 16
May 4
2014-15
December 6
May 2
2015-16
November 29
May 7
2016-17
December 16
April 26
Table 2: Length of Freeze of Moneskeg River
3 The Pile was exhausted -12000 cunits of wood were purchased locally
4
Your task
Write a report (in Word) advising Desmond O’Hara about the stocking policy with the advice about the stockpile level. Also provide any other advice that may help them in making the decision and any other relevant comments about the situation. Explain any assumptions you make and justify your recommendations clearly. Follow the report-writing guidelines outlined last term in MSCI 100/101. The maximum length of the report (not including title page and contents page) is 9 pages. No appendices should be included – put any information required in the main body of the report.
If you use a spreadsheet model in your analysis, then include a description of your model in the Word document. For example, this could include a screenshot and some example calculations to explain how the values are calculated in the model. There is no need to submit the spreadsheet itself.
Your title page should include:
i. Your name and college
ii. Your library card number.
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