Trans World Oil Case

Base Scenario

Objective Function: Minimize total cost

Total Cost = Cost of Refined Product + Marketing Shipment Cost + Ship Lease Cost

Cost of Refined Product = Cost of Gasoline and Distillate from Australia + Cost of Gasoline and Distillate from Japan + Cost of Distillate from US

Decision Variables: Please see the appendix

Constraints: Please see the appendix

After running the model, the total cost for the entire operation with the base assumptions is $1,671,675

Memo 1:

After increasing the demand by 1500 barrel per day the constraint for demand of Gasoline in Australia is 10,500 bbl/day. Also, the refinery capacity is increased by 15000 bbl/day. Running the model again, the incremental cost is calculated $40,348 and incremental revenue is $43,800 per day. Therefore, the incremental profit is $3,452 per day and $1,260,034 per year, which is greater than the required savings. Therefore, we recommend taking the project.

Memo 2:

After increasing the demand for Gasoline by 1,600 bbl/day and for Distillate by 3,200 bbl/day, we run the model again with respective changes in constraints. The resulting total cost is $1,830,100. Incremental cost is ($1,830,100 - $1,712,023) = $118,076. Daily revenue is $137,760. Daily profit is $19,684 and yearly profit is $7,184,556, which is greater than the required profit of $5,200,000. Therefore, we should proceed with the project.

Memo 3:

After increasing the tanker equivalent by 0.5 (from 6.9 to 7.4), total cost of operations decreases from $1,830,100 to $1,825,800. So total savings per day is $4,300 and savings per year is $1,569,500, which is greater than the lease value of $876,000. Therefore, we recommend leasing the tanker.

Memo 4:

If supply from Brunei is increased by 5000 barrels per day with a cost per barrel of $21.50, the cost increases by $1,302,707. Therefore, the we should not increase supply from Brunei.

Appendix

Decision Variables:

1. Marketing Gasoline

1. From Australia to Australia
2. From Australia to Philippines
3. From Australia to New Zealand
4. From Japan to Philippines
5. From Japan to Japan
6. From Japan to New Zealand

1. Marketing Distillate

1. From Australia to Australia
2. From Australia to Philippines
3. From Australia to New Zealand
4. From Japan to Japan
5. From Japan to New Zealand
6. From Japan to Philippines
7. From US to New Zealand
8. From US to Philippines

1. Quantity of Crude from Source

1. Iran Crude to Australia (Low)
2. Iran Crude to Australia (High)
3. Brunei Crude to Australia (Low)
4. Brunei Crude to Australia (High)
5. Iran Crude to Japan (Low)
6. Iran Crude to Japan (High)
7. Brunei Crude to Japan (Low)
8. Brunei Crude to Japan (High)

Constraints:

1. Market Gasoline:

1. Australia >= 9000
2. Japan >= 3000
3. Philippines >= 5000
4. New Zealand >= 5400
5. Total >= 22400

1. Market Distillate

1. Australia >= 21000
2. Japan >= 12000
3. Philippines >= 8000
4. New Zealand >= 8700
5. Total >= 49,700

1. Refinery Constraint

1. Australia <= 50000
2. Japan <= 30000

1. Crude Oil Supply Constraint

1. Iran <= 60000
2. Brunei = 40000

1. US Distillate <= 12000
2. Market Quantity Constraint

1. Australia – Gasoline >= Australia Gasoline (Australia + Japan + Philippines + New Zealand)
2. Japan – Gasoline >= Japan Gasoline (Australia + Japan + Philippines + New Zealand)
3. Australia – Distillate >= Australia Distillate (Australia + Japan + Philippines + New Zealand)
4. Japan – Distillate >= Japan Distillate (Australia + Japan + Philippines + New Zealand)