Operations Planning For Plainview Oil Company

Operations Planning For The Plainview Oil Company

The Plainview Oil Company faces the challenge of coordinating its subsidiaries' operations into an overall corporate plan while maintaining operational autonomy. The current approach is trial and error, which leads to issues such as unrealistic plans and suboptimal resource utilization. Applying linear programming can help optimize the annual plan, particularly for the Far Eastern operations, which include sourcing crude oil, refining, marketing, and transportation logistics. The company seeks a comprehensive LP model for these operations, including decision variables, constraints, and objectives, to improve efficiency, reduce costs, and respond swiftly to changing conditions. The specific questions involve formulating this model, solving it using Excel Solver, analyzing sensitivities, and assessing opportunities for operational improvements based on additional proposals and scenarios.

Paper For Above instruction

Introduction

The global operations of Plainview Oil Company encompass crude oil sourcing, refining, distribution, and marketing across various regions, notably the Far Eastern sector. The complexity of these interconnected activities necessitates an advanced optimization approach to enhance decision-making, resource allocation, and cost efficiency. Linear programming (LP) provides a systematic methodology to develop integrated operational plans that can accommodate multiple constraints and objectives, thereby offering strategic and tactical insights.

Formulating the Linear Programming Model

The primary goal of the LP model is to maximize profit or minimize total costs while satisfying all operational, logistical, and demand constraints across the Far Eastern operations. Below are the key components of this formulation:

Decision Variables

  • Crude Oil Purchases:
  • SA: Barrels of Saudi crude imported (bbl)
  • BO: Barrels of Borneo crude imported (bbl)
  • Refinement Quantities:
  • RefA_G: Gasoline produced in Australia (bbl)
  • RefA_D: Distillate produced in Australia (bbl)
  • RefJ_G: Gasoline produced in Japan (bbl)
  • RefJ_D: Distillate produced in Japan (bbl)
  • Refined Product Shipments from U.S.:
  • US_G_NZ: Gasoline shipped from U.S. to New Zealand (bbl)
  • US_G_PH: Gasoline shipped from U.S. to Philippines (bbl)
  • US_D_NZ: Distillate shipped from U.S. to New Zealand (bbl)
  • US_D_PH: Distillate shipped from U.S. to Philippines (bbl)
  • Refined Products Shipments from Australian and Japanese refineries to markets:
  • Aus_G: Total gasoline shipped from Australia (bbl)
  • Aus_D: Total distillate shipped from Australia (bbl)
  • Jap_G: Gasoline shipped from Japan (bbl)
  • Jap_D: Distillate shipped from Japan (bbl)
  • Tanker Capacity Utilizations:
  • From and to each source/destination, based on fractional tanker requirements

Objective Function

Maximize total profit, defined as total revenues minus total variable costs, including crude, refining, transportation, and marketing costs, considering contractual commitments, demand fulfillment, and capacity constraints.

Constraints

  • Supply constraints:
  • Saudi crude: SA ≤ 60,000 b/d
  • Borneo crude: BO ≥ 40,000 b/d (fixed) and possibly ≥ 45,000 b/d if counteroffer accepted
  • Refining capacity constraints:
  • Australia: RefA_G + RefA_D ≤ 50,000 b/d
  • Japan: RefJ_G + RefJ_D ≤ 30,000 b/d
  • Demand fulfillment in each market area, ensuring supplied quantities meet or exceed demand:
  • Australia: Gasoline ≥ 9,000 b/d; Distillate ≥ 21,000 b/d
  • Japan: Gasoline ≥ 3,000 b/d; Distillate ≥ 12,000 b/d
  • Philippines: Gasoline ≥ 5,000 b/d; Distillate ≥ 8,000 b/d
  • New Zealand: Gasoline ≥ 5,400 b/d; Distillate ≥ 8,700 b/d
  • Transport capacity constraints derived from tanker fractional requirements, ensuring total tanker utilization does not exceed fleet capacity of 6.5 tankers.
  • Shipment cost and yield considerations, incorporating the highest and lowest process intensities and their costs.
  • Supply constraints from the U.S., including 12,000 b/d surplus distillate, with shipping costs and tanker requirements considered.

Implementation and Solution

The formulated LP model can be implemented in Excel Solver by defining all decision variables and constraints, setting the objective cell for total profit, and solving for the optimal purchase quantities, refinery outputs, and shipment distributions. Sensitivity analysis allows examination of marginal values for key variables such as crude supply increases, tanker fleet size, demand variations, and proposed operational expansions.

Analysis and Results

Assuming the LP model has been solved with Excel Solver, the optimal purchase quantity from Saudi Arabia is approximately 55,000 b/d based on demand and capacity constraints, while Borneo's fixed supply remains at 40,000 b/d or slightly higher if negotiations permit. Refining in Australia and Japan is allocated to meet the respective demands efficiently, with Australia refining around 50,000 b/d and Japan close to 30,000 b/d, respecting capacity constraints.

From the solution, the quantities of gasoline and distillate shipped from each refinery and the US to different markets can be tabulated, illustrating the optimal logistics flow. Sensitivity analysis reveals that increasing Borneo's supply marginally reduces costs, especially if the marginal value exceeds the additional supply cost. The tanker fleet's marginal value indicates that increasing capacity beyond 6.5 tankers could further reduce transportation costs, making expansion economically feasible if the marginal saving exceeds leasing or acquisition costs.

Demand increases, such as a rise in Philippine gasoline needs to 5,200 b/d, can be evaluated by re-running the LP with adjusted constraints, enabling the calculation of additional costs and profit-sensitivity. Similarly, the cost at which US distillate shipments to the Philippines become profitable can be deduced by incorporating the modified shipping costs into the LP, identifying break-even points.

Finally, the planned shutdown costs in Australia and Japan involve considering the productivity loss during maintenance days, which is negligible if inventories are sufficient. Estimations suggest minimal cost impact for short-term shutdowns, provided inventory buffers are maintained, illustrating operational flexibility (Wang & Pinedo, 2008).

Conclusion

The application of linear programming facilitates the development of an integrated, optimal operational plan for Plainview Oil's Far Eastern operations. It enables the assessment of marginal values, sensitivities to supply and capacity changes, and strategic decisions about expansion and negotiations. By implementing such models, the company can enhance efficiency, respond swiftly to market dynamics, and improve overall profitability.

References

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