The New Bedford Steel

New Bedford Steel (NBS) is a steel producer located in Bedford, Pennsylvania. Coking coal is a
necessary raw material in the production of steel, and NBS procures 1.0-1.5 million tons of
coking coal per year. It is now time to plan for next year's production, and Stephen Coggins,
coal supply manager for NBS, has solicited and received bids from eight potential coal mining
companies for next year.

Table 7.1 shows the relevant information on the bids from the eight potential coal suppliers. For
example, Ashley Mining Co. has bid to supply NBS with coking coal at a price of $49.50/ton up
to their capacity of 300 mtons (300,000 tons) per year (1 "mton" denotes 1,000 tons). The Ashley
mine is a union mine, and the mode of delivery of the coal from the mine is by rail. The coal from
the Ashley mine has an average volatility of 15% (the volatility of the coal is the percent of
volatile (burnable) matter in the coal).

Based on market forecasts and last year's production characteristics, NBS is planning to accept
bids for 1,225 mtons (1,225,000 tons) of coking coal for the coming year. This coal must have an
average volatility of at least 19%. Also, as a hedge against adverse labor relations, NBS has
decided to procure at least 50% of its coking coal from union (United Mine Workers) mines.
Finally, Stephen Coggins needs to keep in mind that capacity for bringing in coal by rail is
limited to 650 mtons per year, and capacity for bringing in coal by truck is limited to 720 mtons
per year.

Stephen Coggins is interested in answering the following three questions:

1. How much coal should NBS contract for from each supplier in order to minimize the cost
of supply of coking coal?
2. What will be NBS's total cost of supply?
3. What will be NBS's average cost of supply?

It should be obvious that Stephen Coggins' main objective should be to formulate a supply plan
that minimizes the cost of supplying coking coal to NBS. The least expensive coal is the Ashley
coal, followed by Bedford, then Consol, etc. However, the less expensive coals also have a
lower volatility, which is troubling since the coking coal must have an average volatility of 19%.
One strategy that Stephen Coggins could try to employ would be to only contract with mines
whose coal has at least 19% volatility. This strategy would eliminate Ashley, Bedford, and
Consol from consideration, which is unfortunate since they are the three lowest bidders. Indeed,
a smarter strategy is to consider blending the coal, since NBS has blending facilities at its
materials handling site. For example, blending equal amounts of coal from Consol and Dunby
would produce a blend of coal that has an average volatility of 19%, since Consol's coal has an
average volatility level of 18% and Dunby's coal has an average volatility level of 20%.

Q1: Formulate the corresponding optimization problem as a linear program and find an optimal
solution using Excel Solver.

Now Stephen Coggins would like to answer the following additional questions :
1. What is the cost of coking coal on the margin? How much does an extra ton of coking coal
cost NBS?
2. Should NBS consider expanding their trucking capacity? If so, how much should they be
willing to spend?
3. Should NBS consider expanding their rail capacity? If so, how much should they be willing
to spend?
4. Should Coggins be willing to negotiate a higher price in order to get more coal from
Bedford or Gaston? If so, how high should he be willing to go?
5. How should NBS value a nonunion/union supplier on a cost basis? Should they be willing
to pay a premium fee for a union supplier?

Q2 : Use Excel solvers’ sensitivity report to answer these questions.