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In December 1991, Bill Stock, general manager for the Louisiana Division of Coastal States Chemicals and Fertilizers, received a letter from Fred McNair of the Cajun Pipeline Company which notified Coastal States that priorities had been established for the allocation of natural gas. The letter stated that Cajun Pipeline, the primary supplier of natural gas to Coastal States, might be instructed to curtail natural gas supplies to its industrial and commercial customers by as much as 40% during the ensuing winter months. Moreover, Cajun Pipeline had the approval of the Federal Power Commission (FPC) to curtail such supplies. Possible curtailment was attributed to the priorities established for the use of natural gas:

First priority: Residential and commercial heating

Second priority: Commercial and industrial users, whereby, natural gas used as source of raw material

Third priority: Commercial and industrial users whereby natural gas is used as boiler fuel

Almost all of Coastal States' uses of natural gas were in the second and third priorities. Hence, its plants were certainly subject to brown-outs, or natural gas curtailments. The occurrence and severity of the brown-outs depended on a number of complex factors. First of all, Cajun Pipeline was part of an interstate transmission network that delivered natural gas to residential and commercial buildings on the Atlantic Coast and in northeastern regions of the United States. Hence, the severity of the forthcoming winter in these regions would have a direct impact on the use of natural gas.

Secondly, the demand for natural gas was soaring because it was the cleanest and most efficient fuel. There were almost no environmental problems in burning natural gas. Moreover, maintenance problems due to fuel-fouling in fireboxes and boilers were negligible with natural gas systems. Also, burners were much easier to operate with natural gas as compared to the use of oil or the stoking operation when coal was used as fuel.

Finally, the supply of natural gas was dwindling. The traditionally depressed price of natural gas had discouraged new exploration for gas wells; hence, shortages appeared imminent.

Stock and his staff at Coastal States had been aware of the possibility of shortages of natural gas and had been investigating ways of converting to fuel oil or coal as a substitute for natural gas. Their plans, however, were still in the developmental stages. Coastal States required an immediate contingency plan to minimize the effect of a natural gas curtailment on its multiplant operations. The obvious question was, what operations should be curtailed and to what extent to minimize the adverse effect upon profits? Coastal States had the approval from the FPC and Cajun Pipeline to specify which of its plants would bear the burden of the curtailment if such cutbacks were necessary. McNair, of Cajun Pipeline, replied, "It's your 'pie': we don't care how you divide it if we make it smaller."

The Model Six plants of Coastal States Louisiana Division were to share in the "pie." They were all located in the massive Baton Rouge-Geismar-Gramercy industrial complex along the Mississippi River between Baton Rouge and New Orleans. Products produced at those plants which required significant amounts of natural gas were phosphoric acid, urea, ammonium phosphate, ammonium nitrate, chlorine, caustic soda, vinyl chloride monomer, and hydrofluoric acid. Stock called a meeting of members of his technical staff to discuss a contingency plan for allocation of natural gas among the products if a curtailment developed. The objective was to minimize the impact on profits.

After detailed discussion, the meeting was adjourned. Two weeks later, the meeting reconvened. At this session, the data in the accompanying table were presented. Coastal State's contract with Cajun Pipeline specified a maximum natural gas consumption of 36,000 cu ft x 10' per day for all of the six member plants. With these data, the technical staff proceeded to develop a model that would specify changes in production rates in response to a natural gas curtailment. (Curtailments are based on contracted consumption and not current consumption.)

Product	$ per ton	Capacity (Tons per day)	Maximum Production Rate (Percent of Capital)	Natural gas Consumption (1,000 CU FT per ton)
Phosphoric acid	60	400	80	5.5
Urea	80	250	80	7.0
Ammonium phosphate	90	300	90	8.0
Ammonium nitrate	100	300	100	10.0
Chlorine	50	800	60	15.0
Caustic soda	50	1,000	60	16.0
Vinyl chloride monomer	65	500	60	12.0
Hydroflouric acid	70	400	80	11.0

DISCUSSION QUESTIONS

1. Develop a contingency model and specify the production rates for each product for:
   
   1. a 20% natural gas curtailment and
      
   2. a 40% natural gas curtailment
      
      
   
   
   
2. Explain which of the products in the table should require the most emphasis with regard to energy conservation.
   
   
   
   
3. What problems do you foresee if production rates are not reduced in a planned and orderly manner?
   
   
   
   
4. What impact will the natural gas shortage have on company profits?
   
   

Mexicana, a subsidiary of Westover Wire Works, a Texas firm, is a medium-sized producer of wire windings used in making electrical transformers. Carlos Alverez the production control manager, described the windings to Garcia as being of standardized design. Garcia's tour of the plant, laid out by process type (see Figure 1), followed the manufacturing sequence for the windings: drawing, extrusion, winding, inspection, and packaging. After inspection, good product is packaged and sent to finished product storage; defective product is stored separately until it can be reworked.

On March 8, Vivian Espania, Mexicana's general manager, stopped by Garcia's office and asked him to attend a staff meeting at 1:00 P.M.

"Let's get started with the business at hand," Vivian said, opening the meeting. "You all have met Ron Garcia, our new management trainee. Ron studied operations management in his MBA program in Southern California, so I think he is competent to help us with a problem we have been discussing for a long time without resolution. I'm sure that each of you on my staff will give Ron your full cooperation."

Vivian turned to Jose Arroyo, production control manager. "Jose, why don't you describe the problem we are facing." "Well," Jose said, "business is very good right now. We are booking more orders than we can fill. We will have some new equipment on line within the next several months, which will take care of our capacity problems, but that won't help us in April. I have located some retired employees who used to work in the drawing department, and I am planning to bring them in as temporary employees in April to increase capacity there. Because we are planning to refinance some of our long-term debt, Vivian wants our profits to look as good as possible in April. I'm having a hard time figuring out which orders to run and which to back-order so that I can make the bottom line look as good as possible. Can you help me with this?"

Garcia was surprised and apprehensive to receive such a high profile, important assignment so early in his career. Recovering quickly, he said, "Give me your data [Table 1] and let me work with it for a day or two."

TABLE 1
APRIL ORDERS

Product No. W0075C	1,400 units
Product No. W0033C	250 units
Product No. W0005X	1,510 units
Product No. W0007X	1,116 units
Note: Vivian Espania has given her word to a key customer that we will manufacture 600 units of Product No. W0007X and 150 units of Product No. W0075C for him during April.

Standard Cost	Product	Material	Labor	O/H	Selling Price
	W0075C	$33.00	$9.90	$23.10	$100.00
	W0033C	$25.00	$7.50	$17.50	$ 80.00
	W0005X	$35.00	$10.50	$24.50	$130.00
	W0007X	$75.00	$11.25	$63.75	$175.00
Bill of Labor (Hours/Unit)	Product	Drawing	Extrusion	Winding	Packaging
	W0075C	1.0	1.0	1.0	1.0
	W0033C	2.0	1.0	3.0	0.0
	W0005X	0.0	4.0	0.0	3.0
	W0007X	1.0	1.0	0.0	2.0
Plant Capacity: (Hours)	Drawing	Extrusion	Winding	Packaging
	4,000	4,200	2,000	2,300
Note: Inspection capacity is not a problem - we can work overtime as necessary to accommodate any schedule.

Selected Operating Data Average output per month = 2,400 units
Average machine utilization = 63%
Average percentage of production sent to rework dept. = 5 % (mostly from Winding Dept.)
Average no. Of rejected units awaiting rework = 850 (mostly Winding Dept.)

Figure 1

DISCUSSION QUESTIONS

1. What recommendations should Ron Garcia make, with what justification? Provide a detailed analysis with charts, graphs, and computer printouts included.
   
   
   
   

2. Discuss the need for temporary workers in the drawing department.
   
   
   
   

3. Discuss the plant layout.
   
   
   
   

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