Gartland Steel.

University Degree Business and Administrative studies

Gartland Steel

Case Facts

Gartland Steel was a fully integrated steel producer, the fourth largest in the US. It was the largely accepted industry leader in sensitivity to environmental issues and in its actions to alleviate pollution. The Clean Air Act of 1970 created the EPA (Environmental Protection Agency) to establish and enforce air quality goals. The standards postulated threshold levels beyond which ambient pollutants were damaging to health and welfare. Emission rates standards were set ‘stack-by-stack’ for most industrial processes. Though the aim was to bring most of the geographical areas within the purview of the Act, 160 of the 247 regions were non-compliant by the 1975 deadline. The main reason was found to be the high costs of implementing ‘stack-by-stack’ standards.

Offset Policy

To counter this problem, the EPA created the ‘offset’ policy which allowed firms to trade pollution rights within non-attainment regions. In this policy, the companies were allowed intra-pollution category trading but not inter-pollution category trading. This led to a market in pollution rights.

Bubble Policy

This was a derivative of the offset policy. As per this policy, a firm would be free to decide how to bring the net level of pollution within standards, as against installation of mandated stack-by-stack equipment. The policies were however complex and approval by authorities was subjective.

Company Options

Gartland Steel had to change its production policy to comply with the new pollution norms. One of the possibilities was of buying a factory for $750,000 and get an additional allowance of 250,000 pounds/year of pollution “offset”.

The company could also think of changing the production mix in the open hearth furnace, now requiring 0.25 tons of pig iron (instead of 0.14 tons) and 0.95 tons of scrap (instead of 1.08) creating 1 ton of steel and 0.2 tons of scrap. The pollution would decline to 0.795 punds/ton (instead of 0.861 pounds/ton) and the operating cost of the furnace would also reduce by $5/ton.

The major source of pollution for the plant was from the coal and ore yards, creating pollution at approx. at 0.04 pounds/ton of coal and 0.589 pounds/ton of ore. If the pollution could be included under the bubble policy for the entire plant, the company may benefit from the policy.

The pollution at the current levels of production and the current production mix currently stands at 5525 thousand pounds per year. The new bubble policy required the Gartland Steel to reduce the pollution to at most 5163 thousand pounds per year, thereby effecting a reduction of 6.6%. This is as per the bubble policy. Had the stack-by-stack method been implemented for the company, it would have costed an additional 9 million dollars per year.

We now evaluate the various options available for Gartland Steel.

Variables used and their descriptions:

CoalS: coal sold

CoalB: coal bought

CoalY: coal from yard

Coke: coke

Sinter: sinter

Pig: pig iron

PigB: pig iron bought

Steel: steel

Scrap: scrap

ScrapB: scrap purchases

Coil: coils

CoilS: coils sold

Slab: slabs

SlabS: slabs sold

Ingot: ingots

IngotS: ingots sold

Ore: ore

OreY: ore from yard

OreB: ore bought

Note: All processes have been marked sequentially from 1-9 based on Exhibit B

The input variables have been suffixed by the ‘process number + I’.

The output variables have been suffixed by the ‘process number’.

Ten cases:

Current scenario: No pollution restrictions, output and production only decided on the basis of input-output constraints and profitability issues

Following possible cases after pollution restrictions enforced:

No Factory bought, Yard not taken into account for pollution, and new open hearth furnace not installed
No Factory bought, Yard taken into account for pollution, and new open hearth furnace not installed
No Factory bought, Yard not taken into account for pollution, and new open hearth furnace installed
No Factory bought, Yard taken into account for pollution, and new open hearth furnace installed
Factory bought, Yard not taken into account for pollution, and new open hearth furnace not installed
Factory bought, Yard taken into account for pollution, and new open hearth furnace not installed
Factory bought, Yard not taken into account for pollution, and new open hearth furnace installed
Factory bought, Yard taken into account for pollution, and new open hearth furnace installed
Stack-by-stack approach, which would require 9 million additional expense, with production being at earlier levels

Current Production Scenario:

There are currently no pollution restrictions, and the output and production are only decided on the basis of input-output constraints and profitability issues. The constraints are thus only these.

The formulation is as follows:

MAX

! Selling price of all outputs sold

! less the operating costs of processes

! less the cost of raw material purchased

! add the energy credits

200IngotS + 350CoilS + 250SlabS

- 36.21Coke1 - 18.77Sinter2 - 57.82Pig3 - 52.88Steel4 - 28.1Steel5 - 4.56Ingot6 - 19.76Slab7 - 32.3Slab8 - 53.72Coil9 - 47.59CoalB - 36.2OreB - 191.1PigB - 98.48ScrapB

+ 1.86Coke1 + .16Pig3 + .06Steel4 + .13Steel5 + .34Ingot6 + 3.45Slab7 + .44Slab8 + .41Coil9

ST

! Capacity Constraints

Pig3 < 1404

Steel4 < 1740

Steel5 < 2700

Ingot6 < 3408

Slab8 < 720

Coil9 < 3480

! Input = Output

1.43Coke1-Coal1i=0

.52Sinter2-Ore2i=0

1.12Pig3-Ore3i=0

.65Pig3-Coke3i=0

.47Pig3-Sinter3i=0

.01Pig3-Scrap3=0

1.08Steel4-Scrap4i=0

.14Steel4-Pig4i=0

.02Steel4-Scrap4=0

.32Steel5-Scrap5i=0

.81Steel5-Pig5i=0

.02Steel5-Scrap5=0

1.02Ingot6-Steel6i=0

.02Ingot6-Scrap6=0

1.2Slab7-Ingot7i=0

.18Slab7-Scrap7=0

1.06Slab8-Steel8i=0

.04Slab8-Scrap8=0

1.04Coil9-Slab9i=0

.04Coil9-Scrap9=0

! Consumption = Production

Coal1i-CoalB-CoalY=0

Ore2i+Ore3i-OreB-OreY=0

Coke3i-Coke1=0

Sinter3i-Sinter2=0

Scrap4i+Scrap5i-Scrap3-Scrap4-Scrap5-Scrap6-Scrap7-Scrap8-Scrap9-ScrapB=0

Pig4i+Pig5i-Pig3-PigB=0

Steel6i+Steel8i-Steel4-Steel5=0

Ingot7i+IngotS-Ingot6=0

Slab9i+SlabS-Slab7-Slab8=0

CoilS-Coil9=0

LINDO Output:

OBJECTIVE FUNCTION VALUE

1) 299603.9

VARIABLE VALUE REDUCED COST

INGOTS 0.000000 42.069115

COILS 3423.076904 0.000000

SLABS 0.000000 39.066540

COKE1 912.599976 0.000000

SINTER2 659.880005 0.000000

PIG3 1404.000000 0.000000

STEEL4 1740.000000 0.000000

STEEL5 2499.360107 0.000000

INGOT6 3408.000000 0.000000

SLAB7 2840.000000 0.000000

SLAB8 720.000000 0.000000

COIL9 3423.076904 0.000000

COALB 0.000000 47.590000

OREB 0.000000 36.200001

PIGB 864.081604 0.000000

SCRAPB 1835.084961 0.000000

COAL1I 1305.017944 0.000000

ORE2I 343.137604 0.000000

ORE3I 1572.479980 0.000000

COKE3I 912.599976 0.000000

SINTER3I 659.880005 0.000000

SCRAP3 14.040000 0.000000

SCRAP4I 1879.199951 0.000000

PIG4I 243.600006 0.000000

SCRAP4 34.799999 0.000000

SCRAP5I 799.795227 0.000000

PIG5I 2024.481567 0.000000

SCRAP5 49.987202 0.000000

STEEL6I 3476.159912 0.000000

SCRAP6 68.160004 0.000000

INGOT7I 3408.000000 0.000000

SCRAP7 511.200012 0.000000

STEEL8I 763.200012 0.000000

SCRAP8 28.799999 0.000000

SLAB9I 3560.000000 0.000000

SCRAP9 136.923080 0.000000

COALY 1305.017944 0.000000

OREY 1915.617554 0.000000

Scenario 1:

The factory is not bought, the yard is not taken into account for pollution, and new open hearth furnace is not installed.

MAX

! Selling price of all outputs sold

! less the operating costs of processes

! less the cost of raw material purchased

! add the energy credits

200IngotS + 350CoilS + 250SlabS

- 36.21Coke1 - 18.77Sinter2 - 57.82Pig3 - 52.88Steel4 - 28.1Steel5 - 4.56Ingot6 - 19.76Slab7 - 32.3Slab8 - 53.72Coil9 - 47.59CoalB - 36.2OreB - ...

Gartland Steel.

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