Business and Financial Economics of Superior Grain Elevator Inc - Essay Example

Ivey Case Superior Grain Inc Ivey Case Superior Grain Elevator Inc Executive Summary The manager of Superior Grain ElevatorInc learned that the Canadian government had negotiated with Poland concerning a five-year eight-million grain deal, which would be shipped through their facility, and hence the need to expand its wharf capacity. There has been an increase in wheat harvest, and this has triggered Superior Grain Elevator to seek for a major expansion. That is why it has been considering a ship contract by agents. The contract by agents depends on the shipping capacity in tonnage terms in order to fulfill the various contracts which they held with the company. Tests were conducted on a sample of quality data provided by the company in order to determine whether all requirements were met. However, after completing the analysis, it is quite evident that the data did not form a normal distribution and should, therefore, not be used in the determination whether the company will enjoy economic benefits upon the introduction of the third wharf (Lee et al., 2000). Background The two wharfs of Superior Grain Elevator Inc have been quite busy with the increase in the arrival in shipments which caused the ships to anchor for some days in the lake while awaiting a berth. This is because Superior’s grain facility operations have been performing below the expected level in terms of capacity due to increased wheat harvest, which required shipping. This has made Superior Grain Elevator think of adding a third wharf, which is estimated to cost $1,500,000 and is expected to provide a 20% return on investment. The report is designed to determine whether the contraction of additional ships through agents will be of any economic benefit to the company (Lee et al., 2000). In this case, therefore, statistical data will be evaluated and input variables, a model with 2 wharfs and a model with 3 wharfs will be used in determining the economic benefits. Demurrage costs and waiting times for a model using the three wharfs will be computed as well as the annual savings in terms of costs. Problem Will the contracted ships help Superior Grain Elevator to access economic benefits which are to be obtained by building the third wharf? Analysis In this analysis, the simulation model for Superior Grain Elevator will be computed in order to assess the economic benefits which would be obtained by the building of the third wharf. Table 1: Simulation Model   Input Variables Model with 2 Wharfs Ship# Time between arrival of ship i-1 and ship i Arrival time of ship i (Current clock time) Loading time for ship i Wharf to be used for loading ship i Clock time when 1st wharf is ready for next ship Clock time when 2nd wharf is ready for next ship Wait time for ship i Demur Costs Ship IAT Clock Time LT Which Wharf? (2) WF1 out WF2 out Wait Demur 2 1 1.57 1.54 2.18 1 2.18 0.00 2.18 4360.00 2 1.05 2.59 2.53 2 2.18 5.12 2.53 5060.00 3 1.93 4.52 2.24 1 6.76 5.12 2.24 4480.00 4 0.74 5.26 2.10 2 6.76 7.36 2.10 4200.00 5 6.51 11.77 2.24 2 6.76 14.01 2.24 4480.00 6 7.56 19.33 2.62 1 21.95 14.01 2.62 5240.00 7 2.19 21.52 2.36 2 21.95 23.88 2.36 4720.00 8 4.18 25.70 2.81 1 28.51 23.88 2.81 5620.00 9 3.79 29.49 2.10 2 28.51 31.59 2.10 4200.00 10 1.35 30.84 2.06 1 32.90 31.59 2.06 4120.00   Input Variables Model with 3 Wharfs Ship# Time between arrival of ship i-1 and ship i Arrival time of ship i (Current clock time) Loading time for ship i Wharf to be used for loading ship i Clock time when 1st wharf is ready for next ship Clock time when 2nd wharf is ready for next ship Clock time when 3nd wharf is ready for next ship Wait time for ship i Demur Costs Ship IAT Clock Time LT Which Wharf? (3) W1 out W2 out W3 out Wait Demur 3 1 1.57 1.54 2.18 1 2.18 0.00 0.00 2.18 4360.00 2 1.05 2.59 2.53 2 2.18 5.12 0.00 2.00 4000.00 3 1.93 4.52 2.24 3 2.18 6.76 6.76 2.01 4020.00 4 0.74 5.26 2.10 1 7.36 7.36 7.36 2.11 4220.00 5 6.51 11.77 2.24 1.00 14.01 14.01 14.01 2.14 4280.00 6 7.56 19.33 2.62 2.00 21.95 21.95 21.95 2.06 4120.00 7 2.19 21.52 2.36 2.00 23.88 23.88 23.88 2.18 4360.00 8 4.18 25.70 2.81 2.00 28.51 28.51 28.51 2.14 4280.00 9 3.79 29.49 2.10 3.00 31.59 31.59 31.59 2.02 4040.00 10 1.35 30.84 2.06 1.00 32.90 32.90 32.90 2.00 4004.00 The above data clearly show that the introduction or expansion of the operation into the third wharf will lead to a reduction in the time of ship arrival unlike when the company used the first and second wharfs (Robinson, 2004). When the ship arrival time is reduced, it means that the company’s operations will also expand, and this would make the company experience the economic benefits thereof. Also, with the introduction of the third wharf, the loading time for each ship will reduce and the arriving ships will not have to take a long time as they await a berth. With the increase of the third wharf, 135 (115 +20) ships will be expected to arrive in the following year due to the increase in company operation and a reduction in the time taken to load and berth a ship. Increase of the third wharf will also lead to a reduction in waiting times and demurrage costs incurred, hence being economical for the company. If the company builds the third wharf, it will end up saving as follows: Total demurrage costs for the second wharf is 46,480 while that of the third wharf is 41,684, hence the company will end up saving 4,786 per annum. Table 2: Summary of Descriptive Statistics IAT ship inter-arrival times LT ship loading times IAT LT Mean 2.0203 2.5097 Median 1.3500 2.5300 Std Dev 1.9500 0.2703 Min 0.0200 2.1000 Max 7.5600 2.9100 Skewness 1.4298 -0.1298 Excess Kurtosis 1.5311 -1.2600 25% percentile 0.6700 2.1800 75% percentile 2.2100 2.6800 Inter quartile range 1.4400 2.4300 Range 7.5400 0.8500 Coefficient of variation 9.750000 1.351500 No of observations 31.0000 31.0000 From the above statistics, it is quite evident that the mean for ship inter-arrival times is greater than the median which is responsible for the positive skew, while the median for ship loading times is higher than its mean which has contributed to the negative skew. These statistics clearly indicate a high contrast to a normal distribution as the ship inter-arrival times indicate a positively skewed distribution while ship loading times indicate a negatively skewed distribution (Lee et al., 2000). A normal distribution usually has skewness and its excess kurtosis is equal to zero. However, in this case, the data show both positive and negatives distribution. Conclusions and Recommendations From the descriptive statistical data, it is evident that the data from Superior Grain Elevator Inc are not normally distributed and thus cannot be used to make the assumption that the introduction of a third wharf would be economical or would increase the company’s economies of scale (Kros, 2008). In case Superior Grain Elevator Inc wants to use descriptive statistics, it should adopt alternative methods of quality assessment such as the use of the simulation model as in Table 1, as this would help the company to come up with more accurate data (Grant & Leavenworth, 1996). References Grant, E. L., & Leavenworth, R. S. (1996). Statistical quality control (7th ed.). Boston: WCB/McGraw-Hill. Kros, J. F. (2008). Spreadsheet modeling for business decisions. New York: McGraw-Hill/Irwin. Lee, A., Lee, J., & Lee, C. (2000). Statistics for Business and Financial Economics (vol. 1). World Scientific. Robinson, S. (2004). Simulation: The practice of model development and use. John Wiley & Sons. Appendix 1 Read More