Question: Process Capacity at Zug Island Steel
Zug Island operates a mill that makes steel for a variety of uses. You have been hired as a consultant to evaluate the current state of operations of the coking oven, blast furnace, and basic oxygen furnace (BOF) departments. In the first stage of the process, a coking oven changes coal from a nearby coal dump into coke. The coke is left to cool in a heap and then moved to a pile near the blast furnace. Currently, the coke oven has a design capacity of 71,000 tons of coke per year. The blast furnace converts coke from the pile and iron pellets, also from a nearby pile, into pig iron. The pig iron is moved to a staging area to cool. The blast furnace uses 1.5 tons of coke and 2.3 tons of iron pellets to make every ton of pig iron, with a design capacity of 55,000 tons of pig iron per year. In the next step, the BOFs convert pig iron into steel, which is taken to a soaking pit to await the next stage of processing. The BOFs require 0.8 tons of pig iron and 1.2 tons of scrap and chemicals to produce a ton of steel. They have a design capacity of 68,000 tons of steel per year. Over the last year, the plant produced 60,000 tons of steel. You have been asked to calculate the capacity of the production process at Zug Island, stating results in tons of finished product (i.e., tons of steel). Also, the company is considering increasing the capacity of the blast furnace from 55,000 tons to 70,000 tons of pig iron per year, citing two major reasons. First, managers see a need to balance capacity across processes. Second, the change seems very attractive economically, with a return on investment significantly above the firm's requirement. What is your evaluation of this proposed change?