Case: New Bedford Steel Corporation

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. The following table
shows relevant information on the bids from the eight potential coal suppliers.

Table: Bids received by NBS from potential coking coal suppliers

Suppliers Ashley Bedford Consol Dunby Earlam Florence Gaston Hopt

Price($/ton) 49.5 50.0 61.0 63.5 66.5 71.0 72.5 80.0
Union/Non- Union Union Non- Union Non- Union Non- Non-
Union Union Union Union Union
Truck/Rail Rail Truck Rail Truck Truck Truck Rail Rail
Volatility 15 16 18 20 21 22 23 25
(%)
Capacity 300 600 510 655 575 680 450 490
(mtons/year

For example, Ashley Mining Co. has bid to supply NBS with coking coal at a price of $49.5/ton up to their
capacity of 300 mtons (300,000 tons) per year. 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 volatile (burnable) matter present in the coal. Based on
market forecasts and last year’s production characteristics, NBS is planning to accept bids for 1225
mtons (1225,000 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 labour relations, NBS has decided to procure at least 50% of
its coking coal from union 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 the capacity for bringing in coal by truck is
limited to 720 mtons per year. Stephen Coggins is interested in answering the following three questions:

I. How much coal should NBS contract for from each supplier in order to minimize the cost of
supply of coking coal?
II. What will be NBS’s total cost of supply?
III. What will be the NBS’s average cost of supply?