DECISION 517 Spreadsheet Modeling

Fuqua School of Business

Spring Term 1

Grupo Nogueira
Prepare for Class 12

This is the last graded case, and you are to work in groups on the case. You may NOT discuss
your case solution or share materials with students outside your own group.
The goal of this assignment is for you to help Grupo Nogueira improve their sugar refining and
molasses production operations.
Assignment: Build an optimization model to help you advise the Grupo Nogueira production
planning team. What production plan do you recommend to them? What advice can you offer
on the strategic questions (or on other issues) that Nogueira discusses at the end of the case?
Each group should prepare a 10- to 15-minute PowerPoint presentation for class 12 that
describes their analysis and recommendations. Write this presentation as if you were
presenting to Arlete Nogueira. In each section, I will randomly select one or more groups to give
their presentations to the class. I am looking for a correct and thoughtful analysis of the
problem with recommendations supported by analysis.
Deliverables:

At the beginning of class, each group should submit a hardcopy of their presentation; I need
one copy per group. If there are comments you plan to make in your presentation but did
not put in your slides, please include them in the presentation using the "Speaker notes"
feature of Powerpoint and print the "Notes Pages." Please include the following in an
appendix:

A copy of your spreadsheet model

Copies of any Solver (or SolverTable) reports that support your analysis

You should retain copies of these materials yourself as you may find them useful for the
class discussion.

Before class, please submit an electronic copy of your presentation and spreadsheet in Sakai
(under Assignments). If you are selected to present to the class, you should plan to give
your presentation from this file. Although I plan to grade the submitted hardcopy, I may
review your electronic files if I want to examine the details of your model or presentation. I
need only one submission per team.

Note that there is a spreadsheet file on Sakai (under Resources/Class 11) that provides data for
the case.

GrupoNogueira1

Background.Brazilisconsideredtohavetheworld'sfirstsustainablebiofueleconomy,andits
sugarcanebasedethanolisconsideredbymanytobethemostsuccessfulalternativefueltodate.
SugarcanehasbeencultivatedinBrazilsincetheearlycolonialdays,whensugarwasexportedtoEurope
byPortugueseandDutchsettlers.Althoughethanolmadefromsugarcanewasusedsporadicallyasa
fuelforautomobilesduringthe192030s,cheapgasolinebecamethepreferredfuelinBrazilafterWorld
WarII.Aftertheoilcrisisintheearly1970sledtowidespreadfuelshortages,theBraziliangovernment
beganpromotingethanolfromsugarcaneasafuelsource.PuregasolineisnolongersoldinBrazil;all
lightvehiclesinBrazilnowruneitheronamixofgasolineandethanolorentirelyonethanol.
Theprocessingofsugarcaneproceedsinseveralstagesandproducesseveralvaluableproducts.Once
harvested,thesugarcaneistransportedbytrucktoaplantforprocessing.Thefirststageofprocessingis
milling:thesugarcaneiswashed,chopped,andshreddedtoproducecanejuiceandafibrousresidue
calledbagasse.Thecanejuiceisrefinedtoproducesugarcrystalsandmolasses.Thebagassemaybe
usedasafuelsourcetogenerateelectricity(e.g.,torunthemills)ortomakeanimalfeedorpaper.The
sugarcrystalsarefurtherrefinedtoproducevariouskindsofsugar,includingtable,powderedorbrown
sugar,aswellasvarioussyrupsforuseinthefoodindustry.Themolassesisdistilledtoproduceethanol.
Theproductionprocessesareintegratedinsomeplaces,withoneplanttakingsugarcaneasinputand
producingethanol,sugar,andbagasseasproducts.Inotherplaces,theproductionprocessisdistributed
acrossseveralfacilitiese.g.,amillconvertsthecanetocanejuiceandbagasse;arefineryconvertsthe
canejuicetomolassesandsugar;and,finally,adistilleryconvertsthemolassestoethanol.
GrupoNogueira.ArleteNogueira,abusinesswomaninSoPaulo,formedGrupoNogueira(GN)in2007.
Nogueirawasstruckbyhowsomesugarcaneplantationownerscomplainedabouthightransportation
costsatatimewhenoilandethanolpriceshitalltimehighs.Theseplantationownersweretrucking
sugarcanelongdistancestobeprocessedatintegratedprocessingfacilitiesnearthemajorcities.Even
thoughtheethanolsoldforhighpricesinthemarket,theplantationowners'profitswereundercutby
thehightransportationcosts.Nogueirathoughtshecouldstartaprofitablebusinessthatprocessed
sugarcaneatlocationsclosertotheseplantations.
Afterstudyingthecapitalrequirementsandtransportationcosts,Nogueiradecidedtobuildtwoplants
thatintegratedthefirsttwostagesoftheproductionprocess(millingandrefining).GNwouldplace
theseplantsintwotowns,LondrinaandFranca.GNwouldbuysugarcanefromnearbyplantationsand
thenmillitandrefineit.GNwouldthenshiptheresultingmolassestodistilleriesclosertothemajor
cities.Thebagassewouldbesoldinlocalmarketsandthesugarwouldbesoldseparatelyforfurther
processingbyothercompanies.Amillingandrefiningplant,likethoseinLondrinaandFranca,isshown
inFigure1.
Toraisemoneyfortheventure,Nogueiraformedanallianceconsistingofeightsugarplantationsand
sevendistilleries.Inexchangeforthefinancialcontributionstowardsthecapitalcosts,GNagreedtobuy
allofthesugarcaneproducedatitspartnerplantationsatspecifiedpricesandtodeliver,atmarket

ThiscasewaswrittenbyBobClemen,JimSmith,andDavidBrownattheFuquaSchoolofBusiness,DukeUniversityin200910
andrevisedbyBrownandSmithwithassistancefromFernandoVargasin2011.Thecaseisfictitiousandsomeofthedatais
adaptedfromHarvardBusinessSchoolcase189040,"J.P.Molasses,Inc.,"whichissetinadifferentcontext.

prices,specifiedminimumquantitiesofmolassestothepartnerdistilleries.Inthisarrangement,GN
wouldpaythecostoftransportingsugarcanetomillsaswellasthecostoftransportingmolassestothe
distilleries.Thus,thesuccessofGNreliednotonlyonefficientoperationsattheplants,butalsoonits
abilitytotransportthesugarcaneandmolassesefficiently.

Figure1:Amillingandrefiningplant.Thereceivingfacilityandmillareontheright
andtherefineryisontheleft.(PhotobyMariordo,ObtainedfromWikimediacommons.)

ProductionPlanning.ProductionplanningatGNishandledcentrallyanddoneonamonthlybasis.The
productionplanningteamhastoallocatethesugarcanefromeachofitsupstreamsuppliers(the
plantations)tooneorbothofitsplants.Italsohastoallocatethemolassesproducedateachplantto
thedownstreamcustomers(thedistilleries).Theteam'sgoalistomaximizeprofitsforGN,takinginto
accountthevariouscostsandrevenuestreamsandmeetingitsobligationstodelivermolassestoits
downstreamcustomers.
Withthenumerousconstraintsinvolved,itisdifficulttocomparealternativeplanswithouttediously
generatinganentirelynewplan.Itshouldbepossible,Nogueirabelieved,todevelopaspreadsheet
basedsystemtocreateandevaluatepossibleplanseasilyandquickly.Suchasystemwouldhaveto
incorporatethephysicalattributesoftheproductionprocesses,thetransportationcosts,themarket
pricesforthevariousproducts,theavailablesuppliesofsugarcane,andtheobligationstoitspartner
distilleries.
TheoverallprocessdiagramforGNisshowninFigure2.First,duetovariouslossesintransportation,
only97.3%(byweight)ofthesugarcanepurchasedactuallymakesittoeachplantandbeginsthemilling
andrefiningprocess.GN'stwoplantsusedifferentrefiningequipmentandprocesses.TheLondrina
plantconverts35.4%ofthesugarcaneintomolassesand40.2%intosugar;theremainder(24.4%)is
bagasse.TheFrancaplantconverts30.7%intomolassesand45.6%intosugar,withtheremainder
(23.7%)beingbagasse.ThoughtheFrancaplantproducesmoresugar,theLondrinasugarishigher
qualityandcommandsahighermarketprice.

Figure2:ProcessdiagramforGrupoNogueira

Toworkefficiently,bothplantsneededtooperatebetween50%and100%oftheirrespectivecapacities
(8,030metrictonspermonthinLondrinaand8,780metrictonspermonthinFranca).Variable
operatingcostswereR$31permetrictonofsugarcaneprocessedatLondrinaandatR$38permetric
tonofsugarcaneprocessedatFranca.2FixedoperatingcostswereR$10,000permonthatLondrinaand
R$14,200permonthatFranca.LimitationsintherefiningprocessattheLondrinaplantrestrictedthe
productionofsugaratthisplanttoamaximumof2,000metrictonspermonth.Sugarproductionat
Francawaslimitedto4,000metrictonspermonth.TheseproductiondataaresummarizedinExhibit1.
ThequantitiesofsugarcaneproducedatGN'spartnerplantationsforthecurrentmonthareshownin
Exhibit2,alongwiththecurrentcostoftruckingfromtheplantationtoGN'splantsandtheagreedupon
purchasepriceforthesugarcane.Fuelcostsareincludedinthesefreightcostsforsugarcaneand
currentlyaccountforapproximately55%ofthesecosts.
ThequantitiesofmolassesrequiredbyeachofthepartnerdistilleriesareshowninExhibit3,alongwith
thecurrenttransportationcosts.Manyofthedistilleriesarewillingtotakeadditionalmolasses,beyond
theagreeduponquantities.Finally,thereisapossibilityof"openmarket"salesofmolassestonon
partnerdistilleries.Specifically,therearedistilleriesinSantaBrbaradOesteandAraraquarathathave
nominimumpurchaseagreementwithGNbutarewillingtopurchasemolassesfromGNatthemarket
price,uptothespecifiedmaximum.GNwouldberesponsibleforpayingthetransportationcosts

AllcostsarereportedinBrazilianreal,withcurrencysymbolR$.Thecurrentexchangerateisapproximately0.50U.S.Dollars
perBrazilianReal.

associatedwiththedeliveryofmolassestothesedistilleries.Themaximumquantityandtransportation
costsforthesetwodistilleriesareshownatthebottomofExhibit3.Fuelcostsareincludedinthese
transportationcostsandcurrentlyaccountforapproximately45%ofthesecosts.
Thecurrentmarketpricesformolasses,sugar,andbagasseareshowninExhibit4.Purifiedsugarand
bagassearesoldatthesemarketprices"freightonboard"(FOB),meaningthepurchaserpaysallfreight
costsassociatedwiththeirtransport.Incontrast,GNmustpayfreightforallsalesofmolasses,including
"openmarket"salestoitsnonpartnerdistilleriesinSantaBrbaradOesteandAraraquara.Allofthe
distillerieswould,however,paythemarketpriceforthemolassestheypurchase.

Assignment.Thefirsttaskistodevelopaproductionplanforthecurrentmonth.HowshouldGN
allocatesugarcanefromitspartnerplantationstoitsplants?HowshouldGNallocatethemolassesfrom
itsplantstoitspartnerdistilleries?
InadditiontohelpingGNdevelopaproductionplanforthisandfuturemonths,Nogueirahopedthata
spreadsheetbasedplanningtoolcouldhelpheraddresssomeoperationalandstrategicquestionsthat
shehadbeenconsidering.Thequestionsincludethefollowing:

NogueirawonderedabouttheconfigurationofGN'splants:Couldtheybeimproved?For
example,woulditbeprofitabletoincreasecapacityateitherplant?

NogueirawonderedhowmuchmoremoneyGNcouldmakebyincreasingitspurchasesof
sugarcane.Specifically,shewascontemplatingapproachingalargeplantationnearDracena.The
transportationcost(R$/t)fromthisplantationtotheplantsinLondrinaandFrancaareas
follows:

Londrina Franca

Dracena

15.30

13.10

HowmuchshouldGNbewillingtopayforsugarcanefromthispotentialsupplier?

ThoughGNhadlongtermcontractstosupplycertainminimalquantitiestotheirpartner
distilleries,itbotheredNogueiratobeshippingmolasseslongdistancesatgreatexpenseto
meettheserequirements.Howmighttheyrenegotiatesomeofthesesupplyagreementsto
improveGN'sprofitability?

Finally,NogueiraworriedaboutGN'sexposurestovariationsinpricesforsugar,molasses,and
bagasse:HowwouldchangesinthesecommoditypricesaffectGN'sprofitabilityandproduction
plans?ThoughGN'sproductioncostsareindependentofthemarketpricesforsugarand
bagasse,themarketpriceformolassesisstronglycorrelatedwiththepriceofgas/ethanolwhich
isusedasfuelwhentransportingsugarcaneandmolasses.ThoughGN'srevenuewouldincrease
withincreasesinmolassesprices,theirtransportationcostswouldincreaseaswell,asfuel
pricesincreases.

Exhibit 1: PRODUCTION DATA

Londrina
2.7%

Physical yield loss (% of sugarcane purchased)

Supplier-to-factory transport losses

Franca
2.7%

Actual recovery rates (% of sugarcane delivered)

Molasses

35.4%

30.7%

Sugar

40.2%

45.6%

31

38

10,000

14,200

Sugarcane processing

8,030

8,780

Refined sugar

2,000

4,000

Min

50%

50%

Max

100%

100%

Production costs
Variable (R$/t of sugarcane)
Fixed (R$ per month)
Production constraints (t/month)

Operating range (% of capacity)

Exhibit 2: SUPPLIER DATA

Supplier

Available
Quantity
(t/month)

Maring

1,000

Price
(R$/t)
25.20

Paranava

1,583

24.50

5.00

13.70

Frutal

2,140

25.50

19.60

11.50

Rancharia

1,370

23.30

4.00

10.60

Apucarana

2,000

24.20

4.20

12.10

Bastos

1,850

23.30

7.65

11.00

Sacramento

1,260

23.30

14.70

4.80

Iturama

1,700

24.20

16.30

10.30

t = metric ton = 1000 kg

Cost of Freight to
Londrina
Franca
(R$/t)
5.00
11.60

Exhibit 3: CUSTOMER DATA

Distillery

Guaranteed
Quantity
(t/month)

Maximum
Capacity
(t/month)

Ja

480

900

26.00

30.10

Bariri

850

1150

51.70

31.70

Cosmpolis

640

800

16.60

7.30

Itapira

575

775

16.20

21.50

Pirassununga

970

970

24.50

13.20

So Carlos

107

200

26.30

28.00

80

400

21.30

46.20

Santa Brbara dOeste

310

15.30

28.40

Araraquara

470

24.30

14.70

Diadema

Exhibit 4: MARKET PRICES

Cost of Freight from

Londrina
Franca
(R$/t)

Commodity
Londrina sugar

Price
(R$/t)
200

Franca sugar

150

Molasses

36

Bagasse

25