Where are the suppliers

What are the distances and means of transport

What are the 3 means of factory production?

How much does it cost to install production

Where are the customers located

Distance and transport costs

Find the location that minimizes costs

Please do the calculations.

CASE DESCRIPTION This case addresses biodiesel production plant location considerations. The case is appropriate for undergraduate seniors (difficulty level: 4) in supply chain management, logistics, and/or general operations and marketing classes. Understanding the business issues presented is critical to firm success thus, to a student's success when they become involved in such decisions. The time a student must spend on this case for total understanding will vary depending on a student's base level of understanding, but most business students should be able to complete the case in four to six hours out of class and one hour of class discussion. The case is thirteen pages long, including references and appendices. CASE SYNOPSIS Bruce Nave had been using biodiesel in his own construction operation for over a year. With the advent of petroleum oil prices breaking seventy dollars per barrel, he saw an opportunity to start producing biodiesel on a commercial scale. Bruce knew that the success of his planned enterprise would depend in part on location, as each location would have different start up cost, cost of living, local laws, cost of doing business, availability and cost of inputs, and cost of shipping raw materials and finished product. Differences in these costs could quickly erode the slim contribution margins that commodity items generate. The case ends with Bruce wondering where he should locate his bio- diesel production facility. The purpose of this case is to provide a decision scenario to students that will be managing supply chains, logistic functions of a firm, and/or are otherwise involved in strategic decisions relative to location of capacity. INTRODUCTION While Bruce Nave sat in his Arizona office, he stared at the pile of information he needed to assess in order to determine where he was going to locate his new five million gallon per year biodiesel production facility. This new facility would need approximately 40 blue collar and ten white collar employees to operate effectively. In the past year, Bruce had experimented with the use of biodiesel on a small scale to power over 65 diesel engines used in his construction business. From this success and the rising cost of petroleum derived diesel, he decided that producing biodiesel on a commercial scale was a viable business. He knew the location of the facility would profoundly affect profitability. The location decision would be easy if all he had to determine was which possible location reduced total inbound and out-bound transportation costs. However, there were many other quantitative and qualitative factors to consider. In fact, the affect many of these factors had on the location decision were not readily apparent and needed careful consideration, especially since production of biodiesel on a commercial scale was a new commodity industry. At the time, key success factors were not well known for the biodiesel industry, BACKGROUND Biodiesel is made by chemically reacting an animal fat or vegetable oil with a short chain alcohol such as methanol or ethanol in the presence of a sodium or potassium hydroxide catalyst in a process called transesterification. The primary product of the reaction is methyl (or ethyl) esters, also called biodiesel. Biodiesel can be used to power modern non-modified diesel engines in its pure form (100% biodiesel) or in any mixture with petroleum diesel. When biodiesel is burned, fewer pollutants are released into the atmosphere relative to burning petroleum diesel. Biodiesel is also quickly biodegradable. In addition, all outputs of the production process are usable. Bruce was by no means one of the first users of biodiesel. Using vegetable oil to power engines is not a new concept. Rudolph Diesel invented the diesel engine in the 1890s with the intent of using renewable resources as the source of fuel. He used peanut oil to power his invention, but petroleum based fuels were plentiful, easy to produce, and inexpensive, so the diesel engine has since been powered almost exclusively by petroleum based diesel fuel (Grosser, 1978). However, biodiesel burns cleaner than petroleum derived diesel with less soot and no sulfur. In addition, the carbon that is released into the air upon combustion does not increase the current carbon levels, as biodiesel is extracted from plants that take carbon out of the atmosphere. This recycling of carbon means there is no net increase of carbon in the current carbon cycle as there is when petroleum products are bumed. Over time, buring biodiesel instead of petroleum based fuel could stabilize the carbon cycle and possibly reduce global warming. Based on the environmental advantageous and the price of petroleum reaching $70/barrel, biodiesel was becoming a feasible alternative to petroleum based diesel. THE INDUSTRY Worldwide interest in biofuels was growing as well as the actual production of biodiesel. Transesterification of vegetable oils was first recorded in 1853, but due to the inexpensive and abundant supply, and ignorance of environmental harm caused by burning petroleum, petroleum diesel became the fuel of choice after 1920. There was a brief resurgence in ester production in 1940, but it was to produce glycerin forexplosives. Glycerin is a byproduct of the transesterification of vegetable oils and can also be used to make soap. When some farm co-operatives in Austria started producing biodiesel for fuel in the 1980's, the industry truly started to grow. In the 1990's, several European countries and others throughout the world started producing biodiesel in commercial quantities, mostly using rapeseed oil. The Austrian Biofuels Institute listed 21 countries producing biodiesel in 1998. In 1999 the United States of America (US) only produced 500,000 gallons, but by 2005 the US production had expanded to 75 million gallons. In 2005, European production was measured at 800 million gallons per year. Biodiesel production was assured, because several US states and countries in Europe were mandating that biodiesel be used at some minimum percentage mix with petroleum diesel. In addition, some states and countries also offered tax incentives to produce biodiesel. As of April 28, 2006 there were 65 production facilities in the US, six of them BQ-9000 certified, which requires that a firm's production processes and products meet minimum American Society for Testing and Materials (ASTM) standards for biodiesel (Figure 1). BQ-9000 certification also requires biodiesel to meet some other market specific standards, such as storage requirements (EU Biodiesel Production Growth Hits Record High in 2005, 2006, National Biodiesel Board, 2006). Together, the 65 US production facilities had a total capacity of 395 million gallons of biodiesel per year (National Biodiesel Board, 2006). Each gallon of biodiesel requires one gallon of feedstock, Oil feedstock can be derived from oil bearing product such as soy beans, canola, rapeseed, mustard seed, tallow, algae, and used cooking oil. Available US oil bearing products in 2000 for processing into biodiesel was 130 million gallons from soy beans and 65-130 million gallons from waste grease and tallow for up to 260 million gallons of feedstock (Campbell, 2000). Campbell, 2000 proposed that biodiesel production from waste grease, tallow, and oil seed crops such as soybeans, rapeseed, and canola could total four billion gallons in the US without infringing on food consumption. US consumption of diesel for transportation was 40 billion gallons in 2000 (Campbell, 2000). Thus, the US could replace up to 10% of its petroleum diesel usage with biodiesel using the current technology and US grown oil feedstock. World production of vegetable oil stocks was projected to increase, so available vegetable oil for biodiesel could increase. In addition, there was research on a high oil content algae which could conceivably produce all transportation fuel (including gasoline and petroleum diesel) and heating oil (230 billion gallons) without using farm ground that could otherwise be used to produce food (Briggs, 2004). Thus, to Bruce, even though there was unused production capacity, there seemed to be ample opportunity for a strategically located facility. Figure 1: Production Facility Locations 65 production facilities BQ-9000 Accredited Freight costs were a larger proportion of the total supply chain costs in production of biodiesel than they were for petroleum diesel. This is due to the large and expensive facilities needed to capture economies of scale with petroleum facilities relative to transesterification production facilities. Biodiesel production facilities do not need the same large capacity to cover fixed costs (National Biodiesel Board, 2006). For example, many of the 89 newly proposed US biodiesel production facilities in 2006 were expected to produce no more than one million gallons per year (National Biodiesel Board, 2006). Reasonable proximity to feedstock and a ready market to reduce freight costs were representing a bigger weight in the location decision than the economies of scale of the plant Further, encouragement to produce biodiesel was provided by the federal government and some state governments. They were offering some forms of user or producer incentives. The United States Department of Agriculture (USDA) offered grant funds of up to $750,000 for installation of renewable energy systems located in rural areas (National Biodiesel Board, 2006). As of 2005, producers of biofuels in the state of Washington were eligible for state and local deferrals of sales and use taxes until July 1, 2009 on investments in and construction of buildings, new equipment, and labor. In addition, state and local property taxes were exempt for six years, under the Property Tax and Leasehold Excise Exemption, and there was a 13.8% reduction in the Business & Occupation Tax (Spokane County Conservation District, 2006). The state of Washington also mandated that all diesel sold in Washington had to contain 2% biodiesel by November 30, 2008. Once in-state feedstock and production facilities could match3% of diesel demand, that requirement was supposed to increase to a 5% biodiesel blend for all diesel sold (Jaskor, Gail 2006). As of March 6, 2006, Idaho allowed up to a 10% tax reduction to licensed motor fuel distributors forthe biodiesel they sold (Crockett, John 2006). In Oregon, the Business Energy Tax Credit would supply 35% of "eligible costs" for alternative fuel projects, which included the capital costs (Oregon Department of Energy, n.d.). Oregon also offered infrastructure loans to small businesses that built alternative energy facilities, which included biodiesel (Keto, Jeff 2006). Within each of these three states, there were also different tax exemptions available that dealt with the employment opportunities that building a facility would bring to the area. There were also federal tax incentives offered to producers of biofuels in addition to the state incentives. The newest forms of federal tax incentives for biodiesel production at the time were detailed in the Energy Tax Incentives Act of 2005. Over a ten-year period, the US government was going to provide $14.5 billion in tax reductions to manufacturers involved with energy production (CCH, 2005). Under the Governors' Ethanol Coalition, the Commodity Credit Corporation will provide producers of biodiesel with incentive cash payment (they are willing to pay up to $150 million total) for increasing their agricultural commodity purchases from the year before (Governors' Ethanol Coalition, n.d.). Lastly, there was a ten cent per gallon tax credit for up to 15 million gallons of biodiesel produced with agriculture products for smaller producers (U.S. Department of Energy, 2005). PRODUCTION PROCESS The production of biodiesel is a relatively simple process. A suitable feedstock (vegetable oil, either virgin or used, or animal oil such as tallow) is necessary. There are numerous plants that have seeds or fruits that contain a high percentage of oil. This oil is the feedstock for biodiesel production. The amount of oil from an acre of farm ground for various oil producing plants is displayed in Table 1. The first three plants displayed are currently grown and available in the US, Jatropha is grown in many third world countries, palm oil is available on the world market, and the extraction of vegetable oil from algae is not yet commercially feasible. The display is in part to show that vegetable oil production is a viable and growing industry if the demand for biodiesel increases. Gallons per acre will vary dependent upon growing conditions and crop yield per acre (Pediment Biofuels, 2006). Table 1: Yields of Various Feedstocks (Hanson & Oelke, 1998; Brown, et al., 2001-5; Bhardwaj, 2006; Murphy, 2005; and Perry, 2006) Feedstock Average gallons per acre (approximately 7.6 Ibs/gallon of oil) Oil yield from seed Assumed Ibs seed/acre 48 20% 1,824 127 40% 2,413 61 40% 1.159 Soybean Rapeseed & Canola Mustard Jatropha Palm Oil Algae 202 25% 6,140 635 30% 16,087 10,000 50% 152,000 Even though the transesterification process is relatively simple, it is not a process without risk or possible problems. The process starts with oil that is extracted from the oil producing portion of the plant through a crushing and/or chemical process. After extraction, the feedstock is then mixed with a methyl or ethyl alcohol and a catalyst such as sodium or potassium hydroxide. Both methyl and ethyl alcohol are very flammable. Methyl alcohol is very dangerous to work with. In fact, breathing the fumes and ingesting the fluid can be lethal. When methyl or ethyl alcohols are mixed with a base such as sodium hydroxide or potassium hydroxide, an especially strong base, such as sodium methoxide, can be created. These chemicals can be explosive, the fumes are toxic, and ingestion and skin exposure can have lethal results (Mallinckrodt, 2004, Science Lab, 2006). As in any production facility where hazardous material (methyl or ethyl alcohol and sodium or potassium hydroxide, plus acid for pre-treating oil that is high in free fatty acids) is used, adequate handling and emergency processes must be used to ensure safety to workers, the public, and the environment. In addition, after the transesterification process, some amount of alcohol will be emitted as a gas. For economic and environmental reasons, this gas should be recovered for subsequent production. Any water introduced during transesterification will disruptthe process and if the correct amount of alcohol and hydroxide relative to the type and condition of vegetable oil is not used, the transesterification process will not be complete, producing an inferior product. After the transesterification process is completed, there is a cleaning process where water is bubbled through the biodiesel to remove excess alcohol, hydroxides, and soap that may have formed due to improper transesterification. This water may be cleaned and re-circulated, but some portion of the wastewater may need to be disposed of (Van Gerpen, Pruszko, Clements, Shanks, and Knothe, 2005). In general 100 pounds of oil (about 13.16 gallons) plus 20 pounds of methanol and 1.25 pounds of sodium hydroxide produces 100 pounds of biodiesel, 11 pounds of glycerin and sodium, and 10 pounds of methanol. The sodium can be removed from the glycerin and reused, and then the glycerin is commercially viable. Nearly all of the excess alcohol can be captured and reused in the process. Most meal from crushing oil producing seeds such as soy beans can be used as a commercial animal feed, or if it is a mustard seed, can be used as a pesticide. All inputs and outputs are biodegradable, although, as stated above, some materials used in production and the end products are toxic to animals. Once the biodiesel is washed and dried, it must be stored like petroleum diesel to prevent exposure to the ambient atmosphere, as it will pick up moisture that is contained in ambient air. (Methanol Institute, 2006) FEEDSTOCK While soybeans were the most prominent plant used to produce feedstock in the US, rapeseed was dominant in the European Union and had more favorable properties compared to soy biodiesel. Canola is a cultivar of rapeseed grown in Canada and the US. The yield per acre of feedstock is higher for canola than soybeans but soybean meal is more palatable to animals than the meal from canola/rapeseed. All the meals have high nutrient value, especially protein, and may be used as an animal feed supplement. In addition, the biodiesel produced has some desirable traits that esters made from other feedstocks do not, such as a lower gelling temperature (Herkes, 2006). Canola is generally a rotation crop for grasses such as wheat. Thus, it can be feasibly grown every other year in many areas, but is mainly rotated every four years for soil health. It grows best where the climate is moderate and it can be grown without irrigation if there is enough precipitation at the correct time of year. Irrigation can be used to improve yields where precipitation is inadequate, but other crops with a higher market value per acre were grown where irrigation was an option. The time of year the crop is planted can also have an effect on yields. Spring planted or winter planted canola can be produced. (Herkes, 2006). The Palouse region in Eastern Washington and Northern Idaho, and the Camas Prairie of Northern Idaho are ideal areas for growing canola. The Palouse region encompasses two million acres with Rosalia, Washington the approximate center. On average, this area yields 1,555 lbs/acre of spring canola (Brown, Davis, Johnson, Wysocki, 2001-5). The Camas Prairie encompasses 6 million acres with Grangeville, Idaho the approximate center. Average yields in this area are 2,880 Ibs/acre with about half coming from spring and half coming from winter canola (Brown, et al, 2001-5). In addition, the Columbia Basin of Eastern Washington and Oregon with Moses Lake, Washington the approximate center can grow canola using either dry land or irrigated practices. There are ten million acres of dry land farming that could yield approximately 1,500 lbs/acre of winter canola every four years in the Columbia Basin region (Brown, et al, 2001-5). If the price of petroleum increased, it is likely that crops such as canola would produce as much profit as wheat and the every other year cycle could become the most common practice. POSSIBLE LOCATIONS, ASSOCIATED ATTRIBUTES AND COSTS From studying the locations of other US production facilities, where plants that produce desirable feedstock could be grown, where there was a ready market for meal from the oil extraction process, and where there was a ready market for biodiesel, Bruce decided to locate in the Northwest He felt that he could contract enough acreage of canola at $.15 per pound to produce five million gallons of feedstock. Part of the reason that Bruce chose the Northwest was that both he and his wife had roots in the Northwest where family farms had been in the farming community for a long time. He claimed his decision was more of an "emotional attachment to the area than anything else. They also had family members that still farmed in the Palouse area, providing access to a network of farmers. Business people, including farmers, are skeptical of new industries and practices until proven profitable. Biodiesel production had not yet been proven profitable, so an established network was extremely valuable. After considering a number of sites, he narrowed it down to three locations to assess in further detail; the St. John port in Portland, Oregon, the Port of Benton in Richland, Washington, and the port of Wilma in Clarkston, Washington. There were other possible locations, but these three all had the advantage of being fresh water ports on the same river system (Columbia River). Thus, product could be shipped by barge for approximately $.08/ton/mile (Tidewater, 2001). In fact, the St.John port could accommodate ocean-going ships for an estimated $.02/ton/mile. There was truck transportation, which cost approximately $.15/ton/mile, from all feed growing areas to each possible plant site (American Freight Companies, 2001). The only available transportation from Grangeville to Clarkston was by truck. Rail transportation was also an available option for much of the transportation needs as cach port had rail siding access. National rail companies charged approximately $.12/ton/mile (Union Pacific, 2006). There was no national railway option from Rosalia in the Palouse area to Clarkston, but there was an alternative farmer co-op owned railroad. This railroad was only slightly more expensive at an estimated $.13/ton/mile. There was no rail or waterway from the Camas Prairie area to any of the three proposed production facilities, but there was a national rail system that connected all three proposed sites and Moses Lake which was located in the center of the Columbia Basin. In addition to access of transportation from growing areas to each site, the three areas were in close proximity to high demand areas. Fleets of vehicles located in the greater Spokane and Seattle, Washington, and Portland, Oregon areas were all near, and large commercial and government users of diesel were more likely to purchase biodiesel than personal buyers. Due to the solvent nature of biodiesel, dedicated handling and storing equipment is recommended (Van Gerpen et al, 2005). In addition, marketing costs would be minimized by selling to large users. The Spokane Transit company alone used 1.37 million gallons of diesel per year, while the Seattle Transit and Ferry used an additional 20 million gallons per year. Based on the commercial use in the Spokane area and population ratios, the Portland area diesel use can be estimated at 6.56 million gallons (U.S. Census Bureau, 2007). Farmers used approximately 7.3 gallons of diesel per acre per year (Ryan and Tiffany, 1998). All of these customers were willing to use from a minimum of a 2% biodiesel content mix up to a 20% biodiesel mix. Bruce wanted to make his biodiesel available to area farmers and other local users within 80 miles of the production facility. Thus, farmers near the Clarkston location, such as Rosalia (2 million acres), would use approximately 14.6 million gallons of diesel fuel, based on an average of 7.3 gal/acre). Using the 7.3 gal'acre average for farm use, the other area demands can be estimated as well. Those farmers near the Richland area, Columbia Basin (10 million acres), would use approximately 73 million gallons of diesel fuel. Bruce expected the local users to be more willing to use a higher biodiesel percent mix than the Spokane, Portland, and Seattle users. The goal was to sell all biodiesel produced while minimizing total transportation costs and making sure that the type of customer base remained diversified by selling at least a minimum amount to Spokane and Seattle. Bruce also assumed the sales price would remain the same to all customers. All outbound freight would be by truck because production capacity was too low to make shipping by rail or barge feasible in a timely manner. Displayed in Appendix 1 (conveniently divided into Tables 2-4) are the quantitative and qualitative factors for each location that Bruce had to assess in order to make his location decision. Where should Bruce locate and why? Location Information Table 2: Location Distances (www.mapquest.com, 2006) Clarkston Richland St. Johns/Portland Factor Miles to Grangeville to 74 211 418 Miles Rosalia to 77 154 361 154 81 287 1557 1647 1790 Miles Moses Lake to Miles Des Moines to Miles Spokane to Miles Seattle to 106 146 351 318 219 174 Miles Portland to 344 226 8 Miles Clarkston to 0 137 344 Miles Richland to 137 0 226 Table 3: Estimated Freight Costs (Tidewater, 2006; Union Pacific, 2006; American Freight Companies, 2001) Train Private Train .12 .13 .02 Truck Freight Method S/Ton/Mile Ocean River Barge .15 .08 Table 4: Location Details/Costs (Epodunk, Inc., 2007, US Census Bureau, 2007) Clarkston Richland St. Johns Portland 00082 .006816 0468 Real-estate availability thousing permit ratio to population, higher the better) Real-estate cost (single family new housing construction permit avg. 566,100 $221,600 $169,700 cost 04) 6.3% 5.6% 6.2% Labor availability (unemployment rate, assume same pay rate at all sites) Labor skill level (35 years old % graduated high school) 81.4% 92.6% 85.7% Table 4: Location Details/Costs (Epodunk, Inc., 2006, U.S. Census Bureau, 2007) Clarkston Richland St. Johns/Portland Relevant to biodiesel research University University of Idaho/ University of Washington State Idaho/Washington State University University Kadlec Medical Center and Lourdes Counseling Center Hospital and St. Joseph Medical Center (5 miles) University of Idaho/ Washington State University/ Oregon State University Approx. 8 including OHSU hospitals and clinics and Doernbecer Hospital Tri-State Memorial Yes Yes Yes Hospital treat chem. Exposure K-12 Schools University Education Availability High Schools: 1 public High Schools: Well over 10 in each public and Primary/Middle Schools: 8 3 public, 1 private private area of education public, 1 private Primary/Middle Schools: 10 public, 2 private University of University of Idaho/ University of Portland/ Idaho/Washington State Washington State Portland State University/ University/Lewis and University/ Columbia Concordia University Clark State College Basin College Adequate growth potential Adequate growth potential Adequate growth potential Limited Diverse Highly Diverse 93% White non-Hispanic 87% White non-Hispanic 75.5% White non-Hispanic $75,000 $32,000 $300,000 $10,000/month $15,000/month $25,000/month $8,000/month $5,000/month $10,000/month Site Availability Culture Availability Diversity Estimated Permit requirements Port lot rent/month Estimated Utilities (power & H,0) Estimated Hazardous Material Requirements Bond 8%/year Estimated Waste Disposal Cost Production Growth Possibilities Feedstock Growth Possibilities Local Demand growth Airport Availability $1.5 million $1 million $5 million $5,000/month $2,000/month $10,000/month Unlimited Unlimited Unlimited Unlimited Unlimited Unlimited Stable Stable Some Growth Portland International Airport Flights available to international airports Flights available to international airports High Low None Established Network with Farmers (80 mile radius CASE DESCRIPTION This case addresses biodiesel production plant location considerations. The case is appropriate for undergraduate seniors (difficulty level: 4) in supply chain management, logistics, and/or general operations and marketing classes. Understanding the business issues presented is critical to firm success thus, to a student's success when they become involved in such decisions. The time a student must spend on this case for total understanding will vary depending on a student's base level of understanding, but most business students should be able to complete the case in four to six hours out of class and one hour of class discussion. The case is thirteen pages long, including references and appendices. CASE SYNOPSIS Bruce Nave had been using biodiesel in his own construction operation for over a year. With the advent of petroleum oil prices breaking seventy dollars per barrel, he saw an opportunity to start producing biodiesel on a commercial scale. Bruce knew that the success of his planned enterprise would depend in part on location, as each location would have different start up cost, cost of living, local laws, cost of doing business, availability and cost of inputs, and cost of shipping raw materials and finished product. Differences in these costs could quickly erode the slim contribution margins that commodity items generate. The case ends with Bruce wondering where he should locate his bio- diesel production facility. The purpose of this case is to provide a decision scenario to students that will be managing supply chains, logistic functions of a firm, and/or are otherwise involved in strategic decisions relative to location of capacity. INTRODUCTION While Bruce Nave sat in his Arizona office, he stared at the pile of information he needed to assess in order to determine where he was going to locate his new five million gallon per year biodiesel production facility. This new facility would need approximately 40 blue collar and ten white collar employees to operate effectively. In the past year, Bruce had experimented with the use of biodiesel on a small scale to power over 65 diesel engines used in his construction business. From this success and the rising cost of petroleum derived diesel, he decided that producing biodiesel on a commercial scale was a viable business. He knew the location of the facility would profoundly affect profitability. The location decision would be easy if all he had to determine was which possible location reduced total inbound and out-bound transportation costs. However, there were many other quantitative and qualitative factors to consider. In fact, the affect many of these factors had on the location decision were not readily apparent and needed careful consideration, especially since production of biodiesel on a commercial scale was a new commodity industry. At the time, key success factors were not well known for the biodiesel industry, BACKGROUND Biodiesel is made by chemically reacting an animal fat or vegetable oil with a short chain alcohol such as methanol or ethanol in the presence of a sodium or potassium hydroxide catalyst in a process called transesterification. The primary product of the reaction is methyl (or ethyl) esters, also called biodiesel. Biodiesel can be used to power modern non-modified diesel engines in its pure form (100% biodiesel) or in any mixture with petroleum diesel. When biodiesel is burned, fewer pollutants are released into the atmosphere relative to burning petroleum diesel. Biodiesel is also quickly biodegradable. In addition, all outputs of the production process are usable. Bruce was by no means one of the first users of biodiesel. Using vegetable oil to power engines is not a new concept. Rudolph Diesel invented the diesel engine in the 1890s with the intent of using renewable resources as the source of fuel. He used peanut oil to power his invention, but petroleum based fuels were plentiful, easy to produce, and inexpensive, so the diesel engine has since been powered almost exclusively by petroleum based diesel fuel (Grosser, 1978). However, biodiesel burns cleaner than petroleum derived diesel with less soot and no sulfur. In addition, the carbon that is released into the air upon combustion does not increase the current carbon levels, as biodiesel is extracted from plants that take carbon out of the atmosphere. This recycling of carbon means there is no net increase of carbon in the current carbon cycle as there is when petroleum products are bumed. Over time, buring biodiesel instead of petroleum based fuel could stabilize the carbon cycle and possibly reduce global warming. Based on the environmental advantageous and the price of petroleum reaching $70/barrel, biodiesel was becoming a feasible alternative to petroleum based diesel. THE INDUSTRY Worldwide interest in biofuels was growing as well as the actual production of biodiesel. Transesterification of vegetable oils was first recorded in 1853, but due to the inexpensive and abundant supply, and ignorance of environmental harm caused by burning petroleum, petroleum diesel became the fuel of choice after 1920. There was a brief resurgence in ester production in 1940, but it was to produce glycerin forexplosives. Glycerin is a byproduct of the transesterification of vegetable oils and can also be used to make soap. When some farm co-operatives in Austria started producing biodiesel for fuel in the 1980's, the industry truly started to grow. In the 1990's, several European countries and others throughout the world started producing biodiesel in commercial quantities, mostly using rapeseed oil. The Austrian Biofuels Institute listed 21 countries producing biodiesel in 1998. In 1999 the United States of America (US) only produced 500,000 gallons, but by 2005 the US production had expanded to 75 million gallons. In 2005, European production was measured at 800 million gallons per year. Biodiesel production was assured, because several US states and countries in Europe were mandating that biodiesel be used at some minimum percentage mix with petroleum diesel. In addition, some states and countries also offered tax incentives to produce biodiesel. As of April 28, 2006 there were 65 production facilities in the US, six of them BQ-9000 certified, which requires that a firm's production processes and products meet minimum American Society for Testing and Materials (ASTM) standards for biodiesel (Figure 1). BQ-9000 certification also requires biodiesel to meet some other market specific standards, such as storage requirements (EU Biodiesel Production Growth Hits Record High in 2005, 2006, National Biodiesel Board, 2006). Together, the 65 US production facilities had a total capacity of 395 million gallons of biodiesel per year (National Biodiesel Board, 2006). Each gallon of biodiesel requires one gallon of feedstock, Oil feedstock can be derived from oil bearing product such as soy beans, canola, rapeseed, mustard seed, tallow, algae, and used cooking oil. Available US oil bearing products in 2000 for processing into biodiesel was 130 million gallons from soy beans and 65-130 million gallons from waste grease and tallow for up to 260 million gallons of feedstock (Campbell, 2000). Campbell, 2000 proposed that biodiesel production from waste grease, tallow, and oil seed crops such as soybeans, rapeseed, and canola could total four billion gallons in the US without infringing on food consumption. US consumption of diesel for transportation was 40 billion gallons in 2000 (Campbell, 2000). Thus, the US could replace up to 10% of its petroleum diesel usage with biodiesel using the current technology and US grown oil feedstock. World production of vegetable oil stocks was projected to increase, so available vegetable oil for biodiesel could increase. In addition, there was research on a high oil content algae which could conceivably produce all transportation fuel (including gasoline and petroleum diesel) and heating oil (230 billion gallons) without using farm ground that could otherwise be used to produce food (Briggs, 2004). Thus, to Bruce, even though there was unused production capacity, there seemed to be ample opportunity for a strategically located facility. Figure 1: Production Facility Locations 65 production facilities BQ-9000 Accredited Freight costs were a larger proportion of the total supply chain costs in production of biodiesel than they were for petroleum diesel. This is due to the large and expensive facilities needed to capture economies of scale with petroleum facilities relative to transesterification production facilities. Biodiesel production facilities do not need the same large capacity to cover fixed costs (National Biodiesel Board, 2006). For example, many of the 89 newly proposed US biodiesel production facilities in 2006 were expected to produce no more than one million gallons per year (National Biodiesel Board, 2006). Reasonable proximity to feedstock and a ready market to reduce freight costs were representing a bigger weight in the location decision than the economies of scale of the plant Further, encouragement to produce biodiesel was provided by the federal government and some state governments. They were offering some forms of user or producer incentives. The United States Department of Agriculture (USDA) offered grant funds of up to $750,000 for installation of renewable energy systems located in rural areas (National Biodiesel Board, 2006). As of 2005, producers of biofuels in the state of Washington were eligible for state and local deferrals of sales and use taxes until July 1, 2009 on investments in and construction of buildings, new equipment, and labor. In addition, state and local property taxes were exempt for six years, under the Property Tax and Leasehold Excise Exemption, and there was a 13.8% reduction in the Business & Occupation Tax (Spokane County Conservation District, 2006). The state of Washington also mandated that all diesel sold in Washington had to contain 2% biodiesel by November 30, 2008. Once in-state feedstock and production facilities could match3% of diesel demand, that requirement was supposed to increase to a 5% biodiesel blend for all diesel sold (Jaskor, Gail 2006). As of March 6, 2006, Idaho allowed up to a 10% tax reduction to licensed motor fuel distributors forthe biodiesel they sold (Crockett, John 2006). In Oregon, the Business Energy Tax Credit would supply 35% of "eligible costs" for alternative fuel projects, which included the capital costs (Oregon Department of Energy, n.d.). Oregon also offered infrastructure loans to small businesses that built alternative energy facilities, which included biodiesel (Keto, Jeff 2006). Within each of these three states, there were also different tax exemptions available that dealt with the employment opportunities that building a facility would bring to the area. There were also federal tax incentives offered to producers of biofuels in addition to the state incentives. The newest forms of federal tax incentives for biodiesel production at the time were detailed in the Energy Tax Incentives Act of 2005. Over a ten-year period, the US government was going to provide $14.5 billion in tax reductions to manufacturers involved with energy production (CCH, 2005). Under the Governors' Ethanol Coalition, the Commodity Credit Corporation will provide producers of biodiesel with incentive cash payment (they are willing to pay up to $150 million total) for increasing their agricultural commodity purchases from the year before (Governors' Ethanol Coalition, n.d.). Lastly, there was a ten cent per gallon tax credit for up to 15 million gallons of biodiesel produced with agriculture products for smaller producers (U.S. Department of Energy, 2005). PRODUCTION PROCESS The production of biodiesel is a relatively simple process. A suitable feedstock (vegetable oil, either virgin or used, or animal oil such as tallow) is necessary. There are numerous plants that have seeds or fruits that contain a high percentage of oil. This oil is the feedstock for biodiesel production. The amount of oil from an acre of farm ground for various oil producing plants is displayed in Table 1. The first three plants displayed are currently grown and available in the US, Jatropha is grown in many third world countries, palm oil is available on the world market, and the extraction of vegetable oil from algae is not yet commercially feasible. The display is in part to show that vegetable oil production is a viable and growing industry if the demand for biodiesel increases. Gallons per acre will vary dependent upon growing conditions and crop yield per acre (Pediment Biofuels, 2006). Table 1: Yields of Various Feedstocks (Hanson & Oelke, 1998; Brown, et al., 2001-5; Bhardwaj, 2006; Murphy, 2005; and Perry, 2006) Feedstock Average gallons per acre (approximately 7.6 Ibs/gallon of oil) Oil yield from seed Assumed Ibs seed/acre 48 20% 1,824 127 40% 2,413 61 40% 1.159 Soybean Rapeseed & Canola Mustard Jatropha Palm Oil Algae 202 25% 6,140 635 30% 16,087 10,000 50% 152,000 Even though the transesterification process is relatively simple, it is not a process without risk or possible problems. The process starts with oil that is extracted from the oil producing portion of the plant through a crushing and/or chemical process. After extraction, the feedstock is then mixed with a methyl or ethyl alcohol and a catalyst such as sodium or potassium hydroxide. Both methyl and ethyl alcohol are very flammable. Methyl alcohol is very dangerous to work with. In fact, breathing the fumes and ingesting the fluid can be lethal. When methyl or ethyl alcohols are mixed with a base such as sodium hydroxide or potassium hydroxide, an especially strong base, such as sodium methoxide, can be created. These chemicals can be explosive, the fumes are toxic, and ingestion and skin exposure can have lethal results (Mallinckrodt, 2004, Science Lab, 2006). As in any production facility where hazardous material (methyl or ethyl alcohol and sodium or potassium hydroxide, plus acid for pre-treating oil that is high in free fatty acids) is used, adequate handling and emergency processes must be used to ensure safety to workers, the public, and the environment. In addition, after the transesterification process, some amount of alcohol will be emitted as a gas. For economic and environmental reasons, this gas should be recovered for subsequent production. Any water introduced during transesterification will disruptthe process and if the correct amount of alcohol and hydroxide relative to the type and condition of vegetable oil is not used, the transesterification process will not be complete, producing an inferior product. After the transesterification process is completed, there is a cleaning process where water is bubbled through the biodiesel to remove excess alcohol, hydroxides, and soap that may have formed due to improper transesterification. This water may be cleaned and re-circulated, but some portion of the wastewater may need to be disposed of (Van Gerpen, Pruszko, Clements, Shanks, and Knothe, 2005). In general 100 pounds of oil (about 13.16 gallons) plus 20 pounds of methanol and 1.25 pounds of sodium hydroxide produces 100 pounds of biodiesel, 11 pounds of glycerin and sodium, and 10 pounds of methanol. The sodium can be removed from the glycerin and reused, and then the glycerin is commercially viable. Nearly all of the excess alcohol can be captured and reused in the process. Most meal from crushing oil producing seeds such as soy beans can be used as a commercial animal feed, or if it is a mustard seed, can be used as a pesticide. All inputs and outputs are biodegradable, although, as stated above, some materials used in production and the end products are toxic to animals. Once the biodiesel is washed and dried, it must be stored like petroleum diesel to prevent exposure to the ambient atmosphere, as it will pick up moisture that is contained in ambient air. (Methanol Institute, 2006) FEEDSTOCK While soybeans were the most prominent plant used to produce feedstock in the US, rapeseed was dominant in the European Union and had more favorable properties compared to soy biodiesel. Canola is a cultivar of rapeseed grown in Canada and the US. The yield per acre of feedstock is higher for canola than soybeans but soybean meal is more palatable to animals than the meal from canola/rapeseed. All the meals have high nutrient value, especially protein, and may be used as an animal feed supplement. In addition, the biodiesel produced has some desirable traits that esters made from other feedstocks do not, such as a lower gelling temperature (Herkes, 2006). Canola is generally a rotation crop for grasses such as wheat. Thus, it can be feasibly grown every other year in many areas, but is mainly rotated every four years for soil health. It grows best where the climate is moderate and it can be grown without irrigation if there is enough precipitation at the correct time of year. Irrigation can be used to improve yields where precipitation is inadequate, but other crops with a higher market value per acre were grown where irrigation was an option. The time of year the crop is planted can also have an effect on yields. Spring planted or winter planted canola can be produced. (Herkes, 2006). The Palouse region in Eastern Washington and Northern Idaho, and the Camas Prairie of Northern Idaho are ideal areas for growing canola. The Palouse region encompasses two million acres with Rosalia, Washington the approximate center. On average, this area yields 1,555 lbs/acre of spring canola (Brown, Davis, Johnson, Wysocki, 2001-5). The Camas Prairie encompasses 6 million acres with Grangeville, Idaho the approximate center. Average yields in this area are 2,880 Ibs/acre with about half coming from spring and half coming from winter canola (Brown, et al, 2001-5). In addition, the Columbia Basin of Eastern Washington and Oregon with Moses Lake, Washington the approximate center can grow canola using either dry land or irrigated practices. There are ten million acres of dry land farming that could yield approximately 1,500 lbs/acre of winter canola every four years in the Columbia Basin region (Brown, et al, 2001-5). If the price of petroleum increased, it is likely that crops such as canola would produce as much profit as wheat and the every other year cycle could become the most common practice. POSSIBLE LOCATIONS, ASSOCIATED ATTRIBUTES AND COSTS From studying the locations of other US production facilities, where plants that produce desirable feedstock could be grown, where there was a ready market for meal from the oil extraction process, and where there was a ready market for biodiesel, Bruce decided to locate in the Northwest He felt that he could contract enough acreage of canola at $.15 per pound to produce five million gallons of feedstock. Part of the reason that Bruce chose the Northwest was that both he and his wife had roots in the Northwest where family farms had been in the farming community for a long time. He claimed his decision was more of an "emotional attachment to the area than anything else. They also had family members that still farmed in the Palouse area, providing access to a network of farmers. Business people, including farmers, are skeptical of new industries and practices until proven profitable. Biodiesel production had not yet been proven profitable, so an established network was extremely valuable. After considering a number of sites, he narrowed it down to three locations to assess in further detail; the St. John port in Portland, Oregon, the Port of Benton in Richland, Washington, and the port of Wilma in Clarkston, Washington. There were other possible locations, but these three all had the advantage of being fresh water ports on the same river system (Columbia River). Thus, product could be shipped by barge for approximately $.08/ton/mile (Tidewater, 2001). In fact, the St.John port could accommodate ocean-going ships for an estimated $.02/ton/mile. There was truck transportation, which cost approximately $.15/ton/mile, from all feed growing areas to each possible plant site (American Freight Companies, 2001). The only available transportation from Grangeville to Clarkston was by truck. Rail transportation was also an available option for much of the transportation needs as cach port had rail siding access. National rail companies charged approximately $.12/ton/mile (Union Pacific, 2006). There was no national railway option from Rosalia in the Palouse area to Clarkston, but there was an alternative farmer co-op owned railroad. This railroad was only slightly more expensive at an estimated $.13/ton/mile. There was no rail or waterway from the Camas Prairie area to any of the three proposed production facilities, but there was a national rail system that connected all three proposed sites and Moses Lake which was located in the center of the Columbia Basin. In addition to access of transportation from growing areas to each site, the three areas were in close proximity to high demand areas. Fleets of vehicles located in the greater Spokane and Seattle, Washington, and Portland, Oregon areas were all near, and large commercial and government users of diesel were more likely to purchase biodiesel than personal buyers. Due to the solvent nature of biodiesel, dedicated handling and storing equipment is recommended (Van Gerpen et al, 2005). In addition, marketing costs would be minimized by selling to large users. The Spokane Transit company alone used 1.37 million gallons of diesel per year, while the Seattle Transit and Ferry used an additional 20 million gallons per year. Based on the commercial use in the Spokane area and population ratios, the Portland area diesel use can be estimated at 6.56 million gallons (U.S. Census Bureau, 2007). Farmers used approximately 7.3 gallons of diesel per acre per year (Ryan and Tiffany, 1998). All of these customers were willing to use from a minimum of a 2% biodiesel content mix up to a 20% biodiesel mix. Bruce wanted to make his biodiesel available to area farmers and other local users within 80 miles of the production facility. Thus, farmers near the Clarkston location, such as Rosalia (2 million acres), would use approximately 14.6 million gallons of diesel fuel, based on an average of 7.3 gal/acre). Using the 7.3 gal'acre average for farm use, the other area demands can be estimated as well. Those farmers near the Richland area, Columbia Basin (10 million acres), would use approximately 73 million gallons of diesel fuel. Bruce expected the local users to be more willing to use a higher biodiesel percent mix than the Spokane, Portland, and Seattle users. The goal was to sell all biodiesel produced while minimizing total transportation costs and making sure that the type of customer base remained diversified by selling at least a minimum amount to Spokane and Seattle. Bruce also assumed the sales price would remain the same to all customers. All outbound freight would be by truck because production capacity was too low to make shipping by rail or barge feasible in a timely manner. Displayed in Appendix 1 (conveniently divided into Tables 2-4) are the quantitative and qualitative factors for each location that Bruce had to assess in order to make his location decision. Where should Bruce locate and why? Location Information Table 2: Location Distances (www.mapquest.com, 2006) Clarkston Richland St. Johns/Portland Factor Miles to Grangeville to 74 211 418 Miles Rosalia to 77 154 361 154 81 287 1557 1647 1790 Miles Moses Lake to Miles Des Moines to Miles Spokane to Miles Seattle to 106 146 351 318 219 174 Miles Portland to 344 226 8 Miles Clarkston to 0 137 344 Miles Richland to 137 0 226 Table 3: Estimated Freight Costs (Tidewater, 2006; Union Pacific, 2006; American Freight Companies, 2001) Train Private Train .12 .13 .02 Truck Freight Method S/Ton/Mile Ocean River Barge .15 .08 Table 4: Location Details/Costs (Epodunk, Inc., 2007, US Census Bureau, 2007) Clarkston Richland St. Johns Portland 00082 .006816 0468 Real-estate availability thousing permit ratio to population, higher the better) Real-estate cost (single family new housing construction permit avg. 566,100 $221,600 $169,700 cost 04) 6.3% 5.6% 6.2% Labor availability (unemployment rate, assume same pay rate at all sites) Labor skill level (35 years old % graduated high school) 81.4% 92.6% 85.7% Table 4: Location Details/Costs (Epodunk, Inc., 2006, U.S. Census Bureau, 2007) Clarkston Richland St. Johns/Portland Relevant to biodiesel research University University of Idaho/ University of Washington State Idaho/Washington State University University Kadlec Medical Center and Lourdes Counseling Center Hospital and St. Joseph Medical Center (5 miles) University of Idaho/ Washington State University/ Oregon State University Approx. 8 including OHSU hospitals and clinics and Doernbecer Hospital Tri-State Memorial Yes Yes Yes Hospital treat chem. Exposure K-12 Schools University Education Availability High Schools: 1 public High Schools: Well over 10 in each public and Primary/Middle Schools: 8 3 public, 1 private private area of education public, 1 private Primary/Middle Schools: 10 public, 2 private University of University of Idaho/ University of Portland/ Idaho/Washington State Washington State Portland State University/ University/Lewis and University/ Columbia Concordia University Clark State College Basin College Adequate growth potential Adequate growth potential Adequate growth potential Limited Diverse Highly Diverse 93% White non-Hispanic 87% White non-Hispanic 75.5% White non-Hispanic $75,000 $32,000 $300,000 $10,000/month $15,000/month $25,000/month $8,000/month $5,000/month $10,000/month Site Availability Culture Availability Diversity Estimated Permit requirements Port lot rent/month Estimated Utilities (power & H,0) Estimated Hazardous Material Requirements Bond 8%/year Estimated Waste Disposal Cost Production Growth Possibilities Feedstock Growth Possibilities Local Demand growth Airport Availability $1.5 million $1 million $5 million $5,000/month $2,000/month $10,000/month Unlimited Unlimited Unlimited Unlimited Unlimited Unlimited Stable Stable Some Growth Portland International Airport Flights available to international airports Flights available to international airports High Low None Established Network with Farmers (80 mile radius