Exercise 3 Recommending Production Capacity Needed

Exercise 3 Recommending Production Capacity Needed at Toyota Motor
Manufacturing of Canada TMMC
Decision trees are another important if challenging world-class operations
management method which operations managers should understand and with
which other managers should be familiar.

This exercise illustrates how through using a decision tree, determination of an
"optimal" production capacity option can be made from among several possible
capacity options based on the provided probable market demand and expected
costs/payoffs of events that influence the options.
It is spring 2000, and TMMC has indeed just been chosen to produce the new
Lexus RX 330 line, with the first units deliverable in 2003. Toyota must now
determine the amount of annual production capacity it should build at TMMC.
Toyota's goal is to maximize the profit from the RX 330 line over the five years
from 2003-2007. These vehicles will sell for an average of $37,000 and incur a
mean unit production cost of $28,000 (here, $ = the Canadian dollar).
10,000 units of annual production capacity can be built for $50M (M=million) with
additional blocks of 5,000 units of annual capacity each costing $15M. Each
block of 5,000 units of capacity will also cost $5M per year to maintain, even if
the capacity is unused.
Assume that the number of units actually sold each year will be the lesser of the
demand and the production capacity.
Marketing has provided three vehicle estimated demand scenarios with
associated probabilities as follows:

 

Demand 2003 2004 2005 2006 2007 Probability
Low 10,000 10,500 11,000 11,500 12,000 0.25
Moderate 15,000 16,000 17,000 18,000 19,000 0.50
High 20,000 24,000 26,000 28,000 30,000 0.25

Here is the decision tree-based solution that the Acme operations analysts
(hypothetical) who are supporting the team have prepared:

 
a. To maximize profit earned during this period, which annual production
capacity will you recommend that TMMC in 2000 decides to build - 10,000,
15,000, 20,000, 25,000, or 30,000 cars? Justify your choice.
b. What are the weaknesses or limitations in this analysis? How might they
be corrected or reduced?
c. It is now 2015. How well has the RX-330/350 actually done in the North
American market? Is its quality rated as high as a Lexus made in
Japan? Support your views.
d. Include an executive summary.