Posted: November 19th, 2015
Recommending product capacity
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.
Your team must recommend the production capacity needed at TMMC, after being
presented with a decision tree-based solution prepared by the operations analysts
(hypothetical) who are supporting the team.
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
Here is the decision tree-based solution that the Acme North Carolina 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 mid 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
d. Include an executive summary.
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