[solved] Determining Production Capacity Needed at Toyota Motor Manufacturing of Canada (TMMC)
Exercise 3: Determining 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 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
a. To maximize profit earned during this period, which production capacity should TMMC in 2000
decide to build - 10,000, 15,000, 20,000, 25,000, or 30,000 cars? Justify your choice.
You may use the following decision tree developed by Toyota operations analysts in Toyota City, Japan -
or your group may choose to vary it in some way based, perhaps, on its presumed better local market
knowledge.
b. What are the weaknesses or limitations in this analysis? How might they be corrected or at
least reduced?
c. It is now late 2016. How well has the RX-330/350 actually done in the North American market?
Is its quality rated as high as if it were made in Japan?
Do some online research; it's part of improving your attainment of Information Literacy, one of
the UMUC MBA Competencies. Here see the Content/Week 10 references on Grid
Analysis and Decision Trees
