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

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 has been prepared by the operations analysts (hypothetical) who are supporting the team:

a. To maximize profit earned during this period, which 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 2014. 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? Support your views.