Indian Institute of Management Ranchi Production and Operations Management Session 2012-13 and Term: III

Case: Decision Tree for Toyota Plant Capacity It is spring 2008, and Toyota Motor Manufacturing Company (TMMC) has indeed just been chosen to produce the new Lexus RX 330 line, with the first units deliverable in 2011. 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 2011-2015. These vehicles will sell for an average of $37,000 and incur a mean unit production cost of $28,000. 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 Low Moderate High 2011 10,000 15,000 20,000 2012 10,500 16,000 24,000 2013 11,000 17,000 26,000 2014 11,500 18,000 28,000 2015 12,000 19,000 30,000 Probability 0.25 0.50 0.25

To maximize profit earned during this period, which production capacity should TMMC in 2008 decide to build - 10,000, 15,000, 20,000, 25,000, or 30,000 cars? What are the weaknesses or limitations in this analysis? How might they be corrected or reduced? Three pages maximum ES, Introduction, Model, Results and Discussion, References, Appendix with decision tree