Giant Motor Company I

1
This problem deals with strategic planning issues for a large company.
The main issue is planning the company's production capacity for the
coming year. At issue is the overall level of capacity and the type of
capacity for e!ample" the degree of fexibility in the manufacturing
system. The main tool used to aid the company's planning process in
GMC I is a mi!ed integer programming #MI$% model. A mi!ed integer
program has both integer and continuous variables.
&

$roblem 'tatement
The Giant Motor Company #GMC% produces three lines of cars for the
domestic #(.'.% mar)et* +yras" +ibras" and ,ydras. The +yra is a
relatively ine!pensive subcompact car that appeals mainly to -rst.time
car owners and to households using it as a second car for commuting.
The +ibra is a sporty compact car that is slee)er" faster" and roomier
than the +yra. /ithout any options" the +ibra costs slightly more than
the +yra0 additional options increase the price further. The ,ydra is the
lu!ury car of the GMC line. It is signi-cantly more e!pensive than the
+yra and +ibra" and it has the highest pro-t margin of the three cars.
1etooling 2ptions for Capacity 3!pansion
Currently GMC has three manufacturing plants in the (nited 'tates.
3ach plant is dedicated to producing a single line of cars. In its
planning for the coming year" GMC is considering the retooling of its
+yra and4or +ibra plants. 1etooling either plant would represent a ma5or
e!pense for the company. The retooled plants would have signi-cantly
increased production capacities. Although having greater fxed costs"
the retooled plants would be more e6cient and have lower marginal
production costs that is" higher marginal pro-t contributions.
In addition" the retooled plants would be fexible they would have
the capability of producing more than one line of cars.
1
7rom $ractical Management 'cience #&nd ed." /inston and Albright" &881 9u!bury
$ress" pp. ::;.::<%.
2
A continuation of this problem" GMC II #at the end of Chapter 18 in /inston and
Albright%" deals with capacity planning in a multi.period" multi.scenario framewor). In
GMC II the MI$ model is e!tended to handle the multi.period stochastic nature of the
problem.
The characteristics of the current plants and the retooled plants are
given in Table 1. The retooled +yra and +ibra plants are prefaced by the
word new. The -!ed costs and capacities in Table 1 are given on an
annual basis. A dash in the pro-t margin section indicates that the
plant cannot manufacture that line of car. 7or e!ample" the new +yra
plant would be capable of producing both +yras and +ibras but not
,ydras. The new +ibra plant would be capable of producing any of the
three lines of cars. =ote" however" that the new +ibra plant has a
slightly lower pro-t margin for producing ,ydras than the ,ydra plant.
The >e!ible new +ibra plant is capable of producing the lu!ury ,ydra
model" but is not ?uite as e6cient as the current ,ydra plant that is
dedicated to ,ydra production.
The -!ed costs are annual costs that are incurred by GMC independent
of the number of cars that are produced by the plant. 7or the current
plant con-gurations" the -!ed costs include property ta!es" insurance"
payments on the loan that was ta)en out to construct the plant" and so
on. If a plant is retooled" the -!ed costs will include the previous -!ed
costs plus the additional cost of the renovation. The additional
renovation cost will be an annual cost representing the cost of the
renovation amorti@ed over a long period.
9emand for GMC Cars
'hort.term demand forecasts have been very reliable in the past and
are e!pected to be reliable in the future. The demand for GMC cars for
the coming year is given in Table &.
A ?uic) comparison of plant capacities and demands in Tables 1 and &
indicates that GMC is faced with insu6cient capacity. $artially
oAsetting the lac) of capacity is the phenomenon of demand
diversion. If a potential car buyer wal)s into a GMC dealer showroom
wanting to buy a +yra but the dealer is out of stoc)" fre?uently the
salesperson can convince the customer to purchase the better +ibra
car" which is in stoc). (nsatis-ed demand for the +yra is said to be
diverted to the +ibra. 2nly rarely in this situation can the salesperson
convince the customer to switch to the lu!ury ,ydra model.
7rom past e!perience" GMC estimates that :8B of unsatis-ed demand
for +yras is diverted to demand for +ibras and <B to demand for
,ydras. 'imilarly" 18B of unsatis-ed demand for +ibras is diverted to
demand for ,ydras. 7or e!ample" if the demand for +yras is 1";88"888
cars" then the unsatis-ed demand will be ;88"888 if no capacity is
added. 2ut of this unsatis-ed demand" 1&8"888 #C;88"888 ! 8.:% will
materiali@e as demand for +ibras" and &8"888 #C;88"888 ! 8.8<% will
materiali@e as demand for ,ydras. 'imilarly" if the demand for +ibras is
1"&&8"888 cars #1"188"888 original demand plus 1&8"888 demand
diverted from +yras%" then the unsatis-ed demand for +ibras would be
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;&8"888 if no capacity is added. 2ut of this unsatis-ed demand" ;&"888
#C;&8"888 ! 8.1% will materiali@e as demand for ,ydras. All other
unsatis-ed demand is lost to competitors. The pattern of demand
diversion is summari@ed in Table :.
Lyra Libra Hydra
New
Lyra
New
Libra
Capacity #in 1888s% 1888 G88 H88 1E88 1G88
7i!ed cost #in
Imillions% &888 &888 &E88 :;88 :J88
Proft Margin by Car Line (in $1000s)
+yra & . . &.< &.:
+ibra . : . :.8 :.<
,ydra . . < . ;.G
Table 1* $lant Characteristics
Demand (in
1000s)
+yra 1;88
+ibra 1188
,ydra G88
Table &* 9emand for GMC Cars
Lyra Libra Hydra
+yra =A 8.: 8.8<
+ibra 8 =A 8.18
,ydra 8 8 =A
Table :* 9emand 9iversion Matri!
Kuestion
GMC wants to decide whether to retool the +yra and +ibra plants. In
addition" GMC wants to determine its production plan at each plant in
the coming year. Dased on the previous data" formulate a mi!ed
integer programming model for solving GMC's production planning.
capacity e!pansion problem for the coming year.
:
3
Ac)nowledgment* The idea for GMC I and II came from 3ppen et al #1HGH%.
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