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CASE 6.1 G IANT M OTOR C OMPANY T his case 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 example, the degree of flexibility in the manufacturing system. The main tool used to aid the company’s planning process is a mixed integer linear programming (MILP) model. A mixed integer program has both integer and continuous variables. Problem Statement The Giant Motor Company (GMC) produces three lines of cars for the domestic (U.S.) market: Lyras, Libras, and Hydras. The Lyra is a relatively inexpensive subcompact car that appeals mainly to first-time car owners and to…show more content…
Similarly, if the demand for Libras is 1,220,000 cars (1,100,000 original demand plus 120,000 demand diverted from Lyras), then the unsatisfied demand for Lyras would be 420,000 if no capacity is added. Out of this unsatisfied demand, 42,000 ( 420,000 0.1) will materialize as demand for Hydras. All other unsatisfied demand is lost to competitors. The pattern of demand diversion is summarized in Table 6.18. A quick comparison of plant capacities and demands in Table 6.16 and Table 6.17 indicates that GMC is faced with insufficient capacity. Partially offsetting the lack of capacity is the phenomenon of demand diversion. If a potential car buyer walks into a GMC dealer showroom wanting to buy a Lyra but the dealer is out of stock, frequently the salesperson can convince the customer to purchase the better Libra car, which is in stock. Unsatisfied demand for the Lyra is said to be diverted to the Libra. Only rarely in this situation can the salesperson convince the customer to switch to the luxury Hydra model. From past experience, GMC estimates that 30% of unsatisfied demand for Lyras is diverted to Table 6.18 Lyra Libra Hydra Demand Diversion Matrix Lyra NA 0 0 Libra 0.3 NA 0.0 Hydra 0.05 0.10 NA Question GMC wants to decide whether to retool the Lyra and Libra plants. In addition, GMC wants to determine its production plan at each plant in the coming year. Based on the previous data,
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