Toyota’s New Plant :

Applying Quantitative Methods for Managerial Decision Making

Business Decision Methods | RA70700 | Dr. Jeh-Nan Pan | 2017/01/06

By: Arthur Kurek

Harman Warsono
Sergei Katsuba
Susan C. Bahari
 Introduction

In recent years, Toyota was in alert of loss because of the In order to accomplish this, Toyota-Motor Corporation is
hit in the industry caused by the financial crisis in 2008. considering the construction of a plant in either China or
However, starting from 2015, Toyota is planning to make a Mexico. Each plant has a different production capacity. It is
‘purpose driven investment’ to develop the future of the unclear, however, which plant is the most recommendable
automotive industry and to maintain its competitiveness. alternative. Therefore, it was our goal to analyze this.

2
Objectives

Implement Business Decision Method theories to

the real business case of Toyota

Compare and learn from Toyota forecasting method

Provide in-depth cost benefit analysis on each of

the expansion plans

Provide recommendations on which plan will be

more beneficial (according to EMV)

3
Company Background

Established in 1937 by Kiiciro Toyoda. The headquarter is located in Aichi, Japan

In March 2016, Toyota had 348,877 employees with 53 overseas production plants in 28 countries

Toyota currently is the 13th largest global brand, measured by revenues

By 2016, Toyota has produced and sold more than 8 millions vehicles in more than 170 countries
4
 The new factory

¥ 52,5 billion ¥ 117 billion

Maximum production is 100,000 units/ year Maximum production is 200,000 units/ year
The location of the plant is Guangzhou. It will be a joint venture The location of the Mexican plant is Guanajuato.
between Toyota and Guangzhou Automobile Group. This new plant features Toyota New Global Architecture. This is
The new plant is restructuring the existing lines. because the firm will change the layout and workflow of the plant in
Therefore, Toyota will use their current work force. order to have shorter production lines and flow of part supplies.

5
 Research Assumption

Due to the data collection limitation, we can only assume the

analysis by using global average revenue and operating
expenses of all Toyota cars.

For the decision tree analysis, we assumed the following three

scenarios: construct the North American facility in Mexico, build
the Asian plant in China or neither build the plant in Mexico nor
the plant in China.

6
Systematic Problem Solving Flowchart

7
 Methodology & Data Collection

Methodology Data Collection

Forecasting Break-Even Decision Tree

Sales Analysis Analysis

1. Toyota Financial Report (2001-2016)

2. Toyota expansion plan from www.theguardian.com
3. Global Automotive Industry Reports & Online newspapers
8
 Technical Difficulties

Forecasting analysis BEP analysis Decision Tree Analysis

Toyota’s forecasting data is limited BEP calculation depends on the global Finding the right probabilities for decision
It is only available from 2007- 2017 average numbers to be performed tree analysis
Due to the Earthquake in 2011, there is no (Favorable market vs. Unfavorable market)
forecasted data for 2012

9
Analysis 1 – Forecasting

Collect 15 years Forecast using 2 Compare with Analyze which

sales data different methods Toyota’s forecast forecast method
is more accurate
by using MAD

10
Analysis 1 – Forecasting

Description of the data

The quantities that are to be forecasted:

• Income revenue of Toyota company in considered markets.
• Number of sales of Toyota cars in North American and Asian markets.

Methods of forecasting:
• Weighted Moving Average
• Least square regression

The duration of forecasting:

• 20 years for (2001-2021)

Estimation of accuracy :
• Mean average deviation (MAD)
• Investigation of Toyota’s corporate forecasting

11
Analysis 1 – Forecasting
Comparing results of revenue forecasting for North America

Weighted Moving Average Simple Linear Regression

MAD = 1,604.1 MAD = 1,259.5

12
 Analysis 1 – Forecasting
Comparing results of revenue forecasting for North America

Weighted Moving Average Simple Linear Regression

12000
12000

10000
10000

8000 8000
Value

6000 6000

4000 4000

2000 2000

0 0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 0 2 4 6 8 10 12 14 16 18
Time

Income Forecast

13
Analysis 1 – Forecasting
Comparing results of revenue forecasting for Asian region

Weighted Moving Average Simple Linear Regression

MAD = 495.53 MAD = 270.6

14
Analysis 1 – Forecasting
Comparing results of revenue forecasting for Asian region

Weighted Moving Average Simple Linear Regression

6000 6000

5000 5000

4000 4000
Value

3000 3000

2000 2000

1000 1000

0 0
1 2 3 4 5 6 7 8 9 10 11 0 2 4 6 8 10 12
Time

Income Forecast

15
Analysis 1 – Forecasting
Comparing results of sales unit forecasting for North America

Weighted Moving Average Simple Linear Regression

MAD = 361,043.2 MAD = 363,794.8

16
 Analysis 1 – Forecasting
Comparing results of sales unit forecasting for North America

Weighted Moving Average Simple Linear Regression

3500000 3500000

3000000 3000000

2500000 2500000

2000000 2000000
Value

1500000 1500000

1000000 1000000

500000 500000

0 0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 0 2 4 6 8 10 12 14 16 18
Time

Sales in units Forecast

17
Analysis 1 – Forecasting
Comparing results of sales unit forecasting for Asian region

Weighted Moving Average Simple Linear Regression

MAD = 179,591.4 MAD = 119,273.5

18
 Analysis 1 – Forecasting
Comparing results of sales unit forecasting for Asian region

Weighted Moving Average Simple Linear Regression

1800000 1800000

1600000 1600000

1400000 1400000

1200000 1200000

1000000 1000000
Value

800000 800000

600000 600000

400000 400000

200000 200000

0 0
1 2 3 4 5 6 7 8 9 10 11 12 0 2 4 6 8 10 12 14
Time

Sales in units Forecast

19
 Analysis 1 – Forecasting
Analyse which forecast method is better

Forecasting
Asian market North American market
method
Estimated income Estimated regional Estimated income Estimated regional
in 2017 sales in 2017 in 2017 sales in 2017
(billion of ¥) (in car units) (billion of ¥) (in car units)
WMA 4975,23 143,6784.5 10,104.62 274,6238.5
Due to its lower MAD,
Least square regression MAD 495,53 179,591.43 1,604.08 361,043.17

method is preferable. Regression 5435,08 167,1180.82 8,646.42 268,5284.38

MAD 270,60 143,1282.43 1.259,55 264,232.85

20
Analysis 1 – Forecasting
A comparison with Toyota’s corporate forecast
Forecasting data
Year Actual income Toyota’s corporate
Error Regression Error
forecasting

2007 23,948.00 22,300 1,648.00 19,655.65 4,292.35

2008 26,289.24 25,000 1,289.24 20,391.75 5,897.49

2009 20,529.57 25,000 -4,470.43 21,127.85 -598.28

2010 18,950.97 16,500 2,450.97 21,863.95 -2,912.98

2011 18,993.69 19,200 -206.31 22,600.05 -3,606.36

2013 22,064.19 22,000 64.19 24,072.24 -2,008.05

2014 25,691.91 23,500 2,191.91 24,808.34 883.57

2015 27,234.52 25,700 1,534.52 25,544.44 1,690.08

2016 28,403.12 27,500 903.12 26,280.54 2,122.58

MAD 600.58 640.04

21
Analysis 2 – Break even analysis

Analyze cost of Perform BEP Calculate BEP in

the new plants analysis units and JPY

22
 Analysis 2 – Break even analysis

Toyota said the cost of

manufacturing a vehicle at the
new factories will be
approximately 40% less than what
it spent to produce a car in 2008.

Cost of a Toyota car in 2008

Net revenue ¥26,289,200,000,000

Perform BEP Operating income ¥2,270,300,000,000

analysis Operating expenses ¥24,018,900,000,000
Vehicle sales 8,913,000.00
Average revenue per car ¥2,949,534
Average cost per car ¥2,694,817
Average profit per car ¥254,718
http://www.latimes.com/business/autos/la-fi-hy-toyota-mexico-factory-20150415-story.html

23
 Analysis 2 – Break even analysis

Mexico new plant China new plant

Max. annual production capacity 200,000 units 100,000 units
Investment in USD $1 billion $0.453 billion
Investment in Japanese Yen ¥117.158 billion ¥52.5 billion
Estimated cost per car ¥1,616,890 ¥1,616,890
Analyze cost of
the new plants
Average cost = (100%-40%) x ¥2,694,817
Average revenue = ¥2,949,534

http://www.latimes.com/business/autos/la-fi-hy-toyota-mexico-factory-20150415-story.html

24
 Analysis 2 – Break even analysis

𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
BEP =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 −𝐶𝑜𝑠𝑡

Total Investment ¥117,158,000,000 ¥52,500,000,000

Calculate BEP in Average revenue per car ¥2,949,534 ¥2,949,534
units and JPY
Average cost per car ¥1,616,890 ¥1,616,890
BEP in unit 87,913.92 39,395.35
Estimated total variable cost ¥142,147,135,235 ¥63,697,951,483
BEP in revenue ¥259,305,135,235 ¥116,197,951,483

25
Analysis 3 – Decision tree analysis

Analyze overall Decide global Calculate Conduct decision

global industry automotive favourable estimated profit tree analysis
growth market probability for each plan

26
 Analysis 3 – Decision tree analysis

North American plant (Mexico) Asian plant (China)

Analyze overall global
● Annual Capacity: 200,000 vehicles ● Annual Capacity: 100,000 vehicles
industry growth and
● Probability of a favorable market: 70% ● Probability of a favorable market: 60%
Decide global
automotive ○ Unfavorable market: 30% ○ Unfavorable market: 40%
favourable market ● Monetary value fav. market: 80% of capacity ● Monetary value fav. market: 80% of capacity
probability ○ Unfav. market 40% of capacity ○ Unfav. market 40% of capacity
● Median time to finance investments: 40yrs ● Median time to finance investments: 40yrs

27
 Analysis 3 – Decision tree analysis

( 𝐴 𝑋 𝐵 𝑋 𝐶)
EP = 𝐼
( )
40
Calculate
A = Average profit per vehicle
estimated profit
B = Maximum capacity per plant
for each plant
C = Favorable / Unfavorable market value
I = Investments per plant

28
 Analysis 3 – Decision tree analysis

FM = 0.7
6 ¥ 38.41

UM = 0.3
Mexico plant
4 7 ¥ 19.21

EMV = ¥32.65

Build new plant

FM = 0.6
2
8 ¥ 19.33
EMV = ¥32.65

Calculate expected UM = 0.4

monetary value and
1 5 9 ¥ 9.66

perform decision EMV = ¥32.65 China plant

EMV = ¥15.46
tree analysis

Do not build
3
EMV = 0 Decision = Build Mexican plant
29
Conclusion

Forecasting Sales
Different regions have different demand and therefore may require specific forecasting
methods. Compared to our academic forecasting method, Toyota has a more accurate
method. We believe, however, that it can be improved since the MAD is still at ¥640 billion.

Break Even Analysis

According to our calculation and assumption, the plant only needs to sell around 40% of full
capacity in order to break even. However, the number can be increased if more accurate data
(e.g. additional fixed cost, labor cost, material cost, etc.) can be obtained.

Decision Tree Analysis

If Toyota can only build one plant at a time, the company should build the Mexican plant
rather then the Chinese plant or no plant as it represents the highest expected monetary
value (EMV).

30
References
Joseph, N. (2015). Toyota investing $1 billion in Mexico plant. Retrieved from http://www.autoblog.com/2015/04/16/toyota-guanajuato-
____ mexico-plant-official/

Guilford, D. (2016). Mexico plant to show off Toyota's revamped system. Retrieved from ____ ____ ____
____http://www.autonews.com/article/20160305/OEM01/303079958/mexico-plant-to-show-off-toyotas-revamped-system

The Guardian. (2015). Toyota plans new factories in China and Mexico, say reports. Retrieved from
____https://www.theguardian.com/business/2015/apr/03/toyota-plans-new-factories-in-china-and-mexico-reports

Toyota Motor Corporation. (n.d.). Financial Results. Retrieved from http://www.toyota-global.com/investors/financial_result/

KPMG. (2016). Global Automotive Executive Survey 2016. Retrieved from https://assets.kpmg.com/content/dam/kpmg/pdf/2016/01/gaes-
____2016.pdf

Gao, P., Hensley, R., & Zielke, A. (2014). A road map to the future for the auto industry. Retrieved from
____http://www.mckinsey.com/industries/automotive-and-assembly/our-insights/a-road-map-to-the-future-for-the-auto-industry

PwC. (2016). 2016 Auto Industry Trends. Retrieved from http://www.strategyand.pwc.com/trends/2016-auto-industry-trends

31