NETWORK DESIGN IN AN UNCERTAIN ENVIRONMENT

PM Tires sells its products in both Mexico and the United States. Demand in the US is currently 100,000 tires per year and that in Mexico is 50,000 tires per year. In the next two years, demand in either market may go up by 20% with a probability of 0.70 or go down by 30% with probability of 0.30. PM Tires is contemplating on designing its manufacturing network which will be in place for two years. The company is planning to build a dedicated plant (a 100,000-unit plant in the US and a 50,000-unit plant in Mexico) or a flexible plant in the US with 150,000 units of capacity. The dedicated plants can only supply the local market while the flexible plant can supply either market. The fixed and variable costs for each option are shown in the table below.

The current exchange rate, which is assumed to stay the same in the next 2 years is $ 1 US = 9 pesos and a tire sells for $30 in the US and 240 pesos in Mexico. Transportation cost between the US and Mexico are $1 per tire either way. The plant decision will stay in place over the next two years and the discount rate used by PM is k = 0.12. The VP of Operations is working with the CEO to decide on the type of facility to build in each location.

Table 1. Fixed Cost and Variable Cost of Production for PM Tires Dedicated Plant Plant - Capacity Fixed Cost (FC) Variable Cost (VC) Flexible Plant Variable Cost Fixed Cost (FC) (VC) $1.6 million/year $ 15/tire US 100,000 Mexico - 50,000 $ 1 million/year 4 million pesos/ year $ 14/tire 110 pesos/tire Table 1. Fixed Cost and Variable Cost of Production for PM Tires Dedicated Plant Plant - Capacity Fixed Cost (FC) Variable Cost (VC) Flexible Plant Variable Cost Fixed Cost (FC) (VC) $1.6 million/year $ 15/tire US 100,000 Mexico - 50,000 $ 1 million/year 4 million pesos/ year $ 14/tire 110 pesos/tire