Industrial manufacturing, and operations engineering

Summary

In the face of cut-throat competition of the present day, businesses the world over have become more and more technical. Alongside other professionals, engineers play a key role in running businesses successfully across the globe. They play an important role in decision-making, both in the manufacturing and service industries. Most of these decisions are made primarily on the basis of economic factors and their assessment. It is often seen that decision-makers do not possess the required knowledge and skills related to engineering, and thus, they frequently call upon engineers to make technical-economic analyses and suggest recommendations. Engineering Economy is an important subject for aspiring as well as practicing engineers today, as the techniques and models thus adopted assist engineers and managers in making well-thought-out decisions. They can use the knowledge of this subject to analyse and draw conclusions as they work on projects of all kinds of complexities.

The success of engineering and business projects is usually measured in terms of financial efficiency. A project would be able to achieve maximum financial efficiency if it is properly planned and operated with respect to its technical, social and financial requirements. Since it is the engineers who understand the technical requirements of a project, they are best placed to assimilate the technical details with their knowledge of engineering economy to do an effective economic analysis and arrive at a sound managerial decision.

The present volume, comprising 16 chapters, covers many such issues pertaining to economic analysis of projects. Chapter 1 summarizes the basic principles of engineering economy and its applications. Chapter 2 describes the fundamental concepts of mathematics and engineering economics, which will help readers learn the basic mathematical concepts required for economic analysis. The roles of factors involved in economic analysis have been discussed at length in Chapter 3. Chapter 4 describes the key concept of value of money, on which economic analyses are based. Topics such as simple and compound interests, cash flow diagrams, determination of equivalent cash flow at different points in time, nominal and effective interest rates have also been explained here. Chapter 5 describes the basic methods that can be used by engineers to perform economy-studies. The methods that can be used for selecting the best alternative out of many, have been presented in Chapter 6.

Summary

INTRODUCTION

In today's competitive environment, success of an organization, be it a manufacturing or a service organization, depends to a great extent on its ability to estimate costs as accurately as possible. For timely and economical completion of an engineering or business project, it is essential to accurately estimate costs associated with different stages of the project. In engineering projects, the estimation of costs is considered to be more important than revenue estimation. Therefore, different aspects of cost estimation are discussed in this chapter.

Out of two types of costs, i.e., direct costs and indirect costs, it may be noted that indirect costs are not associated with a specific function, department or process. Hence, some logical basis should be used for allocating indirect costs to the different functions. For this purpose, both traditional as well as Activity-Based Costing (ABC) are also discussed in this chapter.

HOW DOES AN ORGANIZATION ESTIMATE COST?

Organizations are involved in either producing tangible products or providing services for customers for which serious efforts are made by them. In order to perform the required activities to produce goods or provide services, capital is required. In other words, for every activity there is an associated cost and, therefore, the organizations need to make cost estimates of the activities. The estimates should be as accurate as possible, so that the organization can arrange the capital required well in advance. Generally, cost estimations are required to be made in the initial stages of implementation of a project or a system. Maintenance and upgradation costs are estimated as a percentage of the first cost and they are subsequently added to make the trial cost estimates. Typical examples of a project include physical items such as building, bridge, manufacturing plant etc.

On the other hand, a system refers to an operational design involving non-physical items such as processes, software, etc. Typical examples of a system include ERP software, GPS system etc.

Cost comprises direct costs and indirect costs. Direct costs refer to costs that are incurred due to the involvement of several resources, such as people, material and machines, in the activities. Indirect costs are mainly incurred due to the factors that support the activities.

Summary

INTRODUCTION

In a competitive business environment, the success of an organization, be it manufacturing or service sector, depends to a great extent on its ability to correctly estimate the future demand of its products or services. The organizations can accomplish the task of estimation of future demand by using forecasting methods. Forecasting helps organizations in proper planning and control of operations and other resources which in turn ensures fulfillment of customers’ future demand. Several methods of forecasting have been developed to deal with forecasting problems of different nature. In this chapter, those methods of forecasting that specifically suit to production or operations situations are discussed and described.

There is seldom a single forecasting method that can produce satisfactory results. One organization may find one method effective for its product or service, another may use some other method and a third may use a combination of methods. Forecasts of different time spans are required to serve as the basis for operating plans developed for different planning horizons. These include (1) plans for current operations and for the immediate future, (2) intermediate-range plans to provide for the capacities of personnel, materials and equipment required for the next 1 to 12 months, and (3) long-range plans for capacity, locations, changing product and service mix, and the development of new products and services.

The forecast required for the planning of daily or weekly operations is called short-term forecasting on the other hand. The forecast required for the planning horizon of 1 to 12 months and 1 to 10 years or more is termed as intermediate-term and long-term forecasting respectively. While selecting a forecasting method it is necessary to consider a method that produces reasonably accurate results for the planning horizon under consideration. For example, if the decision will deal with activities over the next three months, a one month forecast would be valueless. On the other hand, it is unwise to select forecasting model for daily or weekly decisions.

BASIC CATEGORIES OF FORECASTING METHODS

Forecasting methods can be divided into following three categories:

Summary

INTRODUCTION

Engineering economics is concerned with the formulation, estimation and evaluation of the economic outcomes of alternatives that are available to accomplish a defined purpose. Engineering economics can be defined as a collection of mathematical techniques that simplify economic comparison. Engineers use the knowledge of engineering economics in analyzing, synthesizing and drawing conclusions as they work on projects of different sizes. In other words, the techniques and models of engineering economics assist engineers in making decisions. The success of engineering and business projects is normally measured in terms of financial efficiency. A project will be able to achieve maximum financial efficiency when it is properly planned and operated with respect to its technical, social, and financial requirements. Since engineers understand the technical requirements of a project, they can combine the technical details of the project and the knowledge of engineering economics to study and arrive at a sound managerial decision. The basic economic concepts that are essentially factors to be considered in making economy studies are briefly discussed in this chapter.

INTRODUCTION TO ECONOMICS

Economics is about choice and is at the heart of all decision-making. Individuals, businesses and governments are all faced with making choices in situations where resources are scarce. The principles of economics are applied to a wide range of fields, including business, finance, administration, law, local and national government and, indeed, in most of the aspects of everyday life. While studying economics, we examine topics of obvious importance to the well-being of all humans. Increasingly, policy debates in all areas are being cast in economic terms and understanding most of the current issues requires an understanding of economics.

NEED TO STUDY ECONOMICS

Studying economics gives insights into the general environment of resource allocation decisions, opportunity costs and project evaluation which are crucial in many areas. Often, these insights are not obvious, and can be counter-intuitive to those who don't apply economic reasoning.

Economics studies economic activities: Humans perform various types of activities in their daily lives like religious, social, political and economic activities. Economics does not deal with all of them. But humans spend the maximum time on economic activities. Therefore, economics is a subject which studies economic activities of humans.

Summary

INTRODUCTION

Business organizations use physical assets in the form of machines and equipments to produce goods and services. After a particular period of service, there might be a need for the replacement of the existing assets and therefore, the firms must constantly monitor the performance of the assets so as to decide whether they should be continued in service or they should be replaced with new assets. Replacement study is carried out to make an economic decision whether to retain or replace an existing asset at a point of time. If the decision is to replace, the study is complete. However, if the decision is to retain, the cost estimates and decision will be reconsidered at periodic intervals to ensure that the decision to retain is still economically correct.

A replacement study involves an application of the A.W. method of comparing alternatives having different useful lives. In situations where a replacement study is required to be performed for no specified study period, the A.W. values are determined by a technique of cost evaluation called the economic service life (ESL) analysis. However, there is a different procedure for conducting replacement study for cases where study period is specified. All these procedures are discussed in this chapter.

REASONS FOR REPLACEMENT

Replacement study can be required for the following reasons:

Reduced Performance Due to physical impairment deterioration or accident, the ability of the asset to reliably perform its intended functions reduces. This leads to increased costs of operation, higher wastage and rework costs, lost sales, reduced quality and higher maintenance costs.

Altered Requirements In situations where the existing asset cannot meet the new requirements of accuracy, speed and other specifications.

Obsolescence In the presence of a technologically advanced machine or equipment, the existing asset becomes obsolete. The product development cycle time to bring new products to market is getting shorter and this necessitates the replacement study even before the estimated useful life of the asset is reached.

TERMINOLOGIES USED IN REPLACEMENT STUDY

Before the procedure for replacement study is explained, it is important to understand the following terms:

Defender and Challenger Defender and challenger are two mutually exclusive alternatives and a replacement study compares these two alternatives. The existing asset is called the defender whereas its potential replacement is known as the challenger.

Summary

INTRODUCTION

Engineering or business projects can be accomplished by more than one method or alternative. The alternatives are developed from project proposals to achieve a stated purpose. The alternatives may be classified as one of the following:

Mutually exclusive When the selection of one alternative excludes the choice of any other alternative being considered, the alternatives are called mutually exclusive. A mutually exclusive alternative selection takes place, for example, when a person must select the one best diesel car from several competing models.

Independent When more than one economically viable alternative can be selected, the alternatives are classified as independent. Independent alternatives do not compete with one another in the evaluation. Each alternative is evaluated separately and thus the comparison is between one alternative at a time and the do-nothing alternative.

Do-nothing (DN) The “do-nothing” refers to a situation when none of the alternatives being considered is selected, as they are not economically viable. DN option is usually understood to be an alternative when the evaluation is performed. If it is required that one of the defined alternatives must necessarily be selected, do nothing is considered an option.

The alternatives available require the investment of different amounts of capital. The disbursement or outflow will be different in each case. Sometimes, the alternatives may produce different revenues, and frequently the useful life of the alternatives will be different. Because in such situations different levels of investment produce different economic outcomes, it is necessary to perform a study to determine economical viability of the alternatives. This chapter describes the methods used to compare mutually exclusive alternatives as well as independent alternatives.

ALTERNATIVES HAVING IDENTICAL DISBURSEMENTS AND LIVES

This is a simple case of comparison of mutually exclusive alternatives in which revenues from the various alternatives do not exist or may be assumed to be identical, and useful lives of all alternatives being considered are the same. Each of the six methods, i.e., P.W., F.W., A.W., I.R.R., E.R.R. and E.R.R.R discussed in Chapter 5 are used in Example 6.1 for this frequently encountered problem.

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3 - Elementary Economic Analysis

4 - Interest Formulae and their Applications

Acknowledgments

Foreword

Summary

15 - Cost Estimation

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Appendix B

14 - Forecasting

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Frontmatter

1 - Engineering Economics: A Prologue

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7 - Replacement and Retention Decisions

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6 - Selection among Alternatives

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Preface

Copyright page

6 - Retrospective Case Surveys Based on Product Phases

4 - Product Evolution

7 - Retrospective Case Study of General Lighting Solutions and the Compact Fluorescent Lamp

8 - Retrospective Case Study of the Child Restraint System

9 - Example Showing the Application of the Theory in the Work of Maarten Michel

Acknowledgements

Appendix - Student, Product, Year, and Number of Times Researched

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