1 INTRODUCTION Section 1

Why the Economy Perspective

is Important to Engineers
HaeryIP Sihombing (IP)
Pensyarah Fakulti Kejuruteraan Pembuatan (and other professionals)
Universiti Teknologi Malaysia Melaka

MANUFACTURING
ECONOMY

Engineers Design Engineers must work within the realm of

Engineers must be concerned with the economics and justification of engineering
economic aspects of designs and projects projects
they recommend and perform Work with limited funds (capital)
Analysis Capital is not unlimited rationed
Design Capital does not belong to the firm
Synthesis Belongs to the Owners of the firm
Capital is not freeit has a cost

Technical Perspective Economic Considerations

Technical Feasibility: Economic Feasibility:
In order to ensure the implementation of The solutions provided must not exceed
the design, the solution provided must obey monetary budget limits
the laws of nature and science
Technical Efficiency: Economic Efficiency:
Because there may be many solutions to a The most economical of the many technical
problem, the best technical solution should be solution to a problem should be choosen
sought. Examples include designing solutions that
generate the least waste, consume the lest
energy, perform reliably in adverse conditions,
and allow for easy production or maintenance

1
 Definition Definition

ENGINEERING ECONOMY IS INVOLVED WITH

THE FORMULATION, ESTIMATION, AND ENGINEERING ECONOMY IS INVOLVED WITH
EVALUATION OF ECONOMIC OUTCOMES WHEN THE APPLICATION OF DEFINED MATHEMATICAL
ALTERNATIVES TO ACCOMPLISHED A DEFINED RELATIONSHIPS THAT AID IN THE COMPARISON
PURPOSE ARE AVAILABLE. OF ECONOMIC ALTERNATIVES

Role of Engineering Economy

Questions in Decision Making

Knowledge of Engineering Economy will have Remember

Remember:: People make decisions not tools
a significant impact on you, personally.
Engineering Economy is a set of tools that aid in
Make proper economic comparisons decision making but will not make the decision for
In your profession you
Private sector Engineering economy is based mainly on
estimates of future events must deal with the future
Public sector and risk and uncertainty
In your personal life

Role of Engineering Economy Role of Engineering Economy

The parameters within an engineering Sensitivity Analysis plays a major role in

economy problem can and will vary over time the assessment of most, if not all,
engineering economy problems
Parameters that can vary will dictate a
numerical outcome apply and understand ..
The use of spreadsheets is now common
and students need to master this valuable
Sensitivity Analysis tool as an analysis aid

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 DECISION CATEGORIES DECISION CATEGORIES (Cont)
1. Profit
Profit--Enhancing Program 2. Cost-
Cost-Control Program
A company may expand production, its Engineers are often asked to correct errors in

product line, or service, in order to systems--errors that cost money. Designing and
systems
increase sales. These ventures generally implementing solutions also costs money,
take considerable investment,
investment with hope including at a minimum,
including, minimum the time and effort
of increasing revenues spent by the engineer in finding a solution to the
problem. The expectation is that the engineer will
a. New Product Development provide solution that will save money in the long
b. New product Acquisition
run a. Improving Efficiency
c. Production Capacity Expansion
d. Service Capacity Expansion b. Streamlining Operations
e. Improved Customer Service c. Eliminating Waste
d. Reducing Liabilities

DECISION CATEGORIES (Cont) DECISION CLASSIFICATION

3. Public
Public--Improvement Program 1. EXPANSION
Government entities often make investments, This can take many forms, including expanding he
the goals of which is not to increase profits, but production capacity of a current and expanding
rather to increase some measure of public into new markets with new products or services.
satisfaction
a. New product design and development
a. Increased public satisfaction b. Expansion of current development
b. Increased public safety c. Construction of new facility
c. Improved infrastructure d. Acquiring capacity
e. Equipment, process, or technology selection

DECISION CLASSIFICATION (Cont) DECISION CLASSIFICATION (Cont)

2. REPLACEMENT 3. ABANDONMENT
A company may want to continue operations or Although it may not seem like an investment
services in some sector, but may want to do so in a decision, the decision to walk away from a project,
more economical manner. This may lead to replacing such as closing a facility, is a very important
equipment changing processes,
equipment, processes or changing locations.
locations economic decision
decision. It also represents the final
a. Equipment, process, or technology selection stage in our decision-
decision-making process.
b. In house versus outsourcing a. Cease production
b. Cease product line
c. Close a facility
d. Retire equipment

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 DECISION RESULTS Problem Solving Approach
INVEST 1. Understand the Problem (Recognition and definition
This accept or go decision releases the necessary funding of problem or opportunity)
to undertake a project
2. Collect all relevant data/information (Generation
of solution alternatives)
DELAY
This wait decision provides time to gather more information 3. Define the feasible alternatives (Development of
about the prospects of an investment or merely for the feasible alternative cash flows and information gathering)
investment climate to change. On the one hand, the decision
to delay may occur before a go decision 4. Evaluate each alternative
DO NOT INVEST 5. Select the best alternative (Selection and
This reject or no go decision eliminates a proposal from implementation the best alternative)
further consideration. This decision also encompasses halting
for a project, as in the abandonment decision just described 6. Implement and monitor (Post
(Post--implementation
analysis and evaluation)

Problem Solving Approach Problem Solving Approach

1. Understand the Problem
1. Understand the Problem
2. Collect all relevant data/information
2. Collect all relevant data/information
3. Define the feasible alternatives
3. Define the feasible alternatives
4. Evaluate each alternative
4. Evaluate each alternative
5. Select the best alternative
5. Select the best alternative
6. Implement and monitor
6. Implement and monitor

Major Role of One of the more

Engineering difficult tasks
Economy

Problem Solving Approach Problem Solving Approach

1. Understand the Problem 1. Understand the Problem

2. Collect all relevant data/information 2. Collect all relevant data/information
3. Define the feasible alternatives 3. Define the feasible alternatives
4. Evaluate each alternative 4. Evaluate each alternative
5. Select the best alternative Where the major tools 5. Select the best alternative
6. Implement and monitor of Engineering 6. Implement and monitor Tools
Present Worth, Future Worth
Economy are applied Annual Worth, Rate of Return
Benefit/Cost, Payback,
Capitalized Cost, Value Added

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 Time Value of Money

Time Value of Money

Money can make money if Invested
Centers around an interest rate

The change in the amount of money over a

given time period is called the time value of
money; by far, the most important concept
in engineering economy