Industrial Management and

Engineering Economics
(IEng5361)

School of Engineering
Depatment of Electrical and Computer Engineering Program
 Why Industrial Management and
Engineering Economics?
▪ Mainly focusing on the issues of "quality – cost – delivery time", decisions

made during the engineering design phase of product development determine

the majority (some say 85%) of the costs of manufacturing that product

(Service).

▪ Thus, a competent engineer in the 21st century must have an understanding of

the principles of management, economics as well as engineering.

 Why Industrial Management and
▪ Thus, this course examines the most important management and economic
concepts that should be understood by engineers.

Engineering Economics?
❑ Technology and business savvy (know-how) represents a very powerful
combination of great demand in society.

❑ Market environment is rapidly evolving (changing marketplace complexities,

web-based technologies, globalization):

❖ Leaders with understanding of technology and management perspectives are

needed.
 Why Industrial Management and
❖ Engineers with proper management and leadership training have great
opportunities to add value.

❖ Engineering managers lead by supervising complex teams, innovating with

vision for the future, designing global products, and organizing supply
chains. 3

Engineering Economics?
Why Industrial Management and
 1. Introduction
- Management
- Organizations
7. Basic - Productivity
Principles of 2. Plant Layout
Accounting - Plant Location
- Definitions and Types - Plant Layout
- Accounting statements - Ergonomics

6. Investment IMEE 3. Forecasting

Evaluation
- Financial Functions - Usages of Forecasting
- Financial Models - Techniques of Forecasting

5. Project Mgt 4. Materials Mgt

- Introduction - Introduction
- Functions of PM
 Chapter 1: Introduction
1.1 Introduction to Industrial Management 1.2
Organizations and Organizational Structure 1.3
Production and Productivity
1.1 Introduction to Industrial Management
▪ Management is getting things done through people (Parker Follett in Stoner
and Freeman, 1992), by planning, coordinating and directing the activities of an
organization.
▪ Management is the process of getting activities completed efficiently and
effectively with and through the involvement other people.
▪ The creation of conditions that allow the effective use of resources (human,
financial, material, equipment, technical and etc.) to achieve a specified goal.
▪ The decisions and judgments made are normally oriented to the needs of the
organization.
 ▪ Thus, industrial management is a process of planning, staffing, organizing,
directing and controlling the activities of any industry.

Management concerns
❑ Efficiency: is getting the most output from the least amount of inputs in
order to minimize resource costs.

▪ ―Doing things right‖

❑ Effectiveness: is completing activities so that organizational goals are

attained.
▪ ―
Doing the right things‖

8
Why Management?
The main three reasons behind the need of management are:

1
1. The industrial revolution brought about the emergence of large-scale
business and its need for professional managers.
Why Management?
The main reasons behind the need of management are:
2. Management became more important as the developments and complexities
of technology and human relationships get more challenging to those who
perform managerial functions.
 2

Why Management?
The main reasons behind the need of management are:
3. Because of the scarcity/shortage of resources (i.e. facilities, raw materials,
machineries, technologies, human resources, land, budgets, time, etc).

3
Functions of management

❑ The subject of management can be considered a process involving certain

functions that a manager performs.
 1. Decision making,
2. Planning,
3. Organizing,
4. Staffing, 5. Directing,
and
6. Controlling.
1. Decision making
▪ Decision can be defined as an
act involving mental process
at a conscious level in choosing a course of action from available alternatives
for the purpose of attaining a desired result.
▪ Five steps of Decision Making:
1. Fact gathering for understanding the situation
2. Recognition of the right problem
3. Generate as many alternatives as possible
4. Select the best alternative
5. Communicate the decision to others

2. Planning
▪ Planning is determining objectives and formulating methods to achieve them.
▪ Planning involves the predetermining of the course of action to be taken in
relation to the known event.
▪ It also includes anticipating the possibilities of future problems that might
appear.
▪ Failing to plan means planning to fail.
▪ It is a systematic activity which determines when, how and who is going to
perform a specific job.
▪ It is rightly said ―A job well planned is half done‖.
▪ Forecasting, setting objectives, action planning, administering policies,
establishing procedure.
2. Planning
❑ In general, the planning process may systematically be composed of five
elements:
1. Setting Goals
2. Search for Opportunities
3. Formulation of Plans
4. Target Setting
5. Follow-up of Plans
❑ During planning one needs to ask oneself the following:
▪ What to accomplish i.e. Objective?
▪ What resources are available?
▪ What are the methods and means to achieve the objectives?
▪ Is this the optimal path or method?
 Organizing
3.
▪ Organizing may be defined as the structure and process by which a group
allocates its tasks among its members, identifies relationships and
integrates its activities toward common objectives.
▪ The organizing function of management brings together human and
physical resources in an orderly manner and arranges them in
coordinated pattern to accomplish planned objectives.
▪ Each organizational resource (human, material, finance etc.) represent
an investment from which the management system must get the return.
Therefore, these resources should be organized properly for efficient and
effective use of the same.
 Organizing
3.
❑ Selecting organizational structure, delegating, establishing working
relationship.

▪ Division of Work.

o Assign Tasks: Departmentalization.

o Link Departments: Hierarchy Development

▪ Decide how much Authority to Designate/

Authority,
Responsibility and Delegation.
3. Organizing
▪ Decide the Levels at which Decisions are to be made.

▪ Decide how to Achieve Coordination.

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The steps that are important when organizing an enterprise:

▪ Reflection on plans and objectives,
▪ Establishing major tasks,
▪ Dividing major tasks into subtasks,
▪ Allocating resources and directives for subtasks, and
▪ Evaluating the result of implemented organizing strategy
Organizing
5.
Staffing
▪ Staffing deals with the workers and is worker-oriented. This function
includes the process of placing the right person in the right
organizational position.
▪ The process of matching the people and the jobs is done by careful
preparation of specifications necessary for positions and raising the
6. Controlling
performance of personnel by training and retraining of people to fit the
needs of the organizational position.

Directing
❑ For the same idea, different organizations use different terms such as:
▪ Leading
▪ Executing
▪ Supervising
7.
▪ Ordering and
▪ Guiding
❑ What ever terms are assigned to it, the idea of directing is to put into effect
the decisions, plans and programs that have been worked out.
❑ Controlling is a three-step process of measuring progress toward an
objective, evaluating what remains to be done, and taking the necessary
corrective action to achieve or exceed the objectives.

▪ Measuring: determining through formal and informal reports the

degree to which progress toward objectives is being made.
8. Controlling
▪ Evaluating: determining cause of and possible ways to act on
significant deviations from planned performance.

▪ Correcting: taking control action to correct an unfavorable trend

or to take advantage of an unusually favorable trend.

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 Controlling
6.
▪ Control is the process that measures current activities, quantitatively if
possible, and guides it toward some predetermined goal, plan, policy,
standard, norm, decision rule and criterion or yardstick.
▪ The essence of control lies in checking and correcting actions against
desired results in the planning process.
▪ Controlling includes ensuring that employees perform the work allocated
to them in the ways laid down, and with no wastage or duplication of time,
effort or materials. That involves much more than simply instructing a
given number of employees to perform work; they must be supervised and
 Controlling
managed so that their efforts achieve the desired results. This requires that
they are motivated, checked, guided, taught and encouraged.

6.
There are seven principles of control:
1. Strategic Point Control
 2. Feedback
3. Flexible Control
4. Organizational Stability
5. Self-Control
6. Direct Control
7. Human Factor

Levels of
Management
❖ First-line Managers: often called supervisors stand at the base of the
managerial hierarchy.

25
 Controlling
❖ Middle Managers: heads of various departments and organize human
and other resources to achieve organizational goals.

❖ Top Managers: set organizational goals, strategies to implement them

and make decisions.
Managerial Skills
❑ A manager is someone skilled in knowing how to analyze and improve
the ability of an organization to survive and grow in a complex and
changing world.

❖ Management knowledge and skills (operational, strategic,

financial/accounting, interpersonal skills/communications, etc.)

▪ Technical skills

▪ Human skills

▪ Conceptual skills

27
1. Technical Skills

❑ Technical skill involves understanding and demonstrating

proficiency in a particular workplace activity.

❑ A persons’ knowledge and ability to make effective use of any process

or technique constitutes his technical skills.

❑ For e.g. Engineer, accountant, data entry operator, lawyer, doctor etc.

2. Human Skills
28
❑ An individuals’ ability to cooperate with other members of the
organization and work effectively in teams.

❑ Communication.

❑ For e.g. Interpersonal relationships, solving people’s problem and

acceptance of other employees.

3. Conceptual Skills
❑ Ability of an individual to analyze complex situations and to
rationally process and interpret available information.

❑ For eg: Idea generation and analytical process of information.

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30
 Management Vs Administration
Management Administration
Process of planning the work as per the Process of determining the objective to be
objectives laid down by the achieved
administration
Executes policies and programs Lays down policies and principles

Supervises and controls the execution of Prepares the framework under which one
assigned work is asked to work and execute
Co-ordinates activities Provides: direction, guidance and
leadership
Organizational Structure

1.2 Organizations and Organizational Structure

▪ A collection of people working together in a coordinated and structured
fashion to achieve one or more goals.
▪ In other words the process of organization implies the arrangement of human
& nonhuman resources to make a meaningful whole that accomplishes
organizational objectives.

▪ Characteristics: (1) each has a distinct purpose; (2) each is composed of people;
and (3) each develops some deliberate structure so members can do their work.

31

▪ Formal relationship between people in various positions in the organization.

▪ They show who supervises whom
Organizational Structure
& how various jobs &
departments are linked together to
make and achieve coordinated
system.
▪ Main channels of communication:
▪ Downward
▪ Upward
▪ Horizontal
▪ Diagonal

32
 Organizational Structure
▪ When setting up a new business, you should pay careful attention to designing
your company’s organizational structure. This should be decided according to
your company’s size, industry and aims.
▪ Poorly conceived organizational structures will result in sluggish, inefficient
communication in which managers at various levels are required to deliver
information to too many people for too many levels of approval.
▪ Well designed organizational structures will produce efficient communication
channels/flowcharts, and encourage fast and clean decisions.
❑ There are four different types of organizations, namely:
1. Line/functional,
2. Line and staff, and
 Organizational Structure
3. Matrix/project.

❑ Line/functional organization
▪ There is a clear 'line' of responsibility and authority right through the
management structure from the board to the lowest level of supervision, and
below.
▪ Line organization is simple and direct and is easy to understand. The 'chain of
command' is direct and so decisions can usually be made quickly and
implemented rapidly, because of the directness of the control, the coordination
of the activities of all those employed in a department is simplified.
Organizational Structure
Line/functional organizational structure
Organizational Structure

❑ Line and staff organization

▪ In such a structure, the line managers control the primary functions,
such as marketing and production, which are directly concerned with
achieving the objectives of the business; whilst the staff managers are
generally involved with secondary functions which assist the smooth
and efficient running of the primary functions.
 Line and staff organizational structure
❑ Matrix organization
❑ These are temporary organizational structures formed for specific projects for
a specific period of time and are dismantled, once the required goal is achieved.
❑ The specialists are selected primarily on the basis of task-related skills and
expertise rather than decision making experience or planning ability. In
matrix organization, it is possible for the individual employee to have two
managers. However, proposers of matrix organization believe that it provides
an agency with the flexibility to work on critical projects.
❑ This kind of organization occurs frequently in:
❖ Construction (e.g. building a bridge)
❖ Aerospace engineering (designing and launching weather satellite)
❖ Marketing (e.g. advertising company for new product)
❖ Installation of an electronic data processing system, etc.
General Manager
 1.3 Production and Productivity
❑ Production
▪ Production is defined as "the step-by-step conversion of one form of material
into another form through chemical or mechanical process to create or
enhance the utility of the product to the user."
▪ Thus production is a value addition process. At each stage of processing,
 there will be value addition.

Production System
▪ It is that activity whereby resources, flowing within a defined
system, are combined and transformed in a controlled manner to
 add value in accordance with the policies communicated by
management.

Schematic production system

❑ Classification of Production System
▪ Production systems can be classified as Job Shop, Batch, Mass and
Continuous production systems.

Classification of production systems

1. Job Shop Production

▪ Job shop production are characterized by manufacturing of one or few

quantity of products designed and produced as per the specification of
customers within prefixed time and cost.
▪ The distinguishing feature of this is low volume and high variety of products.
▪ A job shop comprises of general purpose machines arranged into different
departments.
▪ Each job demands unique technological requirements, demands processing on
machines in a certain sequence.
1. Job Shop Production

❑ Characteristics
❑ The Job-shop production system is followed when there is:
1. High variety of products and low volume.
2. Use of general purpose machines and facilities.
3. Highly skilled operators who can take up each job as a challenge because of
uniqueness.
4. Large inventory of materials, tools, parts.
5. Detailed planning is essential for sequencing the requirements of each
product, capacities for each work centre and order priorities.
 2. Batch Production
❑ Batch production is defined by American Production and Inventory Control
Society (APICS) “as a form of manufacturing in which the job passes through the
functional departments in lots or batches and each lot may have a different routing.”
It is characterized by the manufacture of limited number of products produced at
regular intervals and stocked awaiting sales.
❑ Characteristics
Batch production system is used under the following circumstances:
1. When there is shorter production runs.
2. When plant and machinery are flexible.
3. When plant and machinery set up is used for the production of item in a
batch and change of set up is required for processing the next batch.
4. When manufacturing lead time and cost are lower as compared to job order
production.

3. Mass Production

▪ Manufacture of discrete parts or assemblies using a continuous process are

called mass production.
▪ This production system is justified by very large volume of production.
▪ The machines are arranged in a line or product layout.
▪ Product &process standardization exists and all outputs follow the same path.
3. Mass Production
Characteristics
Mass production is used under the following circumstances:
1. Standardization of product and process sequence.
2. Dedicated special purpose machines having higher production capacities and
output rates.
3. Large volume of products.
4. Shorter cycle time of production.
5. Lower in process inventory.
6. Flow of materials, components and parts is continuous and without any back
tracking.
7. Production planning and control is easy.
8. Material handling can be completely automatic.
4. Continuous Production

▪ Production facilities are arranged as per the sequence of production operations

from the first operations to the finished product. The items are made to flow
through the sequence of operations through material handling devices such as
conveyors, transfer devices, etc.
Characteristics
▪ Continuous production is used under the following circumstances:
1. Dedicated plant and equipment with zero flexibility.
 2. Material handling is fully automated.
3. Process follows a predetermined sequence of operations.
4. Component materials cannot be readily identified with final product.
5. Planning and scheduling is a routine action.

Productivity
❑ Productivity is a common measure of how well resources are being used or
a measure of the efficient use of resources usually expressed as the ratio of
output to input.
❖ Productivity, the relative efficiency of economic activity—that is, the
amount of products or services produced compared to the amount of goods
and labor used to produce them.
▪ It is a matter of common knowledge that higher productivity leads to a reduction
in cost of production, reduces the sales price of an item, expands markets, and enables
the goods to compete effectively in the world market.
Productivity
▪ It yields more wages to the workers, shorter working hours and greater leisure time
for the employees.
▪ In fact the strength of a country, prosperity of its economy, standard of living
of the people and the wealth of the nation are very largely determined by the
extent and measure of its production and productivity.
▪ By enabling an increase in the output of goods or services for existing
resources, productivity decreases the cost of goods per unit, and makes it
possible to sell them at lower prices, thus benefiting the consumers while at
the same time leaving a margin for increase in the wages of the workers.
Productivity
❑ Difference between Production and Productivity
▪ Production is an organized activity of transforming raw materials into
finished products which have higher value.
▪ Production of any commodity or service is the volume of output
irrespective of the quantity of resources employed.
▪ Production in an industry can be increased by employing more labor,
installing more machinery, and putting in more materials, regardless
of the cost of production.
❑ Difference between Production and Productivity
Productivity
▪ Higher productivity results when we put in production system an element of
efficiency with which the resources are employed.
▪ The combined input of a number of factors such as land, materials, machines,
capital, and labor gives an output in an industry.
Mathematically, Productivity = Output Value/Input Value
▪ For instance, 50 persons employed in an industry may be producing the same
volume of goods over the same period as 75 persons working in another
similar industry.
▪ Productions of these two industries are equal, but productivity of the former
is higher than that of the latter.
Productivity
❑ Key Elements of Productivity include:

▪ Inventions : creation of basic technologies

▪ Innovations: apply existing technologies to create

new products/services

▪ Investments: are made when acquiring resources/inputs

▪ Integrations: the effective use of resources

▪ Information: is the knowledge and data available to make the

decisions.
Productivity
❑ Partial Productivity Measurement
▪ Partial productivity measurement is used when the firm is interested in the
productivity of a selected input factor. It is the ratio of output values to one
class of input.

❑ Multi-factor Productivity Measurement

▪ This productivity measurement technique is used when the firm is
interested to know the productivity of a group of input factors but not all
input factors.
Productivity
❑ Total (Composite) Productivity Measures
▪ A firm deals about composite productivity when it is interested to know
about the overall productivity of all input factors. This technique will give
us the productivity of an entire organization or even a nation.

If we produce only one product, the numerator can be either the total
units of product or total $ value of the product.
Productivity
If we produce several products, the numerator is the total $ value of all
products.
Usually, the numerator is the total $ value of all outputs.
The denominator is total $ value of all inputs.
Measures of Productivity
❑ Example 1: 7040 Units Produced , Sold for $1.10/unit, Cost of labor:
$1,000, Cost of materials: $520, Cost of overhead: $2000
▪ Which productivity measures can be calculated?
▪ What is the multifactor productivity?

▪ Solution: Single productivity measures like labor, material and capital can
be determined.
▪ Combination of the inputs can be determined as multifactor productivity.

63
Measures of Productivity
= 2.20
❑ Example 2: 5,500 Units Produced, Sold for $35/unit, 500 labor hours are used,
Cost of labor: $25/hr, Cost of raw material: $5,000, Cost of overhead: 2 x
labor cost.

▪ What is the labor productivity?

▪ What is the multifactor productivity?

❑ Labor productivity: 5,500 units/500 hours = 11 units/hour

Or we can arrive at a unitless figure:

(5,500 units*$35/unit)/(500 hours * $25/hr) =15.4

64
Measures of Productivity

MFP = 4.52
❑ Example 3: Assume that you have just determined that service employees have
used a total of 2400 hours of labor this week to process 560 insurance
forms. Last week the same crew used only 2000 hours of labor to process 480
forms.

❑ Which productivity measure should be used?

❖ Answer: Could be classified as a Partial Measure (labor productivity).

❑ Is productivity increasing or decreasing?

65
Measures of Productivity
❖ Answer: Last week’s productivity = 480/2000 = 0.24, and this week’s
productivity is = 560/2400 = 0.23.

▪ So, productivity has decreased slightly.

66
 Exercise 1
1. A company that makes shopping carts for supermarkets recently purchased new
equipment, which reduced the labor content needed to produce the carts.
Information concerning the old system (before adding the new equipment) and the
new system (after adding the new machines) includes:
Old System New System
Output/hr 80 84
Workers 5 4
Wage $/hr 10 10
Machine $/hr 40 50
a) Compute labor productivity for both the Old System and the New System.
b) Compute total factor productivity for both the Old System and the New
System.
c) Suppose production with old equipment was 30 units of cart A at a price of
$100 per cart, and 50 units of cart B at a price of $120. Also suppose that
production with new equipment is 50 units of cart A, at a price of $100 per cart,
67
 and 30 units of cart B at a price of $120. Compare total-factor productivity for
the old and the new systems.

Exercise 2
2. A company has introduced a process improvement that reduces the processing
time for each unit and increases output by 25% with less material but one additional
worker.
Under the old process, five workers could produce 60 units per hour. Labor costs are
$12/hour, and material input was $16/unit.
For the new process, material input is now $10/unit and overhead is charged at 1.6
times direct labor cost. Finished units sell for $31 each.
a) Compute single factor productivity of labor in the old system. (Compute it in
four possible ways.)
b) Compute all factor productivity for both old and new systems.
Factor Old System New System
68
 Output 60 60(1.25) = 75
# of workers 5 6
Worker cost $12/hr $12/hr.
Material $16/unit $10/unit
Overhead 1.6(labor cost) 1.6(labor cost)
Price 31 31

Exercise 3
A milk factory seeks advice from an external consulting company concerning its
3.

business and production processes. The final consulting report describes several
steps to increase productivity including implementation of cutting-edge
processing techniques through more powerful filtering systems.

Existing System Proposed System

Workers 12 9

69
 Milk Output/hour 1,000 gallons 1,400 gallons
Wage Rate/hour $12 $12
Filtration Cost/hour $120 $170

a) Calculate the labor productivity for the existing as well as the proposed
system.
b) Find the Total-Factor Productivity for both systems.
c) Assume that current processing includes 700 gallons of Grade-A milk sold at
$2.40/gallon and 300 gallons of Grade-B milk at $1.90/gallon. Furthermore,
assume that under the proposed system, processing will include 600 gallons
of Grade-A milk at $2.40/gallon and 400 gallons of Grade-B milk at
$1.90/gallon. Compare all-factor productivity for both the existing and the
new system. Is the proposed system acceptable? Why?

70
References:
• http://www.newagepublishers.com/samplechapter/002004.pdf
• http://www.newagepublishers.com/samplechapter/000951.pdf
• http://www.springer.com/cda/content/document/cda_downloaddoc
u ment/9780387745237-c1.pdf?SGWID=0-0-45-1031738-p173925907.pdf
• http://www.newagepublishers.com/samplechapter/001029.pdf