CHAPTER 9

Engineering Decision Making- A New Paradigm

Engineering decisions making process has changed due to changes in the nature of business from
production focused to customer focused and due to increase in competition or what we term as
global market.
9.1 Engineering Decision Making (past, present and future):
Earlier, technical organizations were a command and control hierarchical style from the top
down. It was similar to military organization that means we had
 Chief engineer decides the goals and objectives of the product development
 Managers get the orders (called captains)
 Workers do the work (called field soldiers) that is where actual design activities take
place
And then came the industrial revolution that means:
 First came the power systems (winds, steam and water) that helped in manufacturing.
 Second came the interchangeable parts. These parts were precisely made that would work
together after assembly (for example, guns). Components also work in other similar
products.
 And then came assembly line manufacturing and division of labor to make manufacturing
more efficient (for example, cars).
During industrial revolution, one worker did only one kind of job. The idea was put in action
first by Henry Ford in making model T cars.
Since, originally engineering organization was more like a military organization, frequently
military commanders were running engineering firms. Until mid-1980’s, this was the style and
was being taught in engineering management classes in United States. Nineteenth century
engineering decision making philosophy actually started in late 1970’s when USA found out that
it had serious competition. Ford, General Motors, and Chrysler market share worldwide has
fallen by half by late 1970’s. Originally, United States had 100% of American market of TV and
VCR that were invented by US and now US produces no TV and VCR. The overhead cost of a
car manufactured in Japan was less, quality was better; car lasted longer; it cost less and had
fewer defects compared to cars manufactured in US. What American car line did in 6 weeks,
Japanese did in 3 days as far as model changeover was concerned.
Until mid-1980’s manufacturers wanted efficient production than customer service and focus
was unit cost reduction. Since 1990, things changed due to competition with on time delivery
and service quality. This produced continuous need for innovation, product improvement and
change.
Example: Toshiba upgraded its entry level Toshiba 100 series notebook 5 times in eleven
months, while IBM did the similar changes every six months.
When customer demanded product attributes rather than lower quality, the concept of assembly
line production did not work. So, changes took place not only for how they worked but also how
decision making process was carried out changed too.
9.2 Engineering Decision Making Tool Box
An engineering decision making tool box includes many product development and
manufacturing concepts that have been developed and implemented between 1930’s and the
present time. The components of new generation engineering decision making includes,
1. Statistical process control (SPC).
2. Continuous improvement and total quality management (CI and TQM).
3. Customer focus.
4. Theory of constraints (TOC).
5. Activity based cost (ABC).
6. Just-in-time production/inventory systems (JIT).
7. Strategic planning.
8. Process Re-engineering.
9. Benchmarking and best practices.
10. External validation models (ISO-9000, QS-9000 etc.)
11. Learning organization concepts
We will discuss some of them here. Many of these components have been included in what is
called Balanced Scorecard.

Statistical process control (SPC): Previously when parts were handmade, each part worked
together to fit with other parts. But now when parts were mass produced, each part had to fit to
function properly since it is not possible to inspect each part individually. So, now new process
had to be designed.
Process and process variability: Process variation can be divided into two components:
1. Natural process variation (also known as common cause or system variation) that is
inherent in all processes. Natural process variation can be accounted by using random
numbers.
2. Special cause variation that cannot be accounted by using random numbers.

Continuous Quality Improvement (CQI) and Total Quality Management (TQM):

Shewhart Cycle, called plan-do-check-act (PDCA) cycle, was developed for continuous
improvement that emphasized the continuous, never ending nature of process improvement.
During early days of world war-II, America has a substantial problem with military ordnance
(bombs, bullets, torpedoes etc.) so they gathered a team called whiz-kids to improve ordnance
performance. They were highly successful in further refining SPC and improve the quality of
weaponry. Shewhart presented lecture on SPC afterwards and convinced America to use SPC.
He also presented lecture in Japan and by 1970’s Japanese started using the process and by
1980’s quality gap between USA and JAPAN became critical. Now every industry in US started
using continuous improvement philosophy and start becoming competitive again. Today
TQM/CQI concepts also support concepts directly related to continuous improvement.
Central Core Concepts:
 Concept of a system and systems analysis.
 Process variability, including common cause and special cause variation.
 Statistical process control and control charts to identify special cause variation.
 PDCA (plan- do-cycle-act) cycle to improve processes continuously by reducing
common cause variation.
 Tools to identify the root cause problems of processes and to assist in implementing new
processes.

Supporting concepts:
 Emphasis on customer and their needs
 Employee issues including,
o Employment
o Teams including cross-functional and self-directed
o The value of employees
o Emphasis on education and training

The Concept of a System:

Demis defined the entire organization as a system. The following are the elements of a system:
 Management
 Management Philosophy
 Employees
 Citizens of Country
 All facets of Government including laws, taxes, trade barriers etc.
 Foreign Governments
 Customers
 Environmental Constraints
 Shareholders
 Banks and all other Financial Institutions
 Supplies

Customer focus
It is evident today that more and more emphasis be placed on improving the performance of the
company in the areas that customers deem important. Several type of analysis are listed here:
1. Traditional market research to assess the probability of the future success of new
products and services is being performed more frequently, so product could be targeted or
modified to target a particular market segment.

2. Customer satisfaction has become the most important factor so we measure customer
satisfaction not only for the actual product but also for marketing, sales and service of the
product.
The data obtained during these analyses is used to continuously improve customer’s relationship
with the company.

Teams
Earlier an individual performs the same task again and again but now these processes are
automated with machines and robots. Quality is measured frequently. So now worker has
become a problem- solver, capable of recognizing production process and solving them.
Teams are self-managed, with responsibility for process performance, both quality and quantity.
Teams are empowered to make decisions and have control over budget and personnel.
Frequently they are trained in well-developed problem-solving skills.
Cross-functional team is employed primarily in the design phase of a new product or process. It
includes members from all relevant areas such as production, marketing, and design. It requires
training for both the team leader as well as the team members.

Theory of constraints (TOC):

Eli Goldratt first formulated TOC about 15 years back to teach the concept of employing the
removal of constraints from systems. Since throughput is defined as the rate at which firm
produces money, so continuously maximize throughput by removing bottle necks.

Activity - Based Costing (ABC) and Just In Time Production/Inventory System (JIT)
When production decisions are made using TOC, it is called JIT manufacturing. When financial
decisions are made by using TOC, it is called ABC. Japanese discovered JIT about 20 years back
but could not explain why it worked until TOC was used to explain it.
TOC can be applied to workflow management, continuous improvement in both production and
services environment, and in project management.

Strategic Planning Including Mission Value and Vision Statement

Since 1970s, companies have been focusing on strategic planning. Most business has at least one
of three documents that define what the business is and its future aspirations.

Mission Statement
Mission statement defines what the organization is all about? It contains the following elements:
 How this business is different from all others businesses and its competitors?
 It places limits on the scope of the business.
 In some cases, it may state core competencies that the business deems important.
 It is an inspirational document.
Vision Statement
Vision statement contains the following elements:
 It sets the organization’s view of where it will go and what it will look like in the future.
 It articulates a vision or desired scenario of what company will look like, its
characteristics, its culture, its businesses, and its profitability.
Value Statement
Value statement articulates the values and ethical principles the company believes in. It includes
the following elements:
 It contains the statements about the environment, the company culture, employee
entrepreneurship, treatment of company personnel, affirmative action, team functionality,
or belief in quality
 It is produced jointly by the top management and the employees.
The Strategic Plan
The strategic plan is a work in progress that includes the following elements:
 It translates the vision into global operational terms.
 It frequently competes with long term goals.
 It measures progress towards vision with-in a fixed time frame.

Business Process Re-engineering (BPR)

Business Process Re-engineering was championed by Champ and Hammer. It includes the
following elements:
 It is a methodology to create processes that has the smallest number of handoffs possible
with responsibility (and authority) for the entire process vested in one person or one
team. In the old method, each person does a particular job and handoffs the product over
to the next person. So a process may require many handoffs.
 A process may include the number of non-value (do not directly impact the production of
product or service such as management, quality checks etc.) added activities close to
generation. So the idea is to reduce the number of non-value added activities close to
zero.
Benchmarking and Best Practices
Benchmarking and best practices were developed in early 1980’s. The main purpose was:
 To compare one’s business to recognized world-class competitors to discover practices
and processes used in these businesses than make them successful.
 To gain technical advantage, management practices or process innovations.

Example: Motorola in early days of cellular telephone and pager manufacturing, approximately
30% of Motorola’s products were defective either before shipped or after arrived at customer’s
place. Japan and Germany had much smaller rate of failure. This is how Motorola solved the
problem:
Motorola sent a team of management, technicians and workers to these plants to determine why
Japanese and German companies had much smaller rate of failure? Some actually got jobs with
these companies. After a year, everyone assembled and Motorola implement all these ideas,
technology, manufacturing technology, management practices, design for quality, management
of company culture, statistical process control, etc. and create a new manufacturing facility. They
also started six-sigma program. So, only 4.3 phones per million produced were defective. It
eliminated the need for inspection.
External Validation Models (ISO 9000, QS-9000 etc.)
ISO 9000 is a worldwide standard for documenting the process used in manufacturing or
providing services to insure to customers that the manufacturing, quality, and service standards
advertised by the company are true.
QS-9000 is an extension of ISO 9000 to include continuous improvement.
Baldrige award, named after former secretary of commerce Malcomb Baldrige, is America’s
highest award. It is given to two companies each year (1 small and 1 large) based on
management, quality, culture, and customer service. The award is given by U.S. Department of
Commerce and presented by US President. The award is based upon complex criteria of
management, quality, culture, and customer service criteria. Deming prize given by Japan is its
highest award. It is named after American Statistician W. Edward Deming who introduced the
concept of statistical process control (SPC) and continuous improvement to Japan after WWII. It
includes same criteria except oriented towards companies who demonstrate SPC. It is applicable
to all companies.
Learning organization concepts
A learning organization is defined as an organization that recognizes the importance of
continuous learning by employees in ever changing market to meet the needs of the customer.
Organization should function as a large parallel processing computer, harnessing the minds of
each employee implying a well-trained team.

9.3 Balancing Technical Merits, Economy and Delivery:

Professor Robert Kaplan of Harvard Business School and well-known management consultant
David Norton identified four major areas that should be managed and measured in business
today to make sure that progress is being made in each of the following areas:
1. Financial
2. Customer
3. Internal business processes
4. Learning and growth
They used two following types of measures for these four areas:
1. Outcome Measures: These measures are typically used for business financial measures
such as to measure rate of return (ROI) so that you can document business performance
over time.
2. Driver Measures: Drive measures are typically used to pin point the location of a
problem area within a business. For Example, customer satisfaction measure is called
driver measure,
Outcome measures are called lagging measures while driver measures are called leading
measures. A serious problem detected in leading measure later on will manifest itself into
outcome measures. Therefore, this is the key measures and should be corrected immediately. So
there is cause- effect relationship between the two.
 Example: Improving process capability is prerequisite for both process quality and process
cycle time, both being important for on-time delivery of a high quality product. Customer
loyalty is prerequisite to Return on Capital Employed (ROTE). Let’s demonstrate this in
Figure 9.2.
Improving
Process Learning and Growth
Capability

Process Process Cycle

International/Business Process
Quality Time

On-Time
Delivery

Customer
Customer
Loyalty

ROCE Financial

Figure 9.2 Cause-Consequence diagram for a balanced scorecard.

So suppose you produce defective parts and sell to the customer. Customer uses these parts and
that causes customer to buy from another supplier. That result into reduction is sales that results
into lower profit which results into reduction of rate on investment. Of course, if driver measures
were used to measure outgoing product quality, the problem would have been detected well
before the problem started and changes would have been implemented to correct the problem.

9.4 Engineering Decision Making In a Corporate Setting

Kaplan and Norton spent many years to research on companies worldwide to determine what
variables are adequate measures for company performance. Even though you can identify some
generic measures for four criteria suggested earlier, it’s very important for business to perform a
customer analysis to identify the measures that are most appropriate to their company’s mission
and vision. They also concluded that a balance between leading and lagging indicators was
important.
Financial Themes:
According to Kaplan and Norton financial themes for a company depend to a great extent on the
business maturity. Depending on the business maturity (beginning, stable state, harvest stage)
different measures should be employed.
Table 9.1 presents three generic measures depending on the business maturity. These measures
are:
1. Revenue Growth and Mix
2. Cost Reduction, Productivity Improvement
3. Asset Utilization.
 Table 9.1 Financial Measurements for a Balanced Scorecard
Business Revenue Growth Cost Reduction/ Asset
Maturity and Mix Productivity Utilization
Improvement
Growth Sales growth rate by Revenue/ employee Investment (%
Phase segment of sales)
Percentage revenue R & D (% of
from new product, sales)
service, and
customers
Sustain Share of targeted Cost versus Working capital
Phase customers and Competitors’ ratios
accounts
Cost reduction rates ROCE by key
Cross-selling asset categories
Indirect expenses
Percentage revenues (as % of sales) Asset utilization
from new rates
applications
Customer and
product line
profitability
Harvest Customer and Unit costs (per unit Paybacks
Phase product line of output, per
profitability transaction, etc.) Throughput

Percentage
unprofitable
customers

Customer
Business should understand customer, customer’s wants and needs and how well the customer
feels that business is serving him. Three core measures as suggested by Kaplan and Norton are
presented in Table 9.2.
From late 1980s to early 1990s, executives believed in reducing cost. Executives considered this
was an answer to global competition. The costs were reduced by taking measures such as
downsizing, de-layered, re-engineered, restructuring etc. but these measures were not good for
long term success.
Answers to long term success include:
 Delivering more values and increasing customer loyalty.
  Employing customer relationship management (CRM) to select and manage customers to
optimize long-term value, CRM requires customer centered business philosophy,
effective marketing, sales and service processes.

Table 9.2 Core Measures from Customers’ Perspectives

Market Share Reflects the proportion of business in a
given market (in terms of number of
customers, dollars spent, or unit
volume sold) that a business unit sells
Customer Acquisition Measures, in absolute or relative terms,
the rate at which a business unit attracts
or wins new customers or business
Customer Retention Tracks, in absolute or relative terms,
the rate at which a business unit retains
or maintains ongoing relationships with
its customers
Customer Satisfaction Assess the satisfaction level of
customers along specific performance
criteria.
Customer Profitability Measures the net profit of a customer,
or a market segment, after allowing for
the unique expenses required to support
the customer

Internal Business Processes

Kaplan and Norton suggested that three critical business processes which takes place from the
moment a customer need is identified to the time at which that customer need is met. These
measures are show in Table 9.3. These are also referred as balanced scorecard.
 Table 9.3 Measures for Internal Business Processes
Internal Process Process Steps Suggested Measures
The Innovation Identify the Percentage of sales from new
Process Market products
Create the Percentage of sales from
Product or proprietary products
Service Offering
New product introductions vs.
both competitors and plans
Manufacturing process
capabilities
Time to develop next
generation of products
The Operations Build the Product Cycle time for each process
Process or Service
Quality measures
Deliver the
Process parts-per-million
Product or
defect rates
Service
Yields
Waste
Scrap
Rework
Returns
% of processes under statistical
control
The Post-Sale Service the Customer satisfaction surveys
Service Processes customer
% of customers requiring
service

Learning and Growth

Three basic components that measure the ability of a company to learn, grow, and keep pace
with intellectual competition are as follows,
1. Competencies of the staff.
2. Sophistication of the technology infrastructure.
3. Company climate
These are summarized in Table 9.4.
 Table 9.4 Measures for Learning and Growth

Staff Competency Technology Climate for Action

Infrastructure
Strategic Skills Strategic technologies Key decision cycle
Training Levels Strategic databases Strategic focus
Skill Leverage Experience capturing Staff empowerment
(how well are they
Proprietary software Personal alignment
used and deployed)
Patents and copyrights Morale
Teaming