Lecture No.

08 Course: Engineering Management

CHAPTER#10
TECHNIQUES FOR MAKING BETTER
ENGINEERING MANAGEMENT DECISIONS
 INTRODUCTION
• During middle of 1940s, a significant growth of
quantitative management techniques occurred.

• The increase in the use of computers and the modern

problem complexities have enhanced the importance
of many of these techniques.
For Example:
• Linear Programming.
• Non-Linear Programming.
Today, the mostly management techniques which
are in practice:
➢Linear Programming
➢Decision Trees
➢Exponential Smoothing
➢Discounted Cash Flow Analysis
 Optimization Techniques

There are two widely known optimization

techniques known as:
1. Lagrangian Multiplier Technique
(Technique of undetermined Multipliers)
2. Linear Programming Technique
(Advanced form of simplex method technique)
1-LAGRANGIAN MULTIPLIER TECHNIQUE
• This technique is demonstrated for a two
variable function.
• However on similar lines it can be extended
for n variables.
• Assume that we have defined function f(y1,y2)
Subject to the constraint function k(y1,y2)=0
1-LAGRANGIAN MULTIPLIER TECHNIQUE

• With the aid of these two functions the

Lagrangian function , L(y1,y2,λ) formulated as
follows:
1-LAGRANGIAN MULTIPLIER TECHNIQUE
• Subject to the following necessary conditions
for estimating a relative maximum or
minimum value:

• Expressions for y1,y2 and λ can be obtained by

solving the simultaneous equations.
EXAMPLE-1
Solution:
The Lagrange function is formulated as follows

Taking the partial derivative with respect to y1,y2 and

λ results in
 2y1+2λ = 0
2y2- λ=0
2y1-y2=0
So
Y1=8/5
Y2=-8/10
λ =-8/5
Thus the critical point of f, subjected to specified
condition, is (8/5,-8/10) .
 2-LINEAR PROGRAMMING
• In real life situations the objective and
constraint functions will be rather complex.
• However the simplest form of linear
programming problem formulation may be
expressed as follows
This can be subject to
Where
 Example 2
For above equations following values for
symbols are defined

Write down the resulting equations by assuming

that the objective function is to be maximized.
Example 2 (cont.…)
EXAMPLE-3
Solution:
(1)

(2)

(3)

(4)

(5)

(6)
Plot Equation (1) to (6) as:
From Plot of equations 1-6:
➢Company profit is optimum at point F.
(F point satisfies all the constraints)
➢F point shows maximum profit.
The optimum values of Z1 and Z2 at point F are 6.5
and 2. substitute these values in equation.1.
Discounted Cash Flow Analysis
• In various engineering investment decisions,
the time value of money plays an important
role.
• Therefore it is necessary for the engineers to
have some knowledge of engineering
economics.
Discounted cash flow analysis
The basics of engineering economics are

1. Simple Interest
• This is the interest which is calculated on the original sum
of money, called the original principal, for the period in
which the lent or borrowed sum is being utilized.
• The simple interest, St ,is given by:

(1)
Where
M is the principal amount lent or borrowed
i is the interest rate per period ( this is normally a year)
k is the interest periods (these are usually years)
 Simple Interest (Cont.…)
The total amount of money, Mt, after the
specified lent or borrowed period is given by

(2)
Example: 4
Solution:
(1)

(2)
2. Compound Interest
• In this case at the end of each equal specified
period, the earned interest is added to the
original principal or amount lent or borrowed
at the beginning of that period
• Thus, this new principal, or amount, acts as a
principal for the next period and the process
continues.
• To calculate compound amount, Mck, the
resulting formula is developed as follows:
Example:5
Solution:
3. Present Worth
• The present worth of a single payment is given
by:

• In simple terms, this formula is used to obtained

the present worth, M, of money, Mck, after k
periods, discounted at the periodic interest rate
of i.
• Sometime above equation can be written as
Example # 6
Solution:
Formula For Uniform Periodic Payments
• For using formula it is assumed that at the end of
each of the K period or years, the depositor adds
D amount of money. The money is invested at the
interest rate i, compounded annually or
periodically.
• Thus the total amount of money
(1)
where
• It should be noted in this equation that the D
amount of money is first time deposited at the
end of first year or period.
Example # 07
Solution:
By substituting k=3, D=2000 and i= 0.15 in equation
(1):

From above equation the total amount of money

after three year period is:
Example # 8

Given Data: (From Example 7)

Solution:

Substitute the data in given equation:

PRESENT VALUE OF UNIFORM PERIODIC PAYMENTS
➢ In present value of uniform periodic payment we wish to
find the present value of uniform periodic payments after K
periods or years instead of total amount.
➢ Thus the present worth, PW, of uniform periodic payments
is given by

➢ Multiply both side with (1+i)-1,The resulting present worth

formula
Example # 9
Solution:
In this example following values are given:

Substitute these values in equation:

Example 9 Cont.

➢Thus decision to purchase the machine will be profitable

investment.
 Depreciation Techniques
• The term “Depreciation” means a decline in
value.
• In order to take into consideration the change
in the value of the product, the depreciation
charges are made during the useful life of the
engineering products.
• The three depreciation techniques are:
1- Declining-Balance Depreciation Method
2- Straight-line Depreciation Method
3- Sum Of Digits Depreciation Method
 Depreciation Techniques (Cont..)
1. Declining-Balance Depreciation Method
• This method dictates the accelerated write-off of
the product worth in its early productive years and
corresponding lower write-off near the end of
useful life years.
• The depreciation rate αd is given by

where
➢The declining balance techniques requires a
positive value of s. The product book value,
Vbv (M), at the end of year M is given by:
• The annual depreciation charge, DC(M), at the
end of year M is given by
Example # 10
Solution:
From example statement

Substitute in equation
Depreciation Techniques (Cont..)
2. Straight-line Depreciation Method
• This is the most widely used technique and is very
easy to apply.
• In this method it is assumed that the annual
depreciation is constant during the productive life
of the product.
Straight-line Depreciation Method
(Cont..)
• Thus the annual depreciation charge is given by

• The book value of the product at the end of year M

is
Example # 11
Solution:

Substituting the values in equation:

 Depreciation Techniques (Cont..)
3. Sum Of Digits Depreciation Method
• The name of the technique is obtained from the calculation
approach.
• For this technique, in the initial years the depreciation
charge is larger than in the final years of the product useful
life.
• The annual depreciation charge,DCa,is given by

(1)
3. Sum Of Digits Depreciation Method (cont…)

The sum of denominator of equation is given by:

(2)
3. Sum Of Digits Depreciation Method (cont…)

Then substitute equation (2) in equation (1)

The product book value at the end of year M is:

Example # 12
Solution:
Substituting values in equation:
Business Operations Analysis
• Business operations analysis is
concerned with finding the:
➢Point of maximum profit.
➢Point of maximum investment rate.
➢ Point of maximum economic production
when the cost of production is described by the
parabolic equation.
Business Operations Analysis (Cont.…)
• We assume that the cost of production is defined by

Where
C is the cost of production
Z is the number of units produced
Α,β,θ are the constants
Business Operations Analysis (Cont.…)
Differentiating above equation with respect to Z yields:
(1)

The unit cost, Cu , is given by:

(2)
From this equation the quantity of units to be produced
to maximize profit is given by:
Business Operations Analysis (Cont.…)
• By Equating equations (1) and (2)we get

Solving for Z we get

The investment rate ,Ir ,is defined by

Business Operations Analysis (Cont.…)
To find the maximum economic production, we have ( from REF [7])

Where r denote the lowest acceptable rate of return.

Since

Solving for Z, the maximum economic production quantity is given

by
Example # 13
Solution:
 Forecasting
• An engineering manager makes many decisions
which deal with some point in the future.
• Therefore in order to make such decisions
intelligently, projection into the future is necessary.
• For example, when planning for the development of
new product, it would not be wise to plan without
having a knowledge of the new product demand in
the future.
• Forecasting is the process of estimating a future
event using the past data.
Forecasting (Cont..)
When using forecasting techniques care must be
given to the fact that these forecasts will be valid only
if they are used according to specified conditions or
the conditions under which the forecasts are made.
 Forecasting Techniques
• There are various techniques which are utilized to
make product demand and other forecasts.
• The forecasting technique selection may be subject
to any one or more of the following factors
✓ Data accuracy
✓ Forecast development cost
✓ Prediction interval length
✓ Expected accuracy from the forecasted results
✓ Past data availability
✓ Complexity of factors affecting operations in time to
come
✓ Analysis time
Forecasting Techniques (Cont..)
Forecasting techniques can be categorized into the
following two groups

1) Empirical techniques
2) Analytical techniques
Forecasting Techniques (Cont..)

1. Empirical Techniques

These techniques use input data coming

from
subjective judgments.
 Empirical Techniques (Cont.…)
a) Jury of executive opinion approach
• This approach utilizes forecasts made by the
various executives of a company in question.
• The consensus reached from this data is usually
reviewed by a group of senior executives or by
the company president.
• In addition this approach is normally used if the
cost is low as a first step in forecasting
procedure.
 Empirical Techniques (Cont.…)
b) Sales Force Opinion Approach
• This technique is very similar to the jury of
executive opinion approach.
• However the only major difference is that in
this approach the opinions of sales force
personnel are used instead of those of
executive personnel.
 Empirical Techniques (Cont.…)
c) Customer’s Expectation Technique
• The input data for this technique is obtained from
the users of the company product or service.
• This information is used to develop the forecast.
• This technique is very practical when
✓The number of users is small.
✓A small number of big companies dominates the
demand for the service or goods.
✓The company needing forecasting information is
small in size and the resources required to use
other forecasting approaches are not within
reach.
 2. Analytical Techniques
These are those techniques which make use of
mathematics to obtained desired results.
Analytical Techniques
(MODELS)
2. Analytical Techniques (Cont.…)
Model 1: Simple Average
• In this method the demands of all earlier periods
are given equal weight.
• Thus the simple average, As, of past data is given
below

Where
di denotes the demand for the ith past period
k denotes the total number of all the past demand
periods
 2. Analytical Techniques (Cont.…)
• Model 1: Simple Average (Cont..)

➢The advantage of this model is that the effects of

randomness are minimized because all the past
periods data are used in the calculation.
Example # 14

Solution:
Model 2:Simple Moving Average
• In this model the data from several recent past
periods are averaged and used as a forecast for the
next period.
• The number of recent past-periods data to be used
in computing the moving average has to be decided
by the forecaster and then held constant
throughout.
Model 2:Simple Moving Average (Cont.…)
• In this situation, the average “moves” over time
because the oldest period demand data is discarded
and the newest period demand data is included in
the calculation of forecast for the next period.
• This process is shown in figure for the fixed past
periods.
• Figure shows that the data for only four recent past
periods are used to compute moving average
Four Period Moving Average
Model 2:Simple Moving Average (Cont.…)

• Similarly the data for period 2,3,4 and forecast

period 1 are used to calculate moving average
results for the forecast period 2.
• In this situation the period 1 data is discarded
and the forecast period 1 data added.
 Model 2:Simple Moving Average
(Cont.…)
• Thus the g-period moving average Am is given by

• Where di denotes the ith period demand; for i=1

means the oldest period demand in the g-period,
for i=g means the most recent period demand in
the g-period average
Example # 15
Solution:
Substitute given values in equation:
 Model 3: Weighted Moving Average
• This model is similar to model 2.
• However in this model the forecaster assigns a
weight to each demand of past periods in
question.
• This way the forecaster can assign weights to
past g-period demands according to his desire
instead of having equal weight for all the past
period demands.
 Model 3:Weighted Moving Average
• The Weighted moving average, Awm is given by

Where
• Wi denotes the weight associated with ith period
demand di; for i=1 means the weight associated
with the oldest period demand, for i=g means the
weight associated with the most recent period
demand.
Example # 16
Solution:
Model 4: Exponential Smoothing
• This method is widely known and is frequently
utilized in operations management.
• The reasons for its wide usage may be as
follows
✓Availability in the standard computer software
packages.
✓The requirements for data storage and
computation facilities are relatively low.
• Basically exponential smoothing is an
averaging method and is useful for forecasting
one period ahead.
 Model 4:Exponential Smoothing
(Cont.…)
• In this approach, the most recent past period
demands is weighted most heavily.
• For this approach the forecast,ft, for demand one
period ahead is given by

(1)
 Model 4:Exponential Smoothing
(Cont.…)
Where
t is the time period
ft is the forecast for demand one period ahead
dt-1 is the actual demand for the most recent
past period
ft-1 is the demand forecast for the most recent
past period
θ is the weighting factor or the smoothing
constant
 Model 4:Exponential Smoothing
(Cont.…)
• Figure shows various equal time periods
Model 4:Exponential Smoothing (Cont.…)
• From above equation the forecast for the period
just ending is given by

(2)

Where
ft-2 is the forecast for the time period (t-2)
dt-2 is the actual demand for the time period (t-2)
 Model 4:Exponential Smoothing
(Cont.…)
Similarly, the forecast for the period (t-2) is given
by

(3)
Where
dt-3 is the actual demand for the period (t-3)
ft-3 is the forecast for the time (t-3)
 Model 4:Exponential Smoothing
(Cont.…)
Substitute equation (3) into (2)

(4)
Substitute (4) into (1)
 Model 4:Exponential Smoothing
(Cont.…)
• The above equation leads to the following
generalized equation

(5)

Where k is the number of past periods.

 Model 4:Exponential Smoothing
(Cont.…)
• It can be seen from this equation that the weight
associated with each observation of this
equation are not equal but rather the
successively older observations weights decrease
by factor (1- θ)
• In other words the successive terms

decrease exponentially.
• The frequently used values for θ are between
0.01 and 0.3.
• At θ=1 in above equation, the consumption or
demand of the last period is the forecast for the
period ahead.
Example # 17
Soluti
on: (
1
)

(
1)
Solution (cont…)
Solution(cont…)
(5)
 Decision Trees
• The decision tree analysis is used to deal with
sequential problems.
• A decision tree may be simply described as a
schematic diagram of a sequence of alternative
decisions as well as the conclusions of those
decisions.
 Decision Trees (Cont.…)
Some of the advantages of decision tree are
✓It can take into consideration the actions of
more than one decision maker
✓It simplifies the expected value calculations
✓It is a visibility tool to represent the sequential
decision process
 Decision Trees (Cont.…)
• To perform the decision tree analysis there are
basically three steps involved.
• These are diagramming, estimation and
evaluation and selection.
✓Identification and sequence of decisions and
their alternatives
✓Identification of chance events
✓Construction of the tree diagram depicting
decisions and chance events sequence
 Decision Trees (Cont.…)
• The estimation aspect is concerned with
estimating the chance event occurrence
probability and financial consequences of all
possible outcomes.
• Finally, the evaluation and selection are
concerned with computing the actions
expected values and choosing the actions with
the best expected value.
Example # 18
Solution:
Decision Tree for the specified data:
Solution (cont…)

From decision tree the paths 1 to 6 probabilities are

Solution(cont…)
Solution(cont…)
 Fault trees
• This is a technique widely used in industry to
evaluate reliability of complex engineering
systems.
• This technique is schematically resembles and
name similarity to the decision tree concept.
• The fault trees analysis starts by identifying an
undesirable event, called the top event
associated with a system.
• Events which could cause the occurrence of a
top event are generated and connected by
logic gates known as AND,OR and so on.
 Fault Tree Symbology
1. Circle
• This is used to represent the failure of an
elementary component.
• The element component failure parameters such
as constant failure and repair rates, probability
and unavailability and calculated from the field
data or other sources.
• This is shown as
 Fault Tree Symbology (Cont.…)
2. Diamond
• This symbol is used to represent a fault event
whose causes will not be faulty developed due
to lack of interest or data.
• This is shown as
 Fault Tree Symbology (Cont.…)
3. Rectangle
• This symbol is used to represent an event
which occurs due to combination of fault
events through the input of an gate.
• The rectangle symbol is given as
 Fault Tree Symbology (Cont.…)
4. And Gate
• This gate is used to represent a situation such
that an output fault event will occur only if all
the input fault events occur.
• The and gate symbol is shown as
 Fault Tree Symbology (Cont.…)
5. Or Gate
• This is opposite of an AND gate.
• OR GATE signifies that an output fault event occurs if
one or more of the input fault events occurs.
• The OR GATE symbol is shown as
 Fault Tree Construction
• There are various advantages of the fault tree
construction
✓Identifies system weakness in a visible form
✓Acts as a visual tool in communication
✓Evaluates the system design adequacy
✓Acts as a visual tool to perform trade of
studies
Example # 19
Solution: (Fault Tree)
Solution(cont…)
 Quantitative Analysis Of Fault Trees
• Quantitative analysis of fault trees concerned
with the evaluation of probability of occurrence
of top fault event.
• Basic probability theory is used to compute the
probabilities of OR and AND gates top event
occurrence.
Quantitative Analysis Of Fault Trees (Cont.…)
1. OR Gate:
• A “K” independent input fault event OR gate is shown.

• The occurrence probability of event ET is given by

(1)
Quantitative Analysis Of Fault Trees (Cont.…)
P(ET) is the occurrence probability of event ET
K is the number of OR gate input events
Pj is the occurrence probability of jth input fault event;
for j=1,2,3,……..k

• However, if the input event probabilities are very

small, then above equation will be

(2)
Example # 20
Solution:
From equation (1)

From equation (2)

For both equations the result is almost same. The

probability of OR gate top event occurrence is
approximately 0.07.
 Quantitative Analysis Of Fault Trees
(Cont.…)
2. AND GATE
• An “m” independent input fault event AND gate is
shown as
2. AND GATE (cont…)
• Probability of occurrence of top event, ET, is given
by

Where
P(ET) is the occurrence probability of top event
ET
m is the number of AND gate input events
Pj is the occurrence probability of jth input fault
event; for j=1,2,3,……..K
Example # 21
Solution:
 Fault Tree Evaluation
• Fault tree evaluation is concerned with
calculating the probability of occurrence of a
fault tree top event
• The AND and OR gate probability evaluation
equations are used to evaluate the occurrence
probability of the fault top tree event.
• The fault tree top event probability of
occurrence evaluation is demonstrated in the
following example
Example # 22
Solution:
Solution(cont…) :
Solution(cont…):
Solution(cont…)