Cost Engineering and Pricing in Autonomous Manufacturing Systems

COST ENGINEERING AND
PRICING IN AUTONOMOUS
MANUFACTURING SYSTEMS
This page intentionally left blank
COST ENGINEERING AND
PRICING IN AUTONOMOUS
MANUFACTURING
SYSTEMS
HAMED FAZLOLLAHTABAR
Department of Industrial Engineering,
School of Engineering, Damghan University, Iran
MOHAMMAD SAIDI-MEHRABAD
Faculty of Industrial Engineering,
Iran University of Science and Technology, Iran
United Kingdom – North America – Japan – India – Malaysia – China

Emerald Publishing Limited
Howard House, Wagon Lane, Bingley BD16 1WA, UK
First edition 2019
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British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library
ISBN: 978-1-78973-470-6 (Print)

ISBN: 978-1-78973-469-0 (Online)
ISBN: 978-1-78973-471-3 (Epub)
Contents
List of Figures ix
List of Tables xi
Preface xiii
Acknowledgments xv
Chapter 1 Introduction 1
1.1. Autonomous Manufacturing System 1
1.2. Costing and Pricing 3
1.2.1. Opportunity Cost 4
1.2.2. Opportunity Costs and Market Prices 6
1.2.3. Price 6
Chapter 2 Concepts of Costing in Automation 9

2.1. Overview 9
2.2. Introduction and Related Works 10
2.3. Model Development 12
2.3.1. Key Dimensions for Managing
Automation Supply Complexity 12
2.3.2. Reference Automation Agent
Architecture Model 14
2.4. New Paradigm: The Use of Automation Resources 17
2.4.1. Economic Aspects of the Automation
Life Cycle 17
2.4.2. Maximum Benefit of the Product Life Cycle 19
2.5. Data Integration Model 20
2.5.1. Costs and Benefits of IS 21
2.5.2. Balancing Benefits against Implementation
Costs 21
2.6. Discussions and Concluding Remarks 22
vi Contents
Chapter 3 Concepts of Pricing in Automation 25

3.1. Overview 25
3.3.1. Automation Energy Pricing Model 30
3.3.2. Concession Pricing Model 32
3.3.3. Representative Automation Pricing
Methods 36
Chapter 4 Cost Parameters and Costing Models in Autonomous

Manufacturing 43
4.1. Overview 43
4.3. Cost Accounting Concept 45
4.3.1. Documenting Cost Accounting Policies 46
4.4. Cost Object 47
4.5. Manufacturing Costs 51
4.6. Costing Model Development 53
4.7. Application Study 55
Chapter 5 Cost Engineering in Autonomous Manufacturing 65

5.1. Overview 65
5.3. Cost Engineering 72
5.4. Cost-Minimization/Profit Maximization 72
5.4.1. Short-run Cost Minimization 74
5.4.2. Long-run Cost Minimization 75
5.4.3. Application Study 75
5.4.4. Cost Functions 77
5.5. Cost of Quality 81
5.5.1. Application of CoQ in Autonomous
System 83
Contents vii
Chapter 6 Cost and Price in Autonomous Manufacturing 89

6.1. Overview 89
6.3.1. Time-varying Pricing 94
6.3.2. Production Function 97
6.3.3. Electricity Cost Function 99
6.3.4. Labor Cost Function 101
6.4. Manufacturing Profit Maximization 102
6.5. Example 103
Chapter 7 Pricing Models in Autonomous Manufacturing 107

7.1. Overview 107
7.3. Model Development and Analysis 110
Chapter 8 Price Optimization in Autonomous Manufacturing 117

8.1. Overview 117
8.3. Smart Manufacturing 121
8.4. Pricing in Manufacturing 123
8.4.1. Profitable Selling 125
8.4.2. Cost System for Advanced Manufacturing
Systems 126
8.5. Estimating RWSC 127
8.6. Application of the Cost Model 134
References and Further Reading 137
Index 157
List of Figures
Fig. 2.1. Impact of Automation Supply Complexity on

Focal Company. 13
Fig. 2.2. The Switch of the Responsibilities. 15
Fig. 2.3. The Product Life Cycle. 18
Fig. 2.4. The Course of the Cost and Benefit in the Product
Life Cycle. 19
Fig. 3.1. Comprehensive Structure for Pricing in Automation Projects. 32
Fig. 3.2. Concession Pricing Parameters of Automation Projects. 34
Fig. 3.3. Causal Loop Diagram for Concession Pricing of
Automation Projects. 35
Fig. 3.4. Equivalent Marginal Cost Pricing (EMCP) Model in
Automation Pricing. 39
Fig. 3.5. EMCP Model in Automation Pricing. 40
Fig. 4.1. Dimensions for the Analysis to the Cost Object. 48
Fig. 4.2. Dimensions for the Analysis Related to the
Computations Challenge. 50
Fig. 5.1. Combination of Robot and Resources for Cost Minimization. 74
Fig. 5.2. Combination of Robot and Resources for Profit Maximization. 74
Fig. 5.3. Short-run Cost Minimization with One Fixed Input. 76
Fig. 5.4. Cost Function Behavior. 78
Fig. 5.5. Lundvall–Juran Curve Depicting Relationship between
Conformance (Prevention) and Nonconformance
(Appraisal + Failure) Costs and the Tradeoff Point (EQL).82
Fig. 5.6. Type I and Type II Errors. 84
Fig. 5.7. Representation of a Double-stage Acceptance Sampling
Flow Diagram. 85
Fig. 5.8. Schematic Representation of Double-stage Accepting Sampling. 86
Fig. 6.1. Decomposition of the Profit (a) and the Total Cost (b). 94
Fig. 6.2. Diagram of a Typical Manufacturing System. 97
Fig. 6.3. Results of Example 1. 103
Fig. 7.1. The Price–Demand Curve (One Period). 111
Fig. 7.2. The Price–Demand Curve (Two Periods). 111
Fig. 7.3. The Price–Demand Curve (Three Periods). 112
Fig. 8.1. Six Pillars of Smart Manufacturing. 122
Fig. 8.2. A Cost System Supporting Analysis of Advanced
Manufacturing Systems. 127
List of Tables
Table 2.1. Shares of Costs, Revenue, and Benefits of a Manufacturing

Cell as an Example (in US$). 20
Table 3.1. The Summary of Pricing Literature. 30
Table 3.2. Price Adjustment Coefficient of Reference Cases. 36
Table 3.3. Energy Pricing Mechanisms in Some Countries. 38
Table 4.1. Sample Worksheet for Mold Manufacturing Time Calculation. 57
Table 4.2. Sample Worksheet for Assembly Cost Calculation. 61
Table 4.3. Parameters Used for High-cost Manufacturing Environment
And Low-cost Manufacturing Environment (Hourly Rates). 62
Table 5.1. Keywords and Combinations. 69
Table 5.2. AB – Application Area from Costing Method. 70
Table 5.3. AC – Level of Integration Between Costing Methods
and Production Process. 71
Table 5.4. AD – Advantages Resulting from the Application of
Costing Methods. 71
Table 5.5. AE – Difficulties in the Deployment and Utilization of
Costing Methods. 73
Table 6.1. Typical Pricing Profiles in New York, USA.95
Table 6.2. Typical TOU and CPP Pricing Profiles in
California, USA.96
Table 8.1. Computer System Functions for Automated
Manufacturing.120
Table 8.2. Five Cases Considered for Failure Cost Estimation. 131
Preface
Automation will substantially disrupt markets throughout the economy in

the coming decade, ranging from construction to financial services. By under-
standing how technological changes will impact these markets, businesses can
take advantage of the situation. Most importantly, buyers should be aware
that those falling wages costs will help slow price growth in these markets,
potentially providing the flexibility to delay purchasing decisions. Due to high
tendency in employing high-tech machines and devices in industry and with
respect to extensive consideration in automation, it is significant to investi-
gate specific problems and challenges related to autonomous systems. How-
ever, such expensive systems require large amount of economic investment.
Thus, identifying cost factors, analyzing them, and developing engineering
paradigms for control and optimization need to be studied. Engineering design
impacts whole-life cost of products produced. Understanding true cost of a
product and the cost drivers during the design stage could guide the design pro-
cess to obtain more competitive solutions. Cost engineering is concerned with
cost estimation, cost control, business planning and management, profitability
analysis, cost risk analysis and project management, planning, and scheduling.
There are many different approaches and methods for estimating or assessing
costs, all of which have advantages and disadvantages under particular circum-
stances. Cost estimating helps companies with decision making, cost manage-
ment, and budgeting with respect to product development. It is the start of the
cost management process. Cost estimates during the early stages of product
development are crucial.
Also, to have more productive system and to obtain profit, appropriate pricing
models should be developed to handle the operational costs in autonomous man-
ufacturing systems. Price is one of the most flexible elements of the marketing
mix, which interferes directly and in a short term over the profitability and cost
effectiveness of a company. In fact, businesses can combat the destructive pricing
environments that result from increased competition and globalization by imple-
menting a more strategic pricing approach. This method provides businesses with
the ability to maximize profit by providing visibility to pricing sensitivity – allow-
ing you to maximize price in every transaction.
Therefore, both academicians and practitioners can find the book helpful.
Graduate students can use the book as a course textbook or as further reading
source. Industrial practitioners can learn significant concepts and applied models
to be employed in real cases investigations and implementations.
xiv Preface
Therefore, this book encompasses variety of topics in cost analysis for autono-
mous systems and pricing models. Different topics such as scheduling costing,
agent-based costing, cost parameters of an advanced manufacturing system and
operations planning with respect to cost management and cost minimization are
considered in the book. Also, due to high competitive market and profit aspects,
pricing concepts and models for autonomous manufacturing systems are devel-
oped. The models are novel and adapted based on autonomous manufacturing
systems. Some of the distinct properties of the book are listed as follows:
⦁⦁ A pioneer book in cost engineering for autonomous systems.

⦁⦁ Introducing cost parameters, elements, and optimization models.
⦁⦁ Pricing models adapted for autonomous manufacturing.
This book covers several general and technical concepts involved in optimal
decision making for manufacturing systems and also the use of autonomous sys-
tems as industrial automation for both researchers and executive managers. The
book can be employed as a course book in graduate studies of industrial and
systems engineering, operations management, logistics, etc.
Structure of the book and the materials in each chapter are further explained
here.
In Chapter 1, an overview of the book and significance of the concepts con-
sidered in the book are given. In Chapter 2, the basics of costing and different
cost models are explained within a scheduling problem in advanced manufac-
turing system. In Chapter 3, pricing models are discussed in detail and a case
is investigated. Analytical studies on the performance of the pricing models in
different conditions are also included. In Chapter 4, various cost parameters in
manufacturing systems and costing models are reported and detailed in a case
problem where specific data are extracted and a costing model is implemented.
The impact of each cost parameter is also analyzed. In Chapter 5, cost minimi-
zation is discussed with respect to engineering paradigm in product design and
manufacturing planning. In Chapter 6, cost/price interaction for profit modeling
is handled. Profit maximization is a common goal of manufacturing needing to
consider both cost and price at the same time. In Chapter 7, pricing model for
advanced systems is detailed and implemented for a specific system. In Chapter 8,
price optimization with respect to costs is modeled for an advanced manufactur-
ing system. The model considers a comprehensive set of parameters and provides
a generic framework for other systems.
Acknowledgments
We would like to express our gratitude to the many people who saw us through
this book; to all those who provided support, talked things over, read, wrote,
offered comments, allowed us to quote their remarks and assisted in the editing,
proofreading, and design.
We would like to thank Iran National Elites Foundation and Damghan Uni-
versity for enabling us to publish this book. Above all, we want to thank our
families, who supported and encouraged us in spite of all the time it took us away
from them. It was a long and difficult journey for them.
Our specific thanks to Iman Dadashpour and Ahmadreza Rostami for their
warm and effective cooperation in preparing the materials of the book in differ-
ent stages. Last and not least, We beg forgiveness of all those who have been with
us over the course of the years and whose names we have failed to mention.
Hamed Fazlollahtabar
Mohammad Saidi-Mehrabad
Chapter 1
Introduction
1.1. Autonomous Manufacturing System

Intelligent machining systems facilities adaption to the changes in manufacturing
environment, such as orders and changes happening in the system. In machining
system, machine tools play an important role in manufacturing products with high
quality, low cost, and high productivity. This chapter presents a new concept of
intelligent machining system, namely Autonomous Manufacturing System (AMS).
In traditional manufacturing systems, the workers play an important role, with
their knowledge and experience. They adapt flexibly to changes in the manufac-
turing environment. With every new problem, their knowledge is updated through
learning. Abilities in processing information and cognitive abilities enable work-
ers to play an important role in monitoring, control, and production planning.
Those workers with the ability to solve problems and high cognitive capacity
enable adaption with changing manufacturing environment. However, the sys-
tem manipulated by workers with a high price is only suitable for small produc-
tion. In the era of computer-integrated manufacturing, workers are replaced by
automatic control systems and robots, hence the cognitive abilities of workers in
solving problems such as perception, learning, and reasoning to make a decision
also are removed.
The limitations of the automatic control system fail to adapt to the changes
due to the system operating under preset programs. Hence, the system needs to
reset and restart when an error occurs. To overcome these shortcomings, a com-
bination of both advanced automatic control system and the cognitive abilities of
human, cognitive sciences and artificial intelligence as well as the biology-inspired
technologies have been applied to the manufacturing systems, which make the
production system to become more intelligent and more flexible.
Industries today seek the reduction and elimination of waste through continu-
ous improvement projects that enable increased productivity within the produc-
tion process, while preserving quality and serving the customer within each other
(Gracanin, Buchmeister, & Lalic, 2014). These operational improvements pro-
posed to maximize efficiency and effectiveness throughout the production system,
reducing the non-value-added activities, costs, and eventually increase net income
(Ruiz-de-Arbulo-Lopez, Fortuny-Santos, & Cuatrecasas-Arbós, 2013).
Cost Engineering and Pricing in Autonomous Manufacturing Systems, 1–7

Copyright © 2019 by Emerald Publishing Limited
All rights of reproduction in any form reserved
doi:10.1108/978-1-78973-469-020191001
2 Cost Engineering and Pricing in Autonomous Manufacturing Systems
These perspectives makes evident that the increasing global competition among
companies have adopted new production approaches such as Lean Manufactur-
ing in order to make them more competitive (Ruiz-de-Arbulo-Lopez et al., 2013).
Some industries have been through physical and cultural transformation processes
by adopting the Lean concept (Abuthakeer, Mohanram, & Kumar, 2010). Briefly,
Lean Manufacturing is a model that seeks to increase productivity by reducing
or eliminating waste through activities that do not add value in the production
processes (Ohno, 1997; Shingo & Dillon, 1988; Womack, Jones, & Roos, 1991).
The adoption of Lean by companies implies the need for improvement in the
accounting system. The lean organizations see the traditional accounting systems
as unfavorable for eliminating waste. After all, the traditional costing system is not
conceptually prepared to operate efficiently in the lean production model (Malta &
Cunha, 2011; Pike, Tayles, & Mansor, 2011). In fact, even in normal companies
that has a wide range of products the traditional approach to cost when applied
has a distortion in the cost information (Gunasekaran & Sarhadi, 1998; Kaplan &
Copper, 1998). Given this paradigm, Lean Accounting emerges as a way to adapt
or change the traditional costing methods in order to support businesses and lean
industrial processes (Gracanin et al., 2014; Wang & Yuan, 2009).
Producing quality and reliable products at a realistic cost has always been a
fundamental objective for manufacturers. In recent years, customer expectations
for quality at low cost have only intensified. As manufacturers strive to achieve
these goals, they eventually reach a point where tradeoffs must be made between
increasing quality and lowering costs.
For a specific product type, the product size and the resulting weight also affect
the incremental manufacturing cost of cordless products. The weight is depend-
ent on both the size and the type of material used for the window covering. For
example, faux wood blinds have higher weight than identically sized vinyl blinds.
Increasing the size and the weight may result in design modifications. In some cases,
these modifications may be as simple as adding additional cordless modules to the
product or changing the sizes of components, whereas in other cases, the required
design changes may make the design concept unusable. For example, the use of
constant force springs with friction is appropriate for products where the change
in weight over the travel of the bottom rail is small. However, in large faux wood
blinds where the change in weight is high, the design may not be feasible.
Additionally, any customization of the product (e.g., changes in width and
length, choice of fabric, etc.) requires that the cordless technology be designed to
work for the entire range of customization, thereby increasing the cost.
Reducing the energy consumption of machine tools can significantly improve
the environmental performance of manufacturing systems. To achieve this, moni-
toring of energy consumption patterns in the systems is required. It is vital in
these studies to correlate energy usage with the operations being performed in
the manufacturing system. However, this can be challenging due to complexity of
manufacturing systems and the vast number of data sources.
Manufacturing and the processes involved consume substantial amounts of
energy and other resources and, as a result, have a measurable impact on the envi-
ronment. Reducing the energy consumption of machine tools can significantly
Introduction 3
improve the environmental performance of manufacturing processes and sys-

tems. Furthermore, given that machining processes are used in manufacturing the
tooling for many consumer products, improving the energy efficiency of machin-
ing-based manufacturing systems could yield significant reduction in the environ-
mental impact of consumer products.
The problem of optimal manufacturing systems design was explored by many
researchers during the last ten years. It is rather frequent to find in literature the
description of methodology of design of rigid transfer lines or traditional manu-
facturing shop-floors.
1.2. Costing and Pricing

There is a cost associated with higher quality products. For cordless technologies,
the same concept can be manufactured at different qualities by using different
materials (e.g., steel gears instead of plastic gears), different tolerances and sur-
face finish, and using sophisticated transmission systems for smoother operation.
Higher quality increases the life and reliability of the product, thereby reducing
warranty costs for the manufacturers.
The cost is dependent on whether the parts are directly manufactured by the
same firm or purchased from suppliers. Similarly, the cost is also dependent on
whether the parts are manufactured within the United States or overseas.
The Manufacturing Cost Levelization Model is an analytical method for esti-
mating all of the manufacturing costs necessary to produce a given product and
compute a levelized cost per-unit of that manufactured product. Levelized cost
is the minimum per-unit price ($/unit of product) necessary to recover all of the
costs associated with manufacturing the product over an assumed financial cycle
and manufacturing facility lifetime. Manufacturing costs typically includes:
a) manufacturing facility capital investments; b) raw material and energy pur-
chases; c) fixed and variable operations and maintenance costs including labor; d)
financing costs, and e) taxes. Engineering economic methods are used to project
each of these costs into cash flows over the life-time of the manufacturing facil-
ity. Because taxes are a function of product sales revenue, the levelized cost is the
per-unit sales prices where the net present value (NPV) of all costs (including
taxes) equals the NPV of all sales revenues. Thus, the levelized cost is the NPV
of all of the cost cash flows divided by the NPV of the product units produced.
It can be thought of as the minimum per-unit product sales price that pays all
expenses including raw materials, labor wages, debt service for both loans (debt)
and owner’s investments (equity), and taxes – but no profit above just these cash
flow expense items.
The model is designed to reflect a notional manufacturing facility specific to
the production of a technology or product. Although the model can be utilized
to estimate the production cost of any manufactured product, it is specifically
designed to help guide technology R&D research. Estimating the production cost
implications of research at an early stage can help researchers develop processes
and designs that minimize the eventual manufacturing costs and increase the like-
lihood of successful technology deployment. Utilizing the model does require the
development of the core components of any specific manufacturing processes:

the manufacturing equipment, raw materials cost, labor costs, etc. Several meth-
ods are embedded in the model to help a technology researcher produce ballpark
estimates quickly. However, the accuracy of these core components determines
the accuracy of the levelized cost estimate and therefore the model should be
utilized over the course of R&D allowing it to evolve alongside the R&D process
and guide research focus toward the most significant cost drivers.
Managers are most experienced with cost presented as monetary expenses
in an income statement. Politicians and policy analysts are more familiar with
costs as an expense item in a budget statement. Consumers think of costs as their
monthly bills and other expenses.
But economists use a broader concept of cost. To an economist, cost is the
value of sacrificed opportunities. What is the cost to you of devoting 20 hours
every week to studying microeconomics? It is the value of whatever you would
have done instead with those 20 hours (leisure activities, perhaps). What is the
cost to an airline of using one of its planes in scheduled passenger service? In
addition to the money the airline spends on items such as fuel, flight-crew salaries,
maintenance, airport fees, and food and drinks for passengers, the cost of flying
the plane also includes the income the airline sacrifices by not renting out its jet
to other parties (e.g., another airline) that would be willing to lease it. What is the
cost to repair an expressway in Chicago?
Besides the money paid to hire construction workers, purchase materials, and
rent equipment, it would also include the value of the time that drivers sacrifice
as they sit immobilized in traffic jams. Viewed this way, costs are not necessarily
synonymous with monetary outlays.
When the airline flies the planes that it owns, it does pay for the fuel, flight-
crew salaries, maintenance, and so forth. However, it does not spend money for
the use of the airplane itself (i.e., it does not need to lease it from someone else).
Still, in most cases, the airline incurs a cost when it uses the plane because it sacri-
fices the opportunity to lease that airplane to others who could use it.
Because not all costs involve direct monetary outlays, economists distinguish
between explicit costs and implicit costs. Explicit costs involve a direct monetary
outlay, whereas implicit costs do not. For example, an airline’s expenditures on
fuel and salaries are explicit costs, whereas the income it forgoes by not leasing
its jets is an implicit cost. The sum total of the explicit costs and the implicit
costs represents what the airline sacrifices when it makes the decision to fly one
of its planes on a particular route.
1.2.1. Opportunity Cost

The economist’s notion that cost is the value of sacrificed opportunities is based
on the concept of opportunity cost. To understand opportunity cost, consider a
decision-maker, such as a business firm, that must choose among a set of mutu-
ally exclusive alternatives, each of which entails a particular monetary payoff. The
opportunity cost of a particular alternative is the payoff associated with the best
of the alternatives that are not chosen.
Introduction 5
The opportunity cost of an alternative includes all of the explicit and implicit
costs associated with that alternative. To illustrate, suppose that you own and
manage your own business and that you are contemplating whether you should
continue to operate over the next year or go out of business. If you remain in busi-
ness, you will need to spend $100,000 to hire the services of workers and $80,000
to purchase supplies; if you go out of business, you will not need to incur these
expenses. In addition, the business will require 80 hours of your time every week.
Your best alternative to managing your own business is to work the same number
of hours in a corporation for an income of $75,000 per year. In this example, the
opportunity cost of continuing in business over the next year is $255,000. This
amount includes an explicit cost of $180,000 – the required cash outlays for labor
and materials; it also includes an implicit cost of $75,000 – the income that you
forgo by continuing to manage your own firm as opposed to choosing your best
available alternative.
The concept of opportunity cost is forward looking, in that it measures the
value that the decision-maker sacrifices at the time the decision is made and
beyond. To illustrate this point, consider an automobile firm that has an inven-
tory of sheet steel that it purchased for $1,000,000. It is planning to use the sheet
steel to manufacture automobiles. As an alternative, it can resell the steel to other
firms. Suppose that the price of sheet steel has gone up since the firm made its
purchase, so if it resells its steel the firm would get $1,200,000. The opportunity
cost of using the steel to produce automobiles is thus $1,200,000. In this illustra-
tion, opportunity cost differs from the original expense incurred by the firm.
After reading this last example, students sometimes ask, “Why isn’t the oppor-
tunity cost of the steel $200,000: the difference between the market value of
the steel ($1,200,000) and its original cost ($1,000,000)?” After all, the firm has
already spent $1,000,000 to buy the steel. Why the opportunity doesn’t cost the
amount above and beyond that original cost ($200,000 in this example)? The way
to answer this question is to remember that the notion of opportunity cost is for-
ward looking, not backward looking. To assess opportunity cost we ask: “What
does the decision-maker give up at the time the decision is being made?” In this
case, when the automobile company uses the steel to produce cars, it gives up
more than just $200,000. It forecloses the opportunity to receive a payment of
$1,200,000 from reselling the steel. The opportunity cost of $1,200,000 measures
the full amount the firm sacrifices at the moment it makes the decision to use the
steel to produce cars rather than to resell it in the open market.
Opportunity costs depend on the decision being made. The forward-looking
nature of opportunity costs implies that opportunity costs can change as time
passes and circumstances change. To illustrate this point, let us return to our
example of the automobile firm that purchased $1,000,000 worth of sheet steel.
When the firm first confronted the decision to “buy the steel” or “don’t buy the
steel,” the relevant opportunity cost was the purchase price of $1,000,000. This is
because the firm would save $1,000,000 if it did not buy the steel.
But – moving ahead in time – once the firm purchases the steel and the market
price of steel changes, the firm faces a different decision: “use the steel to produce
cars” or “resell it in the open market.” The opportunity cost of using the steel is
the $1,200,000 payment that the firm sacrifices by not selling the steel in the open
market.
Same steel, same firm, but different opportunity cost! The opportunity costs
differ because there are different opportunity costs for different decisions under
different circumstances.
1.2.2. Opportunity Costs and Market Prices

Note that the unifying feature of this example is that the relevant opportunity
cost was, in both cases, the current market price of the sheet steel. This is no
coincidence.
From the firm’s perspective, the opportunity cost of using the productive ser-
vices of an input is the current market price of the input. The opportunity cost of
using the services of an input is what the firm’s owners would save or gain by not
using those services. A firm can “not use” the services of an input in two ways.
It can refrain from buying those services in the first place, in which case the firm
saves an amount equal to the market price of the input. Or it can resell unused
services of the input in the open market, in which case it gains an amount equal
to the market price of the input. In both cases, the opportunity cost of the input
services is the current market price of those services.
1.2.3. Price
Price is one of the most flexible elements of the marketing mix, which inter-
feres directly and in a short term over the profitability and cost effectiveness of
a company (Simon, Bilstein, & Luby, 2008). Despite the importance a price has
on the performance of businesses, it seems that this element has not received
proper attention from many academics and marketing professionals (Avlonitis &
Indounas, 2006). Typically, in marketing, the main focus is placed on the devel-
opment of new products, distribution channels, and communication strategies,
and according to Lancioni (2005) this could lead to precipitated pricing decisions
without properly evaluating market and cost factors.
Thus, pricing is treated as the simplest strategy within marketing, perhaps
because many companies determine their prices based on intuition and the man-
ager’s market experience (Simon, 1992). In addition, only few managers strategi-
cally think about pricing while proactively administrating their prices in order to
create favorable conditions that lead to profits (Nagle & Holden, 2003). Consid-
ering this, Liozu and Hinterhuber (2012) highlight the need for more research
regarding the pricing preferences and practices because, according to the authors,
less than 2% of all published articles in marketing journals are focused on pricing.
Strategic pricing requires a stronger relationship between marketing and the
other sectors of a company. In order to enhance companies’ economic and finan-
cial performance, the pricing policies should be defined by their internal capaci-
ties and on the basic systematical understanding of needs and wishes of their
customers, in addition to market conditions such as economic conditions and
degree of competition (Besanko, Dranove, Shanley, & Schaefer, 2012; De Toni
Introduction 7
& Mazzon, 2013b). In this context, this study’s objective is to propose and test
a theoretical model that indicates the impacts of pricing policies on company’s
profit. In this regard, the theoretical assumptions consider as pricing policies the
definitions that comprise the pricing strategies and the price levels used by com-
panies in their respective markets.
Pricing strategies are based on Nagle and Holden (2003) studies, namely value-
based, competition-based, and cost-based pricing strategies; whereas the pricing
levels are classified as high and low prices (Urdan & Osaku, 2005). Besides identi-
fying the direct effects of these elements over profitability, this research also ana-
lyzed the impacts of moderating effects considering some independent variables
on the business profitability (dependent variable).
According to Monroe (2003), price decisions are one of the most important
decisions of management because it affects profitability and the companies’
return along with their market competitiveness. Thus, the task of developing and
defining prices is complex and challenging because the managers involved in this
process must understand how their customers perceive the prices, how to develop
the perceived value, what are the intrinsic and relevant costs to comply with this
necessity, as well as consider the pricing objectives of the company and their com-
petitive position in the market (De Toni & Mazzon, 2013a, 2013b; Hinterhuber &
Liozu, 2014; Monroe, 2003).
Chapter 2
Concepts of Costing in Automation
2.1. Overview
The system of computing cost of production or of running a business is by allo-
cating expenditure to various stages of production or to different operations of a
firm. Costing may involve only the assignment of variable costs, which are those
costs that vary with some form of activity (such as sales or the number of employ-
ees). This type of costing is called direct costing. For example, the cost of materi-
als varies with the number of units produced, and so is a variable cost.
Costing can also include the assignment of fixed costs, which are those costs
that stay the same, irrespective of the level of activity. This type of costing is called
absorption costing. Examples of fixed costs are rent, insurance, and property taxes.
Costing is used for two purposes:
⦁⦁ Internal reporting. Management uses costing to learn about the cost of opera-
tions so that it can work on refining operations to improve profitability. This
information can also be used as the basis for developing product prices.
⦁⦁ External reporting. The various accounting frameworks require that costs be
allocated to the inventory recorded in a company’s balance sheet at the end of
a reporting period. This calls for the use of a cost allocation system, consist-
ently applied.
Within the areas of both internal and external reporting, costing is most heav-
ily utilized in the area of assigning costs to products. This can be done with job
costing, which requires the detailed assignment of individual costs to production
jobs (which are small product batches). Another alternative is to use process cost-
ing, where costs are aggregated and charged to a large number of uniform prod-
ucts, such as are found on a production line. An efficiency improvement on either
concept is to use standard costing, where costs are estimated in advance and then
assigned to products, followed by variance analysis to determine the differences
between actual and standard costs.
In the contemporary dynamic globalized world economy, manufacturing
organizations are faced with stiff cut-throat competition. The global competition
characterized by the rapid technological innovations and ever-changing market

doi:10.1108/978-1-78973-469-020191002
demands is putting enormous pressure on manufacturing organizations across

the globe. The contemporary manufacturing organizations endeavor to achieve
world-class performance through continuous improvement in the production sys-
tems and development of world-class products and services to satisfy the peculiar
and rapidly changing customer requirements.
2.2. Introduction and Related Works

The manufacturing sector across the globe has witnessed drastic changes in the
later part of the twentieth century. These changes have left their unmistakable
mark on the different facets of manufacturing organizations. The challenges of
stiff competition and the drive for profits are forcing the organizations to imple-
ment various productivity improvement efforts to meet the challenges posed by
ever-changing market demands.
The demands on the efficiency and quality of capital goods, for example,
machine tools and manufacturing systems, are further increasing, whether it
may be the technically defined fields realizing robust processes or the economical
field considering the operating costs. The producer of a manufacturing system
will have an increasing responsibility observing environmental regulations and
restrictions during the life cycle stages while manufacturing, usage and disposal
(Alting, 1996; Jansen & Krause, 1995). Considering environmental aspects of the
production phase, the machining processes are certainly not crucial, even though
there are numbers of potential approaches to increase the intensive usage of
resources and to decrease the effect on the environment by means of using appro-
priate materials. There is another decisive motive taking the whole product life
cycle of a manufacturing system into consideration. Modern machine tools are
very complex systems of high performance. Their use is sensitively influenced by
controlling the systems and subsystems. According to this, the systems should be
economically used at the limit of performance and precision. Long time ago, the
technical evolution of machine tools reached an area of high quality and a long
working life, that is rather determined by technical outdated functionality than
by attrition. Besides, the manufacturing system can be used much more efficiently
using the knowledge and know-how of the manufacturer by means of modern
communication networks using teleservice and teleoperations. Therefore, the pro-
ducer of a product or a manufacturing system remains responsible for a longer
period, and therefore has another opportunity to explore new business areas to
make further profit.
A common language for communicating about business events is a pre-
requisite for coordinating diverse and far-flung units of organizations. In the
realm of computer information systems (IS), one form this common language
can take is data integration, or data elements with standard definitions and
codes. Researchers studying the impact of information technology on organi-
zations often assume that the common language provided by data integration
exists, or that it will be developed because of the benefits of increased commu-
nication within (or across) organizations (e.g., Huber, 1990; Malone, Yates, &
Benjamin, 1987).
Concepts of Costing in Automation 11
However, there is evidence that this common language of logically compatible

data does not exist in a great many large organizations today. Within a single
company there are often different identifiers for key business entities, such as
customer or product, different schemes for aggregating key indicators, such as
sales or expenses, or different ways of calculating key concepts, such as profit
or return on investments. These inconsistencies cause major problems when
firms ask questions that span multiple systems or multiple subunits, thwarting
their ability to make coordinated, organization-wide responses to today’s
business problems.
The scheduling of products, parts, assemblies, or subassemblies to differ-
ent shop floor resources is a well-known and complex problem. It has been
typically formulated as an optimization problem. It is also known to be NP
hard consisting in the selection of the best possible schedule out of n!m where
n is the number of tasks (or jobs) and m the number of available machines.
The complexity of determining effective schedules is subsequently aggra-
vated when (Shen, Wang, & Hao, 2006) operators and tools are included in
the process, optimization occurs both for planning and scheduling, unpre-
dictable conditions impact the system (failures, breakdowns, system changes,
and production surges). This has promoted the subformulation of the sched-
uling problem to meet distinct objectives and several performance indicators
have been chosen as the optimization target. When the main objective is to
improve the system’s balance, typical problem formulations include maximi-
zation of line utilization, minimization of number of stations given the cycle
time, minimization of the cycle time given the number of stations, and a com-
promise between the number of stations and cycle time (Boysen, Fliedner,
Scholl, 2008). When the optimization objective is more focused on perfor-
mance than make span (Pach, Berger, Bonte, & Trentesaux, 2014; Zhao, Zhu,
Ren, & Yang, 2006), minimization of tardiness (Kianfar, Fatemi Ghomi, &
Jadid, 2012; Tharumarajah, 1998; Zhang & Wu, 2008), throughput, energy
efficiency (Pach et al., 2014), work in progress (Tamani, Boukezzoula, & Hab-
chi, 2011), activity-based costing, etc., are commonly used to characterize
the performance of the scheduling algorithms. Scheduling has therefore been
approached from different perspectives, with different objectives. The conven-
tional approaches are based on enumerative or heuristic algorithms and are
normally able to produce near optimal solutions. Known techniques and algo-
rithms include genetic algorithms (Lin, Lee, & Ho, 2013; Zhao et al., 2006),
ant colony optimization (Blum & Samples, 2004; Chen, Lo, Wu, & Lin 2008),
particle swarm optimization (Sha & Hsu, 2006; Zhao et al., 2006; Zhang &
Wu, 2008), fuzzy control (Tamani et al., 2011; Zhao et al., 2006) and neural
networks (Rovithakis, Perrakis, & Christodoulou, 2001).
The focal company may induce working relationships among suppli-
ers, while some autonomous relationships may emerge among the suppliers
(Choi, Dooley, & Rungtusanatham, 2001). The overall relationship arrangement
between the focal company and the automation supply is depicted pictorially in
Fig. 2.1. The arrows indicate the direction of influence (e.g., coordination and
control), and the lines connecting suppliers indicate the relationships among the
suppliers, whether induced by the focal company or emerged autonomously

(e.g., joint product development, participation in common supplier associa-
tions, buyer–supplier relationships between suppliers, etc.). With the recent
trend of increasing levels of outsourcing, orchestrating activities with suppliers
in the automation supply from the perspective of a focal company has become
a top strategic issue. In general, the more its inputs of production the focal
company decides to buy instead of make, the more dependent it is on the auto-
mation supply. More specifically, the higher the percentage of purchased items
and services to the total cost of goods sold, the higher the significance of auto-
mation supply management to the company’s bottom line such as return on
investment or shareholder value.
Researchers and practitioners have responded to this problem by develop-
ing ways to increase data integration. For example, network and relational data
structures that could accommodate the varied needs of many users in a single
integrated data structure have been described (Bonczek, Holsapple, & Whinston,
1978; Date, 1981).
The entity relationship model has been proposed as a means of conceptually
modeling all of a corporation’s data, providing the basis for integrated com-
puter systems (Chen, 1976; McCarthy, 1982). Other researchers have recognized
that organizations do not start from a clean slate, and existing systems typi-
cally are not integrated. Thus, theoretical approaches for integrating existing,
disparate database schemas have been developed (Batini, Lenzerini, & Navathe,
1986). Still others have focused on developing practical methods for immediate
use in actual organizations, including information engineering methodologies
that would provide an information architecture by which organizations could
transform their systems from nonintegrated to integrated forms (Finkelstein,
1990; IBM, 1981; Martin, 1982, 1986). In general, the presumption has been
that greater data integration is universally desirable and leads to greater benefits
for organizations.
2.3. Model Development

2.3.1. Key Dimensions for Managing Automation Supply Complexity
There are three dimensions that managers should consider when managing
the complexity of an automation supply: (1) the number of suppliers in the
automation supply, (2) the degree of differentiation of these suppliers, and
(3) the level of interrelationships among the suppliers. Having arrived at these
three dimensions, drawing from various literature sources including organi-
zation design, organization development, and supply chain management, it
is striking to note that these dimensions in fact correspond to the variables
captured in the “NK” model of complex system proposed by Kauffman. He
approached complexity from a more mathematical and technical perspective.
The three variables in the NK model that correspond with our three dimen-
sions include: “N” sites that exist within a complex system, “A” alternative
states that these sites can be in, and “K” number of functional couplings
among the sites. These three variables overlap quite precisely with our dimen-
sions in that N, A, and K point, respectively, to the number of suppliers, the
degree of differentiation, and the level of interrelationships. Furthermore, in
his description of the complexity of social systems, La Porte also proposed
similar dimensions from a sociological perspective. They are the number of
social components in a social system, the role/position differentiation of these
components, and the degree of interdependence of the functional operations
of these components. Therefore, we feel confident that we have captured three
key dimensions of complexity. We further refine these terms below. Based
on our review of the literature, there are four key areas of managerial focus
when it comes to managing an automation supply. They are transaction costs,
supply risk, supplier responsiveness (Carbone, 1999), and supplier innovation
(Miles & Huberman, 1984). Managing transaction costs focuses on minimiz-
ing the costs incurred at the interface between a focal company and its sup-
pliers; managing supply risk refers to minimizing potential negative events
that might occur in procuring the goods and services from the suppliers;
supplier responsiveness addresses the timeliness of the movement of goods
and services such as on-time delivery and suppliers’ ability to meet changing
requirements; and managing supplier innovation entails tapping into suppli-
ers’ creativity for product and process improvements. We propose the follow-
ing relationships between automation supply complexity and each of these
four constructs, as shown in Fig. 2.1. A positive relationship is depicted with
a plus sign, a negative relationship is shown with a minus sign, and a quad-
ratic relationship is symbolized by a U-shape sign. These relationships depict
a general trend between automation supply complexity and each of the four
managerial focuses as dependent measures. However, the focal company can
emphasize any one of the three dimensions of automation supply complexity
and can set up as the strategic thrust any one of the four dependent measures.
In each of the four sections that follow, we will introduce the general proposi-
tion and, whenever possible, follow that with more specific and detailed cor-
ollaries involving each of the automation supply complexity dimensions and
the four dependent measures.
Fig. 2.1: Impact of Automation Supply Complexity on Focal Company.

2.3.2. Reference Automation Agent Architecture Model

The agent architecture presented in this section is derived from the IDEAS refer-
ence architecture. It shares with this architecture some concepts and their imple-
mentation. Among the concepts are the notion of skill as the basic representation
of the stations’ functionalities; the deployment agent as a software construct that
has the ability to handle agent serialization, deserialization, and the subsequent
deployment across compatible controllers; and the product agent (PA) as the top-
level entity that takes decisions on the locations and associated costs where its
process plan is to be executed.
The deployment agent is a pure technological construct. It is used in the
agent deployment procedure and in the automation of the tests. Although
some names of the transport-related agents are similar, its internal behavior
and interaction dynamics have been substantially modified with respect to the
work reported. In this context, the proposed architecture focuses entirely on
the interactions between the PAs and the transport elements. In respect to the
work detailed, the present architecture is more generically defined, featuring
no specific technological couplings, and hence is able to tackle a wider family
of systems. The link with the IDEAS architecture is worth a mention since
the present implementation has retained the generic technological elements
that have been demonstrated under the IDEAS industrial test cases and that
render it applicable in real world scenarios and not only in simulation. The
proposed agent architecture (Fig. 2.2) is supported by a heterarchical agent-
based model composed of four main agents: Transport Entity Agent (TEA),
Routing Entity Agent (REA), Skill Management Entity Agent (SMEA), and
the PA. All these agents are formally specializations of the Transport Element
Agent abstract class that encapsulates all the generic variables and functions
related to the management of products in runtime. The architecture is addi-
tionally constituted by three interfaces and one abstract class that enable (1)
the development of customized transport cost metric algorithms (Cost Metric
Algorithm Interface, CMAI); (2) the development of customized path com-
putation algorithms (Path Computation Algorithm Interface, PCAI); (3) the
generic interconnections of the agents with the physical world and subsequent
control in the form of the Low Level Control Integration Interface, and the
Low Level Control Integration Library Interface (partially inherited from the
IDEAS architecture following the principles described in Rockart, 1979). The
main interactions are restricted to three pairs of agents.
The first set of interactions occurs between the PAs and the REAs and their
specializations, between the REAs and the TEAs and in between the REAs the
PAs are the top-level decision-makers in the architecture and they interact with
the REAs in order to obtain the transport cost associated with their displacement
to a location where the next step of their process plan will execute. The step-
wise negotiation concerning each skill on the PA’s process plan is an architectural
design decision that seeks to limit the allocation of a high number of resources.
This allows the transport elements more flexibility in re-routing when changes are
Fig. 2.2: The Switch of the Responsibilities.

introduced in the system. It also introduces some decision myopia since the step-
wise negotiation does not necessarily drive the PA through the optimal path for its
entire process plan. However, the present architecture compromises between PA
level decision myopia and the self-organizing effect of transport elements when
handling PAs with weaker allocation commitments to the available resources. The
PAs keep track of their current location by memorizing the last transport element
they have interacted with. The transport elements keep track of all the PAs in the
system. The entire transport procedure is transparent to the PA. In this context,
the PA interacts with the routing elements and their specialized classes only when
entering the system, choosing the next execution location, or reacting to the fail-
ure of the SMEA where they attempt to execute. Fig. 2.2 provides an overview
of the main interactions between the agents when disturbances do not occur. In
the portrayed scenario, the PA is entering the system. Hence, it interacts with the
REA that will trigger the transport to its first execution location.
The communication starts through the request of the transport cost to all the
locations in the system where Skill x can be executed. The REA replies with the cor-
responding list. If the skill is not available, the PA is not allowed to enter the system
or, if it is already in the system, it is routed to the destination where it can be removed.
The PA will subsequently evaluate the costs and choose one of the locations. It will
normally choose the lowest cost solution unless its process plan prescribed the
execution of Skill x in a specific station. Once a destination is selected the PA
requires the corresponding transport to the REA. The REA will then forward the
PA to the TEA listed in its routing tables as the one conducting to the destination
along the shortest path. This procedure is used to progressively process the PA
until it reaches its destination. When the PA arrives at its destination, the receiv-
ing SMEA, which is a specialization of the REA, recognizes that the PA wishes to
use the resources therein and issues a confirmation that the PA has arrived at the
required destination. The PA will subsequently handle the execution, mediated
by SMEA, and upon conclusion will retrigger the procedure of selecting the next
execution location. If the final destination of a PA disappears from the system,
the transport procedure must be interrupted. If during the transport process a
REA deems the target destination of a PA unreachable it temporarily stops the
routing procedure and messages the PA with a set of possible alternatives for the
execution of Skill x. In Fig. 2.2, a station, which by inheritance is also a REA,
receives new link state information that reveals that the desired resource is no
longer present. The PA will then reassess its process plan and decide if it can take
one of the alternatives or if it should be removed from the system. If the cost of
the potential alternatives is the same then the PA chooses a random location. This
is particularly important during the setup stage of the system where several sta-
tions may be available at the same cost and the load must be balanced. The inter-
actions between the REAs are to a certain extent governed by the TEAs. In effect,
each TEA continuously computes its transport cost (+computeCost (capacity:
int, contents: Item [0..*], timeStamp : long) : long) using the user-defined class
that implements the CMAI. The CMAI also features a function (+updateCosts()
: boolean) that instructs the TEA whether it should send its cost update to the
associated REA. Only the REA that precedes a TEA receives its traversing cost
information. In this context, it is possible to control the nervousness of the over-
all system by regulating the output of the update costs function. The interaction
between the TEA and the REA is therefore a simple request–reply communica-
tion triggered by the TEA. The same is valid for the interactions between REAs.
Whenever a REA receives information from a TEA it recomputes the routing
tables using the function (+updateRoutes (systemInfo: hashMap): treeMap) in
the user-defined class that implements the PCAI and forwards the neighborhood
changes to all the other REAs in the system. These generic interactions and basic
behaviors constitute the generic core of the architecture that renders it applicable
to a wide range of systems. However, to extract concrete performance figures
and evaluate the architecture the user-defined algorithms need to be instantiated.
Information about recently plugged resources and the associated skills are broad-
casted every time a station is plugged. On the instantiation of the user-defined
algorithms, since the user-defined algorithms make use of the internal variables
of the different transport elements, it is worth detailing their main purpose.
These variables include the maximum capacity of the transport element
(-capacity : int), a flag representing the filling level (-full : boolean), an identifier
detailing the next item to be dispatched by the transport element (-nextToDis-
pactch : Item), a flag stating the status of the item being dispatched (-dispatched :
boolean), and the destination of that item (-nextDestination : Transport Element
Agent), the current contents of the transport element (-content- s : Item [0..*]), a
flag stating the preparedness of the next item to be dispatched (-readyToDispatch :
boolean), the set of neighboring transport elements that are able to dispatch items
to the current transport element (-inputNeighs : Transport Element Agent [0..*]),
the set of neighboring transport elements to where the current transport element
can dispatch items to (-outputNeigh- s : Transport Element Agent [0..*]), an inter-
nal behavior that aggregates all the monitoring and control behaviors of the agent
(-controlLoop : Behaviour), which is overridden by the specialized classes, and
finally a flag that tracks the status of the hardware execution commanded by the
transport element (-executionSta- tus : boolean). The transport element class also
features a set of abstract functions that handle: dispatching (+dispatchItem(item :
Ite- m)) and reception of items (+acceptItem(item : Item)) and the runtime man-
agement of the neighbors (+addInputNeigh(neigh : Transport Element Agent),
+addOutputNeigh(neigh : Trans- port Element Agent), +removeInputNeigh(neigh :
Transport Ele- ment Agent), +removeOutputNeigh(neigh : Transport Element
Agent) ). As mentioned earlier, the CMAI is a central algorithm in controlling the
nervousness of the system. In the present context, the cost computation function
(+computeCost(capacity : int, contents : Item [0..*], timeStamp : long ): long) is
calculated as follows:
∑ TTi If at least one carrier exceeds the MTT

Cost =
N If 0 carriers exceed the MTT
where TTi is the transport time of a carrier i whose transport time exceeds the
minimum transport time MTT and N is the total number of carriers exceeding
the MTT value.
2.4. New Paradigm: The Use of Automation Resources

2.4.1. Economic Aspects of the Automation Life Cycle
In the case of capital goods, there is an increase in producer’s responsibility for
the caused and determined activities of the product life cycle after the purchase
and installation phase. In Fig. 2.2, this evolutionary process is schematically
depicted. Due to this, the accompanying follow-up costs, for example, caused by
usage, service, and disposal activities, are increasing, but also new and economi-
cally successful business areas can be explored. New cost accounting methods are
needed to assess the share of costs and revenues.
The traditional accounting methods are not qualified to cover these new
demands in order to optimize the cumulative benefit of a production system con-
sidering the whole life cycle. The following fact proves this thesis: business man-
agement cost accounting methods traditionally strive to optimize resources like
asset, staff, material, and systems, but less concentrate on accounting the benefit
of the products. This usually is carried out by order of magnitude estimates, just
to show the advantage of an investment. Intending to assess the increased expen-
ditures during service usage and disposal, it has to be based on a complete new
accounting method. The traditional methods of cost accounting are not able to
assess the quality of the manufactured product sufficiently. Based on own experi-
ences of the usage of flexible manufacturing systems during 15 years of opera-
tion, systems of a higher quality achieved a more effective manufacturing time,
twice as long than the span of a lower quality product. Single CNC machine
tools used in the aviation industry for milling of titanium components during
tree-shift operation reached up to 100.000 hours of operation. Machine tools of
a similar structure but of lower quality were not up to nearly the same load after
only 40.000 hours of operation. The relationship between quality and working
life is principally known but not considered by the traditional assessment of costs
and revenues. According to this example, it is obvious that some evident aspects
are not taken into account if traditional resource-models are applied (Redberg
et al., 1996; Zust, Caduff, & Frei, 1996). An increased budget during the design
and construction phase leads to a higher quality of the product and results in
a prolonged working life and a higher benefit of the product. Considering the
product life cycle as a whole and striving the total benefit as the target of the
optimization, not only the life time but also the costs of operation and other
costs can be assessed more effectively. Within this, all ecological factors can be
considered, too.
The optimization of the cost and revenues of a manufacturing system is based
on its life cycle as outlined in Fig. 2.3. The main stages are the “production,”
“usage (market),” and “disposal/deproduction.” The single processes in the dif-
ferent life cycle stages are linked by the product components or their functional-
ity. As an example, the functions and the features of the manufacturing system
have a substantial influence on the expenditures for maintenance and repair, so
that the total effectiveness of the manufacturing system is determined, too (West-
kamper & Friedel, 1997). Hence, cost reductions in the different life cycle stages
are achieved through a product conception directed toward the requirements of
the use phase. The same interdependence applies to subsequent expenditures aris-
ing during the utilization and disposal or deproduction phase (Dowie, Simon,
& Fogg, 1995; Jansen & Krause, 1995). For example, the shares of different
materials used in the manufacturing system have a substantial influence on the
allocation of cost and revenues in the life cycle of the product. In the future,
the additional responsibility for a system’s disposal will mean to calculate up to
5% of the replacement value of the system for recycling and/or waste removal.
Fig. 2.3: The Product Life Cycle.

In future times, the designer and manufacturer of manufacturing systems will

have an increasing responsibility in developing systems and devices appropriate
or adequate to the demands of the whole life cycle. The product life cycle offers
many opportunities to reduce costs or even to make profit (Zust et al., 1996).
2.4.2. Maximum Benefit of the Product Life Cycle

The growing possibilities given by the modern information and communication
technology (Jansen & Krause, 1995) result in the support of monitoring highly
sophisticated manufacturing systems during their whole life cycle at every place
on earth. Using these technologies and possibilities in the life cycles of the prod-
ucts, it leads to the challenge of operating the products much more effectively
than we do today. The crucial question is how to use and operate the products
with the maximum efficiency and economy regarding the whole life cycle.
The most important distinctive categories for the respective areas of cost
and benefit in the life cycle of a manufacturing system are production, service/
usage and deproduction. There are different influences causing the increase or the
decrease of the costs or the benefit as outlined in Fig. 2.4.
Observing the constraints and regulations of environmentally friendly and
quality-orientated manufacturing processes leads to increasing expenditures (Alt-
ing, 1996; Zust et al., 1996) during the production phase, whereas low costs of
manufacturing (e.g., wages and energy) result in decreased life cycle costs. To
reach a higher benefit out of the product or system during the service and usage
phase, it leads to increasing expenditures, whereas lower cost for operation results
in decreased expenditures (Carannate, Haigh, & Morris, 1996). The same rela-
tion exists for the reuse and recycling phase. The share of reusable parts and
components of the product is the cost-inducing factor while decreased expendi-
tures for the processes of the recycling and deposition result in lower life cycle
costs (Dowie et al., 1995; Westkamper & Friedel, 1997). The share of costs, rev-
enues, and benefits of a manufacturing system is depicted in Table 2.1. The sales/
Fig. 2.4: The Course of the Cost and Benefit in the Product Life Cycle.
Table 2.1: Shares of Costs, Revenue, and Benefits of a Manufacturing Cell as

an Example (in US$).
Costs Revenues Benefit

Manufacture 450,000 500,000 50,000
Operator 2,187,000 3,310,696 1,123,696
Recycle 12,344 13,500 1,156
distribution costs are part of the distributional pre-sale cost, and consist of spare
parts for installation (manufacturer) and training costs (operator). The costs of
the manufacturer mostly cover manufacturing costs including all activities of
product development, design, relevant overhead cost, and special production
costs. Spare and expendable parts are regarded as after sales cost of the opera-
tor to be exchanged as a consequence of warranty contracts or other agreements
between the manufacturer and the buyer or user of the system. Operating cost
for maintenance and repair may arise from repairs carried out by the manufac-
turer and may be resulting, for example, from misoperations of the user or from
maintenance work based on contracts between the manufacturer and customer
(Carannate et al., 1996; Westkamper & Friedel, 1997).
Accompanying payments (cost) and deposits (revenue) during the opera-
tion and utilization phase depends very much on the complexity of the product
and the maintenance strategy. In the worst case, operation and utilization costs
may amount to three or four times the expenditures of product acquisition. The
maintenance costs of plants typically may amount to 4-14’/0 of total produc-
tion costs and often are greater than the plant profit (Carannate et al., 1996).
The prevailing maintenance strategy has a crucial impact on cost and revenue
during the utilization phase. For example, alternatives for maintaining complex
systems are setting up local maintenance branches or establishing maintenance
areas to enable onsite maintenance. Two other maintenance variants relate to
(partly) transportable systems: first, through local branches for interim main-
tenance, where maintenance works include options of upgrading, and second,
through local branches of depot maintenance, exclusively intended to upgrade
at the manufacturer’s site. The revenue of the manufacturer is determined by the
purchase price, whereas the revenue of the operator is determined by the added
value of the manufacturing process. The recycling costs mainly determine the
revenues of the recycler.
2.5. Data Integration Model

The model to be developed here depends upon a very rational view of automation
organization and organizational design. It assumes that benefits and costs will
be summed at the level of the automation organization and that everyone in the
organization shares the goal of maximizing overall benefits minus costs. In spite
of these caveats, the rational model provides a powerful conceptual framework
for thinking about the issue of data integration.
2.5.1. Costs and Benefits of IS

The idea that a careful conceptualization of costs and benefits can lead to use-
ful insights about design choices for IS is not new. As early as 1959, Marschak
conceptualized the differences in IS designs as different ways of selecting and
partitioning the available data from the environment. IS can be seen as having
costs (design and implementation costs to the provider of the system) and ben-
efits (improved decision-making and more informed actions for the user of the
information), which can vary quite independently. Organizations face an array of
possible IS, each with certain implementation costs and different expected deci-
sion-making benefits. Rational organizations should choose a design that maxi-
mizes the benefits minus the costs (Emery, 1982; Marschak, 1959; Mendelson &
Saharia, 1986). To look at data integration in this light, a clear conceptualiza-
tion is needed of how integration affects both the benefits and the costs to users
and implementers. Organizational information processing theory (Daft & Len-
gel, 1986; Galbraith, 1973; Tushman & Nadler, 1978) gives us a basis for such a
conceptualization.
2.5.2. Balancing Benefits against Implementation Costs

Finally, both Galbraith (1973) and Tushman and Nadler (1978) emphasize the
importance of balancing greater effectiveness of more complex information-pro-
cessing mechanisms against their greater costs:
[T]he basic design problem is to balance the costs of information

processing capacity against the needs of the subunit’s work-too
much capacity will be redundant and costly; too little capacity will
not get the job done. (Tushman & Nadler, 1978, p. 619)
While organizational information processing theory does not give much

detailed help in conceptualizing the impact of data integration on the costs of
design and implementation of systems, we can resort to arguments on design
difficulty in general (Simon, 1981) and the design and implementation of IS in
particular (Banker & Kemerer, 1989; Brooks, 1975; Martin, 1982). These suggest
that data integration could have a positive impact on reducing costs by reducing
redundant design efforts. However, because multiple subunits would be involved,
data integration could also have a negative impact on costs by increasing the size
and complexity of the design problem or increasing the difficulty in getting agree-
ment from all concerned parties. If we consider only those situations where uncer-
tainty dominates and IS in general are very appropriate choices, this suggests that
the impact of data integration on the costs and benefits of IS will come primarily
through three potential factors:
(1) increased ability to share information to address subunit interdependence;

(2) reduced ability to meet unique subunit information requirements; and
(3) changes in the costs of IS design and implementation.
2.6. Discussions and Concluding Remarks

With the usage of products and especially manufacturing systems with switched
operation demands, we expect a linked switch of paradigms. The future producer
of manufacturing systems pursues the expansion of his responsibilities and busi-
ness areas. The producer becomes user and recycler of his own products. The
evaluation of the resulting benefit calls for a new method to account costs and
revenues in the life cycle of the products. By means of the method “Life Cycle
Costing” the costs of production, installation, usage and disposal are analyzed,
so a minimum of the total cost and a maximum of benefit are achieved. This opti-
mization process supports the adaptation of the life cycle processes by observing
the demands and constraints of the life cycle management. The life cycle cost
accounting has to prove the thesis, that longevity of products including the per-
manent upgrading of the operating system is ecologically and economically use-
ful. The structures of costs and revenues of the life cycle justify the operation of
new innovative products or system concepts, possibly new operational and main-
tenance concepts, and/or new financing models and cooperation forms.
Indeed, the understanding of the complexity of a system is a first step to the
understanding of the behavior of that system (Choi et al., 2001). In this chapter,
we tried to understand how varying levels of automation supply complexity affect
transaction costs, supply risk, supplier responsiveness, and supplier innovation,
and we articulated them in both linear and nonlinear relationships.
We would submit that by considering the complexity of automation supply,
we were able to paint a more complete picture of how to manage an automation
supply. In particular, nonlinear relationships captured in our propositions offer a
novel approach to considering the automation supply management and may play
a key role in extending future studies.
Researchers should take care to define the automation supply to include only
suppliers who are being actively managed by the focal firm. The automation supply
is the unit of analysis. For example, “number of suppliers” could be measured in
terms of whether the focal firm has purchased a product or service from the sup-
plier over the past 12 months. Further, a scale addressing “level of differentiation”
among suppliers could tap many dimensions including geographical location, cul-
ture, supplier size, unionized or not, technical sophistication, industry, and so on.
“Interrelationships among suppliers” may require surveys and case studies directly
with the focal firm’s suppliers. The existence of supplier associations, annual sup-
plier awards, trade associations, and similar activities may provide measures of inter-
connectedness among suppliers with valid and reliable measures of these constructs.
Researchers will come to a better understanding of automation supply complexity
and its effects on transaction costs, supply risk, supply responsiveness, and innova-
tion. Such efforts should provide insights for industry managers as well. Although
automation supply complexity is itself a complex topic, we believe that focusing
solely on transaction costs is short-sighted automation supply management practice.
The present chapter introduced a heterarchical architecture featuring local sched-
uling/routing of the automation order already under production. The rational for
adopting a more heterarchical model is avoiding the long decision times of hybrid and
traditional approaches in systems that are prone to frequent changes. The results sug-
gest that the proposed architecture can cope well with systems under extreme dynamic
conditions such as runtime topological changes. The results also show that the archi-
tecture and the particular instantiation considered are sensitive to mechatronic con-
straints. Some are directly related to the structure of the system while others have
a more technological background. It is therefore rather difficult to benchmark the
emerging architectures and the proposed work is not an exception. In this context,
the proposed test cases were designed to expose the adaptation capabilities of the
proposed architecture. As detailed, this is an indication that a pre-selection mecha-
nism should be considered. The development of such a mechanism is currently being
considered as a mean to further improve the dynamics of the automation system.
Widespread data integration is an expensive proposition. While much of the
literature focuses on some attractive benefits, we have tried to balance the view
by looking at both positive and negative impacts. The arguments for this new
perspective have been primarily theoretical. Though anecdotal evidence was pre-
sented to bolster the plausibility of the theoretical propositions, future empirical
work will be needed to validate them. The major implication of this analysis is
that in general it will not be cost-effective to integrate all of an organization’s data.
If this is true, organizations will need help in their efforts to “partially integrate”
to achieve the most important benefits and avoid the most burdensome costs. For
the MIS field to provide this help, we need to “unbundle” our concept of data
integration. It is neither an all-or-nothing choice, nor is it the preferred approach.
As researchers and practitioners, we need to change our thinking so that we can
provide guidance to organizations on implementing “partial integration.”
Additional conceptual work and empirical research is needed to suggest which
of these or other partial integration approaches will be most effective, and why.
A second and equally pressing need is for methods that can help an organization
determine which data should be integrated and which should not. Existing automa-
tion information engineering methodologies have overlooked this question because
they assumed that all data should be integrated, though some other IS planning
approaches, such as critical success factors (Rockart, 1979), may be applicable for
the partial integration problem. The choice presumably depends heavily on the
strategic direction of the organization. Firms that attempt to integrate an in appro-
priate subset of the data, or on a wider scope and in more detail than is appropriate
given their organizational situation, will probably face stiff resistance to either the
large cost involved or the loss of local flexibility of heterogeneous subunits.
Though this chapter has pointed out some negative aspects to data integra-
tion, many organizations today are striving for a more global consciousness of
their businesses and a more global response to customers and markets. Huber
(1984) suggests that managers in post-industrial organizations will need to access
more information about more aspects of the business, from even more parts of
the organization, and in shorter time spans. This implies both greater interde-
pendence and greater reliance on computer-based information. These types of
changes in the organizational climate will probably shift the balance toward the
need for greater (but not total) data integration in many firms, heightening the
practical and academic importance of this area of research.
Chapter 3
Concepts of Pricing in Automation
3.1. Overview
Pricing is the process whereby a business sets the price at which it will sell its
products and services, and may be part of the business’s marketing plan. In set-
ting prices, the business will take into account the price at which it could acquire
the goods, the manufacturing cost, the market place, competition, market condi-
tion, brand, and quality of product. Pricing is a fundamental aspect of financial
modeling and is one of the four Ps of the marketing mix. (The other three aspects
are product, promotion, and place.) Price is the only revenue-generating element
among the four Ps, the rest being cost centers. However, the other Ps of marketing
will contribute to decreasing price elasticity and so enable price increases to drive
greater revenue and profits. Pricing can be a manual or automatic process of apply-
ing prices to purchase and sales orders, based on factors such as a fixed amount,
quantity break, promotion or sales campaign, specific vendor quote, price prevail-
ing on entry, shipment or invoice date, combination of multiple orders or lines,
and many others. Automated systems require more setup and maintenance but
may prevent pricing errors. The needs of the consumer can be converted into
demand only if the consumer has the willingness and capacity to buy the product.
Thus, pricing is the most important concept in the field of marketing and it is used
as a tactical decision in response to comparing market situations.

The objectives of pricing should consider the following:
⦁⦁ the financial goals of the company (i.e., profitability);

⦁⦁ the fit with marketplace realities (will customers buy at that price?); and
⦁⦁ the extent to which the price supports a product’s market positioning and be
consistent with the other variables in the marketing mix.
Price is influenced by the type of distribution channel used, the type of promo-
tions used, and the quality of the product. Where manufacturing is expensive,
distribution is exclusive, and the product is supported by extensive advertising

doi:10.1108/978-1-78973-469-020191003
and promotional campaigns, then prices are likely to be higher. Price can act as a
substitute for product quality, effective promotions, or an energetic selling effort
by distributors in certain markets.
From the marketer’s point of view, an efficient price is a price that is very close
to the maximum that customers are prepared to pay. In economic terms, it is a
price that shifts most of the consumer economic surplus to the producer. A good
pricing strategy would be the one which could balance between the price floor
(the price below which the organization ends up in losses) and the price ceiling
(the price by which the organization experiences a no-demand situation).
Also, competition in manufacturing industry calls for transformation from
traditional cost reduction in mass production to value proposition in customer-
oriented product development. The driving force is the development of technolo-
gies to enable faster and seamless information sharing between manufacturers
within supply chains as well as customers, government, and other stakeholders.
Information flow becomes a critical element of supply chain in addition to mate-
rials and energy flows. With the support of information infrastructure, manufac-
turers will be able to become more agile in acquiring information, internally (e.g.,
cost of production and inventory) or externally (e.g., customer satisfaction and
market trends). With such information, more intelligent and timely decisions can
be made to ensure success in global competition.
Marketers develop an overall pricing strategy that is consistent with the organiza-
tion’s mission and values. This pricing strategy typically becomes part of the com-
pany’s overall long-term strategic plan. The strategy is designed to provide broad
guidance to price-setters and ensures that the pricing strategy is consistent with
other elements of the marketing plan. While the actual price of goods or services
may vary in response to different conditions, the broad approach to pricing (i.e., the
pricing strategy) remains a constant for the planning outlook period which is typi-
cally 3–5 years, but in some industries may be a longer period of 7–10 years. Broadly,
there are six approaches to pricing strategy mentioned in the marketing literature:
Operations-oriented pricing: The objective is to optimize productive capacity, to
achieve operational efficiencies, or to match supply and demand through varying
prices. In some cases, prices might be set to de-market.
Revenue-oriented pricing: (also known as profit-oriented pricing or cost-based pric-
ing) The marketer seeks to maximize the profits (i.e., the surplus income over
costs) or simply to cover costs and break even. For example, dynamic pricing
(also known as yield management) is a form of revenue-oriented pricing.
Customer-oriented pricing: The objective is to maximize the number of custom-
ers, encourage cross-selling opportunities, or to recognize different levels in the
customer’s ability to pay.
Value-based pricing: (also known as image-based pricing) Occurs where the com-
pany uses prices to signal market value or associates price with the desired value
position in the mind of the buyer. The aim of value-based pricing is to reinforce
the overall positioning strategy, for example, premium pricing posture to pursue
or maintain a luxury image.
Concepts of Pricing in Automation 27
Relationship-oriented pricing: The marketer sets prices in order to build or main-

tain relationships with existing or potential customers.
Socially oriented pricing: The objective is to encourage or discourage specific
social attitudes and behaviors, for example, high tariffs on tobacco to discourage
smoking.
Consumers can have different perceptions on premium pricing, and this factor
makes it important for the marketer to understand consumer behavior. Accord-
ing to Vigneron and Johnson’s figure on “Prestige-Seeking Consumer Behaviors,”
consumers can be categorized into four groups; these are Hedonist & Perfection-
ist, snob, bandwagon, and veblenian. These categories rank from level of self-con-
sciousness, to importance of price as an indicator of prestige. The veblen effect
explains how this group of consumers makes purchase decisions based on con-
spicuous value, as they tend to purchase publicly consumed luxury products. This
shows they are likely to make the purchase to show power, status, and wealth. Con-
sumers who fall under the “snob effect” can be described as individuals who search
for perceived unique value, and will purchase exclusive products in order to be the
first or very few who have it. They will also avoid purchasing products consumed
by a general mass of people, as it is perceived that items in limited supply hold a
higher value than items that do not. The bandwagon effect explains that consum-
ers who fit into this category make purchasing decisions to fit into a social group,
and gain a perceived social value out of purchasing popular products within said
social group at premium prices. Research shows that people will often conform to
what the majority of the group they are a member of thinks when it comes to the
attitude of a product. Paying a premium price for a product can act as a way of
gaining acceptance, due to the pressure placed on them by their peers. The Hedonic
effect can be described as a certain group of people whose purchasing decisions
are not affected by the status and exclusivity gained by purchasing a product at a
premium, nor susceptible to the fear of being left out and peer pressure. Consumers
who fit into this category base their purchasing decisions on a perceived emotional
value, and gain intangible benefits such as sensory pleasure, aesthetic beauty, and
excitement. Consumers of this type have a higher interest on their own well-being.
The last category on Vigneron and Johnson’s figure of “Prestige-Seeking Consumer
Behaviors” is the perfectionism effect. Prestige brands are expected to show high
quality, and it is this reassurance of the highest quality that can actually enhance
the value of the product. According to this effect, those that fit into this group value
the prestige’s brands to have a superior quality and higher performance than other
similar brands. Research has indicated that consumers perceive quality of a prod-
uct to be relational to its price. Consumers often believe a high price of a product
indicates a higher level of quality.
Even though it is suggested that high prices seem to make certain products
more desirable, consumers who fall in this category have their own perception of
quality and make decisions based upon their own judgment. They may also use
the premium price as an indicator of the product’s level of quality.
Concession pricing belongs to the category of semi-structured decision-
making; it faces many complicated and changeable decision settings. Some
parameters can be quantified, such as the engineering project’s total investment

cost, operation cost, loan interest, etc., while a considerable number of determin-
istic parameters cannot be described in quantifiable terms, such as the degree of
government support, price competitiveness, etc. (Yu, 2006). Using a mathemati-
cal model to determine concession pricing problems will often neglect much of
important decision-making information that cannot be quantified (Yu, 2006).
Therefore, price adjustment is necessarily integrated into the pricing process.
Moreover, parameters of (public–private partnership) PPP concession pricing
involve a complex structure arising from (1) multiple interdependent components
affecting concession price internally through cause and effect feedback loops and
(2) the risk factors that may influence pricing parameters dramatically. To capture
the complexity and dynamism of parameters in a holistic manner, the determina-
tion of concession price is divided into two parts in this study: (1) calculate the
basic price (BP) of an automation project based on quantifiable parameters by
using system dynamics (SD) model; (2) make consideration of the effect of risk
factors on quantifiable pricing parameters and adjust the basic concession price
to form final price (FP). BP determination occupies a rather important position
in price decision-making. It is the bottleneck of the concession pricing and also
the focus of this study.
Premium pricing (also called prestige pricing) is the strategy of consistently
pricing at, or near, the high end of the possible price range to help attract status-
conscious consumers. The high pricing of a premium product is used to enhance
and reinforce a product’s luxury image. Examples of companies that partake
in premium pricing in the marketplace include Rolex and Bentley. As well as
brand, product attributes such as eco-labeling and provenance (e.g., “certified
organic” and “product of Australia”) may add value for consumers and attract
premium pricing. A component of such premiums may reflect the increased
cost of production. People will buy a premium priced product because of the
following:
⦁⦁ They believe the high price is an indication of good quality.

⦁⦁ They believe it to be a sign of self-worth – “They are worth it”; it authenticates
the buyer’s success and status; it is a signal to others that the owner is a member
of an exclusive group.
⦁⦁ They require flawless performance in this application – The cost of product
malfunction is too high to buy anything but the best – for example, a heart
pacemaker.
The old association of luxury only being for the kings and queens of the world
is almost nonexistent in today’s world. People have generally become wealthier;
therefore the mass marketing phenomenon of luxury has simply become a part
of everyday life, and no longer reserved for the elite. Since consumers have a
larger source of disposable income, they now have the power to purchase prod-
ucts that meet their aspirational needs. This phenomenon enables premium pric-
ing opportunities for marketers in luxury markets. Luxurification in society can
be seen when middle-class members of society are willing to pay premium prices
for a service or product of the highest quality when compared with similar goods.
Examples of this can be seen with items such as clothing and electronics. Charg-
ing a premium price for a product also makes it more inaccessible and helps it
gain an exclusive appeal. Luxury brands such as Louis Vuitton and Gucci are
more than just clothing and become more of a status symbol.
Prestige goods are usually sold by companies that have a monopoly on the mar-
ket and hold competitive advantage. Due to a firm having great market power they
are able to charge at a premium for goods, and are able to spend a larger sum on
promotion and advertising. According to Han, Nunes and Dreze (2015) figure on
“signal preference and taxonomy based on wealth and need for status” two social
groups known as “Parvenus” and “Poseurs” are individuals generally more self-
conscious, and base purchases on a need to reach a higher status or gain a social
prestige value. Further market research shows the role of possessions in consumer’s
lives and how people make assumptions about others solely based on their posses-
sions. People associate high-priced items with success. Marketers understand this
concept, and price items at a premium to create the illusion of exclusivity and high
quality. Consumers are likely to purchase a product at a higher price than a similar
product as they crave the status, and feeling of superiority as being part of a minor-
ity that can in fact afford the said product.
A price premium can also be charged to consumers when purchasing eco-
labeled products. Market-based incentives are given in order to encourage people
to practice their business in an eco-friendly way in regard to the environment.
Associations such as the Marine Stewardship Council (MSC)’s fishery certifica-
tion programmer and seafood eco-label reward those who practice sustainable
fishing. Pressure from environmental groups has caused the implementation of
associations such as these, rather than consumers demanding it. The value con-
sumer’s gain from purchasing environmentally conscious products may create a
premium price over noneco-labeled products. This means that producers have
some sort of incentive for supplying goods worthy of eco-labeling standard. Usu-
ally more costs are incurred when practicing sustainable business, and charging
at a premium is a way businesses can recover extra costs. The summary of the
related literature is shown in Table 3.1.

In this section, we provide a mathematical representation of the residential load
control problem in real-time pricing (RTP) environments inclining block rate
(IBR). We consider the general wholesale electricity market scenario, where each
retailer/utility serves a number of end users. The RTP information, reflecting the
wholesale prices, is informed by the retailer to the users over a digital communi-
cation infrastructure, for example, a local area network (LAN). In this scenario,
our focus is to formulate the energy consumption scheduling problem in each
household as an optimization problem that aims to achieve a trade-off between
minimizing the electricity payment and minimizing the waiting time for the opera-
tion of each household appliance in response to the real-time prices announced
by the retailer company.
Table 3.1: The Summary of Pricing Literature.
No. Authors Year Objective Methods

1 Zhang 2009 Concession period Critical path
determination method and Monte
Carlo simulation
technique
2 Ng, Xie, Skitmore, 2007 Concession price Fuzzy simulation
and Cheung and period
3 Subprasom and 2007 Concession price Genetic algorithm
Chen and case study
4 Shen, Bao, Wu, and 2007 Concession period Bargaining–game
Lu theory
5 Huang and Chou 2006 Minimum revenue Real option
guarantee approach
6 Shen and Wu 2005 Concession period Net present value
(NPV) and Monte
Carlo simulation
7 Cheng and Tiong 2005 Tariff design in NPV and risk
BOT water supply analysis (risk
projects allocation)
8 Ye and Tiong 2003 Concession period NPV and Monte
design Carlo simulation
9 Shen, Li, and Li 2002 Concession period NPV
10 Ngee, Tiong, and 1997 Concession pricing Multi-linear
Alum regression model
3.3.1. Automation Energy Pricing Model

Consider a manufacturing unit that participates in a real-time pricing program.
Let x denote the set of devices in this unit, which may include robots and other
automation devices. For each device, we define an energy consumption scheduling
vector as follows:
xa = [ xa1 ,..., xaH ](3.1)
where H ≥ 1 is the scheduling horizon that indicates the number of hours ahead
which are taken into account for decision-making in energy consumption sched-
uling. For example, H = 24 or H = 48. For each upcoming hour of the day
h ∈ Η  {1,..., H }, a real-valued scalar xah ≥ 0 denotes the corresponding 1-h energy
consumption that is scheduled for an autonomous device a ∈ Α. On the other
hand, let Ea denote the total energy needed for the operation of autonomous
device a ∈ Α . For example, in the case of a robot, in total Ea = 16 kWh is needed
to charge the battery for a 40-mi driving range (Ipakchi & Albuyeh, 2009). Next,
assume that for each device a ∈ Α , the decision maker indicates ασ , βσ ∈ H as

the beginning and end of a time interval in which the energy consumption for
autonomous device a is valid to be scheduled, respectively. Clearly, we always have
ασ < βσ. For example, after loading a robot with the products to be moved to the
next processing station, the decision maker may select ασ = 2 PM and βσ = 6PM
for scheduling the energy consumption for the robot as he expects the products to
be ready to use by the next station. Given the predetermined parameters Ea , ασ ,
and βσ , in order to provide the needed energy for each autonomous device a ∈ Α
in times within the interval [ ασ , βσ ] , it is required that
β∂
∑x
h = α∂
h
a = Ea 0 (3.2)
Furthermore, to constraint (3.2), it is expected that xa = 0 for any h < ασ and

h > βσ as no operation (thus energy consumption) is needed outside the timeframe
[ ασ , βσ ] for autonomous device a. We note that the time length βσ − ασ needs to be
larger than or equal to the time duration required to finish the normal operation
of device a.
All autonomous devices have certain maximum power levels denoted by γ amax ,
for each a ∈ Α . For example, a robot may be charged only up to γ amax = 33 kW
(Ipakchi & Albuyeh, 2009). Some devices may also have minimum stand-by power
levels γ amin , for each a ∈ Α . Therefore, the following lower and upper bound con-
straints are needed on the choices of the energy scheduling vector X a for each
device a ∈ Α :
γ amin ≤ xah ≤ γ amax , ∀h ∈ [ ασ , βσ ].(3.3)
Finally, we note that there is usually a limit on the total energy consumption at
each manufacturing unit at each hour. This limit, denoted by E max , can be set by
the utility to impose the following set of constraints on energy scheduling:
∑x
a∈A
h
a ≤ E max , ∀h ∈ H .(3.4)
Together, constraints (3.2)–(3.4) determine all valid choices for the energy con-
sumption scheduling vectors. Therefore, we can define a feasible scheduling set X
for all possible energy consumption scheduling vectors as
βσ
X =x| ∑x
h = ασ
h
a = Ea , ∀a ∈ A,
γ amin ≤ xah ≤ γ amax , ∀a ∈ A, h ∈ [ ασ , βσ ], (3.5)

xah = 0, ∀a ∈ A, h ∈ H \ [ ασ , βσ ],
∑x
α∈ A
h
a ≤ E max , ∀h ∈ H }
where x = ( xa , ∀a ∈ A) denotes the vector of energy consumption scheduling

variables for all devices. An energy schedule X is valid only if x ∈ X . Clearly, the
proper choice of x would depend on the electricity prices. The real-time prices
are provided by the utility company via a LAN. The user announces his needs
by selecting parameters Ea , ασ , βσ , γ amin and γ amax for each device a ∈ Α . Then, the
energy scheduler, with some help form the price predictor if needed, determines
the optimal choice of energy consumption scheduling vector x. The resulting
energy consumption schedule is then applied to all autonomous manufacturing
devices in form of on/off commands with specified power levels over a wired or
wireless manufacturing network among the devices and the smart meter.
3.3.2. Concession Pricing Model

In another case, the pricing methodology employed in designing an objective and
reliable concession pricing model for automation project is based on a compre-
hensive literature review for data collection and SD and case-based reasoning
(CBR) as quantitative tools for data analysis. Fig. 3.1 shows the flow of the over-
all research framework, which consists of the following steps.
(1) Identify the pricing parameters and risk factors of an automation project,
and divide them into two categories. One is pricing parameters, which are
Fig. 3.1: Comprehensive Structure for Pricing in Automation Projects.

quantifiable variables that have been clearly defined in project’s feasibility

study report. The second category comprises uncertain risk factors, which are
unquantifiable.
(2) Calculate the BP of automation project based on quantifiable pricing param-
eters using SD.
(3) Verify the reliability and accuracy of the proposed SD-based concession pric-
ing model through an automation project as the case study.
(4) Consider the effect of uncertainty (risk factors) on concession pricing; past
experiences of similar cases are used to determine the price adjustment coef-
ficient utilizing CBR technique.
(5) Finally, the FP of target automation projects can be determined based on the
results of steps 2–4.
3.3.2.1. Concession Pricing Parameters and Risk Factors. Zhang (2009)

considered that a functional pricing mechanism should (1) clearly define the
cost and revenue structure that is necessary for the concessionaire to maintain
the project at a required level of service in the operation period and to cover
the initial construction investment and (2) assess the impacts of main factors
that affect the cost and revenue structure. Automation project concession price
determination is usually conducted after the project feasibility study on the
basis of taking an overall consideration of all parameters that affect the price.
Parameters directly related to concession pricing involve two categories: one
is the cash outflow (cost) parameters and, the other is cash inflow (benefit)
parameters. The concession price can be determined by cash inflow parameters
and cash outflow parameters jointly through NPV calculation as shown in Fig.
3.2. This section aims to briefly describe the pricing parameters of automation
projects.
The real pricing data and information extracted from automation project fea-
sibility report are used to formulate the pro forma cash flow. The total configura-
tion investment and operation cost have been calculated by their subparameters,
respectively, which constitute the cash outflow.
SD is used to systematically consider price parameters (variables) of automa-
tion projects for concession pricing determination. With reference to findings
from previous research, the overall structure of concession pricing variables using
causal loop is constructed with the use of Vensim PLE32 software as shown in
Fig. 3.3 (Shen et al., 2002; Shen & Wu, 2005). It is beneficial to visualize how
interrelated variables affect one another (Ogunlana, Li, & Sukhera, 2003). The
influence diagram depicts a succession of causation so that the cause and effect
relationship can be traced by following the direction of the arrows (Love, Man-
dal, Smith, & Li, 2000). This indicates whether there is an increasing or decreas-
ing relationship between two variables, which was denoted by a polarity, that is,
positive “+” or negative “−” on the arrow. Any change of pricing parameters
will have an effect on concession price. Fig. 3.2 shows that total cost of automa-
tion projects is jointly determined by configuration investment cost and opera-
tion cost; the configuration investment cost can have positive influence operation
cost and cause higher total cost through the feedback loop. Higher configuration
Fig. 3.2: Concession Pricing Parameters of Automation Projects.
investment will induce an increase in the length of the automation process, there-
fore resulting in a higher operation cost. To compensate for the increase in total
cost, the concession price will need to be amplified. Meanwhile, there is a negative
feedback loop among the concession price, annual automation depreciation and
concession period. An increase in depreciation or concession period will affect
the concession price adversely. In this study, the concession period is assumed to
be fixed. Other critical parameters including loan, tax rate, government subsidy,
and income are also included in this model. Based on this, the total net benefit
and NPV can be determined by the annual total cost and annul total income at
the discount rate of minimum attractive rate of return (MARR). Such circular
cause and effect relationships provide the foundation for building quantitative
concession pricing model via SD. The NPV of an automation project refers to the
sum of the present values of a stream of cash flow. If NPV is above or equal to 0,
the project is deemed as acceptable as it can achieve the target MARR, and vice
versa (Huang, Xu, Tan, & Li, 2004).
Automation concession price can be divided into two parts. Part one is the BP,
which can be calculated through SD model based on actual data extracted from
feasibility study report of an automation project. Part two is the adjustment price
(AP), which is determined based on the value of risk impact on concession price.
The combination of both makes up the FP of the service of automation projects,
which can better guarantee the rationality and validity of the concession price.
Fig. 3.3: Causal Loop Diagram for Concession Pricing of Automation

Projects.
To facilitate the determination of AP, the ratio between automation project’s AP

and BP is defined as price adjustment coefficient and denoted by λ:
Final Price = Basic Price +Adjustment price

Final price = (1+λ) Basic Price
Then, the problem of sophisticated price adjustment of automation project

is transformed into the determination of the price adjustment coefficient. It will
not only make the settlement of the BP adjustment simpler and faster, but can
also greatly improve the speed and quality of the pricing process (Yu, 2006). Pro-
vided that two most similar reference cases are identified from the database, their
BP can be calculated by SD model through inputting the relevant data into the
computerized pricing model, and then the price adjustment coefficient can be
determined by FP and BP jointly as shown in Table 3.2. Based on this, the conces-
sion adjustment coefficient of target automation project can be determined by the
formula (3.7). Project risk similarity (PRS) represents the degree of risk similarity
between reference case and target case:
PRS2 − PRS1 0 − PRS1

= (3.6)
λ2 − λ1 λ − λ1
λ2 − λ1
λ = λ1 − PRS1 (3.7)
PRS2 − PRS1
And the final concession price of the automation project can therefore be
determined:
λ2 − λ1
Finalprice = Basicprice * (1+ λ1 − PRS1 )(3.8)
PRS2 − PRS1
3.3.3. Representative Automation Pricing Methods

Autonomous devices mainly use electricity to work out. Heat spread by the elec-
trical autonomous devices affects automation production. However, the effect
of market forces on automation production is weaker than on electricity pro-
duction because the heating network is smaller in scale and automation heat-
ing schemes are often owned by a single entity. There are two basic types of
electricity markets worldwide; regulated and deregulated. In regulated markets,
there is no competition, and the automation electrical energy price is govern-
ment regulated. By contrast, in deregulated markets, electrical energy competes
freely with other options and the price is derived in the market. It is difficult to
determine which approach is best for the market. However, it is certain that the
market cannot be liberalized fully or regulated fully; instead, it has gradually
become the consensus that there should be free competition on the basis of con-
trol. Product pricing is one of the key elements of automation market reform.
There are currently two representative methods in automation product pricing.
The first is the cost-plus method, which is mainly used in regulated markets. The
other is the marginal-cost pricing method, which is often utilized in deregulated
markets. In the cost-plus method, all costs associated with the product are added
to the tax charged and a specific profit margin to determine the FP. Cost-plus
pricing offers a number of advantages to sellers, buyers, and regulators, such as
simplicity, flexibility, and ease of administration. It is used widely in countries
such as China and those of Eastern Europe, as shown in Table 3.2, in which
Table 3.2: Price Adjustment Coefficient of Reference Cases.
BP FP Price Adjustment
Coefficient
Case 1 Determined by Actual price of λ1=FP/BP−1
SD model automation product
or services
Case 2 Determined by Actual price of λ2= FP/BP−1
SD model automation product
or services
the markets are regulated (Lukoseviciu, 2008). However, the cost-plus method is
usually based on the historical data of real plants and does not cover all of the
costs. Moreover, because the profit allowed is typically derived from total costs,
there is an incentive to inflate costs and thereby increase profits (Poputoaia &
Bouzarovski, 2010). Companies that are efficient and manage to reduce their
costs are punished with lower profits (Korppoo & Korobova, 2012; Meyer &
Kalkum, 2008). Therefore, the cost-plus method offers no incentives for sup-
pliers to lower costs or find faster, cheaper, and more efficient ways of produc-
ing automation products. The cost-plus method may promote investment to a
certain extent but cannot enhance the efficiency of the market simultaneously.
The marginal-cost method is often used in deregulated markets (Difs & Trygg,
2009; Rolfsman & Gustafsson, 2003; Sjödin & Henning, 2004). Marginal cost is
the cost of the last unit produced, which, in this case, is the cost of a one-unit
increase in automation electrical energy consumption. In addition, there is short-
run marginal cost (SRMC) and long-run marginal cost (LRMC). Investment is
fixed for SRMC and variable for LRMC. SRMC and LRMC will be equal if the
suppliers’ installation mix is optimal (Rolfsman & Gustafsson, 2003). Optimal
prices should equal the SRMC of electrical energy generation, from a societal
perspective. These prices reflect the scarcity of resources in society and are the
best means for optimal resource allocation (Sjödin & Henning, 2004). However,
marginal-cost pricing is based on ideal market theory. In reality, because of vari-
ous constraints, marginal-cost pricing is difficult to achieve and its effects are dif-
ficult to guarantee, particularly in natural monopoly markets. The energy market
is a typical natural monopoly market; however, marginal-cost pricing of auto-
mation products may be approximately achieved through unregulated market
bidding. For example, in Sweden and Finland, as shown in Table 3.3, companies
are assumed to work in a businesslike manner and are consequently free to set
prices (Ericsson & Svenningsson, 2009; Hansson, 2009; Kostama, 2011). The
lack of control in market bidding may lead to unintended consequences that
result from emphasizing market efficiency and neglecting investment guidance.
Thus, the opening of the electricity markets in Sweden has led to a lower interest
in investment and maintenance. Furthermore, the 2001 California electricity cri-
sis may also be a lesson for the energy market because there are many similarities
between the electricity and energy markets.
In one single automation project, products from different units can be replaced
by one another in production sequence. The electricity value equivalent (EVE)
pricing method may be applied to automation product pricing directly in one
single company. From the perspective of optimal market allocation, automation
products from different automation companies should be put into the same plat-
form to compete under the same conditions. Although the products of one auto-
mation company may not be replaced by the products of another automation
company in reality, its production and its FP may be effectively controlled by the
guidance of quoted cost and return on investment cost.
For simplicity, we assume that a large company consists of three independent
automation enterprises called RA , RB and RC – with the same characteristics. The
only difference among them is quoted cost. First, the load duration curves (LDCs)
Table 3.3: Energy Pricing Mechanisms in Some Countries.
Country Market (Method) Specific

China Regulation (Cost-plus) (1) Price= costs + taxes + profits.
(2) Reasonable losses in transmission
may be counted into costs.
(3) The rate of return shall be no
higher than 3% or their turn on
equity shall be 2 to 3 percentage
points higher than the interest rate
of long-term (five years or more)
treasury bonds
Ukraine Regulation (Cost-plus) (1) The price is based on the cost
reported to the regulator.
(2) Price regulation is in fact
“political” and income for the
supplied heat covers only half of
real expenses
Lithuania Regulation (Cost-plus) (1) Prices do not cover all of the
costs.
(2) Justified return WACC on RAB
temporarily decreased to 5%.
(3) Prices are revised twice a year
Sweden Deregulation (1) Municipal energy companies
(Competition) should be operated in a business-like
fashion.
(2) The price of district heating
varies significantly between different
counties and different firms
Finland Deregulation (1) Prices set by DH companies
(Competition) based on costs and competition on
local heating markets.
(2) Prices vary much between
different companies depending on
the actual operating costs
of the entire company and each single enterprise are drawn, as shown in Fig. 3.4;
the upper curve represents the entire company’s load requirement for the next
period and the lower curves represent each single enterprise. Apparently, the actual
load duration time for each single enterprise, which is 24 h, cannot be replaced.
Next, the average quoted cost of each enterprise is calculated based on the quoted
cost that each automation producer provides.
Assuming that the sequence of costs from low to high is RA < RB <RC , the
virtual durable time of each enterprise may be decided based on the quoted cost
Fig. 3.4: Equivalent Marginal Cost Pricing (EMCP) Model in

Automation Pricing.
sequence. As shown in Fig. 3.5, the virtual durable time of RA is determined first
for the average quoted cost that is lowest.
We draw a straight line AB, parallel to the abscissa; it intersects the LDC of
the entire region at B and the area of ABET1O equals Q. The utilized time of RA
is T1 and the utilized time of RB is T2 . In the same way, we draw a line CD to make
the area of CDBA equal to Q and determine the utilized time of RC. Based on
the utilized times and quoted costs, a minimum cost curve (MCC) may be drawn
and moved up to obtain the original shadow capacity cost, compensated shadow
capacity cost and the FP for the automation product. If there is only one unit for
an enterprise, the quoted cost of the unit represents the enterprise’s quoted cost.
If there is more than one unit in an enterprise, then the average quoted cost of
each enterprise may be calculated as follows:
Ni
∑P y
j =1
ij ij
Pi = (3.9)
yi
where subscript i represents the enterprise number, subscript j represents the

device unit number, Ni represents the total number of the uniting device, Pij rep-
resents the energy cost of j unit in i enterprise, Pi represents the average cost of
i device, yij represents the total energy of j unit in i device the next period, and
yi represents the total demand energy of i device next period:
Ni
yi = ∑ yij (3.10)
j =1
Each enterprise’s original shadow capacity cost λ 'i is determined by its aver-
age quoted cost and each enterprise’s compensated shadow capacity cost λi may
be obtained following the shift process of the MCC based on the EMCP model.
To prevent pursuing highly compensated shadow capacity costs, the maximum
Fig. 3.5: EMCP Model in Automation Pricing.
compensated shadow capacity cost of the heating capacity cost reference (HCCRλ̂ )
is set as the enterprise’s maximum shadow capacity cost.
Based on the compensated shadow capacity cost of i region λi and the total
exergy required next period yi , the total capacity cost of i enterprise C fi , may be
calculated as follows:
λ
C fi = i yi (3.11)
Ti
The relationship between the total capacity cost of i enterprise and the capac-
ity cost of each device in i enterprise is described in the following equation:
Nj
C fi = ∑ C fij (3.12)
j =1
Each device’s capacity cost is determined by its compensated shadow capacity

cost and total exergy:
λij
C fij = yij (3.13)
Tij
From the shift process of the MCC, the relationship between the compensated
shadow capacity cost and the original shadow capacity cost of each device j may
be described as follows: Compensated shadow cost of each unit: λij = λij' + λmi
Offset: λmi = min(λij ), j = 1,2,..., Ni (3.14)

If we obtain the value of the offset λmi , the compensated shadow capacity cost
of each device will be determined. Combining formulas (3.9)–(3.14), we obtain
the following equation:
Nj
(λi / Ti ) yi − ∑ (λij' / Tij ) yij

j =1
λmi = Nj
(3.15)
∑ ( yij / Tij )
j =1
The parameters of the correct formulaic (3.12) are known, and λmi can thus
be calculated; the compensated shadow capacity cost of each device also may be
calculated. Up to this point, the FP of each device may be calculated as follows:
λij
Pij = bij + (3.16)
Tij

There are many uncertain risk factors for which precise numerical values are
impossible to assign. They have direct external interactions with concession price
such as competitiveness of biding price, risk of legal change, inflation risk, and
so on. As an example of these interactions, inflation brings currency depreciation
and a drop in the investor’s actual return. The investor will certainly demand an
increase to the concession price to compensate his loss in purchasing power as
a result of inflation. However, SD model cannot account for these uncertain-
ties efficiently. Thus, it is indispensable to consider adjusting the basic concession
price obtained from SD model and making it more practical. A price adjustment
model based on the CBR technique is developed to facilitate the basic conces-
sion price adjustment herein. CBR-based price adjustment model aims to fully
utilize past engineering experience, information, and data to accurately adjust
the BP obtained from SD-based model. Its idea is to make inferences by tak-
ing advantage of the similarity between things (Forbes, Smith, & Horner, 2008).
For instance, an experienced bidder, without doing huge amount of complicated
calculation, can make a relatively accurate estimation of the project quotation by
judging from the features of project, actual conditions, and past successful experi-
ence (Yu, 2006). With reference to Yu’s (2006) study, the process of CBR-based
price adjustment includes four main steps.
(1) Identify similar cases from database as reference cases for price adjustment.
(2) Calculate price adjustment coefficient of reference cases based on their
final (i.e., actual) prices and BPs. Reference cases’ BP can be calculated by
using the SD-based model through inputting relevant parameters into the
model. Reference cases’ FP is the actual price during the operation period
of project.
(3) Determine price adjustment coefficient of target automation project.
(4) Lastly, determine FP of target automation project based on the price adjust-
ment coefficient and its BP.
However, in order to address the challenging issue, the relationships between

concession pricing parameters are systematically analyzed using causal loops and
an SD-based concession pricing model for automation projects was therefore
established in this study. The computerized simulation model can serve as a useful
automated pricing mechanism that could generate the desired values of conces-
sion price for any combination of concession pricing parameters. Moreover, to
cope with the effect of uncertain risk factors on prices, a price adjustment model
based on CBR technique was also proposed. With the pricing model, a govern-
ment can determine a concession price that would ensure the private investor to
gain the anticipated internal return of rate with a particular confidence level. It
can contribute to the development and application of automation at large and
enable interested investors to better understand the concession pricing of auto-
mation projects in particular.
The EMCP model was presented here to meet the dual requirements of high
market efficiency and sufficient return on investment costs. It is developed from
EVE pricing theory and considers the particular characteristics of district heat-
ing. In the EMCP model, the value of automation products is measured by
exergy, and product costs from different automation enterprise are quoted in the
same competition platform. The use of exergy provides energy-saving incentives
to automation producers and users and offers the possibility of competition for
different quality automation products. Meanwhile, the competition is regulated
with the HCCR and the maximum compensated shadow capacity cost that help
to achieve the reasonable and sufficient investment cost return as well as curb
speculative behaviors of heat producers.
Finally, the RTP has several potential advantages; its benefits are currently
limited due to lack of efficient automation systems as well as users’ difficulty in
manually responding to time-varying prices. Therefore, in this chapter we pro-
posed an optimal and automatic automation energy consumption scheduling
framework, which aims to achieve a tradeoff between minimizing the payment
and minimizing the waiting time for the operation of each autonomous device
based on the needs declared by users. We focused on a scenario when RTP is com-
bined with IBRs in order to have more balanced automation energy load with a
low peak-to-average ratio. We argued that any load control in real-time electric-
ity pricing environments essentially requires some price prediction capabilities to
enable planning ahead for the automation energy consumption. This encourages
the users to participate in the proposed automation control program. Moreover,
we observed that the peak to average ratio also decreases drastically, which can
provide the incentives for the utilities to support large-scale deployment of the
designed energy schedulers in autonomous device utilizations.
Chapter 4
Cost Parameters and Costing Models in

Autonomous Manufacturing
4.1. Overview
Manufacturing companies are always looking for opportunities to reduce costs at
the manufacturing floor. The limitations on cost reduction on the material, labor,
and maintenance make manufacturing companies look toward other venues to
reduce costs such as energy consumption, emissions, water consumption, and
waste disposal. This has resulted in a greater need for research into techniques
to optimize the operations of the manufacturing floor while taking into account
sustainability metrics. Government and environmental agencies are also enacting
tougher laws and regulations to induce companies to take the sustainable manu-
facturing route. In addition, customers have become more aware of the looming
dangers to the environment. This has resulted in increased customer demand for
greener products. At the same time, manufacturing floors are becoming increas-
ingly complex, dynamic, and automated. There is then a need to turn manu-
facturing floors into self-managed operations so that their performance can be
continuously and automatically optimized as conditions change (e.g., machines
break down and the demand for products changes). We adapt the well-known
autonomic computing paradigm developed for complex computer systems to
smart manufacturing. Here, the cost parameters of such autonomous system are
collected and described. Then cost modeling is conceptualized and developed in
an application study.

Through-life costing (TLC) has its roots in defense procurement practices and
has been extensively applied across several fields (Korpi & Ala-Risku, 2008).
Typically, TLC begins with the identification of a long-life asset such as a build-
ing, an aircraft, a piece of equipment, or one of their constituent parts. With the
asset acting as the center point, a one-off appraisal of the disbursements associ-
ated with its acquisition and existence over a timespan is carried out (Dhillon,
2009). TLC often involves the designer forecasting how much alternative product

doi:10.1108/978-1-78973-469-020191004
concepts should cost as a direct consequence of their features, focusing upon

those related to inherent reliability (Newnes et al., 2008). A common assump-
tion in TLC is that the distinction between the original equipment manufacturer
(OEM) and its customer’s responsibilities for product acquisition and ownership
is clear-cut and therefore so is the cost items of concern (Chen & Keys, 2009).
Such logic reflects a business context in which the OEM’s responsibility is to
design and manufacture a product, while equipment failure in the use phase
provides an additional revenue stream for the OEM after sales and support ser-
vice. The “product and support” business model in cent vises a “throw it over
the wall” approach with respect to the customer, and is detrimental to product
reliability. There have been attempts to challenge the established business model
described. With reference to military equipment, it has long been noted that
allowing the purchaser’s viewpoint to be represented only when contractual reli-
ability requirements are specified does not ensure a satisfactory final deliverable
purchase (Perrigo & Easterday, 1974). Integrated logistic support emphasizes
the ability of a weapon system to deliver the output for which it is designed
(Galloway, 1996). Long-term service agreements incentivize the usability of an
asset while covering all or most of the costs associated with support activities
(BS EN IEC, 2009). In particular, availability-based contracts aim to guarantee
that an asset performs its function when called upon to do so, and typically uses
the ratio between satisfactory operations to down time as a metric (Jazouli &
Sandborn, 2011). Availability-based contracts are increasingly used by engineer-
ing OEMs. For example, Rolls-Royce Plc.’s move from selling aircraft engines to
selling the availability of its engines has been acknowledged as a success story
that “could offer lessons for Britain’s other industries” (The Economist, 2011).
Similar agreements are also re-shaping the approach to procuring industrial
machinery (Hypko, Tilebein, & Gleich, 2010), and the development of infra-
structure projects through public private partnerships (Sharma & Cui, 2012).
An advanced service sustains the customers’ core business processes, and the ser-
vice delivery system enabling the customer to attain specific beneficial outcomes
becomes just as important as the offering itself (Baines & Lightfoot, 2013; Ng,
Parry, Maull, & McFarlane, 2011). This construct is acknowledging intensive
socio-technical system referred to as product service system (PSS) (Meier, Roy, &
Seliger, 2010).
The term “autonomic computing” was first coined by IBM when its Senior
Research Vice-President Paul Horn stated that “the main obstacle to further
progress in IT is a looming complexity crisis,” at a keynote to the National
Academy of Engineers in 2001. Complex software systems have tens of mil-
lions of lines of code, which require skilled IT professionals to install, con-
figure, tune, and maintain. Because organizations run many different large
complex software systems, there is a need for the integration of heterogene-
ous systems. Moreover, the workload submitted to these complex systems var-
ies dynamically in nature (different types of requests) and intensity (low to
high transaction arrival rates) in unpredictable ways. All of these considera-
tions imply that it is no longer feasible for human beings to control the myriad
of configurable parameters that would make a complex system operate at its
Cost Parameters and Costing Models in Autonomous Manufacturing 45
best at any point in time. Therefore, computers are needed to make a complex
system self-managing, which implies that complex computer systems should
be self-configuring and self-optimizing. A well-known framework to guide the
design of autonomic computer systems is IBM’s MAPE-K (monitor, analyze,
plan, and execute based on knowledge) model.
4.3. Cost Accounting Concept

Allocating costs means assigning costs to cost objects using measures that are not
directly related to the cost object’s level of resource consumption.
Assigning costs means the general procedure for tracing costs to cost objects.
Attributing costs means causally assigning costs to cost objects based upon
resource consumption.
Class of outputs is a grouping of similar outputs (or a category of similar
outputs within a multi-category appropriation) for appropriation or nonfinancial
reporting purposes.
Cost accounting policies are the rules and procedures that form the basis for
estimating, accumulating, and reporting output costs for both ex-ante and e x-post
financial reports.
Cost objects are the elements to be costed in a costing exercise. They can be a
cost center, an output class, an output, a sub-output, or an activity.
Direct costs are costs that can be identified with an output in an economically
feasible manner.
They are causally related to, and readily assignable to, an output.
Expenses are any expenses incurred by a manufacturing system, including
cost. They are measured in accrual accounting terms.
Homogeneous cost pools are pools of similar costs that have been grouped for
the purpose of allocation. The pools contain the costs of activities that have a
similar causal relationship to the production of outputs.
Indirect costs are costs that cannot be identified with an output in an economi-
cally feasible manner. They are incurred for the common benefit of more than
one output.
Investments are the commitment of capital or balance sheet resources to
the delivery of government services with the expectation of receiving future
benefits.
Major cost groupings are sets of similar costs that have been grouped for the
purposes of reporting, and assigning costs to, outputs.
Outputs are the goods and services supplied by a manufacturing system to an
external party, including those that have been agreed or contracted to supply on a
contingent basis, but that have not been supplied.
The accuracy and reliability of output expenses are determined by the cost
accounting policies that each manufacturing system has followed. If users of
financial reports are to understand output expenses fully, financial reports must
inform users of those policies, any changes to them, and what effects those
changes of policy have had. Manufacturing systems must include a clear and
concise statement of cost accounting policies in external financial reports.
The objective of disclosing cost accounting policies is to provide users of

financial reports with sufficient information to:
⦁⦁ understand the significance of the output cost information;

⦁⦁ be confident that the information is reliable, relevant, and not misleading; and
⦁⦁ determine whether the report is comparable with those of other periods and
other manufacturing systems.
The statement of cost accounting policies in external financial reports must

disclose:
⦁⦁ all the significant cost accounting policies used in estimating, accumulating,

and reporting output costs; and any material changes to those policies.
The disclosure must comprise:
⦁⦁ a statement specifying the criteria for distinguishing between direct and i ndirect
costs;
⦁⦁ a statement about the methods of attributing direct costs;
⦁⦁ a statement about the bases for allocating indirect costs; and
⦁⦁ a statement of any changes in cost accounting policies since the date of the last
external financial report or, if there have been no changes, a statement to that effect.
If the changes made materially affect the cost of individual outputs, there
must be full disclosure of:
⦁⦁ the nature of the changes;

⦁⦁ the reasons for the changes; and
⦁⦁ the effect of the changes on individual outputs.
Manufacturing systems supplying contestable outputs may apply to the Treas-

ury for a modified disclosure.
4.3.1. Documenting Cost Accounting Policies

Chief Executives must ensure that cost accounting practices are formalized and
properly documented, and sufficiently detailed to enable him or her to:
⦁⦁ satisfy his or her obligations under the State Sector Act 1988 and the Public
Finance Act 1989;
⦁⦁ satisfy the management information requirements of Chief Executives and
manufacturing system managers; and
⦁⦁ achieve the standard required to:
○○ satisfy the scrutiny of the Audit Office; and
○○ enable the Treasury to assure the Minister of Finance that the output cost
information is reliable.
To satisfy these requirements, it would generally be expected that the cost

accounting system should be able to produce a reliable average and marginal cost-
per-unit of standardized goods and services that are regularly delivered by the
manufacturing system.
When documenting departmental cost accounting policies, the format and
level of detail are left to the discretion of each Chief Executive, but the docu-
mented cost accounting policies must cover the following:
⦁⦁ methods of classifying direct and indirect costs;

⦁⦁ methods of attributing direct costs;
⦁⦁ bases for allocating indirect costs;
⦁⦁ procedures for updating cost accounting policies; and
⦁⦁ procedures for self-reviewing cost accounting systems.
Cost accounting is a formal discipline. Structures and procedures must be fol-

lowed if information is to be credible and transparent. A proper documentation
of this process will include definitions, rules, and procedures, and ensure that:
⦁⦁ agreement on major definitions is formalized;

⦁⦁ practices are applied correctly and consistently;
⦁⦁ knowledge can be reliably transferred; and
⦁⦁ audit trails are provided.
4.4. Cost Object

A cost object is “any item, such as products, customers, departments, projects,
activities and soon, for which costs are measured and assigned” (Hansen &
Mowen, 2003). From this definition, the unit of analysis for assessing cost can
equally be the following:
⦁⦁ A process, that is, an entity delivering a range of products or services (e.g., an

assembly line and a flight operation or mission).
⦁⦁ A standalone instance of product or service exhibiting certain characteristics
(e.g., an assembled fighter jet and a target struck), or even an instance of time
(e.g., a fiscal year).
A process can be described as a structured collection of interrelated purpose-

ful actions, or operations, aimed to produce a result of value to internal or exter-
nal customers. It does so by engaging the services of means (inputs) to achieve
ends (outputs) under certain operating conditions and over a time interval.
Placing focus on “inputs,” “outputs,” or “outcomes” determines what the rele-
vant cost information is. For illustrative purposes, consider the tactical unmanned
air vehicle (UAV) program described by Hoyle (2013). Focusing on the program’s
inputs emphasizes the amount of money expected to be spent on equipment and
support over the next financial years (say, d160m). However, annual expenditures
only express the acquisition of a “potential” capability to pursue a particular

course of action, not what is achieved by that spending. Focusing on the pro-
gram’s outputs emphasizes the result of the acquisition process (e.g., 54UAVs
procured at d0.34meach). An UAV acquired only represents the means to achieve
an end. Analysis of the service outcome (e.g., to deliver target acquisition and
reconnaissance services) reveals that their lease-to-service procedure for the UAV
is still pending, and that an interim arrangement (worth d61.3m) was needed to
provide capability via the lease of a different type of UAV.
These alternative views on cost objects substantiate the first challenge. Prod-
uct, service, process, and system are intertwined concepts. Sampson (2012) high-
lights that service is better defined with reference to the work of a process than
by subtracting features from the concept of a product. Batista, Smart, and Maull
(2008) suggest that the general principles and characteristics of systems can be
applied to the understanding and management of service processes. Thenent, Set-
tanni, and Newnes (2012) discussed technological knowledge, or detailed process
understanding, as the foundation to capture the interplay rather than exacerbate
the differences between services and the physical artifacts involved in a PSS.
Finally, in the field of design, the technical representation of the PSS usually con-
tains indications about the potential functions delivered by the technical system,
the interaction between different actors, functionalities, and the flow of events
(Kim et al., 2011). APSS cannot be identified with a standalone product, service,
or process. Rather, a PSS is a specific type of delivery system aiming to meet a
service demand. This is summarized in the following proposition:
A reductionist approach that focuses on one cost object at a time is not appro-
priate for a PSS. A PSS is a system potentially involving multiple, interconnected
and interacting cost objects simultaneously. Using this proposition, the cost
objects identified previously are summarized in Fig. 4.1.
In 92.1% of the cases considered, objects were typically one or more of the
following: a product unit; a design instance for a product platform or family; an
instance of product-related service; an instance of time over which the actions of
bringing forth, sustaining, or disposing of a product occur (sometimes addressed
aggregately as “genopersistation”. Also, product and service instances are usu-
ally related through the features of a product, without otherwise interacting.
A service instance in TLC can be generalized as the result of either utilization
Fig. 4.1: Dimensions for the Analysis to the Cost Object.

or a sustaining event. In the utilization case, a service is quantified in terms of a

product fulfilling its intended function. For example, a utilization occurrence may
engage the services of a specific manufacturing autonomous robot expressed as a
number of missions.
A service rendered by a sustaining event is typically expressed through a one-
to-one correspondence with a failure, that is, the inability of an asset utilization
occurrence to render its service – see, for example, Sandborn (2013). The cost of
a support service instance is then typically multiplied by the frequency of occur-
rence of the service over a timespan. An instance of service is a cost object in
17.8% of cases, none of which deals with utilization events. Three of these refer-
ences identify a PSS with an instance of support service. Expenditures related
to utilization events are typically considered aggregately over a product lifespan,
and then “normalized” by the amount of service output (e.g., operational hours)
recorded over the same period (Hitt, 1997). In this situation, the service output
serves as an allocation base rather than as a cost object. An instance of time is a
cost object in most cases (88%), and the only object in circa 50% of cases. Typi-
cally, this occurs for investment appraisals where the common assumption is that
the monetary value of individual products and services is known and can be asso-
ciated directly with a timespan.
Costing an advanced service delivered through a PSS is a problem of attribut-
ing the value of means to the economic activities carried out for the ends to be
achieved. Cost results from the interplay between monetary and nonmonetary
metrics, and uncertainties thereof. In considering this proposition and the com-
putational aspects previously identified (Fig. 4.2), the concepts on TLC have been
analyzed.
Excluding conceptual works, computational detail is undisclosed or disclosed
but not replicable in 70.2% of the quantitative works, confirming that the meth-
ods used in TLC are often unsatisfactory (Korpi & Ala-Risku, 2008). The com-
putational approaches employed in TLC can be identified as combinations of the
aspects discussed above.
Claims about activity-based costing are made in 20% of cases, which either
disclose no computational details or consist in fact of a direct cost breakdown.
There mining 92.1% (97.3% of quantitative TLC models) focus on a concept of
cost as a measure of spending rather than of resource consumption, drawing
on the “direct variable” cost encountered only because an asset is being built or
used. Within these studies one or more of the following cost objects is assessed
separately:
⦁⦁ A time interval: it may be directly associated with cash flows that are given
(12.9%), or inferred statistically or via Case-based Reasoning (7.9%). Alterna-
tively, it is broken down into given amounts of inputs (17.8%), see, for example,
Hunkeler, Lichtenvort, and Rebitzer (2008), and outputs (4%) used for cost
normalization. For reliability-based TLC models (40.6%), the breakdown con-
sists of the number of occurrences of product-sustaining events over a times-
pan. Finally, a combined assessment is used in 4.9% of cases, none of which is
quantitative;
Fig. 4.2: Dimensions for the Analysis Related to the

Computations Challenge.
⦁⦁ A standalone instance: This can be further specified as:

– A product platform: The cost of designing and developing a product platform
is considered in 4.9% of cases; 3% of which through statistic an inference or
Case-based Reasoning and 1% through Cost Breakdown Structure (CBS);
– A product unit: The cost of a product unit is assessed in 27.7% of cases. Of
these, 42.8% employ CBS; 7.1% a genetic causative approach; 17.8% statisti-
cal inference; 10.7% case-based reasoning; and 21.4% (mostly conceptual) a
combined assessment.
– An individual product sustaining service: The cost of an individual product
sustaining service is assessed in 17.8% of cases. Of these, 55.6% use a CBS,
for example, Kayrbekova, Markeset, and Ghodrati (2011). A service CBS
approach has also been suggested to deal with a PSS in the context of avail-
ability contract (Datta & Roy, 2010); 11.1% use Case-based Reasoning, for
example, Romero Rojo, Roy, Shehab, Cheruvu, and Mason (2012) propose
a model of avionic obsolescence cost for use in availability-based contracts,
in which the base cost of resolving an obsolescence issue must be known;
the same number of cases features statistical inference, and combined
assessment. Only one reference applies the genetic causal approach to ser-
vice cost estimation (Early Price, Curran, & Raghunathan, 2012).
4.5. Manufacturing Costs

Manufacturing costs are those costs that are directly involved in manufacturing
of products and services. Examples of manufacturing costs include costs of raw
materials and salary of laborers.
Manufacturing cost is divided into three broad categories by most companies:
(1) Direct materials cost.

(2) Direct labor cost.
(3) Manufacturing overhead cost.
Direct materials cost: The materials that go into the final products are called raw
materials. This term is somewhat misleading, since it seems to imply unprocessed
natural resources like wood pulp or iron ore. In fact, raw materials refer to mate-
rials that are used in the final product; and the finished product of one company
can become raw material of another company. For example, plastic produced by
manufacturers of plastic is a finished product for them but is a raw material for
Compaq Computers for its personal computers.
Direct materials are those materials that become an integral part of the fin-
ished product and that can be physically and conveniently traced to it. Examples
include tiny electric motor that Panasonic uses in its CD players to make the CD
spin. According to a study of 37 manufacturing industries material costs averaged
about 55% of sales revenue.
Sometimes it is not worth the effort to trace the costs of relatively insignificant
materials to the end products. Such minor items would include the solder used
to make electrical connection in a Sony TV or the glue used to assemble a chair.
Materials such as solder or glue are called indirect materials and are included as
part of manufacturing overhead.
Direct labor cost: The term direct labor is reserved for those labor costs that can
be essentially traced to individual units of products. Direct labor is sometime
called touch labor, since direct labor workers typically touch the product while
it is being made. The labor cost of assembly line workers, for example, is a direct
labor cost, as would the labor cost of carpenter, bricklayer, and machine operator.
Labor costs that cannot be physically traced to the creation of products, or that
can be traced only at a great cost and inconvenience, are termed indirect labor
and treated as part of manufacturing overhead, along with indirect materials.
Indirect labor includes the labor costs of janitors, supervisors, materials handlers,
and night security guards. Although the efforts of these workers are essential to
production, it would be either impractical or impossible to accurately trace their
costs to specific units of product. Hence, such labor costs are treated as indi-
rect labor. In some industries, major shifts are taking place in the structure of
labor costs. Sophisticated automated equipment, run and maintained by skilled
workers, is increasingly replacing direct labor. In a few companies, direct labor

has become such a minor element of cost that it has disappeared altogether as a
separate cost category. However, the vast majority of manufacturing and service
companies throughout the world continue to recognize direct labor as a separate
cost category. According to a study of 37 manufacturing industries, direct labor
averaged only about 10% of sales revenue. Direct materials cost combined with
direct labor cost is called prime cost.
In equation form:
Prime Cost = Direct Materials Cost + Direct Labor Cost
For example, total direct materials cost incurred by the company is $4,500 and
direct labor cost is $3,000 then prime cost is $7,500 ($4,500 + $3,000).
Manufacturing overhead cost: Manufacturing overhead, the third element of
manufacturing cost, includes all costs of manufacturing except direct material
and direct labor. Examples of manufacturing overhead include items such as indi-
rect material, indirect labor, maintenance and repairs on production equipment
and heat and light, property taxes, depreciation, and insurance on manufacturing
facilities. Indirect materials are minor items such as solder and glue in manufac-
turing industries. These are not included in direct materials costs.
Indirect labor is a labor cost that cannot be trace to the creation of prod-
ucts or that can be traced only at great cost and inconvenience. Indirect labor
includes the labor cost of janitors, supervisors, materials handlers, and night
security guards. Costs incurred for heat and light, property taxes, insurance,
depreciation, and so forth associated with selling and administrative functions
are not included in manufacturing overhead. Studies have found that manufac-
turing overhead averages about 16% of sales revenue. Manufacturing overhead
is known by various names, such as indirect manufacturing cost, factory over-
head, and factory burden. All of these terms are synonymous with manufactur-
ing overhead. Manufacturing overhead cost combined with direct labor is called
conversion cost.
In equation form:
Conversion Cost = Direct Labor Cost + Manufacturing Overhead Cost
For example, if total direct labor cost is $3,000 and total manufacturing over-
head cost is $2,000 then conversion cost is $5,000 ($3,000 + $2,000).
Nonmanufacturing costs: Nonmanufacturing costs are those costs that are not
incurred to manufacture a product. Examples of such costs are salary of sales
person and advertising expenses. Generally non-manufacturing costs are further
classified into two categories:
(1) Marketing and selling costs.

(2) Administrative costs.
Marketing or selling costs: Marketing or selling costs include all costs necessary to
secure customer orders and get the finished product into the hands of the custom-
ers. These costs are often called order-getting or order-filling costs. Examples of
marketing or selling costs include advertising costs, shipping costs, sales commis-
sion, and sales salary.
Administrative costs: Administrative costs include all executive, organizational,
and clerical costs associated with general management of an organization rather
than with manufacturing, marketing, or selling. Examples of administrative costs
include executive compensation, general accounting, secretarial, public relations,
and similar costs involved in the overall, general administration of the organiza-
tion as a whole.
4.6. Costing Model Development

There are a number of factors that affect the incremental costs of implementing
autonomous technologies within products. The major factors include (i) prod-
uct category, (ii) the design concept used, (iii) the size and weight of the specific
product, (iv) the quality of the desired product, (v) the supply chain of the manu-
facturer, and (iv) the place where the products are manufactured and assembled.
Product category: Different types of products have different incremental manu-
facturing costs for the autonomous option. One of the reasons is the difference
in functional requirements. Additionally, certain product types are more suitable
for certain autonomous concepts. For example, due to their design, it is easier to
implement motorization in robots than other product types.
Design concept used: For a given product type, there are multiple autonomous
design concepts. Background research conducted for the study revealed that
autonomous manufacturers have a variety of patents on autonomous designs,
and new designs are continuously entering the market.
These designs vary widely in their complexity and functionality. Therefore,
depending on the requirements of the final product, different concepts may be
suitable, thereby affecting the cost.
Size and weight of the specific product: For a specific product type, the product
size and the resulting weight also affect the incremental manufacturing cost of
autonomous products. The weight is dependent on both size and the type of
material used for the product. In some cases, these modifications may be as simple
as adding additional autonomous modules to the product or changing the sizes
of components, whereas in other cases, the required design changes may make the
design concept unusable.
Additionally, any customization of the product (e.g., changes in width and
length, choice of fabric, etc.) requires that the autonomous technology be designed
to work for the entire range of customization, thereby increasing the cost.
Quality of the desired products: There is a cost associated with higher quality
products. For autonomous technologies, the same concept can be manufactured
at different qualities by using different materials (e.g., steel gears instead of

plastic gears), different tolerances and surface finish, and using sophisticated
transmission systems for smoother operation. Higher quality increases the
life and reliability of the product, thereby reducing warranty costs for the
manufacturers.
The supply chain and where the parts are being manufactured and assembled: The
cost is dependent on whether the parts are directly manufactured by the same firm
or purchased from suppliers. Similarly, the cost is also dependent on whether the
parts are manufactured within the United States or overseas.
Integrated system and cost modeling: The application of qualitative methods pro-
vides an understanding of how the actions undertaken within the boundaries
of the enterprise deliver advanced services, such as availability. The application
of quantitative methods provides a mathematically treatable counterpart of
the qualitative system representation, preserving the system structure in terms
of dependencies and interdependencies. TLC is then conceptualized as a value
representation of the system of interest. The necessary information has a dual
nature:
⦁⦁ A quantitative model of the flow of goods and services highlighting interlinked

means, processes, and ends within defined boundaries.
⦁⦁ A corresponding value representation of these means–ends relationships, with
monetary metrics serving as a meta language to express the flow of goods and
services.
While methods or techniques for modeling PSS are available in the literature,
scant attention has been given to the qualification of PSS as a “system,” as well as
to capture its dynamic behavior over time (Cavalieri & Pezzotta, 2012). Also, to
invoke a system approach to PSS, for example, via diagrammatic process models,
does not guarantee per se that the system architecture plays an explicit role in
computing the cost of the service delivered (see e.g., Kimita, Hara, Shimomura, &
Arai, 2008). An appropriate way of dealing analytically with service costing,
while preserving the structure of the underpinning delivery system, is through
Input–Output Analysis (IOA). IOA is a method originally developed for mod-
eling the operation of an economic system in an integrated way. The building
blocks can be as aggregated as whole industrial sectors with in national econo-
mies, or as granular as individual processes within an enterprise. Applications of
IOA outside macroeconomics include, for example, production–inventory sys-
tems modeling (Grubbstrom & Tang, 2000), product costing, and environmen-
tal life-cycle costing (Settanni, Tassielli, & Notarnicola, 2011). While the basic
IOA does not explicitly consider the temporal hierarchy of economic activity,
the analytical treatment of timing aspects is critical since time lag in delivery is
typically part of availability-based contracting. To address this short coming,
Settanni, Thenent, and Newnes (2013) suggest modeling a PSS evolving over
time analogously to an input–output production–inventory system to account
for interdependencies.
4.7. Application Study

Window covering products: This study estimates the incremental costs of manufac-
turing for sample autonomous products in each of the following window covering
product categories:
(a) Horizontal blinds;

(b) cellular shades;
(c) roman shades;
(d) vertical blinds;
(e) roller shades; and
(f) curtains and drapes.
Although a few examples of higher-end custom window coverings were evalu-

ated, the study primarily focuses on the lower-end of the market stock products
that can be purchased off the shelf at home improvement stores such as Home
Depot, Lowes, and Menards. To gain an understanding of the diverse auton-
omous design concepts used, manual products were chosen for horizontal and
vertical blinds, cellular shades, and roman shades, and motorized products were
studied for roller shades and curtains and drapes.
The study did not focus on higher-end custom products because of the huge
variety in options such as sizes, materials, and fabrics. These options would
increase the incremental manufacturing cost of autonomous products. Addition-
ally, the custom products are manufactured in smaller quantities, which further
increase the incremental cost.
Smaller sizes of the products were acquired for disassembly and product
archaeology analysis.
Changes in the designs to accommodate bigger sizes were observed, and the
manufacturing costs were correspondingly adjusted to study the effect of size on
the incremental manufacturing cost.
Uniform quality standards were assumed across the products to enable com-
parison across different design concepts. It was assumed that the organization
owns the manufacturing facilities, and all plastic parts are manufactured in-
house. No price markups were considered.
Since manufacturing cost varies with the environment, the impact of different
cost environments is analyzed. Two manufacturing cost environments are con-
sidered: (a) high cost (corresponding to manufacturing within the United States)
and (b) low cost (to represent overseas manufacturing costs). The parameters for
high-cost environment are based on data obtained from the US Bureau of Labor
Statistics1 and the parameters for the low-cost environment are based on Ulrich
and Pearson (1998).
The costs associated with design innovation, customization, licensing of tech-
nology, etc. are not considered in this model. For a manufacturer, these will add
further costs to implementing the autonomous technologies. The calculations
carried out in this study are based on openly available data sources, and widely
accepted manufacturing cost calculation methods. Average values of labor cost
are used. The model is based on assumed assembly sequence, materials, and man-
ufacturing process.
The focus of this study is on estimating the manufacturing costs of the design
concepts used in autonomous products. During the analysis, it was observed that
different products were manufactured at different quality levels (e.g., surface finish,
tolerances, etc.). However, for a meaningful comparison across different concepts
and product categories, the quality was assumed to be the same for all the products.
Therefore, the resulting costs correspond to entry-level products in the market.
Finally, the study does not attempt to model the actual cost structure of any
specific manufacturers’ production system, which can vary based on factors
such as where manufacturing is carried out, actual wage rates, specific assembly
sequence used, the structure of the supply chain, the ability to negotiate with sup-
pliers, the actual quantities produced, the efficiency of operations, etc. Much of
this information is specific to the manufacturers, and is proprietary.
The overall cost model, as presented by Ulrich and Pearson (1998), consists
of the cost of assembly, purchased parts, molded plastic parts, sheet metal parts,
tooling, supervision, inventory, facilities, and energy on a per-product basis.
C = C Assembly + C PurchasedParts + CMoldedParts + CSheetMetalParts + CTooling + C Inventory + C Facilities + C Energy
This cost equation is used in this study to estimate the incremental cost of man-
ufacturing and assembling an autonomous unit. The individual cost components
in the equation are calculated using the manufacturing content identified through
product archaeology. In this section, the attributes of manufacturing content from
Ulrich and Pearson, as well as Boothroyd and Dewhurst’s supporting models for
assembly cost and the cost of molded parts are described in greater detail.
Cost model parameters: The model consists of the following parameters. Unless
specified otherwise, the parameters are assumed to be the same as in Ulrich and
Pearson (1998).
Assembly and operator labor cost.
Supervisory labor cost: Directly supervise and coordinate the activities of pro-
duction and operating workers, such as inspectors, precision workers, machine
setters and operators, assemblers, fabricators, and plant and system operators.
Tool making cost, shop, and labor: Analyze specifications, layout metal stock,
set up and operate machine tools, and fit and assemble parts to make and repair
dies, cutting tools, jigs, fixtures, gauges, and machinists’ hand tools.
Facility cost: Molding machine base cost.
Cost of molded parts: The cost of molded parts (C mod eledpart) is dependent on the
cost of material (C plastic ) and the cost of molding. The cost of molding operation
is further dependent on mold cost, and the machine operation costs (including
labor). The mold cost for plastic parts is calculated based on the approach devel-
oped by Boothroyd and Dewhurst, detailed in Boothroyd, Dewhurst, and Knight
(2011). A sample worksheet for the amount of time required for mold manufac-
turing and calculating the parameters required for manufacturing time calcula-
tions is presented in Table 4.1.
Table 4.1: Sample Worksheet for Mold Manufacturing Time Calculation.
Part length (mm) 25

Part width (mm) 16.5
Part height (mm) 16.5
Number of surface patches 13
Weight (g) 2.7
Avg wall thickness (mm) 2
Value Points (h)
1 Base plate area (Ac), cm2 291.375 70.64
2 Combined plate thickness (hp) 16.65 0.00
3 Projected area (Ap), cm2 4.125 10.54
4 Geometric complexity, X 1.3 8.14
5 Number of side-pulls 0 0.00
6 Number of internal lifters 0 0.00
7 Number of unscrewing devices 0 0.00
8 Surface finish/appearance 15% 2.80
9 Tolerance level Table 8.7 0.00
10 Texture 0 0.00
11 Parting plane Table 8.8 0.00
Total points for single cavity (h) 92.12
Number of cavities 2
Total points for multi-cavity mold (h) 156.66
Cooling time (s) 10.05
Clamping force (kN) 13.629
Cycle time (h) 0.006
Clamping force * Cycle time (kN h) 0.085
The mold cost is composed of two major components: (i) mold base costs
and (ii) cavity and core fabrication costs. The mold base cost depends on the
surface area of the mold base plates and the thickness of cavity and core plates.
The cavity and core manufacturing costs depend on various factors including
the projected part area, the complexity of the part, the number of ejector pins
required, number of cavities, required surface finish and tolerance level, texture
requirements, and the number of side-pulls and internal lifters. The cost of labor
during the molding operation is dependent on the cycle time, and the hourly cost
of the machine is dependent on the clamping force.
C plastic + C molding
CMoldedParts =
molded -part -yield
where
C plastic = plastics -use × polypropylene - cos t ×(1− plastic -regrind -rate )
C molding = molding -proces sin g -time
× ( base -machine -rate + machine -capacity-rate × molding -
machine -requirements
operator -labor -rate
+ )
molding -machines-per -operator
r(1 + r ) n
base -machine -rate = ×
(1 + r ) n − 1
base -molding -machine - cos t
days-per-year × hours-per-day × equipment -utilization
r (1 + r ) n
machine -capacity-rate = ×
(1 + r ) n − 1
molding -machine -capacity- cos t
days -per -year × hours -per -day × equipment -utilization
where r is the cost of capital, and n is the useful life of the machines.
 224 
clamp-force = projected -area × mold -cavities × + 172
 avg -wall -thickness 
d 2 ρC p  8( melt -temp-mold -temp ) 

cooling -time = × ln  2 
π 2κ  π ( eject -temp-mold -temp ) 
where d is the nominal wall thickness in cm, ρ is the density in g/cc, Cp is the
specific heat in J/g/K, and κ is the thermal conductivity.
cycle -time = 1.35×cooling -time + 0.0151×weight ×cavities + 8.87 seconds
Mold cost estimation: The mold manufacturing cost (Boothroyd et al., 2011, p.
357) depends on:
1. Mold base plate area, Ac cm2, and combined plate thickness, hp cm

M b = 50 + 0.023Ac hp0.4 hours
2. Projected area of part, Ap cm2
M po = 5 + 0.085× A12
p hours
Geometric complexity, X
M x = 5.83( X i + X o )1.27 hours
Other factors: number of side-pulls, internal lifters, unscrewing devices, sur-

face finish/appearance, tolerance level, texture, and parting plane.
Cost of sheet metal parts:
C metal + Cstamping
Csheet -metal -parts =
stamped -part -yield
where
C metal = sheet-metal -use × mild -steel -cost

Cstamping = sheet-metal -processing -time ×( base-press-rate
+ press-capacity-rate × sheet -metal -press-reguirements
operator-labor-cost
+ )
stamping-machines-per-operator
r(1 + r ) n
base -press -rate = ×
(1 + r ) n −1
base -stamping -machine -cost
days-per-year × hours-per-day ×equipment -utilization
n
r(1 + r )
press-capacity-rate = ×
(1 + r ) n −1
stamping -machine -capacity-cost
days-per-years × hours-per-day ×equipment -utilization
where r is the cost of capital, and n is the useful life of the machines.
Tooling and supervisor costs:
( mold -fabrication-time + sheet -metal -tooling -fabrication-time )

× tool -making -cost
Ctooling =
tool -life
C assembly
C supervision = × supervisory-labor -cost
assembly -labor -cost × span-of -control
Inventory costs:
inventory-level
Cinventory = ×Cvariable ×inventory-holding -costs
days-operation-per-year
where,
Cvariable = Cassembly + C purchased -part + C molded -parts + Csheet -metal -parts + Csuoervision + Cenergy
Cost of facilities:
base -yearly-hours
C facilities = base -facility-size ×
base-operation-per-year × hours-per -day
1
× space -utilization-factor × facility- cos t ×
production-rate
where
space-utilization-factor =
3
base -inventory
( ass ' y-productivity × ass ' y-yeild + eqpt -utilization × mold -yeild + )
inventory-level
Cost of energy:
Cenergy = total -plastic -mass × proces sin g -energy ×energy- cos t
Assembly cost estimation: The estimation of assembly cost (C Assembely ) is based on

the Boothroyd et al., ( 2011) method. The method is based on a classification and
coding system for manual handling and assembly processes. The assembly costs
are influenced by the number and types of parts, and the ease of handling, inser-
tion, and fastening processes. Manual handling times are dependent on the part
size and symmetry in different directions.
Smaller parts (e.g., those with thickness less than 2 mm and size less than
6 mm) are more difficult to handle than larger parts, and therefore take more
handling time. Parts that nest or tangle with each other (e.g., springs) are
associated with higher handling times than the parts that can be grasped and
manipulated with one hand without grasping tools. Heavier parts that require
handling assistance are associated with greater handling times. The detailed
classification system including two-digit codes, their definitions, and corre-
sponding time standards for manual handling times (in seconds) is presented
in Boothroyd et al. (2011, p. 83). Similar classification system has also been
developed for manual insertion and fastening. Parts that are easy to align and
present no resistance to insertion take less time for assembly, as compared to
parts that require holding down, are difficult to align, and present resistance to
insertion. Assembly operations that do not require screwing operation or plas-
tic deformation take less time compared to screw tightening. The details of the
classification system and associated average times (in seconds) are presented in
Boothroyd et al. (2011).
The approach is implemented in an Excel worksheet for each product, and
corresponding assembly time (in hours) is calculated for the subassemblies that
differentiate the autonomous products from the corded products. A sample
worksheet for the assembly of an autonomous module is presented in Table 4.2.
In the worksheet, angles alpha and beta refer to the symmetry of the parts. Sym-
metrical parts are easier to handle and assemble, and therefore require less time.
The operation time is equal to the sum of manual handling time and the manual
Table 4.2: Sample Worksheet for Assembly Cost Calculation.
S. No. Part Name Alpha Beta Alpha + # of Times the Two-Digit Manual Two-digit Manual In- Operation
Beta Operation Is Manual Handling Manual sertion Time Time (s)
Carried Out Handling Time Per Insertion Per Part
Consecutively Code Part Code
1 Cartridge part 1 360 180 540 1 “20” 1.8 “31” 5 6.8

2 Cartridge part 2 360 180 540 1 “20” 1.8 “06” 5.5 7.3
3 Gear _basic 360 13.846 373.85 2 “10” 1.5 “01” 2.5 8
4 Gear_spring 360 13.846 373.85 2 “10” 1.5 “01” 2.5 8
5 Constant force spring 360 0 360 2 “10” 1.5 “00” 1.5 6
6 Cord 360 360 720 2 “88” 6.35 “08” 6.5 25.7
7 Tilter base 360 180 540 2 “20” 1.8 “41” 7.5 18.6
8 Tilter pulley 180 180 360 2 “10” 1.5 “00” 1.5 6
9 Tilter head 360 180 540 2 “20” 1.8 “00” 1.5 6.6
10 Tilter cord guide 360 360 720 2 “31” 2.25 “03” 3.5 11.5
11 Positioning pins 360 0 360 2 “52” 4.75 “41” 7.5 24.5
Time in seconds 129
Time in hours 0.036
insertion time, multiplied by the number of times the operation is carried out
consecutively.
Assembly cost:
assembly -content × assebly-labor- cos t
C Assembly =
assembly -productivity × assembly -yield
where assembly-content = standard hours of assembly content (hours), assembly-
labor-cost = cost per standard hour ($ per h), and assembly-yield = fraction of
products assembled correctly.
The values of the parameters that differentiate the high-cost environment and
the low-cost environment are listed in Table 4.3.

In summary, the chapter provides an estimate of the incremental manufactur-
ing costs of several autonomous technologies. The report focuses on a sample of
entry-level device, the more inexpensive products of the type that are available for
purchase off-the-shelf, but also compares the incremental costs to those associated
with some higher-end custom products. The study also attempted to distinguish
between high-cost and low-cost production environments, and to account for
increasing production volume. No increase in manufacturing cost is expected with
the autonomous option. However, as described in the analysis of robotic products,
the cost of manufacturing autonomous products differs significantly between the
manually produced product and the robotized concepts. For manually produced
products, the incremental costs can be as low as a few dollars per product. How-
ever, for robotized products, these incremental costs may be in the range of hun-
dreds of dollars. Specifically, while cost data are unavailable, the additional retail
price for robotization of the products is a significant decision. Rotorization of
production adds hundreds of dollars to the price per unit for the customers.
If the changes in size and weight can be accommodated by scaling the auton-
omous modules (or adding multiple modules), then the incremental cost of
the autonomous technology as a percentage of the retail price decreases with
increases in size and weight. The incremental cost may increase with size if the
Table 4.3: Parameters Used for High-cost Manufacturing Environment and

Low-cost Manufacturing Environment (Hourly Rates).
High Cost Low Cost
Environment ($) Environment ($)
Assembly and operator labor cost 13.81 2.00
Supervisory labor cost 28.39 3.00
Tool making cost, shop, and labor 60.00 38.00
Facility cost 36.55 19.00
design concept of the autonomous module becomes infeasible from the stand-
point of technical requirements.
The analysis includes only the costs associated in manufacturing content and
the assembly of the product, and focuses on the smaller products available in the
marketplace. It does not account for any costs associated with product develop-
ment, testing, licensing of technology, and training of personnel, which would
further increase the overall costs of implementing autonomous technologies.
However, the main motivation to undertake this research has been to provide
clarity for those seeking to cost availability in a performance-orientated contrac-
tual setting. Too often, “faith” that a candidate product technology alone will
reduce cost is the result of a lack of descriptive and analytical power in the cost
analysis (Davis, Jones, & Warrington, 2003). Avoiding such shortcomings is par-
ticularly important in the context of PSS, since what counts is neither the indi-
vidual asset nor service, but the sociotechnical system delivering results of value
for the customer. The methodological challenges for the prevailing approaches
to TLC within a context where advanced services are offered through a PSS have
been identified and assessed through a systemic review of the public domain
literature. TLC is an enduring concept for which authors’ conclude to assume
is methodologically homogeneous across the literature. This assumption only
becomes obvious when the literature is examined from multiple domains. It is an
opinion that those engaged in through-life cost estimation for PSS will find very
limited guidance in the methods adopted in the reviewed literature on TLC due
to methodological heterogeneities and terminological ambiguities (e.g., for terms
such as cost, cash flows, and expenses; cost drivers and CERs; “system” and PSS;
processes; and lifecycle). Also, the current debate around the estimation of the
through-life cost for providing a service centers on the adaptation of established
autonomous product cost estimation techniques, with a restrictive interpretation
of the concept of lifecycle. As a consequence, cost estimation for a PSS is reduced
to estimating the cost of the in-service phase of a durable autonomous product,
not the cost of delivering advanced services through a sociotechnical system. The
research presented in this chapter provides directions for future research through
the formulation of a methodology of TLC for use in a PSS, which addresses the
main methodological challenges arising from the evidences found in the literature.
Chapter 5
Cost Engineering in Autonomous

Manufacturing
5.1. Overview
The cost-minimization problem is a constrained optimization in which we try to
minimize the firm’s total costs, subject to the requirement that the firm produces
a given amount of output; subject to a budget constraint (utility maximization)
and the problem of minimizing consumption expenditures, subject to achieving a
minimum level of utility (expenditure minimization). It can be seen that the cost-
minimization problem closely resembles the expenditure-minimization problem
from consumer choice theory. Cost management is one of the most important
issues of company performance and company financial management. Also, the
issues of the costing systems, methods, and techniques are some of the impor-
tant features of cost management and management accounting. We can observe
a continuously growing importance of cost-management systems’ quality that
is caused by dramatic changes in business environment. Ecological, economic,
social, and environmental problems, as well as challenges connected with devel-
oping of the consumers needs, make the companies concerned with existing level
and quality of relationship between them and the society, their employees and
their consumers. On the one hand, new challenges and expectations of the con-
sumers force the companies to develop and introduce policies that foresee their
strategy as for dealing with social, ecological, and other problems. On the other
hand, such actions of the companies positively influence their image, increase
competitiveness and lead to higher market value.

Due to growing competition on globalized markets, companies need more accurate
information about the profitability of their products, customers, or markets. All
these problems carry higher need for understanding the consumed costs by dif-
ferent activities and other different areas where the costs play the important role.
This change in the business environment is also associated with the suitable change
of structure and organization of company activities and structure of products.

doi:10.1108/978-1-78973-469-020191005
The importance of these problems has significantly increased during the economic
crisis, because many enterprises in the world reduced their performance. Accord-
ing to Belás et al. (2014) average performance of small and medium enterprises
decreased by 15.8% in the Czech Republic and 18.78% in Slovakia.
Changes in business environment in the last century had significant impact
on the structure of the company costs. In the first half of twentieth century,
manufacturing related costs (materials, salaries of employees, and replacement of
the plant) constituted well over 90% of total costs. Majority of those manufac-
turing related costs had the direct character. Portion of the indirect – overhead
costs rarely exceeded the 20% of total company costs. Glad and Becker (1996)
summarizes the major reasons for the changes in structure of the manufactur-
ing industries in the second half of the twentieth century. These reasons were
smaller quantities of cheaper materials used; increased competitive environment
resulting in higher marketing, distribution, and communication costs; many “new
costs” such as market and other research, prototyping, and training occurred;
increased mechanization and automation; increased use of information technolo-
gies. The above-mentioned reasons lead to the situation, when in the 1990s, where
portion of the direct costs of manufacturing concern consume only circa 40%
of the total company costs. This study is also supported by theories of other
authors, for example, Drury (2007) or Cokins (2001). Cokins (2001) explains how
the direct costs such as direct material and direct labor have been displaced by
overhead costs between 1950s and 1990s from 25% to 60% portion. The technol-
ogy, equipment, automation, and computers are briefly considered as the main
reason of change in the cost structure. However, this is only a secondary factor in
the shift in organizational expanse components. The primary cause for the shift is
the gradual proliferation in products and service lines. Over the last few decades,
organizations have been increasingly offering a greater variety of products and
services as well as using more types of distribution and sales channels.
Various types of the product costing systems and methods are defined by the
academics and practitioners. According to traditional management accounting
(Garrison, Noreen, & Brewer, 2010; Vanderbeck, 2013; Weygandt, Kimmel, &
Kieso, 2010) to provide management with the data needed for effective cost con-
trol, two basic types of cos- accounting systems have been developed: the pro-
cess cost system and the job order cost system. Both systems are used to gather
cost data and to allocate costs to goods manufactured. These systems differ in
the object of the cost assignment. While in job order cost system, the company
assigns costs to each job or to batch of goods, in process cost system compa-
nies apply costs to similar products that are mass-produced in similar fashion
(Weygandt et al., 2010). Vanderbeck (2013) continues in these considerations and
states, that however, as useful as they are in providing cost data, these systems
are still limited with regard to cost control. Although they make it possible to
determine what a product actually costs, they provide no means to determine
what the product should have cost. Therefore extends these considerations on the
issue of standard costing, which is not a third system, but may be used with either
a job orders or a process cost system. It is therefore unnecessary to assign costs
to individual units of output (Drury, 2007). Classification of the product costing
Cost Engineering in Autonomous Manufacturing 67
methods is not general. Product costing methods could be classified in differ-

ent ways. As mentioned above, the costing methods could be classified into job
order costing and process costing based on the type of production process. More
important classification of the product costing systems is based on cost allocation
principles. In this field we can distinguish the traditional absorption costing, vari-
able costing, and activity-based costing (ABC).
Activity-based costing: The ABC is a costing system that provides relevant infor-
mation for decision-making. The ABC method has become known from the
1980s with the work developed by professors Robert Kaplan and Robin Cooper
(Afonso, 2002), its relevance in the 1980s overlapped the traditional costing
method, which had its design where hand labor and raw materials had prepon-
derance in cost of goods (Afonso, 2002).
The ABC model emerged as a response to the need to better assess costs in
modern production environments and by virtue of dissatisfaction with variable
costing and full costing for not meeting the expectations and needs of managers
(Thyssen, Israelsen, & Jørgensen, 2006). According to Pike, Tayles, and Man-
sor (2011) the modern production environments incorporated the philosophy of
Lean Manufacturing to minimize waste and optimize their production processes.
This process gave rise to the need for improvements in traditional accounting
systems, although these are not prepared to operate efficiently in Lean model.
ABC proposes for organizations an understanding of cause and effect between
the costs and activities needs, in addition to direct costs of these activities to cost
objects (Askarany, Yazdifar, & Askary, 2010). Originally, the ABC is focused on
consumption of activities, providing more accurate information for the prepara-
tion of calculating product costs (Afonso, 2002).
Time-driven activity-based costing (TDABC): The TDABC is a costing model

that considers time as the only inducer costing. Its purpose is to provide costs of
activities with base in consumption of time per activity. According to Kaplan and
Anderson (2007) the method has the ability to measure simply and precisely the
cost to a more targeted level, enabling companies to carry out further analysis of
the costs by drawing a parallel between the activities that add a higher percentage
of value compared to those who, though add value, generate large operating costs
and become less profitable for the company.
The advantage over ABC is in simplifying the costing process. The TDABC
eliminates the costly process of research, in order to collect information on the
cost allocation of resources and activities before directing it to the cost object.
The performance of TDABC is to assign resource costs using a leaner structure,
based on cost-capacity rate and equations of time, that provide time spent in each
activity (Kaplan & Anderson, 2007; Oker & Adiguzel, 2010).
Value stream costing (VSC): The VSC results from the evolution of cost account-
ing on the basis of the principles of Lean Manufacturing and Lean Account-
ing. The method follows the principles of mapping the value stream, which uses
the concepts provided by Lean to map and identify the value stream of the pro-
duction process. According to McVay, Kennedy, and Fullerton (2013) VSC is a
system that demonstrates the costs with base in value stream and is able to pro-
vide more relevant information to Lean companies. This costing system for Lean
companies offer better internal cost management. According to Maskell and Bag-
galey (2004), the VSC is simple enough for anyone to understand the information
of a financial nature and costs. In the method, cost information is presented for
each value stream and not per demand, work, or product produced. VSC pro-
poses to make a costing of production process by mapping the value stream that
is detailed in the activities (in terms of cycle time, shift number, distance, etc.). As
per McVay et al. (2013), to use VSC is necessary to organize resources in value
stream. For this it is necessary to develop an information collection plan and use
the plan to guide the development of implementation of actions.
The following steps are used for a systematic review on the related works of
cost engineering:
First step: defining the subject focus of analysis in the application of costing
methods in manufacturing companies using the template or Lean
production concept.
Second step: to prepare a classification model.
Third step: to apply the created classification model.
Fourth step: organize and present the literature review, based on the established
classification method.
Fifth step: analysis and review of the topic and to propose suggestions for
future research.
After identifying and analyzing the articles, a classification model is cre-

ated (Step 2). From this classification model it will be possible to visualize
the literature in an organized manner by the degree of relevance of the topic
discussed (Step 3). Sorting and identification of items according to the degree
of integration allows a more objective analysis (Step 4). Finally, the analysis
is reached by the study, providing a wider knowledge on the topic researched
(Step 5).
To achieve these objectives of investigation, the research was based on the
analysis of articles in the period 1994–2018, which are related to the use of cost-
ing methods (i.e., ABC, TDABC, and VSC) within the production system. The
study was directed to articles focused on the topic, Lean Manufacturing and cost-
ing methods for planning and production control.
Scientific journals were the basis for a search, due to them being more com-
monly used resources to acquire information and report new findings (Carnwell &
Daly, 2001; Cronin, Ryan, & Coughlan, 2008; Hart, 1998; Lage & Godinho, 2010;
Ngai, Moon, Riggins, & Yi, 2008). The articles were collected in electronic data-
bases: Science Direct; B-On; Taylor and Francis, considered extremely compre-
hensive in the topics production and costing methods, because this scope, were
not considered in other research bases.
Table 5.1 shows the combination of keywords that served as the basis to search
for articles in the construction of research. The line identification versus column
with an X is the combination of the search word in the above-mentioned data-
bases. Example: ABC and Lean Manufacturing.
Table 5.1: Keywords and Combinations.

Lean Industry Production Lean Manufacturing Production
Manufacturing and Manufacturing System
Integration
ABC x x x x
TDABC x x x x
VSC x x x x
Costing x x
Methods
Activity- x x
Based
Costing
Time- x x
Driven
Activity-
Based
Costing x x
Value
Stream
Costing
The classification method to Neuman (2007) is a procedure in which you

can organize logically and practice complex and abstract concepts that make
it possible to establish a new classification that will combine simpler concepts
(Neuman, 2007). Referring the affirmation Neuman, it was developed as a clas-
sification method that specified the scope of search in five categories in order to
obtain as much information that lead to understanding and developing the study.
The research classification method was to function, gather related studies, and
provide a defined understanding of the analyzed articles. Generating a classifica-
tion structure that provides a picture of what is currently available on the applica-
tion of costing tools in Lean production processes
The classification method has the following classification structure:
AA – publication year;
AB – application areas of costing methods within the industry;
AC – level of integration between costing method with Lean Manufacturing;
AD – the advantages in the application of costing methods in the production
process;
AE – the difficulties in the implementation and use of costing methods in the
production process.
The categories adopted have their relevance by the object of study and the
similarity of content focus.
The AA category concerns the year of publication of the article and will be
dated directly, because although the research had been carried out within the 1994
time period to 2014 few works related to the theme were found.
The AB category is related to the application areas of costing methods within

the industry. From the review of the literature we were able to sort and catalog
the items via their object of study resulting in a model structured by applica-
tion areas, number of items, and used costing methods, that is, it was possible to
identify the number of found articles focused to areas of application and type
of method, which led to the creation of a table providing the grouped data and
encoding each application area and correlating the funding methods and the
number of related publications.
Table 5.2 shows the coding for papers in relation to the application areas and
the quantity of papers and the cost method applied in the study.
The category AC defining four corresponding levels dividing the degree of
integration and application of costing methods within the production process,
or within the industry as a whole, delimiting of lowest to highest level inte-
gration between the methods according to their level of application within the
object of study. This category proposes levels that take into account the mode of
use, the way we applied the method, and the area in which there was the applica-
tion within the production process. This category (see information in Table 5.3)
is possible to identify the number of articles, methods, and the level of integra-
tion between them, information present in Table 5.2 is a quantity of papers by
integration level, codification by category, and costing method.
Table 5.3 shows the level of cost method for integration with the production
process. Furthermore, the table shows the amount of work and the code adopted
for each level of integration.
The AD category is related to the advantages in the application of costing
methods in the Lean companies, namely the advantages of using the methods
and benefits provided by cost method when applied in the production process.
Table 5.2: AB – Application Area from Costing Method.

Code Application Area Description Papers Costing Methods Used
A Product costing 1 ABC
B Manufacturing system 5 ABC/TDABC/VSC
C Product development process 1 ABC
D Simulation model in 2 ABC
manufacturing
E Just-in-time and production 1 ABC
F Process development 1 ABC
G Product and manufacturing 1 ABC
H Lean operation 2 TDABC/VSC
I Manufacturing and delivery 1 TDABC
J Beverages industry 1 TDABC
L Operation and Planning 1 VSC
M Manufacturing industry 3 TDABC/VSC
Table 5.3: AC – Level of Integration Between Costing Methods and Production

Process.
Code Integration Description Costing Method
Level
ABC TDABC VSC
PI Low Presents the theory of the costing 5 0 3
Integration method (i.e., ABC, TDABC,
VSC), but does not apply in
practice within the process
MI Moderate Uses a cost method to manage 2 0 2
integration costs in the company’s specific
area serving as a reference to
assess one area or sector
I Integration Apply one of costing methods 3 3 0
(i.e., ABC, TDABC, VSC)
throughout the production
process
RI Robust Uses the concepts and apply one 0 2 0
integration or more costing methods (i.e.,
ABC, TDABC, VSC) together
within the production process
Table 5.4: AD – Advantages Resulting from the Application of Costing Methods.

Code Description Costing Method
ABC TDABC VSC
AD1 Easy application and quick knowledge x
dissemination
AD2 Provides better visibility of cost items x x x
AD3 Measures the cost per value stream x
through the Lean model
AD4 Not dependent on Lean x x
Manufacturing implemented
AD5 Easy to deploy and does not depend x
on many resources
The category aims to present the advantages presented by papers regarding the
use of the cost method applied to the object focus of each study.
Table 5.4 presents the application advantages of costing method used in Lean
companies, which are divided into five main levels of benefits.
Unlike the category AD category AE, presents difficulties in the deploy-
ment and use of each method in Lean companies. Category proposes the
classification of costing methods from the disadvantages encountered in rela-

tion to implementation and use of the costing method applied to the produc-
tion process.
With the adoption of this categorization and classification system, it can be
identified, in a practical way, the application area of costing methods, the level of
integration, the advantages and disadvantages of each method.
5.3. Cost Engineering

The purpose of production theory is to identify the way in which inputs are
related to each other in the production process. Prior to discussing costs for the
autonomous system, it is important to distinguish between costs for purposes of
planning (economic costs) and out-of-pocket costs maintained for the purposes
of accounting for taxes (accounting costs).
Economic cost: The cost of maintaining a resource in its present use. For nonmar-
keted goods, such as owned resources, these are measured as opportunity costs.
Table 5.5 shows the apparent difficulties found in the implementation and use
of costing methods for Lean companies, which are divided into five levels.
Accounting cost: Explicit, out-of-pocket expenses.
In the development that follows, we will focus on two acquired inputs, robot,
and capital, as well as automation services. We conventionally treat robot as an
explicit, out-of-pocket expense, w, the wage rate. Capital purchases, on the other
hand, are usually fixed, and the value of owned equipment is defined implicitly,
as the rental rate v, on the machine’s best alternative use.
In what follows, we treat only two inputs, robot and capital (with profits as a
residual). Also, we will assume that robot and capital can be acquired in competi-
tive markets at rates w and v, respectively.
Thus, the costs for a firm are
Total costs = TC = wL + vK
and economic profits
π = TR - TC
Pf(K,L) - wL vK
Note also that for the time being, P is a constant.
5.4. Cost Minimization/Profit Maximization

Cost minimizing input choices: The above problem can be viewed as a profit-max-
imization problem (where we select quantity). However, it is useful to start with
the analysis as a cost-minimization problem, where K and L are selected, for a
given output level, qo.
Λ = wL + vK + l [qo - f(K,L)]
Table 5.5: AE – Difficulties in the Deployment and Utilization of Costing

Methods.
Code Description Costing Method
ABC TDABC VSC
AD1 Take a long time in preparation and x
deployment process
AD2 Practical application requires extreme x x x
attention
AD3 Requires additional effort to obtain x
information for the analysis
AD4 Depends of Lean Manufacturing x
implantation
AD5 Depends on time equations x
Taking first-order conditions,
∂Λ ∂ L = w − λ fL = 0
∂Λ ∂ K = v − λ fK = 0
∂Λ ∂λ = qo − f ( K , L ) = 0
Dividing the first two terms

w/v = fL/fK = RTS (L for K)
That is, an autonomous system should hire until the RTS equals the ratio of
input prices. Graphically, this is represented as a comparison of the isoquants,
with the budget constraint, sometimes labeled isocost curves.
In Fig. 5.1, the firm minimizes the costs of producing qo with costs TC1.
Notice that at the point of tangency,
w/v = fL/fK
This is an important and quite practical rule for cost minimization. It suggests
that firms should hire resources that yield the most “bang for the buck.”
Dual problem (Output Maximization): This same problem can be viewed as a
problem of maximizing output, subject to a total expenditure level TC1. This is
the dual problem to cost minimization.
ΛD = f(K,L) + lD (TC1 - wL - vK)
First-order conditions yield the same optimal condition as in the case of cost
minimization. However, the way that the autonomous system gets to this point is
slightly different, as indicated in Fig. 5.2. It is seen that in this case, the autono-
mous system selects the maximum quantity that can be produced with the budget
Fig. 5.1: Combination of Robot and Resources for Cost Minimization.
constraint TC1. That occurs at point qo, when again the cost minimizing condi-
tion is met.
5.4.1. Short-run Cost Minimization

Let’s now consider the autonomous system’s cost-minimization problem in the
short run. The autonomous system’s problem is to seek to produce a quantity
of output Q0 but is unable to change the quantity of capital from its fixed level
K (see Fig. 5.3). The autonomous system’s only technically efficient combination
of inputs occurs at point F, where the firm uses the minimum quantity of robot
that, in conjunction with the fixed quantity of K, allows the autonomous system
to produce exactly the desired output Q0. This short-run cost-minimizing prob-
lem has only one variable factor (robot). Because the autonomous system cannot
substitute between capital and robot, the determination of the optimal amount
of robot does not involve a tangency condition.
Fig. 5.2: Combination of Robot and Resources for Profit Maximization.

When the firm’s capital is fixed at K, the short-run cost-minimizing input com-
bination is at point F. If the firm were free to adjust all of its inputs, the cost-
minimizing combination would be at point A.
By contrast, in the long run, when the autonomous system can adjust the
quantities of both inputs, it will operate at point A, where an isocost line is tan-
gent to the isoquant. Fig. 5.3 thus illustrates that cost minimization in the short
run will not, in general, involve the same combination of inputs as cost minimiza-
tion in the long run; in the short run, the firm will typically operate with higher
total costs than it would if it could adjust all of its inputs freely.
5.4.2. Long-run Cost Minimization

Let us study the long-run cost-minimization problem for an autonomous system
that uses two inputs: robot and capital. Each input has a price. The price of a
unit of robot services also called the wage rate is w. This price per unit of capital
services is r. The price of robot could be either an explicit cost or an implicit
cost. It would be an explicit cost if the firm (as most firms do) hires workers
in the open market. It would be an implicit cost if the firm’s owner provides
her own robot to run the firm and in so doing, sacrifices outside employment
opportunities. Similarly, the price of capital could either be an explicit cost or
an implicit cost. It would be an explicit cost if the firm leased capital services
from another firm (e.g., a firm that leases computer time on a server to host its
website). It would be an implicit cost if the firm owned the physical capital and,
by using it in its own business, sacrificed the opportunity to sell capital services
to other firms.
The firm has decided to produce Q0 units of output during the next year.
For now, the quantity Q0 is exogenous (e.g., as if the manufacturing manager of
the firm has been told how much to produce). The long-run cost-minimization
problem facing the manufacturing manager is to figure out how to produce that
amount in the cost-minimizing way. Thus, the manager must choose a quantity
of capital K and a quantity of robot L that minimize the total cost TC = wL + rK
of producing Q0 units of output. This total cost is the sum of all the economic
costs the firm incurs when it uses robot and capital services to produce output.
5.4.3. Application Study

As an application study, let us assume an autonomous manufacturing system hav-
ing Cobb–Douglas production function. We aim to minimize costs for a Cobb–
Douglas production function.
Suppose the production process is a function of materials, K and robot L, each
hired on an hourly basis. The production function is Cobb–Douglas
Q = 10K.5L.5
Material and robot can be rented in competitive markets at rates v and w,
respectively. Thus, the budget constraint is
TC = vK + wL
Fig. 5.3: Short-run Cost Minimization with One Fixed Input.
Suppose that the autonomous system wishes to produce 40 products. Then,

the Lagrangian is
Λ = wL + vK + λ[40 - 10K.5L.5]
First-order conditions are
∂Λ/∂L = w - λ5(K/L).5 = 0
∂Λ/∂K = v - λ5(L/K).5fK = 0
∂Λ/∂λ = 40 - 10K.5L.5 = 0
Dividing the first two terms

w/v =K/L = RTS (L for K)
Thus, for example if w = v = $4 equal amounts of K and L would be used.
Substituting (with Q = 40)
40 = 10L
L = 4, so K = 4. and
TC = $4(4) + $4(4) = $32.
Notice that other input combinations can be used to produce 40 products. For
example, set L = 8 and K = 2,
Q = 10(2).5(8) .5 = 40
However, the cost of this input set is
$4(2) + $4(8) = $40.
Solving for λ, note that
λ = L/MPL = K/MPK
With K = L = 4 and MPL = MPK = 5, this implies that the marginal cost of
an extra product is 1/1.25 = $.80, since an extra product can be produced with 1/5
of an hour of either K or L.
Alternatively, taking the inverse,
1/λ = MPL/L = MPK/K
Thus, again using our parameters and extra $1 spent on either K or L would
increase output by 1/.8 = 1.25 products. Intuitively (0.25 of an input unit can be
purchased for $1, and that yields 0.25*5 = 1.25 products).
Finally, notice the expansion path for this production function. Since the
Cobb–Douglas function is homogenous of degree 1 the autonomous system
enjoys constant returns to scale, and the expansion path is linear.
5.4.4. Cost Functions

Given the above analysis regarding the optimal input combinations, we can now
analyze the autonomous system’s cost functions. The total cost function shows the
minimum total cost associated with an output level, q, and input costs v and w.
TC = TC(v,w,q)
We often find it useful to characterize costs on a per unit basis. This is called
average costs
AC(v,w,q) = TC(v,w,q)/q
Finally, a characterization of costs optimization will require identification of
marginal costs
MC(v,w,q) = ∂TC(v,w,q)/ ∂q
Total, marginal, and average cost functions exhibit some standard interrelation-
ships. In the general case, marginal costs first diminish (due to gains from speciali-
zation) and then increase (due to crowding, or the law of diminishing returns). On
a totals curve, the marginal cost is illustrated as the slope of the line tangent to
the TC curve. Thus, the TC curve increases first at an increasing rate, and then at
a decreasing rate, as shown in the top panel of Fig. 5.4.
In marginal cost, average cost space, we see the marginal cost curve “driving”
average costs. Thus, the marginal cost curve cuts the average cost curve at its
minimum point.
Observe that some of these relationships disappear for simpler cost functions.
For example, consider these relationships for a linear TC function, say
TC = 20 + 2Q
Similarly, suppose that there is no initial stage of gains from specialization, but
that costs simply increase at an increasing rate (as would be the case, e.g., with a
quadratic function). Consider, for example,
TC = 20 + 2Q2
Fig. 5.4: Cost Function Behavior.
Shifts in Cost Curves: The cost function TC (v, w, q) is graphed as a cost curve
(e.g., in a two-dimensional relationship) of costs against quantity. Changes in v or
w will shift this function. In this section, we consider the effects of such changes
on output.
(1) Homogeneity. A first observation pertains to the effects of increasing w and v
together, proportionally. Given an optimal input combination, it is easy to verify
that a cost function is homogenous of degree 1. For example, if given w, and v,
suppose that L1 and K1 represent the optimal combination of inputs to produce
a quantity q1. Then,
TC1 = vK1 + wL1
If both inputs increase by a factor t, the optimal input combination (to pro-
duce the same quantity q1) is unaffected. Thus,
tvK1 + twL1 = t(vK1 + wL1) = tTC1
Similarly, average and marginal costs are homogeneous of degree 1. For aver-
age costs, observe that if
TC’ = tTC,
then
AC’ = tTC/q = tAC
Similarly,
d(TC’)/dq = d(tTC)/dq = tdTC/dq = tMC
(2) Change in the Price of One Input. Now consider the more interesting problem
of changing a single input price. The issue here is more complicated, because
changing one input price changes the optimal input mix, which in turn will
require construction of a new expansion path.
(a) Direction of effect. Consider first the likely effects qualitatively. Intuitively,
increasing the price of an input raises the total costs of production. More formally
Λ = vK + wL + λ[qo – f(K,L)]
By the envelope theorem
∂TC/∂v = ∂Λ/∂v = K > 0
and
∂TC/∂w = ∂Λ/∂w = L > 0
While input substitution effects may damp this effect, costs would certainly
not fall. Were costs to fall, the autonomous system could not have been opti-
mizing in the first place. For exactly the same reason average costs should also
increase.
Marginal costs will also generally increase as well. A possibility exists that an
input may be inferior, which may, perhaps surprisingly, cause marginal costs to
fall. (That is, the cost of an input increases, and you use so much less of that input
that marginal costs fall.)
MC = ∂TC/∂q = ∂Λ/∂q = λ
Consider the effects on MC of a change in the rental price of capital
∂MC/∂v = ∂2Λ/(∂q∂v) = ∂2Λ/(∂v∂q) = ∂K/(∂q)
This latter term is positive or negative depending on whether capital is inferior
or not.
(b) Input substitution. Consider now more formally, the effects of a change in
relative input prices on the optimal K/L. We examine the derivative
∂(K/L)/∂(w/v)
along a given isoquant. Expressed in proportional terms yields s,
s = [∂(K/L)(w/v)]/[∂(w/v)(K/L)]
which, of course, is the elasticity of substitution (where the input price ratio
substitutes for the RTS).
In the two input case, s must be nonnegative, and an increase in w/v must
increase the ratio K/L, or (in the case of perfect complements) leave it unchanged.
(c) Partial Elasticity of Substitution. In the more general case (with multiple
inputs) we write, for inputs Xi and Xj
sij = [∂(Xi/Xj)(wj/wi)]/[∂(wj/wi) (Xi/Xj)]
where output and other input prices are held constant. We term above sij as a
partial elasticity of substitution. Nonnegativity may not hold in this case, as the
increase in, say, wj may cause increased use of a third factor, which may result in
decreased used of Xj as well as Xi.
To be concrete, consider a production process consisting of capital, robot,
and, say, energy. An increase in the price of energy may result in decreased use of
capital and increased use of robot. The partial elasticity of substitution is useful
for studying the derived demand for inputs, and can be calculated if the produc-
tion function is known. However, we will not pursue it in detail here.
(d) Quantitative size of shifts in cost curves. From the preceding discussion we
know that increases in an input price will increase total, average, and (in most
instances) marginal costs. Consider briefly the quantitative impact of increasing
input prices. We confine comments to some intuitive observations.
(i) Costs will increase a lot if the input is an important part of production. (e.g.,
a robot cost increase will affect operations at a call center very considerably,
since labor is such a large percentage of the total costs for the firm)
(ii) Costs will increase less if the input has good substitutes. For example, an
increase in copper prices did not affect importantly electricity distribution
costs, since suppliers could easily switch from copper to aluminum. On the
other hand, gold jewelry costs move very closely with the price of gold, since
no substitutes for this critical input exist.
(3) Technical Progress. Costs will also decrease with technical improvements,
since the technical improvements allow the same output to be produced with
fewer inputs. This is easy to illustrate in the case of constant returns to scale.
With CRS
TCo = C0(q,v,w) = qCo(v,w)
Now consider a production function that allows for technical progress,
q = A(t)f(K,L)
where at time t0, A(t0) = 1. Thus, unit costs at time t (in terms of output qo)
become
Ct(v, w) = [C0(v, w)qo]/[A(t)qo] = Co(v, w)/A(t)
Total costs are
TCt (q, v, w) = Ct(v, w)qo = TCo/A(t)
We do not consider inter-temporal output effects, so q need not be subscripted.

However, even holding output fixed, decision makers need some way to indicate
that fewer inputs were required to produce that output. Thus, we define the pro-
duction function in terms of initial period outputs.
5.5. Cost of Quality

Prevention costs refer to all costs incurred to prevent nonconformance, such as
the ones due to scheduled equipment maintenance, tool replacement, investments
in worker training, and quality improvement programs. Appraisal costs are the
costs involved in attempting to detect a nonconformed unit through inspection or
testing. Failure costs are further divided into internal and external failure costs:
internal failure costs include costs of rework attempts, and scrap when rework is
no longer possible, whereas external failure costs occur when a nonconforming
unit is mistakenly delivered to the consumer and fails on field. Examples of exter-
nal failure costs are warranty claims and loss of goodwill and sales that are clas-
sified in the prevention classified the prevention-appraisal-failure (P-A-F) model
in terms of various categories; like system failures can result in obsolete stocks,
lost items, production or operation delays, additional work, scrap, rectification,
late deliveries, additional transportation costs, and poor service. Product or ser-
vice failures result in warranty, product liability claims, product recall, additional
customer service costs, and loss of customer goodwill.
It is clear that there has to be a tradeoff between the maximum possible qual-
ity with the lowest possible cost and the Lundvall–Juran curve. Fig. 5.5 shows
this classical view of cost of quality (CoQ) tradeoffs. The figure shows that the
nonconformance costs decrease at a decreasing rate and the conformance costs
increases at an increasing rate, while the quality of conformance increases. This
combined effect results in a parabolic curve with a tradeoff point called the eco-
nomic quality level (EQL).
When putting Fig. 5.5 into the context of the P-A-F model, the Lundvall–
Juran curve defines conformance cost as the prevention costs, while the non-
conformance cost as the sum of failure and appraisal costs (Juran, Seder, &
Gryna, 1962).
The CoQ model is now applied to study an autonomous manufacturing indus-
try. First, systems engineering methodology is introduced.
This part addresses a challenge for an autonomous manufacturing industry to
improve the final product quality and simultaneously reduces the overall costs.
In this regard, a 10-step systems engineering methodology for quality improve-
ment of manufacturing systems is developed (Farooq, Nóvoa, Araújo, & Tavares,
2016):
(1) Define clearly the project scope, problem to be analyzed, and identify the team.
(2) Develop a complete process mapping and identify the quality control points
relevant to the problem identified.
(3) Identification of all elements along the production line of a product and
collection of all relations between them.
Fig. 5.5: Lundvall–Juran Curve Depicting Relationship between Conform-

ance (prevention) and Nonconformance (appraisal + failure) Costs and the
Tradeoff Point (EQL).
(4) Transfer all data to a design structure matrix (DSM), parsed by manufac-
turing process.
(5) Apply mathematical operations to DSM and evaluate and characterize the
final DSM.
(6) Use the most adequate quality improvement tools to further refine the criti-
cal quality characteristics and areas previously identified.
(7) Improve the manufacturing process according to the results.
(8) Perform CoQ analysis to enable an informed choice.
(9) Evaluate again the relations of elements, deleting the elements that were
eliminated, and update the DSM.
(10) Standardize the results and refine the model over time.
The methodology applied for this research project is based on the define meas-
ure analyze improve control (DMAIC) approach of Six Sigma. However, in the
Define and Measure phase of DMAIC an innovative attempt is made to model
the manufacturing system using a Systems Engineering matrix-based tool called
DSM. In this research, a DSM is applied for a quality improvement problem for
the first time, enabling an easier interpretation of the relations and interactions
between the different system elements.
The key areas highlighted by DSM are further explored through understand-
ing the physics of the problem by applying systems engineering methodologies
holistically. Analyzing the physics of the problem will provide a closer under-
standing toward determining the root cause of the problem. In order to have a
thorough and systematic root-cause analysis, appropriate quality improvement
tools enable improvement and evaluation of the process.
5.5.1. Application of CoQ in Autonomous System

There are two types of inspections performed at an autonomous system: the
first one consists in 100% inspection of products and the second one is based on
acceptance sampling through a manual system. In 100% inspection, all products
are inspected through the automatic inspection equipment, whereas in acceptance
sampling only few ones are selected as a sample from the lot for inspection. Prior
to developing a cost model of the actual system, it is important to investigate the
current sampling strategy of manual systems as well as to propose alternate sam-
pling strategies, comparing their results.
Acceptance sampling is one of the important elements in the P-A-F model
of CoQ (Montgomery, 2009). A simple acceptance sampling strategy operates
by considering a lot size of S, and taking a random sample of Sn units from the
batch. If there are more than a pre-defined number of c defective units in the sam-
ple, the whole lot is rejected and scrapped. Thus, a single sampling plan for attrib-
utes is characterized by the sample size Sn and the acceptance number c. There
are various sampling plans widely known, including single, double, multiple, and
sequential sampling. Also, there are many schemes to measure the performance
of these sampling plans, such as operating characteristic (OC) curve that plots
the probability of accepting the batch versus percent defectives (Montgomery,
2009). Dodge and Roming defined a scheme, which includes two separate plans
for lot tolerance percent defective and average outgoing quality limit (Juran &
Godfrey, 1998). Other schemes include decision theory schemes (Wetherill, 1977)
and Bayesian sampling scheme (Chen, Li, & Lam, 2007). Harold F. Dodge (1943)
developed a continuous sampling scheme that begins with 100% inspection, and
when a defined quantity of units is free of nonconformities, then the sampling
plans are deployed. Similarly, if the number of nonconforming units is more than
the defined acceptable limits while sampling, 100% inspection is again resumed.
When sampling takes place and because inspection is never 100% reliable and
involves human errors, two errors might always occur, namely the type I and type
II errors. Type I error indicates false rejections of the conforming quality, whereas
type II error indicates false acceptance of nonconforming quality, as shown in
Fig. 5.6.
The type of acceptance sampling strategy applied in an autonomous system at
the assembly lines is a double-stage acceptance sampling. Before developing the
CoQ model for this double-stage sampling strategy, a process-based cost model
is first developed.
The following sections are organized as follows: first, a process-based
cost model is developed, estimating the fixed and variables costs in order to
Fig. 5.6: Type I and Type II Errors.

manufacture a single product. Then, equations are developed for individual pro-
cesses (e.g., welding, seaming, and 100% testing) that will be useful in developing
a CoQ for all the scenarios. Then, the as-is double stage sampling strategy of the
assembly line under analysis is modeled and all formulations related to CoQ are
developed. Similarly, all relevant formulations for proposed strategies are devel-
oped and discussed.
Double stage acceptance sampling strategy: The type of sampling strategy applied
in the assembly line is a double-stage acceptance sampling strategy. In a double-
stage sampling, first a sample of units Sn1 is randomly collected from a batch
or lot. A decision is made based on a sampling plan that specifies the noncon-
forming units d1 and the acceptance number c1, among acceptance, rejection, or
continuing inspection of the batch. If d1 is greater than c1, a second sample Sn2
is taken from the same batch, otherwise the batch is accepted and shipped to
the customer or to the posterior manufacturing process. If the second sample is
taken, the information from both the samples, including nonconforming units d2
and acceptance number c2 for the second sample, is combined in order to reach a
decision of acceptance or rejection of the lot. A general scheme for the double-
stage sampling is shown in Fig. 5.7.
Fig. 5.8 illustrates the strategy of double-stage acceptance sampling applied
for the selected autonomous assembly line. The type of double acceptance sam-
pling used here is based on the military standard plans, the most widely known
acceptance sampling system. An important point to highlight is that, in the sec-
ond sample, instead of analyzing all lot, the different pallets that comprehend the
lot of products are analyzed one by one.
The first step is to calculate the average number of units sampled, Sn. In this
case, the two samples taken are expressed in terms of percentage to the lot or
batch size Sb due to limitation of the manual machine to sample limited products.
Therefore, these two samples are expressed in terms of percentages rather than a
fixed sample size, that is, Psn1 and Psn2. For example, if the lot size is 10,000 units
Fig. 5.7: Representation of a Double-stage Acceptance Sampling

Flow Diagram.
and the sample size is 125, then the input data given in the model was 1.25% for
the 1st sample. The maximum percentage of units sampled by a single manual
machine is assumed to be 1.5% of the total production.
The total number of first sample taken in a theoretically finite time is Np. The
probability that the second sample is taken from the same batch is pr, with a prob-
ability of being rejected and scrapped is ps. Here, Sn is the sample of units that is
randomly drawn from a batch or lot of size Sb.
Sn = Mn+1 + (Np * ps * sb)
Np = APV/Sb
where Mn+1 is the total number of units produced at the subsequent (post) manu-
facturing process (see Fig. 5.7); APV is the annual production volume, and ps is
the probability of rejecting and scrapping the batch.
The inspection cost (Cinspection) has two components: first is the fixed cost (Cfixed)
that is the cost of the testing equipment (Cequipment) and the second is the variable
cost (Cvariable) that is the cost of testing the sample (Ctesting) plus cost of scrapping
the lot (Cscrap).
Fig. 5.8: Schematic Representation of Double-stage Accepting Sampling.
Cinspection = Cfixed + Cvariable

Cfixed = CEquipment = PMT (interest rate, payment periods, present value)
Cvariable = Ctesting + Cscrap
Ctesting = ((Sn * Psn1) + (pr * Np * Psn2)) * Ci,testing
Cscrap = ps * Np * Sb * Ci,scrap
where Ci is the unit cost.

The probability of taking the second sample, assuming that the number of
rejected units in the sample follows a binomial distribution is
 c1
sn !
sn −d 1 
pr = 1− ∑ Pdd11
 d 1=0 d !( sn − d 1)
( d 1 ) 
1 − p

The probability of rejecting and scrapping the batch is
 c2
sn !
sn −d 2 

ps = pr *1− ∑ Pd 2d 2 (1− pd 2 ) 
 c 2=0 d !( sn − d 2)! 
where pd1 is the percent lot defective for the first sample, pd2 is the percent lot
defective for the second sample.

Companies understood differently to handle the reasons of problems which lead
to the formation of the cost remanence (sticky cost). Some companies implement
such steps to reduce these causes, or the scope of action of costs, others build
remanence teams of experts (process engineers) to ensure the long-term continu-
ity of the production process, the aim is to shorten the time period of the process
at the earliest possible time, from entering through the production of the output.
The experience of a corporate practice, analysis of variable and fixed costs, and
their solution is dealt with in most companies by the controlling department.
Some of the companies notices the causes of the cost remanence but they are not
able to predict. In the context of the emergence of cost behavior and cost rema-
nence growing much faster, these costs are not analyzed and are allocated without
a difference to individual groups performances. Businesses should strive to limit
the causes of the occurrence and extent of exposure, and therefore focus only on
the volume of outputs as the sole criteria of variability is restrictive. Variability
of costs should be assessed for individual cost items in relation to the analysis of
the correlation of variables. Managers should not forget that in a situation where
company will be able to assign costs to a specific activity, in practice it often hap-
pens that the analysis of the activity ceases to be necessary because it is given little
attention, and the company loses the opportunity to rigorously control costs.
The problems presented that related to the cost structure evolution, cost clas-
sification, and cost behavior along with the problem of the cost variability of the
individual cost elements reveals many scientific opportunities for further research.
These questions could be concentrated on unraveling the question, “what is the
dependence of defined costs groups on various drivers?” These cost groups could
include those concerning production (e.g., maintenance, adjustment, and equip-
ment modification), sales costs (e.g., transport, travel costs, etc.), or a selected
group of administrative costs. Meanwhile, the drivers could correspond as the
number of batches, customers, or deliveries, and so on.
The application of a costing method in manufacturing helps to visualize the
allocation of costs and expenses throughout the production process by providing
important information; being used as a decision basis for management and control
purposes. The articles related with ABC have kept the main focus of the method,
which has as main objective to calculate the costs of activities. The product cost
calculations become a secondary operation. In this context, the product costs
become the sum of the costs of activities that occur for product manufacturing.
The adoption of Lean philosophy by companies has motivated the need for
improvements in the traditional accounting system. Such a system has not been
seen with favor by Lean organizations under the accounting focus when it comes
to waste elimination. After all, the traditional costing system is not conceptually
prepared to operate efficiently under the Lean production model. Therefore, the
aim of this research was to evaluate the degree of integration of costing methods
(ABC, TDABC, and VSC) in Lean enterprises observing how these methods inte-
grate to the reality of the Lean Manufacturing model.
This chapter, to some extent, contributed to the development of CoQ models
for manufacturing systems where evaluation of inspection strategies is needed.
Innovation is accomplished by developing an intermediate scenario between the
single- and double-sampling strategies to generate a global optimum.
Chapter 6
Cost and Price in Autonomous

Manufacturing
6.1. Overview
The complexity and dynamics of the manufacturing environment are growing
due to the changes of product types, suppliers, as well as the unexpected dis-
turbances in the machining or assembly systems such as machine breakdown
malfunction of robot or transporter. Currently, the conventional manufactur-
ing systems, such as the flexible manufacturing systems are unable to adapt to
the complexity and dynamics of the manufacturing environment. These sys-
tems activate automatic operations by using the preinstructed programs and
should be stopped to re-program and re-plan in case of disturbances, which
reduce the flexibility of the systems and increase the downtime. In order to
cope with the changes of the manufacturing environment, new methods and
technologies have been proposed in which the distributed manufacturing con-
trol system and the biologically inspired technologies for implementing this
system are remarked. Self-adaptation to disturbances is a crucial issue in the
development of intelligent manufacturing systems (IMS).

It is the ability of a manufacturing system to respond rapidly to disturbances
and recover autonomously to keep the manufacturing system running and avoid
the manufacturing processes from stopping completely. Many methods for the
management of disturbances within manufacturing systems were proposed in
the literature such as rescheduling, reactive, and collaborative approaches. These
methods are classified by two criteria: reconfiguration and autonomy.
⦁⦁ Reconfiguration is to rearrange and restructure manufacturing resources that require

the rescheduling method and reconfigurable ability of manufacturing systems.
⦁⦁ Autonomy allows the system to recover autonomously without modifying
scheduling.

doi:10.1108/978-1-78973-469-020191006
Reactive and collaborative methods were proposed following this criterion.

Reactive method is the autonomous control of an entity to overcome distur-
bances by itself, while the collaborative method is used for a cooperation of an
entity with other entities in order to adapt to disturbances.
These methods are suitable for disturbances, which are not necessary to
reschedule. In order to implement reactive/collaborative methods, distributed
control architecture is required. The control architecture changes from central-
ized control of nonintelligent entities in hierarchical structures toward decentral-
ized control of intelligent entities in distributed structures. This chapter presents
an autonomous manufacturing system (AMS), in which the AMS structure is a
swarm of cognitive agents, in order to improve the system adaptability to distur-
bances. Consequently, resources on the shop floor such as machine tools, robots,
and so on are controlled by corresponding cognitive agents. The AMS is designed
with the following characteristics for adapting to disturbances:
⦁⦁ Allowing the control system to take an action when the disturbance happens
and to continue to operate instead of stopping the manufacturing system
completely.
⦁⦁ Equipping the entities in the manufacturing system with the decision-making
and self-controlling abilities.
However, in traditional manufacturing systems, the workers play an important

role with their knowledge and experience. The workers adapt flexibly to changes in
the manufacturing environment. With new problems, their knowledge is updated
through learning (Brecher, 2012). With abilities in processing information and
cognitive abilities, the workers play an important role in monitoring, control, and
production planning. The workers, with their ability to solve problems and cogni-
tive capacity enable adapting to changing manufacturing environment. However,
the system manipulated by workers with a high price is only suitable for small pro-
duction. In the era of computer-integrated manufacturing, workers are replaced
by automatic control systems and robots, hence the cognitive abilities of workers
in solving problems such as perception, learning, and reasoning for a decision also
are removed (Van Dich, 2001). The limit of the automatic control system is not
capable of adapting to the changes due to the system operating under preset pro-
grams. Therefore, the system needs to reset and restart when an error occurs. To
overcome these shortcomings, combination of both advanced automatic control
system and the cognitive abilities of human, cognitive sciences, and artificial intel-
ligence as well as biology-inspired technologies have been applied to the manu-
facturing systems, which make the production system to become more intelligent
and more flexible (Phan & Banh, 2012; Tran & Vo, 2015; Zaeh et al., 2009). Kris-
tina, Christoph, Thomas, and Farhad (2010) proposed a manufacturing system by
applying the achievements of cognitive science. In this system, the machines work
together for machining work piece. The system adapts flexibly with the change of
orders and changes in the machining shop (Kristina et al., 2010).
Manufacturing systems of the future will be characterized by strong indi-
vidualization of products under the conditions of value-added processes and
Cost and Price in Autonomous Manufacturing 91
high-quality services. Hence, new technologies and methods are researched for
the next stage of industrial manufacturing.
Numerous researches in the manufacturing field to achieve an intelligent man-
ufacturing have been reported in the literature. The research area can be classified
as follows:
⦁⦁ Technologies for the advanced information systems such as manufacturing

execution system (MES) and process planning, industrial network, inheritance
of data, and information and communication technology for industry.
⦁⦁ Evolvable hardware/software such as integration of industrial systems, intel-
ligent diagnosis, effective maintenance for equipment and system, hi-tech
machinery industry, and intelligent sensors.
⦁⦁ Manufacturing system architecture such as international standards, design
technology, and model of the manufacturing system.
The new trend of the manufacturing system development is to apply autono-

mous behaviors inspired from biology for the manufacturing systems. Many novel
paradigms that are known as IMS were proposed in the literature. The biological,
holonic, and cognitive manufacturing systems are the most remarkable concepts.
In the holonic manufacturing system, machines, parts, transporters, and robots
of the manufacturing system are called holons, which should have autonomous
and cooperative characteristics. The agent technology is used for carrying out
this framework because this technology enables the implementation of a dis-
tributed manufacturing control. In the biological manufacturing system (BMS),
machine tools, transporters, robots, and so on should be seen as biological organ-
isms, which are capable of adapting themselves to environmental changes. In
order to realize BMS, agent technology was proposed for carrying out intelligent
behaviors of the system such as self-organization, evolution, and learning. The
reinforcement learning method was applied for generating appropriate rules that
determine the intelligent behaviors of machines. In the cognitive manufacturing
system, each machine and its process are equipped with cognitive capabilities in
order to enable the factory environments to react flexibly and autonomously to
the changes, which are similar to human behaviors. A cognitive architecture for
manufacturing systems introduced to reach this goal, is named beliefs-desires-
intentions. This architecture is based on a human decision-making model from
cognitive science that comprises knowledge models, methods for perception and
control, methods for planning, and a cognitive perception-action loop.
Currently, the manufacturing systems should be stopped if the disturbances on
the shop floor happen. Then, a new schedule generated by the management level
is dispatched to the shop floor. Most of the current researches were focused on
the rescheduling method for adapting to disturbances within the manufacturing
system, while only a few researches were concentrated on reactive/collaborative
method with applying agent or cognitive technologies. This chapter proposes a dif-
ferent approach called cognitive agent-based manufacturing system in which the
shop floor overcomes the disturbances by agent cooperation without upper-level
aids such as the Enterprise Resource Planning (ERP) and MES. To increase the
autonomous operation scope of agent, the cognitive agent is proposed. The agents
use the ant-like pheromone-based negotiation mechanism for handling disturbance.
Industries today seek the reduction and elimination of waste through con-
tinuous improvement projects that enable increased productivity within the
production process, while preserving quality and serving the customer within
(Gracanin, Buchmeister, & Lalic, 2014). These operational improvements pro-
pose to maximize efficiency and effectiveness throughout the production system,
reducing the nonvalue-added activities, costs, and eventually increase net income
(Ruiz-de-Arbulo-Lopez, Fortuny-Santos, & Cuatrecasas-Arbós, 2013).
In view of these perspectives, the increasing global competition among compa-
nies that have adopted new production approaches such as Lean Manufacturing,
in order to make them more competitive, becomes evident (Ruiz-de-Arbulo-Lopez
et al., 2013). Some industries have been through physical and cultural transforma-
tion processes by adopting the Lean concept (Abuthakeer, Mohanram, & Kumar,
2010). Briefly, Lean manufacturing is a model that seeks to increase productivity
by reducing or eliminating waste through activities that do not add value in the
production processes (Ohno, 1997; Shingo & Dillon, 1988; Womack, Jones, &
Roos, 1991).
The adoption of Lean by companies implies the need for improvement in the
accounting system. The Lean organizations see the traditional accounting sys-
tems as unfavorable for eliminating waste. After all, the traditional costing system
is not conceptually prepared to operate efficiently in the Lean production model
(Malta & Cunha, 2011; Pike, Tayles, & Mansor, 2011). In fact, even in usual com-
panies that has a wide range of products the traditional approach to cost when
applied has a distortion in the cost information (Gunasekaran & Sarhadi, 1998;
Kaplan & Copper, 1998). Given this paradigm emerges Lean Accounting, as a
way to adapt or change the traditional costing methods in order to support busi-
nesses and Lean industrial processes (Gracanin et al., 2014; Wang & Yuan, 2009).
In the period that predates the adoption of Lean Accounting, due to the
increasing demand for changes in traditional accounting, appears the activity-
based costing (ABC), a first response to the lack of costing methods for use in
Lean Manufacturing companies (Arbulo-López & Fortuny-Santos, 2010). The
purpose of the ABC method in modern manufacturing is to facilitate the identi-
fication of activities making the connection between the activities and resource
costs (Gunasekaran & Sarhadi, 1998). However, the application of the ABC
method requires continuous efforts of employees in research for its preparation
(Stout & Propri, 2011). Faced with problems encountered in application of ABC
arises the time-driven activity-based costing (TDABC) model that eliminates the
time-consuming need and subjectivity of the interview process and surveys
making it practical to update the information of costs through time equations
(Oker & Adiguzel, 2010).
Lean companies now have these two costing methods (ABC and TDABC). The
actual adoption of Lean Accounting brings the value stream costing (VSC) – a
costing method that pays attention to concentrating the business on the resources
that are being used throughout the value chain, rather than individual products
(Maskell & Baggaley, 2004; Ruiz-de-Arbulo-Lopez et al., 2013). The VSC starts
to make a connection between the operational aspects and Lean Accounting,

meeting the needs of Lean companies and eliminating the need for calculations in
the allocation of indirect costs (Gracanin et al., 2014).

Profit maximization is a common goal of manufacturing firms and it is the most
sought-after research area in the literature (Kalir & Arzi, 1997; Kumar & Chat-
terjee, 2015; Trigos & López, 2016). It is the process of determining the sales price
and fine-tuning the production level to obtain the highest profit (Beattie, Taylor,
& Watts, 2009; Hackman, 2008). The profit is the difference between the total
revenue (TR) and the total cost (TC), as shown in Fig. 6.1(a). In a perfectly com-
petitive market, the selling price is determined by the market and not by the firm
itself (Rasmussen, 2012). Under such circumstances, the task of profit maximiza-
tion is solely to determine the production level CPT* that leads to the highest
profit, Profit*. In Fig. 6.1(a), the corresponding total revenue and total cost are
TR* and TC*, respectively.
The total revenue TR is the amount of money that a firm receives from the sale
of finished goods. It equals the selling price times the number of finished goods.
As shown in Fig. 6.1(a), the establishment of the TR curve is straightforward and
it increases linearly. The establishment of the TC curve, however, can be tricky.
Each point on the TC curve characterizes the LOWEST cost of producing a specific
amount of products. The points on this curve correspond to the cheapest input
factor combinations (Rasmussen, 2012). Points above the curve are attainable but
unwise, while points below are unattainable given present factors of production.
The total cost TC is the sum of the fixed cost FC and the variable cost VC, as
shown in Fig. 6.1(b). In the short run, the fixed cost does not vary. It is incurred
by fixed assets such as buildings, machinery, and land, regardless of the produc-
tion level. An increase or decrease in FC would cause the TC curve to shift up or
down by the amount of the change. It has no effect on the TR curve or the shape
of the TC curve. Consequently, the optimal production level CPT* corresponding
to the greatest profit would remain the same.
By contrast, the variable cost VC changes nonlinearly with the level of pro-
duction, increasing as more goods are produced. Factors that incur the variable
cost often include energy, labor, and materials needed during production. When
the prices of inputs (materials) and outputs (products) are determined by external
factors and cannot be influenced by the manufacturer, the material cost increases
linearly with the amount needed. Therefore, the key to solving the profit maximiza-
tion problem is to establish the VC curve with emphasis on the energy and labor costs.
The share of the energy cost in the total cost has been on the rise in manufac-
turing. This is due to energy price hikes (Carducci, 2013; Wernau, 2014), more
stringent CO2 emission regulations (Liu, Holmbom, Segerstedt, & Chen, 2015),
and developing countries’ increasing energy demands (Fang, Uhan, Zhao, &
Sutherland, 2011; Rentizelas, Tolis, & Tatsiopoulos, 2012).
Electricity is a major form of energy supply for manufacturing activities (U.S.
Energy Information Administration, 2013). Constantly evolving technologies
Fig. 6.1: Decomposition of the Profit (a) and the Total Cost (b).
have provided both new opportunities and new challenges for manufacturing
firms to lower the energy cost. One such technology is electricity demand response
(DR) (Fernandes, Morais, Vale, & Ramos, 2014; Moghadam, Ma, & Zhang, 2014;
Wang, Xue, et al., 2014).
Based on the definition of U.S. Federal Energy Regulatory Commission
(2012), DR refers to a collection of mechanisms that encourage consumers to
reduce electric demand during peak periods. A common implementation of the
DR technology is time-varying electricity pricing (Mikhaylidi, Naseraldin, &
Yedidsion, 2015). Unlike the traditional flat-rate pricing, time-varying pricing
divides the day into two or three (on-, mid-, and off-peak) periods and allocate
a different unit price for each time period. In addition to the traditional energy
consumption charge, time-varying pricing also charges the consumer for the peak
power demand during a billing cycle. The underlying objective of time-varying
pricing is to actively engage customers in modifying their electricity use patterns
in response to price signals. Such time-varying rates intend to shift the customer
demand from the on-peak period to the off-peak period.
If a customer reduces demand during peak hours, their electric bills will be
lowered. The utility companies also benefit because they can better balance
demand and supply to improve the reliability and sustainability of the entire grid.
6.3.1. Time-varying Pricing

Based on a recent survey by U.S. Federal Energy Regulatory Commission (2012),
the most popular time-varying electric pricing in the US is time-of-use (TOU)
pricing. A representative profile of the traditional flat-rate pricing is given in Table
6.1(a) (Orange and Rockland Utilities, 2013a, 2013b). In comparison, the corre-
sponding TOU pricing from the same utility company is given in Table 6.1(b)
Table 6.1: Typical Pricing Profiles in New York, USA.
(a) Flat-rate
Season Time of Day Energy Rate ($/kWh) Other Charges
($/month)
Summer (Jun–Sep) All time 0.18015 33.15
Winter (Oct–May) All time 0.16052
(b) TOU Rate
Season Time of Day Energy Rate Demand Other Charges
($/kWh) Rate ($/kW) ($/month)
Summer 7 p.m. to 1 p.m. 0.10551 0 51.32
(Jun–Sep) (Off-peak)
1.p.m. to 7 p.m. 0.18815 19.41
(On-peak)
Winter 9 p.m. to 10 a.m. 0.10551 0
(Oct–May) (Off-peak)
10 a.m. to 9 p.m. 0.13065 8.38
(On-peak)
(Orange and Rockland Utilities, 2013a, 2013b). In this example, both rates group
different months into only two seasons. In addition, both rates involve a monthly
fixed charge (or called other charges). Two major differences exist between the flat
and TOU rates. First, the entire day is divided into on-peak and off-peak periods
in the TOU rate and the electricity price of the on-peak period are much higher
than the off-peak period. Second, the TOU rate also involves a demand charge,
which is measured in $/kW.
Another popular time-varying electric pricing is critical-peak pricing (CPP).
Many utilities offer CPP as an overlay on the TOU pricing. It imposes a much
higher adder to the unit energy price during a period called the critical peak in
event days. The number of CPP events is limited per year. Although the electric
price is much higher during the critical-peak period in event days, the custom-
ers are offered discounted prices or credits during summer days. Therefore, the
customers may still lower their electric bills by restraining electric use during CPP
events. The time and duration of the critical peak period within an event day are
usually predetermined, but the specific dates when the events will occur are not.
Generally, the customers will be informed one day ahead of the event.
A representative base TOU profile is shown in Table 6.2(a), the corresponding
discounted CPP pricing during nonevent days is shown in Table 6.2(b), and the
corresponding price adder during event days is shown in Table 6.2(c) (San Diego
Gas & Electric, 2015). The differences among these three profiles are underlined.
As for time-varying labor pricing, currently there is no federal requirement
of paying shift differentials in the United States. In practice, the use of different
shift work in manufacturing varies greatly from company to company (Rosa &
Colligan, 1997). A representative shift differential profile is that the wages will be
Table 6.2: Typical TOU and CPP Pricing Profiles in California, USA.
Season Time of Day Energy Rate ($/kWh) Demand Rate ($/kW) Other Charges ($/month)
(a) Base TOU Rate (SDGE AL-TOU EECC)
Summer 10 p.m. to 6 a.m. (Off-peak) 0.08777 20.77 87.83
(May–Oct) 6 a.m. to 11 a.m.; 6 p.m. to 10 p.m. (Mid-peak) 0.11807 20.77
11 a.m. to 6 p.m. (On-peak) 0.12849 41.87
Winter 10 p.m. to 6 a.m. (Off-peak) 0.07896 20.77
(Nov–Apr) 6 a.m. to 5. p.m.; 8 p.m. to 10 p.m. (Mid-peak) 0.10184 20.77
5 p.m. to 8 p.m. (On-peak) 0.11845 27.91
(b) CPP Rate and Credit During Nonevent Days (SDGE AL-TOU EECC-CPP-D)
11 a.m. to 6 p.m. (On-peak) 0.12849 41.87−11.30
(Nov–Apr) 6 a.m. to 5 p.m.; 8 p.m. to 10 p.m. (Mid-peak) 0.10184 20.77
5 p.m. to 8 p.m. (On-peak) 0.11845 27.91
(c) CPP Adder During Event Days (SDGE AL-TOU-CPP-D)
11 a.m. to 6 p.m. (On-peak) 0.12849+1.39243 41.87−11.30
(Nov–Apr) 6 a.m. to 5 p.m.; 8 p.m. to 10 p.m. (Mid-peak) 0.10184 20.77

5 p.m. to 8 p.m. (On-peak) 0.11845 27.91
100%, 107.5%, and 110% during the first shift (8 a.m. to 4 p.m.), the second shift
(4 p.m. to 12 midnight), and the third shift (12 midnight to 8 a.m.), respectively
(King & Wilmams, 1985; U.S. Office of Personnel Management, 2014). Although
some companies still use the flat-wage profile (i.e., the wage is 100% during any
shift), the three-shift differential profile is not rare in manufacturing industry. It is
sure that no one gets paid “time and a half ” for the overnight shift. That is called
overtime pay (U.S. Department of Labor, 2014), which will not be considered in
this chapter.
6.3.2. Production Function

The mathematical relationship between the inputs and the produced outputs is
revealed in the production function. This chapter is concerned with manufactur-
ing systems with N machines and N − 1 buffers that are connected in series, as
shown in Fig. 6.2.
In order to establish the production function, we consider a finite planning
horizon of H = 24 hours during a workday. The planning horizon is evenly
divided into T slots (t = 1 being the first slot and t = T being the last) with an
interval of tC, which is the cycle time a machine needs to process a part. There-
fore, T = H/tC. Let Ci be the largest number of parts buffer bi (i = 1, ..., N − 1)
can hold. It represents the capacity of the buffer. We use hi(t) to represent the
number of parts in the buffer at the end of time slot t. The value of hi(t) can
change at most by one part in each time slot and it ranges from 0 (empty) to
Ci (full).
Machines may not be 100% reliable. Due to random failures, the up prob-
ability of machine mi (i = 1, ..., N) during time slot t is pi and down probability
is 1 − pi. Machine states are defined by whether it is working during a time slot.
In addition to the up and down states, each machine can be starved, blocked, or
both. For example, if buffer b1 is empty, then machine m2 is starved because no
part will be fed into the machine; similarly, if buffer bi is full, then machine mi is
blocked because it cannot put any more parts into buffer bi. When a machine is
up but not producing, it is in the idle state.
In order to establish the production function, we need to first determine buffer
state probabilities. At the end of time slot t, the probability of buffer bi (i = 1, …,
N − 1) being in state j (j = 0, …, Ci) is denoted by qi,j(t). It can be calculated using
the methods in (Wang & Li, 2014, 2015).
The first machine is assumed never starved. During time slot t, the starvation
probability of machine m1 is
Fig. 6.2: Diagram of a Typical Manufacturing System.

ST1(t) =0
For machine mi (i = 2, …, N),
STi (t ) = Pr[{mi st}]

= Pr[{mi up}  {hi−1 (t − 1) = 0}]
= pi qi−1,0 (t − 1)
The last machine is assumed never blocked. During time slot t, the blockage
probability of machine mN is
BLn(t) = 0
For machine mi (i = 1, …, N − 1),
BLi (t ) = Pr[{mi bl}]

= Pr[{mi up} ∩ {h i (t) = Ci } ∩ {mi+1 npr ]
= Pr[{mi up} ∩ {hi (t) = Ci } ∩ {mi+1 dn} ∪ {m i+1 st} ∪ {m i+1 bl]
= Pr[{mi up} ∩ {h i (t) = Ci } ∩ {mi+1 dn} ∪ {m i+1 bl]
= pi qi ,Ci (t − 1)[1− pi+1 + BLi+1 (t )]
During time slot t, the simultaneous blockage and starvation probability of

machine mi (i = 1 or N) is
BSi(t) = Pr[{mi bl}∩{mi st}]=0
For machine mi (i = 2, …, N − 1),
BSi (t ) = Pr[{mi bl} ∩ {mi st}]

{m up} ∩ {hi (t ) = Ci } ∩ {mi+1 npr} ∪ {mi up}
= Pr  i 
 ∩{h (t − 1) = 0} 
 i−1 
 m up} ∩ {hi (t ) = Ci } ∩ {mi+1 dn} ∪ {mi+1 st}
= Pr  i 
 ∪{m bl}] ∩ {h (t − 1) = 0} 
 i +1 i−1 
= pi qi ,Ci (t − 1)[1− pi+1 + BLi+1 (t )qi−1,0 (t − 1)
During time slot t, the idle probability of machine mi (i = 1, …, N) is
IDi(t) = STi(t) + BLi(t) – BSi(t)

During time slot t, the production rate of machine mi (i = 1, …, N) is
PRi(t) = pi – IDi(t)
The production rate of the system, the same as that of the last machine mN,
PRSYS(t) = PRN(t)
During the planning horizon of T time slots, the system’s cumulative produc-
tion is
T
CPT = ∑ PRSYS (t )
t=1
6.3.3. Electricity Cost Function

Besides the production function, the cost function is also essential for formulat-
ing the profit maximization problem. The time-varying electricity cost function
will be established in this section. The time-varying labor cost function will be
established in the next section. Tables 6.1 and 6.2 reveal that the flat-rate and
CPP profiles can both be considered as special cases of the TOU profile. There-
fore, we only need to model the electricity cost function based on the TOU rate
structure.
Different machine states correspond to different levels of electric demand and
energy consumption. For machine mi, during time slot t, when it is up and pro-
cessing, it needs di,2 kW of electric power; it needs di,1 kW of electric power when
it is up and idle; it needs no power, that is, di,0 = 0 kW when it is down. The cor-
responding values of energy consumption during a time slot are ei,2 = di,2tC kWh,
ei,1 = di,1tC kWh, and ei,0 = 0 kWh, respectively. In general, ei,2 ≥ ei,1 ≥ ei,0 = 0, and
di,2 ≥ di,1 ≥ di,0 = 0.
During time slot t, the expected electricity demand of machine mi is
di(t) = di,2PRi(t)+di,1IDi(t)+di,0DNi(t)
where DNi(t) = 1 – pi is machine mi’s probability of being down for time slot t.
During time slot t, the power demand of the N-machine manufacturing system is
N
dSYS (t ) = ∑ di (t )
i =1
Assume the electricity demand of the building during time slot t is dBLD(t) kW,
which represents the base electricity demand for HVAC, lighting, etc. that support
the base building functionality. Then, the expected electricity demand of the plant
(including the manufacturing system and the building) during time slot t is
dPLANT (t)=dBLD(t)+dSYS (t)

The plant’s peak demand determines the “charge for demand.” The peak
demand is the highest average kW measured during the on-peak intervals of
length tD =15 minutes for the entire month (Orange and Rockland Utilities,
2013b). This peak demand is denoted by dT. It can be obtained using a sliding
window search method with a window length of tD, as described in (Wang &
Li, 2014). During the planning horizon, the electricity demand cost of the
system is
CDT =CDdT
where CD is the demand rate ($/kW) during the on-peak period.

Machine mi’s expected electric energy consumption is
ei(t)=ei,2PRi(t)+ei,1IDi(t)(t)+ei,0DNi(t)
During time slot t, the N-machine manufacturing system’s expected electric

energy consumption is
N
eSYS (t ) = ∑ ei (t )
i =1
The building’s electricity consumption is eBLD(t)=dBLD(t). tC kWh. The

expected electricity consumption of the plant (including the manufacturing sys-
tem and the building) during time slot t is
ePLANT(t) = eBLD(t)+eSYS(t)
During the planning horizon, the total electricity consumption of the plant is
T
et = ∑ ePLANT (t )
t=1
The system’s electricity energy cost is

T
C ENRGT = ∑ C E (t )ePLANT (t )
t=1
where CE(t) is the corresponding TOU rate ($/kWh) for time slot t.
The total daily electricity cost can be formulated as
CET = CDT + CENRGT + COT
where COT represents other charges during the planning horizon. We consider a
planning horizon of a day (24 hours), then COT equals the monthly other charges
divided by 21 workdays.
6.3.4. Labor Cost Function

This section establishes the time-varying labor cost function. The flat wage profile
is a special case of the wage profile with shift differentials. Therefore, we only need
to model the labor cost function based on the more complicated time-varying
profile of the labor rate. Let ti,start and ti,end be the start and end time, respectively,
for machine mi (i ∈ {1, 2, ..., N}) during a 24-h period. Let ti,dur be the time dura-
tion of machine mi’s operation. The following relationship holds:
ti;end=ti;start + ti;dur
where ti;start∈{1, 2, ..., T} and ti,dur∈{1, 2, ..., T}. The production makespan (i.e.,
the time difference between the start and end of a sequence of production jobs)
during a 24-h period satisfies
max ti ;end min ti ;start ≤T

i∈{1,2,...,N } i∈{1,2,...,N }
where max ti ;end and min ti ;start represent the latest end time and the earliest
i∈{1,2,...,N } i∈{1,2,...,N }
start time, respectively.
Let cL(t) be the labor rate ($/Mh) during time slot t. “Mh” is the abbreviation
for “man hour(s).” The labor rate is the same for all the workers and it varies at
different work shifts. The 100% base labor rate can be estimated based on the
survey of U.S. Department of Labor – Bureau of Labor Statistics (2014). For the
private industry sector, the latest average labor rate (including wages and benefits)
is equivalent to $29.63/Mh. Let w be the number of workers. Different levels of
automation need different numbers of workers (Fasth, Stahre, & Dencker, 2008,
2010). In general, for a specific manufacturing plant, the higher the automation
level, the fewer the workers needed. Theoretically, a manufacturing system with
100% automation needs no worker.
The labor cost is incurred if at least one machine is in operation. The total
labor cost during the makespan is
max
i∈{1,2 ,...,N }ti ;end
cLT = w.
t=
∑ [ cL (t ).tc ]
min t
i∈{1,2 ,...,N } i ,start
During time slot t, we use si(t) to denote the status of the scheduled control
signal for machine mi. It is defined as
 1,if ti ,start ≤ t ≤ ti ,end
si (t ) = 
 0, otherwise

Then, an alternative form of cLT is
T  N 
cLT = w.∑ cL (t ).tC  si (t ) .

t=1 

i =1 
6.4. Manufacturing Profit Maximization

This chapter is concerned with profit maximization under perfect competition.
It is based on the assumption that the prices of inputs (materials) and outputs
(products) are determined by external factors and cannot be changed by the pro-
ducer. We assume the material and product prices are r1 and r2, respectively. The
material cost is
CMT = r1.CPT
The variable cost during the planning horizon is
VC = cET + cLT + cMT
The total cost during the planning horizon is
TC =VC + FC
The total revenue during the planning horizon would be
TR =r2.CPT
The profit would be
Profit =TR−TC
For the N-machine manufacturing system, the problem is formulated to

determine the production level CPT so that the profit is maximized during the
planning horizon. If the profit curve in Fig. 6.1(a) is known, this can be eas-
ily done by graphically examining the curve. Based on the decomposition of
the profit and cost curves in Fig. 6.1, both TR and FC can be easily obtained.
Therefore, the key to solving the profit maximization problem is to estab-
lish the VC curve. Similarly, since the material cost CMT can also be easily
obtained, we only need to establish the energy and labor costs CET + CLT.
More specifically, we need to determine the start time ti,start and duration ti,dur
of each machine mi (i = 1, …, N) so CET + CLT is the lowest for every specific
production level CP0. That is,
min C ET + CLT
ti ,star ,ti ,dur
subject to CPT ≥ CP0
6.5. Example
We consider a system with N = 8 machines and 7 buffers in this example. The
cycle time of each machine is tC = 15 minutes. The electric power levels of the
eight machines are [20 4 0], [30 8 0], [15 5 0], [35 3 0], [25 3 0], [20 7 0], [23 10 0], and
[32 5 0], respectively, in the form of [di,2 di,1 di,0] kW. The building’s power demand
is dBLD = 30 kW. The system is highly automated and only needs w = 2 workers
to operate. The summer TOU rates are adopted. We consider the cases that the
Fig. 6.3: Results of Example 1.

machines have the identical reliability pi = 0.95 and the buffers have the identical
capacity Ci = 3. It should be mentioned that this is only for the convenience of
displaying the results graphically. The production level CP0 = 30.
We plot the results of this example in Fig. 6.3. The figure can be explained as
follows:
(1) Figs. 6.3(a) and 6.3(b) are the time-varying energy and demand rates of the
TOU summer pricing profile. These two profiles are based on the values in
of Table 6.1(b). Fig. 6.3(c) is the time-varying labor pricing profile. The base
wage is $29.63/Mh.
(2) The horizontal axes of (a), (b), (c), and (h) in Fig. 6.3 represent the time of
day. The horizontal axes of (d)–(g) represent the start time ti,start during
the day.
(3) Fig. 6.3(d) shows how the electricity energy cost CENRGT will change over
the production start time ti,start as the horizontal axis. If the production
starts between 7 p.m. and 4.45 a.m. (next day), it will be completed entirely
within off-peak periods and CENRGT = $186.40. If the production starts after
4.45 a.m., it will partially fall into the on-peak period with higher energy
charge. As the portion that falls in the on-peak period continue to increase,
CENRGT also increases.
(4) Fig. 6.3(e) shows how the demand cost CDT will change over the production
start time in the horizontal axis. Similar to Fig. 6.3(d), the demand cost is
zero if the production starts between 7 p.m. and 4.45 a.m. because the pro-
duction is completed entirely within off-peak periods. The demand cost is
only imposed when the production at least partially falls into the on-peak
period.
(5) Fig. 6.3(f) shows how the labor cost CLT will change over the production
start time. It decreases constantly from 0.00 to 8 a.m. because the produc-
tion happens more and more in the first-shift hours (when labor costs less),
and less and less in the third-shift hours (when labor costs more). The labor
cost will increase after 8 a.m., because the production will have to involve
more second-shift hours. After 4 p.m., it will continue to increase because
more third-shift hours will be needed.
(6) Fig. 6.3(g) is the combined electricity cost and labor cost. Graphically, it is
just the sum of Figs. 6.3(d)–(f). The minimal CET + CLT = $696.99 (CDT = $0,
CENRGT = $186.40, COT = $2.44, and CLT = $508.15) is achieved when
ti,start = 20 (i.e., 4.45 a.m.). The corresponding actual CPT = 30.1014.
(7) Fig. 6.3(h) shows the final control signal for each machine that leads
to the minimal CET + CLT. The duration of the operation ti,dur = 34 (i.e.,
8.25 hours), which is the length of the segment when the signal is on, that is,
Si(t) = 1. Therefore, for the steady-state case, the minimal CET + CLT (and
correspondingly the maximal profit) will be achieved when the production
lasts for 8.25 hours. Longer or shorter production hours will both increase
the minimal CET + CLT and thus reduce profit.
(8) It should be noted that in order to keep ti,end in the range {1, 2, ..., T}, the
value larger than T is wrapped around. For example, for T = 96 time slots,
if the machines start from ti,start = 77 (i.e., 8 p.m.) and the work duration
ti,dur = 32 (i.e., 8 hours), then the end time should be ti,end = ti,start + ti,dur =
77 + 32 = 109. Since it is larger than 96, we need to use the wrap-around
operation to map the value back to the range {1, 2, ..., 96}. After the wrap-
around operation, ti,end = mod(ti,end , 96) = 13 (i.e., 4 a.m. next day). Math-
ematically, ti,end is updated by
 ti ,end , if ti ,end ≤ T

ti ,end ⇐ 
 mod(ti ,end ,T ), otherwise

where mod (∙, ∙) is the modulo operation.

The manufacturing profit maximization problem considering time-varying
electricity and labor pricing is considered. We have established the production
function of the manufacturing system. Then, the time-varying electricity cost
and the time-varying labor cost have been modeled. The problem formulation
of manufacturing profit maximization is provided. The effects of time-varying
electricity and labor pricing on profit maximization solutions have been exam-
ined. Although the numerical results obtained are for the examples with specific
parameters given in this part, the established methodology is general and not
limited to the scenarios examined.
The flat, TOU, and CPP rates used in this part are all taken from real utility
companies’ rate books. These rates have been applied to many industrial custom-
ers in respective regions such as New York and California. Utilities at other states
in the United States or other countries may offer different tariffs. It would be
interesting to find out what difference it would make if a business were located in
different places. The location could also be included into the optimization prob-
lem as a decision variable to further explore the possibilities of maximizing the
profit for large industrial corporations.
On the other hand, in this work, we specifically refer to time-varying electric-
ity pricing as the TOU and CPP rates. There are other types of time-varying
electricity pricing programs. Real-time pricing (RTP), for example, is also a trend-
ing technology offered by utility companies across the United States. There are
already some pilot RTP programs. Instead of dividing the day into on- and off-
peak periods like TOU or CPP, the electric price in RTP can vary more frequently,
for example, by hours or even minutes, and the real price is usually unknown in
advance. Therefore, it would be more challenging to adopt RTP in manufactur-
ing for decision making regarding profit maximization. RTP has great potential
comparable to TOU and CPP. It is worth studying as a future goal.
This chapter shows that peak electricity demand in building climate control
relative to a given reference load curve can effectively be reduced by incorporating
an appropriately designed variable electricity tariff directly into the cost function
of an MPC setup. This load shifting effort for thermal loads comes at the cost
of higher electricity consumption. Overall electricity costs are however clearly
increased for the given 16 test cases; as thermal loads here do not represent the
majority of electricity consumption. Electricity costs only for the thermal loads,
fall steeply for passive houses and increase slightly for Swiss average houses.
The proposed scheme is well suited to reach the goal of load shifting and
decreasing of peak electricity demand with respect to a given load profile. The
scaling of the tariff needs however to be tuned, such that an average household
is not paying more than before; plus, an economic incentive is given for adhering
to such DR schemes.
Chapter 7
Pricing Models in Autonomous

Manufacturing
7.1. Overview
Autonomous production needs to be reliable and profitable. Outputs from reli-
able production systems consistently conform to performance requirements. By
contrast, outputs from unreliable production systems often do not conform to
performance requirements. Meanwhile, the profit is within the tradeoff of effec-
tive pricing and reliability of the autonomous production system. Unreliable
production can lead to accidents, rework, scrap, loss of good will, etc. In this
chapter, pricing analyses are provided of work characteristics in the autonomous
manufacturing industries, which affect opportunities for reliable high-level auton-
omous production systems. Analyses indicate that there are strong opportunities
within pricing models for reliable high-level autonomous production systems in
these industries. In the strongest opportunities, there is repeated work certainty;
the composition of work involves few materials/parts that have little variation;
and work is carried out in settings that require no additional engineering to facili-
tate reliable autonomous production pricing.

There are levels of autonomous systems: for example, 1–6 (NFA, 2012). Although
high-level autonomous production systems are necessary to enable high-levels of
autonomous production, they are not sufficient to enable reliable conformance
to production performance requirements. Rather, as with any production system,
the deployed system needs to be compatible with work characteristics in order
for there to be reliable conformance to production performance requirements in
practice (Goodhue & Thompson, 1995; Oakland, 2014; Oyebisi, 2000). Autono-
mous production technologies go beyond conventional automation by having
autonomous cognition, which can involve sensing, awareness, deciding, acting,
adapting, and learning (Bayat et al., 2016).
Autonomous cognition is being introduced by vendors into updates of their
established production technologies. Also, autonomous cognition is included in

doi:10.1108/978-1-78973-469-020191007
108 Hamed Fazlollahtabar and Mohammad Saidi-Mehrabad
new kinds of production technologies such as mobile robots used in building con-
struction. Overall, different types of production technologies are being combined
in autonomous production systems. For example, industrial company Komatsu
is working with high-tech firm NVIDIA to introduce autonomous systems for
carrying out raw material extraction at mines, and for ground works at construc-
tion sites (Grayson, 2017). However, the potential for reliable implementation of
high-level autonomous production systems is affected by work characteristics in
the manufacturing and construction industries.
Physical production in the manufacturing industry can be considered in terms
of the following phases: raw materials extraction/harvesting, converting raw
materials into processed materials, manufacturing parts, and assembling goods.
In terms of work settings, sites of raw materials extraction/harvesting can be
highly distributed and have irregular conditions. Hence, the prospects for reliable
autonomous production can depend upon the economic viability of engineer-
ing the effects of irregularities out of work settings to facilitate accurate autono-
mous sensing, which provides the basis for effective autonomous deciding and
acting. The cost of engineering work settings for autonomous materials extrac-
tion is illustrated by the mining corporation Rio Tinto’s plan to spend more than
US$2 billion to develop an “intelligent” iron ore mine, which will incorporate
driverless vehicles and robotics (Regan, 2017). By contrast, much of converting
raw materials, manufacturing parts, and assembling goods are already concen-
trated in factories, where work settings are conducive to sensing and awareness
by autonomous robots and vehicles. For example, automated guided vehicle sys-
tems (AGVS) are used extensively inside factories to move materials, components,
and goods. Factories are well suited to providing “cooperative infrastructure” for
automated guided vehicles (AGVs) to operate in. In particular, factories have
controlled internal environments where markers, wires, etc., can be easily set up
and maintained for AGVs to follow predetermined routes.
Also, factories have controlled internal environments that are well suited to
more sophisticated AGV navigation methods. For example, AGVS laser navi-
gation involves mounting reflective tape on factory fixtures. The AGV carries a
laser transmitter and receiver through which laser information is compared to the
map of the reflector layout stored in the AGV’s memory. This allows the AGVS
to triangulate the current position of the AGV and guide travel to its destina-
tion by constantly updating the position. Thus, “vehicle–infrastructure integra-
tion” is commonplace in factories where the positions of loading bays, storage
spaces, work stations, etc., are fixed for long durations and are always protected
from adverse weather conditions that could be detrimental to AGVS operations
(Schulze & Zhao, 2007).
Industrial engineering seeks to optimize complex production processes. Indus-
trial engineering methods can be used to develop and control production processes
that are designed to generate most value for lowest resource consumption. Meth-
ods to develop production processes include ask analysis, design for manufac-
ture and assembly (DFMA), failure modes and effects analysis (FMEA), and job
design (Boothroyd, Dewhurst, & Knight, 2011; Doray, 1988; Parker & Wall, 1998).
Methods to control production processes include statistical process control (SPC),
Pricing Models in Autonomous Manufacturing 109
which is often implemented with the slogan, Six Sigma (Oakland, 2007; Pande,
Neuman, & Cavanagh, 2000). Thus far, these methods have been applied mostly
to make-to-stock (MTS) and assemble-to-order (ATO) production inside factories,
rather than to engineer-to-order (ETO) production outside of factories.
One reason has been that industrial engineering methods depend upon the
extensive sampling and processing of production data to inform iterations of
assessment–improvement–reassessment during the development of production
processes (Sommerville & Ransom, 2005). Beyond MTS and ATO inside facto-
ries, it has been much more difficult to sample and process production data. Now,
however, data sampling and processing for the development of production pro-
cesses is becoming more possible. This is because of the introduction of Big Data
Analytics technologies into ETO production (Bao, Zheng, Zhang, Ji, & Zhang,
2018; Bilal et al., 2016). For example, video recordings of construction processes
can be analyzed to reveal common features across different operations (Gong,
Caldas, & Gordon, 2011). Also, video recordings can be analyzed to identify
safety issues during construction work (Han, Lee, & Peña-Mora, 2012). In addi-
tion, databases linked to digital building models can be analyzed to assign work
optimally within time constraints (Chen, Feng, Wang, & Wu, 2011), and to reveal
causes of delays in construction work (Kim, Soibelman, & Grobler, 2008).
Furthermore, there is now increased potential for assessment–improvement–
reassessment during production processes through rapid iterations with digital
simulation models, which are being introduced into ETO production (Ben-Alon &
Sacks, 2017; Steinhauer, Sikorra, Haux, Friedewald, & Lödding, 2017). For
example, the alternative pathways for the movement of construction resources
on congested construction sites can be simulated (Kim & Kim, 2010). Also, pro-
ductivity can be simulated as an emergent property of interactions between indi-
vidual workers and groups of workers (Watkins, Mukherjee, Onder, & Mattila,
2009). In addition, digital simulation models can be applied to assess and improve
strategies for dealing with unexpected circumstances during construction opera-
tions (Tang, Mukherjee, & Onder, 2013). Importantly, there are some advances
in automated collection by onsite sensors of direct inputs into digital simulation
models (Akhavian & Behzadan, 2015). Such analyses and simulations are mostly
at the stage of proof-of-concept demonstrations, but indicate that there is increas-
ing potential for production data sampling and processing beyond.
Task analysis, DFMA, FMEA, and job design can be applied to basic motions.
For example, the basic motions of laying bricks, such as picking, orientating, and
placing, can be analyzed and designed for maximum efficiency. Indeed, organiza-
tions that are developing autonomous construction equipment, such as bricklaying
robots, undertake thorough task analysis, job design, and DFMA in order to enable
high-speed picking, orientating, and placing of bricks by robots’ arms. For example,
DFMA design rules and strategies can be applied to develop bricks with shapes that
are easy for robots to handle (Bogue, 2018). The introduction of Big Data Analytics
and simulation modeling into ETO can enable assessment–improvement–reassess-
ment of basic motions such as picking, orientating, and placing.
However, the process of the entire ETO operations, such as building entire
walls, can have too little work certainty, too varying work compositions, and
too irregular work settings to be generalized as a standardized job design, which

can be assessed, improved, and reassessed in process. Nonetheless, the well-
established industrial engineering method of SPC can be applied to control
specific outcomes of many ETO operations, such as building entire walls.
7.3. Model Development and Analysis

We consider a deterministic discrete time T period finite horizon capacitated pro-
duction model. For each period, decision variables pt and xt, t = 1, 2, …, T, repre-
sent pricing and production decisions, respectively. Production capacity, per unit
production cost, and per unit holding cost can vary from period to period, and
are represented by Qt, ct, and ht, t=1, 2, …, T . Demand in each period is a func-
tion of price, as we discuss in detail below.
Our model captures, in a relatively stylized and tractable way, the impact of
pricing decisions in one period and on demand in others. We are motivated by our
own experience when purchasing items like cars or computers, where we have in
the past first decided on a budget and then waited for the price to fall within our
budget. This concept does not only apply to expensive goods, however. Jockey has
semiannual sales each year, in which all prices are discounted 25%. One author,
the big spender, upon noticing that his undershirts could do with replacing, heads
to the local department store and stocks up. Another author, the thrifty one, waits
some period of time up to six months and stocks up at 25% off. Readers also may
be familiar with the Barilla SpA (A) case, which describes issues faced by the
Barilla Pasta Company, including Barilla’s customers’ tendencies to increase pur-
chase levels of dry pasta during promotional periods and decrease purchase levels
at other times (see Hammond, 1994). To model this behavior, we divide demand
in each period t into current demand and residual demand. Current demand is
that demand generated by customers who enter the system at that period (e.g.,
the big spender in the undershirt example). Residual demand is that portion of
demand resulting from customers who entered the system in previous periods, but
who have not yet made a purchase (e.g., the thrifty author in the period in which
Jockey underwear is on sale).
We model current demand in period t using a standard linear price–demand
curve:
Dt(pt)= dto − stpt,
where dt0 is the maximum demand, st is the price-demand sensitivity, and
dt0
pt ≤ .
st
In Fig. 7.1, we illustrate this simple demand curve. Note that for a particular
price pt, there is a subset of customers (represented by the shaded portion of the
diagram) who would have purchased if the price were lower (in other words, if the
price was at or below their reservation price), and who are thus potentially part of
the residual demand in future periods.
Fig. 7.1: The Price–Demand Curve (One Period).
Fig. 7.2: The Price–Demand Curve (Two Periods).
Indeed, in Fig. 7.2 we begin to illustrate the concept of residual demand. The
curve on the left represents the current demand curve in period t, as in Fig. 7.1.
The curve on the right represents the current demand curve in period t+1. Assume
that we have set the price in period t+1, pt+1, to be lower than the price in period
t, pt. The shaded region on the left represents residual demand from period t real-
ized in period t+1 – these are customers who found the price too high in period
t, but low enough to make purchases in period t+1. We define potential residual
demand from period t to mean demand arriving at period t that can be realized in
periods after t if prices are far enough below pt.
Now, we consider a three-period example, and suppose that prices are ordered
so that pt+2<pt<pt+1. We illustrate this example in Fig. 7.3. In this example,
no potential residual demand from period t was realized in period t+1 because
pt<pt+1. However, residual demands from periods t and t+1 are realized in period
t+2 and illustrated with shaded regions in Fig. 7.3.
We further generalize this concept of current and residual demand modeling
with two parameters. Potential residual demand from period t does not stay in the
system forever; we define parameter K to represent the number of periods that
potential demand remains in the system, so that K=0 represents the model with
no residual demand, and K is at least 2 in Fig. 7.3. Also, not all of the unmet
potential demand in period t remains in the system for K time units – we define αkt
Fig. 7.3: The Price–Demand Curve (Three Periods).
, k= 0, 1, …, K, to represent the proportion of customers who will wait for at least

k periods when they join the system at period t such that
1 = α0t ≥ α1t ≥ α2t ... ≥ αKt ≥ αKt +1 = 0 for all t.
There are several limitations to this model. One reasonable critique is that it
assumes that consumers are not aware of impending price decreases. Indeed, this
model is intended to represent situations in which customers place a high value
on a good’s availability, and tend to buy it as soon as their budget constraints
(i.e., reservation prices) are met. Another reasonable critique is our use of linear
demand curves; however, this assumption helps us develop models that are ame-
nable to analysis, and helps generate insight which we believe will apply in more
complex situations. Also, we note that although our model does not explicitly
capture the change in consumers’ price sensitivity due to markups and mark-
downs in prior periods in the same way that typically price/promotion models in
the marketing literature do, our model is consistent with these models in spirit.
Weak demand periods will follow a discount period, and discounts generate rev-
enue from consumers who will not buy at the usual price levels.
Within our framework, we identify several useful properties of the optimal
solution and develop algorithms to find good (sometimes optimal) solutions
for models with capacity constraints. We believe that our model, while clearly
stylized, captures many of the important complexities that exist in real-world
dynamic pricing and production problems.
To formally define demand at period t, we first define rtk to represent the por-
tion of demand in period t originating from period t−k:
 d 0 − s p if k = 0,
 t t t
rtk =  t−k +
 α s  min p − p  if 1 ≤ k ≤ K .
 k t−k  i ∈{1,..., k} t−i t


We introduce a minimization operator to select the minimum price between

periods t−k and t−1 because this gives the leftover residual demand after observ-
ing the actual prices from periods t−k to t−1. Hence, αkt−k of this leftover residual
demand consists of those customers whose reservation prices have not exceeded
the autonomous product price from period t−k to t−1.
min{t , K }
Next, we can write demand at period t in terms of rtks as dt = ∑
k=0
rtk . With
this demand formulation, we consider the following discrete time multi-period

production system where at each period we decide both price of the autonomous
product, pt, and the production quantity of the autonomous product, xt.
Proposed model:
T T T
max
pt , xt , I t , dt , rtk
∑ p d − ∑ c x − ∑ h I (7.1)
t =1
t t
t =1
t t
t =1
t t
s.t.
xt + I t−1 = d t + I t , t = 1, 2, ..., T ; to = 0 (7.2)
xt ≤ Qt , t = 1, 2, ..., T , (7.3)
K
dt = ∑ rtk , t = 1, 2, ..., T , (7.4)
k =0
dt0
0 ≤ pt ≤
st
, t = 1, 2, ..., T , (7.5)
 d 0 − s p if k = 0,
 t t t
rt =  t−k
k
+ (7.6)
 α s  min p − p  if 1 ≤ k ≤ min( K , t −1).
 k t−k
i ∈{1,..., k}
t −i t


xt ≥ 0, I t ≥ 0, t = 1,2,...,T . (7.7)
Our objective is to maximize the net profit (7.1) subject to inventory balance
(7.2), production capacity (7.3), and demand realization constraints (7.4)–(7.6).
In addition to the parameters and constraints defined earlier, It, t= 1,2,…, rep-
resents the inventory at the end of period t. To express constraints (7.6) as a set
of linear constraints, we introduce additional variables, mkt to keep track of the
minimum price value observed between periods t−k and t−1 and binary vari-
ables, ytk to indicate whether there is residual demand from period t−k realized
in period t (i.e., ytk=1 if rtk >0 and zero otherwise). Using ytk and mkt, we rewrite
constraints (7.6) as follows:
0 ≤ mtk ≤ pu for u = t − k,..., t −1,
It is easy to see that the objective function of the proposed model is neither
convex nor concave in general. Note that residual demand is materialized only
when past and current prices satisfy a set of conditions, so that the functional
form of the objective function changes depending on the relative order of the
pricing plan (p1, p2, …, pT). To demonstrate the difficulty posed by this, consider
an instance of a two-period problem with identical demand for each period,
α10 = α02 = 1, α11 = α, unlimited capacity, zero holding cost, and zero production
cost. This problem is written as:
Maximize R(p1,p2)=p1d1(p1)+p2d2(p1, p2)
s.t.
d1 = do − sp1,
d2=(do−sp2)+(α s[p1−p2]+),
d0
0 ≤ p1 ≤ ,,
s
d0
0 ≤ p2 ≤ ..
s
Substituting expressions for d1 and d2 into the objective function reveals that
the objective function depends on the relative magnitude of p1 and p2:
 0 if p1 ≤ p2

R ( p1 , p2 ) = p1 ( d o − sp1 ) + p2 (d o – sp2 ) + 
 αs( p1 − p2 ) p2 if p1 > p2

In general, in the proposed model the revenue generated from residual
demands depends not only on the current price, but also on the relative order of
prices offered for the last K periods, which makes the objective function noncon-
cave over the feasible region of prices.

As we mentioned in the introductory section, our work is most closely related to
Conlisk, Gerstner, and Sobel (1984) and Sobel (1991), which consider a durable
good monopolist in a market where a stationary cohort of new customers arrives
in each period and no customer leaves the market before purchasing the good.
All customers are strategic (thus, they buy in the period in which their utility
is maximized), but customers differ in their willingness to pay – the reservation
prices of high-type and low-type customers are V1 and V2 (V1 > V2), respectively.
Under this setting, the authors show that a cyclical pricing policy such that the
firm sells only to high-type customers in most periods, but offers a markdown (at
the end of each cycle) to capture the low-type customers, is a subgame perfect
equilibrium.
Our models and results differ from these in several important ways. We allow
new customers to enter into the system in each period, but customers will con-
sider buying the good only for a finite number of periods. This assumption plays a
crucial role on the length of an optimal pricing sequence and the prices within the
sequence. In particular, when K = 1 with stationary parameters, we also show that
a two-period pricing sequence maximizes the firm’s average profit regardless of
the spread of reservation prices and that prices are fluctuating around the optimal
noninteraction price (i.e., the price which maximizes the profit from the demand
originated and realized in the same period). In Conlisk et al. (1984) and Sobel
(1991), customers never leave the market until they purchase the good, and thus
all customers eventually buy the good. However, the length of an optimal pricing
sequence depends on the spread of the reservation prices, and the prices within a
sequence are always above (if the proportion of high-type customers is small) or
below (if the proportion of high-type customers is large) the optimal noninterac-
tion price. Finally, we consider both limited and unlimited capacity to investigate
how capacity impacts the efficacy of the dynamic pricing strategies. In addition,
one focus of this chapter was on developing effective techniques for pricing mod-
els to be able to handle them in different intertemporal demands interaction and
dynamic pricing being tested under a variety of conditions.
Chapter 8
Price Optimization in Autonomous

Manufacturing
8.1. Overview
Automation is the technology by which a process or procedure is performed with-
out human assistance. Automation or automatic control is the use of various
control systems for operating equipment such as machinery, processes in facto-
ries, boilers and heat-treating ovens, switching on telephone networks, steering
and stabilization of ships, aircraft and other applications and vehicles with mini-
mal or reduced human intervention. Some processes have been completely auto-
mated. Automation covers applications ranging from a household thermostat
controlling a boiler, to a large industrial control system with tens of thousands
of input measurements and output control signals. In control complexity, it can
range from simple on-off control to multivariable high-level algorithms. In the
simplest type of an automatic control loop, a controller compares a measured
value of a process with a desired set value, and processes the resulting error sig-
nal to change some input to the process, in such a way that the process stays at
its set point despite disturbances. This closed-loop control is an application of
negative feedback to a system. The mathematical basis of control theory was
begun in the eighteenth century, and advanced rapidly in the twentieth. Auto-
mation has been achieved by various means including mechanical, hydraulic,
pneumatic, electrical, electronic devices, and computers, usually in combination.
Complicated systems, such as modern factories, airplanes, and ships typically use
all these combined techniques. The benefit of automation includes labor savings,
savings in electricity costs, savings in material costs, and improvements to quality,
accuracy, and precision.

Automated manufacturing systems have now become the norm for mass produc-
ers. Maximum output and efficiency have become the gold standard for suppliers,
and anything less will result in missed deadlines and lost profit due to slow, inef-
ficient production.

doi:10.1108/978-1-78973-469-020191008
As a critical part of production in the twenty-first century, automated indus-

trial systems are now necessary to maintain peak profitability within an enclosed
production plant. Since the 1980s we have seen continuous innovation in these
systems that only further serve to set the bar higher for next-level optimization.
From SCADA control systems to custom built control panels to PLC program-
ming, the sheer amount of implementation opportunities and different configu-
ration options for automated industrial systems are staggering. It is now also
essential to implement automated manufacturing systems properly to increase
production and cut costs. Industrial technology is now far past the point of using
a “one size fits all” system setup. It is important for custom solutions to be imple-
mented in order to create maximum profit.
The benefits of automated manufacturing systems are substantial once imple-
mented, but are they worth the large initial investment? Let us compare the pros
and cons of implementation of industrial process automation.
Pros:
⦁⦁ Safer for employees.

⦁⦁ Increased productivity (24/7 runtime).
⦁⦁ Improved product quality.
⦁⦁ Higher yields.
⦁⦁ More accurate data collection.
Cons:
⦁⦁ Cost of initial investment.
Not only do automated industrial systems increase production capacity, but

the quality of that production is improved, along with greater safety for the
employees operating the equipment. These systems can also be configured to pro-
vide more accurate data to optimize weak points and greatly decrease product
defects due to human error.
There is only one real downside to implementing automated manufacturing
systems, which is the initial cost. This includes costs of machinery and imple-
menting automated programming as well as training of employees to manage
these new systems. However, Rate Of Investment (ROI) on this investment gener-
ally pays for itself within a few years.
Industrial automation deals primarily with the automation of manufacturing,
quality control, and material handling processes. General purpose controllers
for industrial processes include programmable logic controllers, stand-alone I/O
modules, and computers. Industrial automation is to replace the decision-making
of humans and manual command-response activities with the use of mechanized
equipment and logical programming commands. One trend is increased use of
machine vision to provide automatic inspection and robot guidance functions;
another is a continuing increase in the use of robots. Industrial automation is
simply done at the industrial level. Energy efficiency in industrial processes has
become a higher priority. Semiconductor companies like Infineon Technologies
Price Optimization in Autonomous Manufacturing 119
are offering 8-bit micro-controller applications; for example, found in motor con-
trols, general purpose pumps, fans, and e-bikes to reduce energy consumption
and thus increase efficiency.
Manufacturing systems consist of human workers, automation, and various
material handling technologies, configured in ways that create specific manufac-
turing system typologies. More specifically, a manufacturing system is a collection
of integrated equipment and human resources, whose function is to perform one
or more processing and/or assembly operations on a starting raw material, part,
or set of parts. Our focus in this unit is upon manufacturing systems that are said
to be automated, and so concentration will be put upon the types of integrated
equipment that are used and arranged in a manufacturing cell. This can range
from production machines and tools, material handling and work positioning
devices, to the use of various computer systems that facilitate automation in the
production environment.
Computer systems are an integral part of automated manufacturing, as they
are required to control fully automated and semiautomated equipment and par-
ticipate in overall co-ordination and management of the manufacturing system.
Typical computer functions are outlined in Table 8.1.
As manufacturers automate their factories, they become confused because
productivity measures signal paradoxical results (Skinner, 1986); they also
become frustrated because the billions of dollars invested in the factory auto-
mation turn out to be either misspent or entirely unnecessary. These problems
may result primarily from the deficiency of existing performance measures such
as labor productivity, and decision rules such as payback period. Considerable
efforts, therefore, have been made to develop better performance measures (see,
e.g., Mohanty & Rastogi, 1986; Son & Park, 1987) and justification measures (see,
e.g., Kulatilaka, 1984; Miltenburg & Krinsky, 1987; Moerman, 1988; Son, 1987).
However, no matter how sophisticated and reliable these economic evaluation
measures may be, such problems still remain if a company’s accounting system
fails to provide managers with reliable cost information, which is used for the eco-
nomic analyses. Unfortunately, traditional cost accounting is simply not appro-
priate to “unmanned” factories because it is based on direct labor. Therefore,
the economic evaluation problems of advanced manufacturing systems are attrib-
uted more to the inadequacy of traditional cost systems than to the deficiency
of existing justification techniques. Yet, the research of developing reliable cost
systems is still in an embryonic stage because of difficulty in measuring and pre-
dicting the economic benefits of advanced manufacturing systems. Since Kaplan
(1983) identified new areas of inquiry for management accounting research in
measuring manufacturing performance and evaluating proposals, many authors
have proposed ways of revising traditional cost accounting (see, e.g., Cooper &
Kaplan, 1988; Brimson, 1988). However, being mostly accounting professionals,
these authors have worked on accurate price costing (e.g., finding better ways of
allocating overhead to products) rather than on reliable estimation of economic
benefits expected from factory automation. This is not surprising, as accountants
are interested more in recording the historical financial activities than in predict-
ing or estimating the future outcome of the activities. As a result, the economic
Table 8.1: Computer System Functions for Automated Manufacturing.
Function Description
Communicate Operators must receive the appropriate work instructions
instructions to for work units that they are processing at manual
workers workstations
Download work All computer-controlled machines are operated by
part programs programs that are sent to it by the computing system
Control material Workstation availability and material handling system
handling system status must be co-ordinated in order to ensure efficient
processing of work units in transit
Schedule Certain production scheduling functions may be
production accomplished at the site of the manufacturing system
Diagnose failures Diagnostics of equipment, the preparation of
preventative maintenance schedules, and the
maintenance of the spare parts inventory
Monitor safety The maintenance of the system to ensure it only operates
in a safe manner
Maintain quality This involves the detection and rejection of work units
control that are effective in the work system
Manage operations Managing the overall operations of the manufacturing
system, either directly via supervisory control, or
indirectly via the production of periodic reports
analysis has been restricted to “readily available” cash flows, ignoring strategically
important intangibles such as manufacturing quality and flexibility, and assum-
ing that cash flows are usually given.
One of the widely used terms describing the production of tomorrow is smart
manufacturing. The volume of publications on smart manufacturing is rapidly
growing. Many publications focus on in-depth coverage of the topics shaping
smart manufacturing. This chapter defines what the author believes are core con-
cepts of importance to smart manufacturing in the hope of streamlining and
systemizing the growing body of research. Smart manufacturing has attracted
attention of numerous researchers who reported their findings in the literature.
Thoben, Wiesner, and Wuest (2017) discussed the main characteristics of cyber-
physical systems and provided an overview of Germany’s Industry 4.0 initiative
and manufacturing efforts undertaken in other counties. An attempt was made to
identify relevant research issues. Kang et al. (2016) reviewed the literature related
to smart manufacturing and identified technologies of importance to its progress.
In addition, some future trends in smart manufacturing were discussed. Helu,
Libes, Lunell, Lyons, and Moris (2016) defined requirements for data-driven deci-
sion-making in manufacturing. Based on these requirements, main technologies
and barriers facing implementation of data-driven decision-making in industry
were identified. Lu, Morris, and Frechette (2016) reported on the standards that
may impact products, systems, and business aspects of smart manufacturing.
O’Donovan, Bruton, and O’Sullivan (2016) focused on problems facing appli-
cations of data analytics in industry. The authors advocated the use of formal
methodologies to develop analytics capability rather than focusing on prescrip-
tive approaches. The methodology discussed in their article was demonstrated
with a case study. Standards are important in integration of smart manufacturing
technologies facing transformation challenges, some of which were outlined in
Macke, Rulhoff, and Stjepandic (2016). A tool deployed on mobile devices for
initiating queries in support of incoming changes was discussed. Zhang et al.
(2014) overviewed technologies such as cloud computing, internet of things, ser-
vice-oriented solutions, and high-performance computing. It was suggested that
they make a cloud manufacturing platform outlined in their article. Shafiq, Sanin,
Toro, and Szczerbicki (2015) proposed a framework for knowledge representation
of engineering objects incorporating relevant knowledge and experience. It was
demonstrated that the framework was a specialization of a cyber-physical system.
Zhong, Xu, Chen, and Huang (2017) discussed the concept of smart manufactur-
ing objects handled with the internet of things and wireless technologies. Data
analytics was applied to study behavior of smart manufacturing objects. Besides
architectures and concepts of interests to smart manufacturing, research offer-
ing specific models and algorithms has been initiated. Ivanov, Dolgui, Sokolov,
Werner, and Ivanova (2016) addressed the short-term supply chain scheduling in
a smart factory. A scheduling approach involving nonstationary jobs flow and
temporal decomposition was developed. Moon and Park (2014) offered a sched-
uling solution for management of energy consumption in manufacturing. Chun
and Bidanda (2013) reviewed the literature on sustainable manufacturing. They
raised the issue of sustainability in global manufacturing, design for sustainabil-
ity, product life-cycle management, and green supply chain management. Cyber-
security is paramount to the progress in smart manufacturing. Kim and Chang
(2014) discussed information leakage vulnerabilities faced by organizations and
offered some solutions.
8.3. Smart Manufacturing

Smart manufacturing has been inspired by the concepts largely developed in the
realm of computing. Though manufacturing will continue to benefit from these con-
cepts and other ideas that will emerge (e.g., quantum computing could be a major
disruptor), it has its own identity captured in six pillars that will be discussed next
(see Fig. 8.1). They are neither exhaustive nor stationary. The ultimate pillars will be
defined by the research, technology development, and applications that will emerge
in the future. The ultimate pillars could be formally defined in number of ways,
including clustering of the research papers, industrial reports and information about
new technology with text and data mining algorithms. The six pillars of smart man-
ufacturing are manufacturing technology and processes, materials, data, predictive
engineering, sustainability and resource sharing and networking. The names and
the degree of importance of these six pillars have been changing; however, they have
Fig. 8.1: Six Pillars of Smart Manufacturing.
been around manufacturing throughout its history. For example, data have been an
integral part of manufacturing. In the era of smart manufacturing it has become
big data. Production planning and forecasting have preceded predictive engineering
versed in data science of today.
Since research on the topic of pricing practices and servicing is sparse, a
qualitative multiple case-based research method was chosen (Yin, 2009). Case
research has proven to be particularly beneficial in the early explorative stages
of theory development, when the phenomena under study are not completely
understood since qualitative cases aid the investigation of constructs, their
relationships, and why these relationships exist (Voss, Tsikriktsis, & Frohlich,
2002). In addition, case research provides in-depth observations of the studied
phenomena in their natural settings, and thus favors addressing why, what, and
how questions (Yin, 2009). A sample of five large manufacturing companies,
supplying high-value capital equipment to industrial customers, was purpo-
sively selected (Miles & Huberman, 1994) to have contexts in which services are
more likely not given for free (Witell & Löfgren, 2013). Small and medium-sized
enterprises (SMEs) were excluded since only large companies are expected to
provide a setting in which the studied phenomena would occur to differenti-
able degrees. In fact, “the manufacturing firms that have served are larger than
traditional manufacturing firms in terms of sales revenues” (Neely, 2009,
p. 103). Furthermore, servicing in small and medium business is still underin-
vestigated and previous research almost “neglects how firms” size may affect
service business development’ (Gebauer, Paiola, & Edvardsson, 2010). To con-

trol the sample (Voss et al., 2002) with respect to the competitive positions of
the firms, these were selected so that the sample would include the following:
(1) companies operating in different industries (e.g., mass transit vehicles and
infrastructure, oil and gas equipment, and print and document management
solutions);
(2) companies from the same industry, but occupying different positions of the
value chain;
(3) companies facing dissimilar competitive pressures; and
(4) companies having different service offerings in place.
Acquisition and pricing decisions have received less attention in the remanu-
facturing literature, although several assumptions about consumers’ perception
and willingness to pay for remanufactured products have been considered. On
the one hand, some researchers assume that consumers see no difference between
new and remanufactured products, such as Majumder and Groenevelt (2001),
Savaskan, Bhattacharya, and Van Wassenhove (2004), Ferrer and Swaminathan
(2006). In these studies, a remanufactured product is assumed to be a perfect sub-
stitute for a new product. On the other hand, some researchers assume that the
market for remanufactured and new products are fully segmented and there is no
cannibalization. In “the middle,” some researchers assume that there exists partial
cannibalization and remanufactured products competing with new products on
the basis of price; for example, Debo, Toktay, and Van Wassenhove (2005), and
Atasu, Sarvary, and Van Wassenhove (2008). In all of these studies, the consum-
ers’ willingness to pay for a remanufactured product is assumed to be heterogene-
ous, uniformly distributed on a given scale, and lower than that of a new product.
We will take a similar approach.
8.4. Pricing in Manufacturing

Pricing is the process whereby a business sets the price at which it will sell its prod-
ucts and services, and may be part of the business’s marketing plan. In setting
prices, the business will take into account the price at which it could acquire the
goods, the manufacturing cost, the market place, competition, market condition,
brand, and quality of product.
Pricing is a fundamental aspect of financial modeling and is one of the four
Ps of the marketing mix. (The other three aspects are product, promotion, and
place.) Price is the only revenue-generating element among the four Ps, the rest
being cost centers. However, the other Ps of marketing will contribute to decreas-
ing price elasticity and so enable price increases to drive greater revenue and
profits.
Pricing can be a manual or automatic process of applying prices to purchase
and sales orders, based on factors such as a fixed amount, quantity break, pro-
motion or sales campaign, specific vendor quote, price prevailing on entry, ship-
ment or invoice date, combination of multiple orders or lines, and many others.
Automated systems require more setup and maintenance but may prevent pricing
errors. The needs of the consumer can be converted into demand only if the con-
sumer has the willingness and capacity to buy the product. Thus, pricing is the
most important concept in the field of marketing; it is used as a tactical decision
in response to comparing market situations.
The objectives of pricing should consider:
⦁⦁ the financial goals of the company (i.e., profitability);

⦁⦁ the fit with marketplace realities (will customers buy at that price?);
⦁⦁ the extent to which the price supports a product’s market positioning and be
consistent with the other variables in the marketing mix; and
⦁⦁ the consistency of prices across categories and products (consistency indicates
reliability and supports customer confidence and customer satisfaction).
Price is influenced by the type of distribution channel used, the type of pro-
motions used, and the quality of the product. Where manufacturing is expensive,
distribution is exclusive, and the product is supported by extensive advertising
and promotional campaigns, then prices are likely to be higher. Price can act as a
substitute for product quality, effective promotions, or an energetic selling effort
by distributors in certain markets.
From the marketer’s point of view, an efficient price is a price that is very close
to the maximum that customers are prepared to pay. In economic terms, it is a
price that shifts most of the consumer economic surplus to the producer. A good
pricing strategy would be the one which could balance between the price floor
(the price below which the organization ends up in losses) and the price ceiling
(the price by which the organization experiences a no-demand situation).
Marketers develop an overall pricing strategy that is consistent with the organ-
ization’s mission and values. This pricing strategy typically becomes part of the
company’s overall long-term strategic plan. The strategy is designed to provide
broad guidance to price-setters and ensures that the pricing strategy is consist-
ent with other elements of the marketing plan. While the actual price of goods
or services may vary in response to different conditions, the broad approach to
pricing (i.e., the pricing strategy) remains a constant for the planning outlook
period, which is typically 3–5 years, but in some industries may be a longer period
of 7–10 years.
Broadly, there are six approaches to pricing strategy mentioned in the market-
ing literature:
⦁⦁ Operations-oriented pricing: where the objective is to optimize productive

capacity, to achieve operational efficiencies, or to match supply and demand
through varying prices. In some cases, prices might be set to de-market.
⦁⦁ Revenue-oriented pricing: (also known as profit-oriented pricing or cost-based
pricing) – where the marketer seeks to maximize the profits (i.e., the surplus
income over costs) or simply to cover costs and break even. For example,
dynamic pricing (also known as yield management is a form of revenue-
oriented pricing.
⦁⦁ Customer-oriented pricing: where the objective is to maximize the number of

customers, encourage cross-selling opportunities, or to recognize different lev-
els in the customer’s ability to pay.
⦁⦁ Value-based pricing: (also known as image-based pricing) occurs where the com-
pany uses prices to signal market value or associates price with the desired
value position in the mind of the buyer. The aim of value-based pricing is to
reinforce the overall positioning strategy, for example, premium pricing posture
to pursue or maintain a luxury image.
⦁⦁ Relationship-oriented pricing: where the marketer sets prices in order to build or
maintain relationships with existing or potential customers.
⦁⦁ Socially oriented pricing: where the objective is to encourage or discourage
specific social attitudes and behaviors, for example, high tariffs on tobacco to
discourage smoking.
Not too long ago, manufacturing managers walked the floor with little more
than a pencil and clipboard to note needed supplies, lines that were underper-
forming, etc. Fast forward to 2013, and this is considered inefficient at best and
downright archaic at worst. The space has matured to include mobile devices,
advanced analytics software, and more recent innovations like radio-frequency
identification (RFID) tags.
Technology is now spurring a similar evolution on the manufacturing sales
side. The solutions and acronyms may be different but the end result is the same –
a movement away from making decisions based on human observation and man-
ual systems toward one that depends on machine data and analytics.
8.4.1. Profitable Selling

Recent advancement in cloud and big data have pushed this evolution into the
realm of possibility, and forward-thinking manufacturers have begun to turn this
remaining bastion of “seat-of-the-pants-operations” into a competitive advantage.
The often-complex sales cycle in the manufacturing industry requires that front-
line salespeople have the right tools to drive margin across a variety of products and
through multiple channels: direct, distributor, and original equipment manufacturer
(OEM). For this reason, leading-edge manufacturers have started to leverage sys-
tems to analyze massive quantities of data to identify where money is being inad-
vertently left on the table during the sales process. They also use this information to
set data-informed, intelligent pricing, and deliver meaningful data to the front lines.
This simplifies business decisions and enables sales to capture opportunities to
sell more profitably by negotiating confidently at the “moment of truth,” which is
anytime they ask for a customer’s business.
Traditionally, this type of profit optimization was only achievable if an organi-
zation had a team of analysts manually crunching data. Even then, it could take
months to identify opportunities. As a result, these capabilities were accessible
only to the largest enterprises.
However, algorithm-based predictive analytics now enable insights to be
derived almost instantly. Using machine analytics to maximize profits provides
manufacturers of all sizes with a new way to improve their business and develop
real competitive advantage.
8.4.2. Cost System for Advanced Manufacturing Systems

Today’s ever-growing competition mandates manufacturers to make superior
products, which cost less, have better quality, and are more flexible to changes
in production conditions and customer demand. Productivity, quality, and flex-
ibility become not only the most critical components of manufacturing strategy
but also the most critical measures of performance and justification of advanced
manufacturing systems. Therefore, the three components should be quantifiable
and then convertible to monetary terms because dollars are the best communica-
tion language in a profit organization. Son (1990) and Son and Park (1990) have
defined costs of productivity, quality, and flexibility and their components. Pro-
ductivity cost includes costs used as input items of conventional total productiv-
ity measures. Similarly, quality and flexibility costs are used as input elements of
(total) quality and (total) flexibility measures, respectively. Both include oppor-
tunity costs: quality cost items include opportunity cost resulting from defects of
processes and products and flexibility cost items from a synchronization of mate-
rial flows from vendors to customers. Three costs regrouped into two categories of
relatively well-structured costs (RWSC) and relatively ill-structured costs (RISC),
as illustrated in Fig. 8.2. The terms “relatively well-structured” and “relatively ill-
structured” are similar to Simon’s (1960) “programmed” and “non-programmed,”
and Gorry and Scott Morton’s (1971) “structured” and “unstructured” except for
the emphasis on “relativity.” Productivity cost elements are RWSC because they
are actual tangible input items required to make a product, which have been well
understood by accountants for centuries. Note that the conventional manufac-
turing cost of direct labor, direct material, and overhead has been reorganized:
in particular, the lumpy overhead is broken down into many categories for accu-
rate evaluation of changes due to factory automation. As the separated overhead
items are no longer arduous to trace in the computer-controlled environment, the
overhead calculation is no longer based on direct labor.
However, quality and flexibility costs are RISC. Two reasons are usually con-
sidered for the ill-structuring of a problem (Keen & Scott Morton, 1978):
(1) lack of knowledge, and

(2) unwillingness to explore the problem in depth.
Quality and flexibility costs have not been well recognized by most people. In
particular, accountants have unwillingly explored the costs although some small
groups of special interest in other disciplines have done so: for example, some
quality-control professionals have explored the relationships between prevention
and failure costs; production and inventory-control professionals have investi-
gated the relationships between set-up and inventory costs; and some queuing
theorists have examined the relationships between waiting and idle costs. Unfor-
tunately, however, these various professionals have not yet developed systematic
Fig. 8.2: A Cost System Supporting Analysis of Advanced

Manufacturing Systems.
ways of estimating the RISC. Because ill-defined opportunity costs are involved,
RISC is relatively more difficult and subjective to estimate than RWSC. Even
RWSC is not easy to estimate, not only because manufacturing processes are
complicated to track but because cost estimation is at best guesswork about the
unknown future, based on analysis and judgment of the known present. There-
fore, many different approaches can be applied depending upon each analyst’s
experience, interpretation, and assumptions. The cost equations derived in the
following sections are intended to illustrate a possible way of estimating RWSC
and RISC components.
8.5. Estimating RWSC

Labor cost: It is the cost of direct labor and indirect labor (formerly, an overhead
item) involved in production activities and includes wages, salaries, and fringes.
Wages are moneys paid for direct labor and salaries are moneys paid for indirect
labor; fringes are benefits for both direct and indirect labor such as social security,
medical and safety insurance, training cost, and holiday, vacation, and sick pay.
Traditionally, a worker handles only one machine, and wage calculation, based on
either work hours or output, is simple. In advanced manufacturing systems such
as manned cells, however, the worker is trained to handle many machines and
becomes multifunctional. Since the wage rate for each machine may be different
and work hours or output of each machine may be difficult to measure, the mul-
tifunctional worker often receives a salary rather than a wage. The worker spends
more time solving problems than operating machines. As the level of automation
increases, direct labor for tooling and fixturing, material handling, and inspection
declines. In its place, indirect labor such as computer programmers and operators,
maintenance personnel, and technical support specialists may increase. The trend
is a shift from direct to indirect labor. Let N be a planning horizon. Then, the
labor cost during a planning horizon (C1) may be
L1 L2
Cl = (direct labor cost) + (indirect labor cost) + (fringes) = ∑Cd Nnd + ∑Ci ni + C fr
d =1 i =1
where L1 is the number of different jobs using direct labor, Cd is the wage of job
d per unit time, nd is the number of direct labor units for job d, L2 is the number
of different jobs using indirect labor, Ci is the salary of job i during a planning
horizon, ni is the number of indirect labor units for job i, and Cr, is the fringes for
direct and indirect labor during a planning horizon.
Material cost: It is the cost of making all materials ready for production. There-
fore, material cost includes costs ordering, purchase, and transportation, if neces-
sary, not only for direct materials but also for indirect materials like lubricants.
Then, the material cost during a planning horizon (CR) is
CR = (direct material cost) + (indirect material cost) + (Ordering cost)

J
= ∑Cd ( j ) nd ( j ) + Cid + Co
j =1
where J is the number of different parts, Cd(j) is the unit cost of direct material
for part j, nd(j) is the amount of direct materials used for part j, Cid is the indirect
material cost except tools, and Co is the total material ordering cost.
Machine cost: It is the counterpart of labor cost in a machine-paced environment.
Machine cost includes costs of utilities (power and fuel), maintenance, repair, insur-
ance, and property tax for manufacturing equipment such as machine tools (lathe,
drilling machine, etc.), washing machines, inspection machines, material handling sys-
tems, and computers, if any. In conventional manufacturing systems, the machine cost
is an overhead item and its allocation is based on direct labor hours, because collecting
data on machine hours for individual jobs is difficult and involves additional clerical
cost. In the factory automation environment, however, measuring the machine cost
becomes easy since direct linkage of computers with machines allows machine hours
to be tracked quickly and reliably, as in computer numerical control (CNC) and direct
numerical control (DNC) machines, robots, and automatic guided vehicles (AGVs).
Let K be the total number of pieces of manufacturing equipment. Then, the machine
cost during a planning horizon (CM) is
CM = (Utility cost) + (Maintenance cost) + (Repair cost) + (Property tax)

K
= ∑{Cu ( k )Tm ( k ) + C mt ( k )Tmt ( k ) + Cr ( k )Tr ( k ) + aFk + bFk }
k =1
where Cu is the utility cost of machine k per unit time, Tm(k) is the total machine
time of machine k, Cmt(k) is the maintenance cost of machine k per unit time,
Tmt(k) is the total maintenance time of machine k, Cr(k) is the repair cost of
machine k per unit time, 7;(k) is the total repair time of machine k, a is the insur-
ance premium rate, Fk is the first cost (initial investment) of machine k, and b is
the property tax rate.
Tool cost: It is the cost of maintaining cutting tools and includes costs of cut-
ting tools replaced due to wear and breakage. Tool cost does not include tool
change costs because they are part of the labor cost when tools are changed
manually and tool change time is negligible when tools are changed automati-
cally. In conventional systems, tool cost is estimated on the basis of Taylor’s
equation (see Degarmo, Black, & Kosher, 1984), which computes tool life
under deterministic conditions. However, tool failure phenomena are proba-
bilistic in nature, and it is relatively difficult to develop comprehensive analyti-
cal methods of predicting tool failure. A rather conservative and deterministic
approach is to assume useful tool life and regularly change a tool before it
reaches its average tool life (Elmaraphy, 1985). Let M be the number of differ-
ent tools. Using the principles of the regular tool changes, the tool cost (CT)
can be defined as
CT = (unit cost per tool)(total number of tools changed)
M
= ∑Ctl ( m ){nw ( m ) + nb ( m )}
m =1
where Ctl(m) is the unit cost of tool type m, nw(m) is the number of worn tools
of type m, and nb(m) is the number of broken tools of type m.
Floor-space cost: Floor-space cost indicates the cost of utilities, maintenance,
repair, insurance, and property tax associated with manufacturing floor space.
This is the space occupied by machine tools; material-handling equipment and
computers; work-in-process (WIP) inventory; tools and fixtures; pallets; and sup-
porting facilities such as cafeterias, rest areas, and locker rooms. Let Cep be the
space cost per square foot and SM be the manufacturing floor space. Then, the
floor-space cost during a planning horizon (Cs) is
Cs = Cep * SM
Computer-software cost: It is the cost of maintaining computer software such as

operating system, automatically programmed tools for NC machines, database
management system, manufacturing automation protocol for the communica-
tions among existing machines and computers, material requirements planning
and optimized production technology for inventory control, and so forth. Note
that the other computer costs such as salaries of programmers and operators;
utilities, maintenance, repair, insurance, and property tax for computers; and
space cost for computer facilities, have already been considered in labor, machine,
and floor-space costs, respectively. Also note that the initial cost of software is
usually included in the initial investment for computer-controlled equipment.
Let Cms(s) be the membership fee of software type s during a planning horizon
and nsw(s) be the number of software type s. Then, the total membership fee of
software type s will be Cms(s)nsw(s). If there are S different software programs,

the computer software cost (Cc) will be
S
Cc = ∑C ms ( s ) nsw ( s )
s =1
Depreciation cost: It is the cost of recovering manufacturing equipment and facil-

ities whose values decrease with use and time. Unlike other cost elements, the esti-
mated depreciation cost data during the planning horizon are typically available
from the accounting records. It is noted, however, that obsolescence due to fast
technological progress, especially in microelectronics manufacturing, renders the
economic life of equipment volatile and hard to quantify. For the reliable estima-
tion of the economic life, accountants need to gain first-hand knowledge of the
revolution in manufacturing technologies.
Estimating RISC
⦁⦁ Quality cost items
With techniques such as autonomous inspection devices, accurate and fast online
100% inspection has become possible. Sampling inspection may not be sufficient
for firms that are serious about their product quality. However, 100% inspection
is not always possible, and may not be better than the sampling inspection, espe-
cially in the case of component parts: as a complete check of a component part
may require that the part be removed from its fixture, it is difficult to realign the
part to the same position of the fixture. Therefore, we assume sampling inspec-
tion for component parts (in-process inspection), and 100% inspection for fin-
ished parts (final inspection).
⦁⦁ Prevention cost
According some researches, prevention cost is the cost of preventing defective

(finished) products through checking and correcting in-process quality problems
before final inspection and, therefore, combines conventional appraisal and pre-
vention costs. Prevention cost is concerned with studies of control charts (CC)
and process capability (PC). The CC and PC use the same sort of statistical and
analytical tools, but the difference is that the results of PC studies with respect
to the upper and lower specification limits (USL and LSL) are directed at the
machines used in the processes, while those of CC with respect to the upper and
lower control limits (UCL and LCL) are directed at the output or products from
the processes.
⦁⦁ Failure cost
Failure cost is the loss due to failure of finished products to meet quality stand-
ards set by both a company and customers, and combines conventional internal
Table 8.2: Five Cases Considered for Failure Cost Estimation.

Cases Probability Cost/Unit
Internal Identify good as good (1 – e1)(1 – p) 0
Identify good as bad e1(1 – p) Cg
Resorted w(1 – e1)p Cb
Identify good as bad Not resorted (1 – w)(1 – e1)p Cb + Cs
External Identify good as good e2p Cs
Total 1.0
failure and external failure costs. Failure cost is concerned with final inspection.
The following items define (see Table 8.2)
Cg cost of reworking a good part because of misclassification,

Cb cost of reworking a bad (defective) part,
Cs cost of scrapping a defective part that could not be restored,
Ca cost of dissatisfying a customer by selling a defective part, p proportion defec-
tive of a part,
e1 error rate of misclassifying a good part into bad (type-I error),
e2 error rate of misclassifying a bad part as good (type-II error),
w rate of restoring a defect to a good part.
With assumption of 100% inspection, then five cases can be considered for
estimating the failure cost of a part (Cra), as in Table 8.2. From Table 8.2 we can
easily obtain
C fa = e1C g + p{(1− e2 )Cb − e1C g + (1− e2 )(1− w )Cs + e2Ca }
Since p is a random variable, the expected value of the failure cost for a part
(Cf) is
C f = e1C g + E [ p ]{(1− e2 )Cb − e1C g + (1− e2 )(1− w )Cs + e2Ca }
If Cg = Cb
C f = e1C g + E [ p ]{(1− e1 − e2 )Cb + (1− e2 )(1− w )Cs + e2Ca }
Let Cf(i) be the Cf value of part j. Since there are J different parts, the failure
cost during a planning horizon (CF) is
J
C F = ∑C f ( j )Q j
j =1
where Qj is the amount part j produced.
⦁⦁ Flexibility cost items

The estimation of the flexibility cost is based on the work of Son and Park (1990).
Definitions and equations of its elements are summarized below:
–Set-up costs
Set-up cost (A) is the cost of preparing machines for each production run.
Let Csu(k) be the set-up cost for machine k per unit time and Tsu(k) be the total
set-up time for machine k during a planning horizon. Then,
K
A = ∑Csu ( k )Tsw ( k )
k =1
–Waiting cost
Waiting cost (Cw) is a cost associated with parts that are waiting for service
somewhere in the manufacturing processes, that is, the cost of WIP inventory.
Cw = (waiting cost per unit time) (total waiting time of parts

produced)
 J K j +1 J 
= υ  ∑∑Tw ( j , k ){n( j , k −1) − n( j , k )}+ ∑Tw ( j , k j + 1) n( j , k j + 1)
 j =1 k = 0 j =1 
where υ is the opportunity cost per unit time, Kj is the number of processes
which part j visits, Tw (j, k) is the cumulative waiting time of part j up to pro-
cess k, n (j, −1) is the number of raw materials for part j that have entered the
manufacturing area, n (j, k) is the number of part j that completed process
k, {n (j, k−1)−n (j, k)} is the amount of WIP between processes k−1 and k,
and n (j, Kj+ 1) is the total number of finished parts j. Note that n(j,−1)=Wj
and n(j,Kj+1)=Qj.
⦁⦁ Idle cost
Idle cost is a cost associated with the under-utilization of manufacturing

equipment. K
CH=(idle cost per unit time) (total idle time of equipment)= υ∑(1− uk ) N

k=
where Uk is the utilization of machine k.
⦁⦁ Inventory cost
Inventory cost is the cost of carrying or lacking inventory. Inventory here

includes raw materials and finished goods only, since WIP is accounted for
in waiting cost.
CH = ( warehouse space cost ) + ( holding cost ) + ( shortage cost )

J
= CspS1 + ∑[Csm ( j ){I om ( j ) +U j −W j }+ Csf ( j ){I of ( j ) + Q j − D j }]
j =1
J
+∑[Cbm ( j ){W j −U j − I om ( j )}+ Cbf ( j ){D j −Q j − I of ( j )}]
j =1
where SI is the warehouse space, Csm(j) is the cost of carrying a unit of raw mate-
rial of part j, Iom(j) is the initial inventory of raw materials for part j, Uj is the
amount of raw materials obtained from suppliers, Csf(j) is the cost of carrying
a unit of product (or finished good) of part j, Iof(j) is the initial inventory of
finished part j, Dj is the demand rate for part j, Cbm(j) is the shortage cost of a
unit of raw material of part j, and Cbf (j) is the shortage cost of a unit of finished
product of part j.
⦁⦁ Obtaining parametric values in the cost model
Many of the parametric values of the cost model developed above are readily
available or estimated at the accounting department or other departments in a
company. Wages (Cd) and salaries (Ci), for instance, are available in the personnel
department; the rate of restoring a defect to a good part (w), in the quality-con-
trol department; amounts of raw materials obtained from suppliers (Uj), in the
purchasing department; the total number of machines (K), in the manufacturing
department; and inventory service and risk costs, Csm(j)and Csf(j), in the plant
warehouse. The planning horizon (N) is chosen by a decision-maker or an ana-
lyst. Parametric values of opportunity costs are neither readily available nor easy
to obtain; however, they are not impossible to estimate. For example, opportunity
cost per unit time (υ) of equipment idle and part waiting can be considered in
two ways depending on market conditions: if there is enough demand, they may
be considered as lost profits because opportunities of making and selling more
products are foregone. If, however, there is not enough demand, they may be
considered as capital tied up in equipment and WIP inventory, respectively. For
lost profits, profit is not known before the total cost and income are calculated,
but it is estimated from accounting records using a regression analysis. For tied-
up capital, profit estimates are based on the internal rate of return. Total set-up
time for each machine during a planning horizon (Tsu(k)) is typically obtained
from the routing sheet. In group-technology-based manufacturing systems, how-
ever, Tsu(k) is not easy to obtain because “random” set-up adjustment for differ-
ent part types within a part family is usually difficult to measure. Complexity in
a manufacturing system and uncertainty in machine and tool breakdown also
make it difficult to measure parametric values such as a machine’s total repair
time (Tr(k)) and equipment utilization (Uk)’ a part’s waiting time (Tw), and so
forth. Although computer-controlled machines such as CNC and DNC machines,
robots and AGV can easily and accurately record these data, these machines are
still expensive and cannot project future data. Computer simulation is a useful
alternative for collecting and projecting those data elements because simulation
can easily trace complicated dynamic manufacturing processes and estimate the
manufacturing system’s operating characteristics (Son & Park, 1990).
8.6. Application of the Cost Model
⦁⦁ Remedy of the “productivity paradox”
The “productivity paradox” (Skinner, 1986) indicates that productivity and prof-
its do not always go hand in hand. This occurs when the increased products due
to improved productivity are not sold because of poor quality of products and
the inflexibility of a manufacturing system to customer whim. As productivity is
the measure of the efficiency of converting tangible inputs (i.e., productivity cost)
into output, it does not consider whether the produced items generate profits
through sales.
The cost model above can help cure the productivity paradox. For instance,
the integrated manufacturing performance measure (IMPM) below (see Son,
1990; Son & Park, 1987; for more details), based on the cost model, indicates
whether the company makes money from the output.
Total output value
IMPM =
Productivity cost + Quality cost + Flexibility cost
In the above equation, the decreasing inventory cost (a flexibility cost element)
indicates sales increases because the inventory amount is the difference between
the production amount and the sales amount; if the inventory cost is zero, it
means that all the products are sold. Furthermore, the decreasing external failure
cost (a quality cost element) signals the decreasing returns of the sold products,
that is, increased customer satisfaction. Therefore, the cost model supports the
IMPM to measure manufacturing “effectiveness” and to remedy the productivity
paradox.
⦁⦁ Strategic decision-making about factory automation
Restricting project justification analysis to readily available cash flow estimates

(here, RWSC) may deprive firms from taking advantage of strategic opportuni-
ties to improve their long-term competitive position; considering intangible ben-
efits such as improved product quality and manufacturing flexibility (here, RISC)
promote more congruence between a company’s manufacturing strategy and the
subsequent evaluation of manufacturing operations (Kaplan, 1983). As the equa-
tions of the cost model generate cash flows of RISC as well as RWSC over each
project’s life cycle, it can support strategic decision-making about factory auto-
mation. The multi-period, after tax discounted cash flow model developed by Son
(1987) and Park and Son (1988) is a good example of applying the cost model to
strategic decision-making about factory automation.

This study expands the cost concept to include RISC because performance
evaluation and project justification of advanced manufacturing systems based
solely on RWSC may result in the productivity paradox and constrain desirable
investment projects. Derivation of these cost equations is, by nature, relatively
subjective; it is more so for RISC such as quality and flexibility costs. In particu-
lar, measuring quality and flexibility is not only an interdisciplinary research
area requiring at least managerial accounting, production management/eco-
nomics, and industrial and manufacturing engineering, but also a risky research
area because they are intangible and ill structured, and entail considerable time
for recognizable results.
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Index
Absorption costing, 9, 67 Autonomous manufacturing system

Accounting cost, 72 (AMS), 1–3, 90
Acquisition, 20, 43–44, 48, 123 AB–application area from costing
Activity-based costing (ABC), 11, 49, method, 70
67, 92 ABC, 67
Adjustment price (AP), 34–35 AC–level of integration between
Administrative costs, 53, 87 costing methods and
Algorithm-based predictive analytics, production, 71
125 AD–advantages resulting from
Allocating costs, 45 application of costing
Annual production volume (APV), methods, 71
85 AE–difficulties in deployment, 73
Assemble-to-order production (ATO cost engineering, 72
production), 109 cost minimization/profit
Assembly cost, 62 maximization, 72–81
estimation, 60 cost of quality, 81–87
Assembly labor cost, 56 cost-minimization problem, 65
Assembly lines, 83 indirect–overhead costs, 66
Assigning costs, 45 keywords and combinations, 69
Attributing costs, 45 price optimization in, 117–134
Automated guided vehicle systems pricing models in, 107–114
(AGVS), 108 Autonomous production, 107
Automated guided vehicles (AGVs), Autonomous system, 43
108 CoQ application in, 83–87
Automated systems, 25, 124 Autonomy criteria, 89
Automatic control, 117 Average costs, 39, 77–79
loop, 117 average quoted cost of enterprise, 39
system limitations, 1, 90 functions, 77
Automatic guided vehicles (AGVs),
128, 133 Bandwagon effect, 27
Automation, 117 Basic price (BP), 28, 34–35
concession price, 34 Big data, 122, 125
energy pricing model, 30–32 Big Data Analytics, 109
life cycle economic aspects, 17–19 Biology-inspired technologies, 90
resources, 17–20 Business
supply complexity, 12–13 environment, 65
Automobile firm, 5 events, 10
Autonomic computing, 43–45 management cost accounting
Autonomous cognition, 107–108 methods, 17
Autonomous devices, 36 model, 44
158 Index
California electricity crisis (2001), 37 direct numerical, 128, 133

Case-based reasoning (CBR), 32 material handling system, 120
Cash inflow parameters, 33 production process, 108
Cash outflow parameters, 33 quality, 120
Causal loop diagram for concession statistical process, 108–109
pricing of automation Control charts (CC), 130
projects, 35 Conventional manufacturing
Circular cause and effect cost, 126
relationships, 34 systems, 128
Class of outputs, 45 Conversion cost, 52
Clothing, 29 Cooperative infrastructure, 108
Cloud computing, 121, 125 Cordless technology, 2
Cobb–Douglas production function, Cost accounting, 45
75 documenting cost accounting
Cognitive agent-based manufacturing policies, 46–47
system, 91–92 policies, 45
Communicating instructions to Cost and price in autonomous
workers, 120 manufacturing
Compensated shadow cost of each AMS, 90
unit, 40–41 decomposition of profit, 94
Competition-based pricing strategies, electricity cost function, 99–100
7 example, 103–105
Computer numerical control (CNC), labor cost function, 101
128, 133 manufacturing profit
Computer simulation, 133–134 maximization, 102
Computer system, 119 MES, 91
autonomic, 45 model development, 93
complex, 43, 45 production function, 97–99
functions for automated reconfiguration and autonomy, 89
manufacturing, 120 time-varying pricing, 94–97
integrated, 12 Cost breakdown structure (CBS), 50
Computer-controlled machines, 133 Cost Metric Algorithm Interface
Computer-software cost, 129–130 (CMAI), 14, 16–17
Computing, high-performance, 121 Cost minimization/profit
Concession pricing model, 27–28, 32 maximization, 72
causal loop diagram, 35 application study, 75–77
comprehensive structure in combination of robot and
automation projects, 32 resources for cost
parameters and risk factors, 33–36 minimization, 74
parameters of automation projects, cost functions, 77–81
34 long-run cost minimization, 75
Consumers, 27–28 short-run cost minimization,
Control 74–75, 76
computer numerical, 128, 133 Cost of quality (CoQ), 81
define measure analyze improve application in autonomous system,
control approach, 82 83–87
Index 159
Lundvall–Juran curve depicting Current demand, 110–111

relationship, 82 Custom products, higher-end, 55
Cost parameters and costing models Customers
application study, 55–62 core business processes, 44
autonomic computing, 44–45 customer-oriented pricing, 26, 125
cost accounting concept, 45–47 Cyber physical systems, 120
cost object, 47–51
costing model development, 53–54 Data
manufacturing companies, 43 analytics, 121
manufacturing costs, 51–53 data-driven decision-making,
PSS, 44 120–121
TLC, 43–44, 63 integration model, 20–21
Cost-based pricing (see Revenue- in smart manufacturing, 121–122
oriented pricing) Decision rules, 119
Cost-inducing factor, 19 Define measure analyze improve
Cost-management systems, 65 control approach (DMAIC
Cost-minimization problem, 65 approach), 82
Cost-plus method, 36–37 Demand, 110, 112
Cost(ing) (see also Labor), 3–7 Deployment agent, 14
accounting policies, 46–47 Depreciation cost, 130
in automation, 9 Deproduction, 19
automation resources, 17–20 Deregulated electricity markets, 36
data integration model, 20–21 Design for manufacture and assembly
of energy, 60 (DFMA), 108–109
engineering, 72 Design structure matrix (DSM), 82
estimation, 127 Device’s capacity cost, 40
of facilities, 60 Digital simulation models, 109
functions, 77–81 Direct costing, 9, 45
levelized, 3 Direct labor, 127–128
of manufacturer, 20 cost, 51–52
minimizing input choices, 72 Direct materials cost, 51
model application, 134 Direct numerical control (DNC), 128,
model development, 12–17, 53–54 133
model parameters, 56 “Direct variable” cost, 49
of molded parts, 56 “Disposal/deproduction”, 18
objects, 45, 47–51 Double stage acceptance sampling
opportunity, 4–6 strategy, 84–86
related works, 10–12 Download work part programs, 120
of sheet metal parts, 59 Driving force, 26
switch of responsibilities, 15 Dynamic pricing, 26, 112, 124
system for advanced
manufacturing systems, Eco-labeling, 28
126–127 Economic cost, 72
of testing equipment (Cequipment), 85 Economic quality level (EQL),
of testing sample (Ctesting), 85 81–82
Critical-peak pricing (CPP), 95 Efficient price, 26, 124
160 Index
Electricity, 93–94 Gucci, 29

cost function, 99–100
markets, 36 Hedonic effect, 27
payment, 29 Heterarchical agent-based model, 14
regulated and deregulated High-cost manufacturing
electricity markets, 36 environment, 62
Electricity value equivalent pricing Holons, 91
method (EVE pricing Homogeneity, 78
method), 37 Homogeneous cost pools, 45
Electronics, 29
Energy IBM, 44–45
consumption of machine tools, 2–3 IDEAS architecture, 14
consumption scheduling vector, Idle cost, 132
30–32 Image-based pricing (see Value-based
cost of, 60 pricing)
pricing mechanisms, 38 Inclining block rate (IBR), 29
Engineer-to-order production (ETO Independent automation enterprises,
production), 109–110 37
Engineering economic methods, 3 Indirect costs, 45
Entity relationship model, 12 Indirect labor, 52, 127–128
Equivalent marginal cost pricing Indirect–overhead costs, 66
model (EMCP model), 39 Individual product sustaining service,
in automation pricing, 40 50–51
Expenditure minimization, 65 Industrial engineering methods,
Expenses, 4–5, 11, 45, 52, 63, 87 108–109
External reporting, 9 Industrial process automation, 118
Infineon Technologies, 118
Facility cost, 56 Information leakage vulnerabilities,
Factory automation, strategic 121
decision-making about, 134 Information systems (IS), 10
Failure cost, 130–131 costs and benefits, 21
Failure diagnosis, 120 Input–Output Analysis (IOA), 54
Failure modes and effects analysis Input–output production–inventory
(FMEA), 108–109 system, 54
Faux wood blinds, 2 Inspection cost (Cinspection), 85
Feasible scheduling set, 31 Insurance, 9, 52, 128–129
Final price (FP), 28 Integrated manufacturing
of device, 41 performance measure
Fixed cost (Cfixed), 9, 85 (IMPM), 134
Flexibility cost items, 132 Integrated system and cost modeling,
Floor-space cost, 129 54
Focal company, 11 Intelligent iron ore mine, 108
Friction, 2 Intelligent machining systems, 1
Fringes, 127 Intelligent manufacturing systems
(IMS), 89
Genopersistation, 48–49 Intensive socio-technical system, 44
Index 161
Internal reporting, 9 Manufacturers, 26

Internet of things, 121 production system, 56
Inventory cost, 132–133 Manufacturing
Investments, 37, 45 costs, 3, 51–53
firms, 122
Job design, 108–109 organizations, 9–10
overhead cost, 52
Labor (see also Cost(ing)) pricing in, 123–127
assembly labor cost, 56 profit maximization, 102
cost, 101, 127–128 sector, 10
direct, 127–128 strategy, 126
indirect, 52, 127–128 systems, 1, 10, 18, 45, 90–91, 119
operator labor cost, 56 technology and processes, 121–122
productivity, 119 Manufacturing Cost Levelization
supervisory labor cost, 56 Model, 3
time-varying labor cost function, Manufacturing execution system
101 (MES), 91
Lean Marginal cost
accounting, 2, 67–68 functions 77
concept, 2 pricing method, 36–37
manufacturing, 2, 67–68, 92 Market prices, 6
production processes, 69 Market-based incentives, 29
Levelized cost, 3 Marketers, 26
Load duration curves (LDCs), 37–38 Marketing
Local area network (LAN), 29 costs, 53
Long-run cost minimization, 75 mix, 6
Long-run marginal cost (LRMC), 37 Material
Long-term service agreements, 44 cost, 128
Louis Vuitton, 29 in smart manufacturing, 121–122
Low Level Control Integration Mathematical model, 28
Library Interface, 14 Minimum attractive rate of return
Low-cost manufacturing (MARR), 34
environment, 62 Minimum cost curve (MCC), 39
Lower specification limits (LSL), 130 Modern machine tools, 10
Luxurification in society, 28–29 Mold cost estimation, 58
Luxury brands, 29 Moment of truth”, 125
Monitor safety, 120
Machine Motorized products, 55
analytics, 125–126 MSC’s fishery certification
cost, 128–129 programmer, 29
tools, 10 Multifunctional worker, 127
Machining processes, 3, 10
Make-to-stock production (MTS Net present value (NPV), 3
production), 109 of automation project, 34
Manned cells, 127 Network and relational data
Manual products, 55 structures, 12
162 Index
“NK” model of complex system, 12 Prestige-Seeking Consumer

Nonmanufacturing costs, 52 Behaviors, 27
Prevention cost, 130
Objectives of pricing, 25 Prevention-appraisal-failure model
“One size fits all” system setup, 118 (P-A-F model), 81
Operating characteristic (OC), 83 Price, product, promotion, and place
Operating cost for maintenance and (Four Ps), 123
repair, 20 Price adjustment, 28
Operation management, 120 coefficient of reference cases, 36
Operations-oriented pricing, 26, 124 Price optimization
Operator labor cost, 56 application of cost model, 134
Opportunity costs, 4–6, 126 autonomous manufacturing
Optimal choice of energy systems, 117–118
consumption scheduling computer system functions for
vector, 32 automated manufacturing,
Optimal manufacturing systems 120
design, 3 industrial automation, 118–119
Optimal prices, 37 pricing in manufacturing, 123–127
Organizational information RWSC estimation, 127–134
processing theory, 21 smart manufacturing, 121–123
Original equipment manufacturer Price/pricing (see also Cost(ing)), 3–7,
(OEM), 44 25, 123–124
Overall cost model, 56 approaches to pricing strategy,
Overall pricing strategy, 124 124–125
Overtime pay, 97 in automation, 25
autonomous cognition, 107–108
Parametric values in cost model, cost system for advanced
133–134 manufacturing systems,
Partial elasticity of substitution, 80 126–127
“Parvenus”, 29 decisions, 123
Path Computation Algorithm decisions, 7
Interface (PCAI), 14 ETO, 109–110
Payback period, 119 industrial engineering methods,
Payoff, 4 108–109
Perfectionism effect, 27 literature, 30
Physical production in manufacturing in manufacturing, 123
industry, 108 model development, 29–41
Plastic manufacturers, 51 model development and analysis,
Plus cost of scrapping lot (Cscrap), 85 110–114
Policy analysts, 4 objectives, 25–29
“Poseurs”, 29 premium, 29
Predictive engineering, 121–122 profitable selling, 125–126
Premium pricing, 28 strategies, 7
Prestige brands, 27 Price–demand curve, 110–112
Prestige goods, 29 Process capability (PC), 130
Prestige pricing (see Premium pricing) Process-based cost model, 83
Index 163
Product agent (PA), 14–16 computer-software cost, 129–130

“Product and support” business depreciation cost, 130
model, 44 estimation, 127
Product costing systems, 66–67 floor-space cost, 129
Product Life Cycle, 18 indirect labor, 127–128
course of cost and benefit in, 19 machine cost, 128–129
maximum benefit, 19–20 tool cost, 129
shares of costs, revenue, and Representative automation pricing
benefits, 20 methods, 36–41
Product pricing, 36 Residual demand, 110–114
Product service system (PSS), 44 Resource sharing and networking,
Production/productivity, 18–19 121–122
cost, 126 Revenue-oriented pricing, 7, 26, 124
function, 97–99 RFID tags, 125
paradox, 134 Robots, 128, 133
technologies, 108 Routing Entity Agent (REA), 14–16
Profit, 107
maximization, 93 Salaries, 127
profit-oriented pricing (see SCADA control systems, 118
Revenue-oriented pricing) Scheduling
Profitable selling, 125–126 approach, 121
Project risk similarity (PRS), 35 horizon, 30
Property taxes, 9 of products, parts, assemblies, or
Provenance, 28 subassemblies, 11
Public Finance Act (1989), 46 schedule production, 120
Public–private partnership (PPP), 28 Seafood eco-label reward, 29
Self-adaptation to disturbances, 89
Qualitative multiple case-based Self-managed operations, 43
research method, 122 Selling costs, 53
Quality and flexibility costs, 126 Semiconductor companies, 118–119
Quality cost items, 130 Service instance, 49
Quantum computing, 121 Service-oriented solutions, 121
Set-up cost, 132
R&D process, 4 Shop floor resources, 11
Real-time pricing (RTP), 29 Short-run cost minimization, 74–75
Reconfiguration criteria, 89 with one fixed input, 76
Recycling costs, 20 Short-run marginal cost (SRMC), 37
Reference automation agent Short-term supply chain scheduling,
architecture model, 14–17 121
Regulated electricity markets, 36 Single CNC machine tools, 17–18
Relationship-oriented pricing, 27, 125 Skill Management Entity Agent
Relatively ill-structured costs (RISC), (SMEA), 14–16
126–127, 130–134 Smart manufacturing, 120–123
Relatively well-structured costs SMEs, 122
(RWSC) (see also Snob effect, 27
Cost(ing)), 126 Socially oriented pricing, 27, 125
164 Index
Standalone instance, 47, 50 Traditional cost accounting, 119

Standard linear price–demand curve, Traditional costing system, 2, 67
110 Traditional manufacturing systems,
State Sector Act (1988), 46 90
Statistical process control (SPC), Transport element, 16–17
108–109 Transport Element Agent, 14, 16–17
Strategic decision-making about Transport Entity Agent (TEA), 14–16
factory automation, 134 Transportable systems, 20
Strategic pricing, 6
Supervisory labor cost, 56 U.S. Federal Energy Regulatory
Supply chain, 26, 54, 56 Commission, 94
management, 12, 121 Uniform quality standards, 55
scheduling, 121 Unmanned air vehicle program (UAV
Sustainability, 121–122 program), 47–48
System dynamics model (SD model), Unreliable production, 107
28, 33 Upper specification limits (USL), 130
Task analysis, 108–109 Value stream costing (VSC), 67–68,

Taxes, 3 92–93
Taylor’s equation, 129 Value-based pricing, 7, 26, 125
Theoretical model, 7 Variable cost (VC), 9, 85, 93
Through-life costing (TLC), 43–44, 63 Variance analysis, 9
Time interval, 49 Veblen effect, 27
Time-driven activity-based costing Vehicle–infrastructure integration,
(TDABC), 67, 92 108
Time-of-use (TOU), 94–96 Vensim PLE32 software, 33
Time-varying
labor cost function, 101 Wages, 127
pricing, 94–97 Waiting cost, 132
Tool cost, 129 Waiting time, 29
Tooling and supervisor costs, 59 Window covering products, 55
Total capacity cost of enterprise, 40 Work-in-process inventory (WIP
Total cost (TC), 93–94 inventory), 129
functions, 77
Total revenue (TR), 93 Yield management (see Dynamic
Traditional accounting methods, 17 pricing)

Cost Engineering and Pricing in Autonomous Manufacturing Systems

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COST ENGINEERING AND

United Kingdom – North America – Japan – India – Malaysia – China

First edition 2019

Copyright © 2019 Emerald Publishing Limited

Reprints and permissions service

No part of this book may be reproduced, stored in a retrieval system, transmitted in

British Library Cataloguing in Publication Data

ISBN: 978-1-78973-470-6 (Print)

Chapter 2 Concepts of Costing in Automation 9

Chapter 3 Concepts of Pricing in Automation 25

Chapter 4 Cost Parameters and Costing Models in Autonomous

Chapter 5 Cost Engineering in Autonomous Manufacturing 65

Chapter 6 Cost and Price in Autonomous Manufacturing 89

Chapter 7 Pricing Models in Autonomous Manufacturing 107

Chapter 8 Price Optimization in Autonomous Manufacturing 117

References and Further Reading 137

Fig. 2.1. Impact of Automation Supply Complexity on

Table 2.1. Shares of Costs, Revenue, and Benefits of a Manufacturing

Automation will substantially disrupt markets throughout the economy in

⦁⦁ A pioneer book in cost engineering for autonomous systems.

1.1. Autonomous Manufacturing System

Cost Engineering and Pricing in Autonomous Manufacturing Systems, 1–7

improve the environmental performance of manufacturing processes and sys-

1.2. Costing and Pricing

development of the core components of any specific manufacturing processes:

1.2.1. Opportunity Cost

1.2.2. Opportunity Costs and Market Prices

Concepts of Costing in Automation

Cost Engineering and Pricing in Autonomous Manufacturing Systems, 9–23

demands is putting enormous pressure on manufacturing organizations across

2.2. Introduction and Related Works

However, there is evidence that this common language of logically compatible

suppliers, whether induced by the focal company or emerged autonomously

2.3. Model Development

Fig. 2.1: Impact of Automation Supply Complexity on Focal Company.

2.3.2. Reference Automation Agent Architecture Model

Fig. 2.2: The Switch of the Responsibilities.

∑ TTi If at least one carrier exceeds the MTT

2.4. New Paradigm: The Use of Automation Resources

Fig. 2.3: The Product Life Cycle.

In future times, the designer and manufacturer of manufacturing systems will

2.4.2. Maximum Benefit of the Product Life Cycle

Table 2.1: Shares of Costs, Revenue, and Benefits of a Manufacturing Cell as

Costs Revenues Benefit

2.5. Data Integration Model

2.5.1. Costs and Benefits of IS

2.5.2. Balancing Benefits against Implementation Costs

[T]he basic design problem is to balance the costs of information

While organizational information processing theory does not give much

(1) increased ability to share information to address subunit interdependence;

2.6. Discussions and Concluding Remarks

Concepts of Pricing in Automation

3.2. Introduction and Related Works

⦁⦁ the financial goals of the company (i.e., profitability);

Cost Engineering and Pricing in Autonomous Manufacturing Systems, 25–42

Relationship-oriented pricing: The marketer sets prices in order to build or main-

parameters can be quantified, such as the engineering project’s total investment

⦁⦁ They believe the high price is an indication of good quality.

3.3. Model Development

Table 3.1: The Summary of Pricing Literature.

No. Authors Year Objective Methods

3.3.1. Automation Energy Pricing Model

assume that for each device a ∈ Α , the decision maker indicates ασ , βσ ∈ H as

Furthermore, to constraint (3.2), it is expected that xa = 0 for any h < ασ and

Chapter 2 Concepts of Costing in Automation 9

Chapter 3 Concepts of Pricing in Automation 25

Chapter 4 Cost Parameters and Costing Models in Autonomous

Chapter 5 Cost Engineering in Autonomous Manufacturing 65

Chapter 6 Cost and Price in Autonomous Manufacturing 89

Chapter 7 Pricing Models in Autonomous Manufacturing 107

Chapter 8 Price Optimization in Autonomous Manufacturing 117

References and Further Reading 137

Fig. 2.1. Impact of Automation Supply Complexity on

Table 2.1. Shares of Costs, Revenue, and Benefits of a Manufacturing

γ amin ≤ xah ≤ γ amax , ∀a ∈ A, h ∈ [ ασ , βσ ], (3.5)

Offset: λmi = min(λij ), j = 1,2,..., Ni (3.14)