LESSON 1: THE FIELD OF ENGINEERING
Sales - where the engineer assists the
MANAGEMENT
Engineers are expected to perform a
variety of tasks depending on their
specialization and job level.
THE FUNCTIONS OF THE ENGINEER
 Since prehistoric times, mankind has
benefited from the various tools,
equipment, and projects developed by
engineers. Among these are the
following:
1. the stone bladed axe which was a very
useful tool; and the irrigation system
used to promote crop growing 6000 to
3000 B.C.;
2. the pyramids of Egypt 3000 to 600 B.C.;
3. road building by the Romans-600 B.C.
to A.D. 400;
4. the production of paper and gunpowder
by the Chinese 100 A.D. to 1600 A.D.;
5. the production of steam engine and the
spinning and weaving machinery 1601
A.D. to 1799 A.D.; and
6. the manufacture of cars and household
appliances modern times.
new or improvements of old ones, are very
much needed in the following specific
problem concerns:
1. the production of more food for a
fast-growing world population;
2. the elimination of air and water
pollution;
3. solid waste disposal and materials
recycling;
4. the reduction of noise in various
forms;
5. supplying the increasing demand for
energy;
6. supplying the increasing demand for
mobility;
7. preventing and solving crimes; and
8. meeting the increasing demand for
communication facilities.
THE FUNCTIONS OF ENGINEERING
1. Research- where the engineer is engaged
in the or
2. process of learning about nature and
codifying this knowledge into usable theories.
3. Design and development - where the
engineer undertakes the activity of turning a
product concept to a finished physical item.
4. Testing where the engineer works in a
unit where new products or parts are tested
for work- ability.
5. Manufacturing-where the engineer is
directly in charge of production personnel or
assumes responsibility for the product.
6. Construction - this is where the
construction engineer (a civil engineer) is either
directly in charge of the construction personnel
7.
company's customers to meet their needs,
especially those that require technical
expertise.
8. Consulting - where the engineer works as
consultant of any individual or organization
requiring his services.
5. Government-
where the engineer may find
employment in the government
performing any of the various tasks in
regulating, monitoring, and controlling
the activities of various institutions,
public or private.
6. Teaching -
where the engineer gets
employment in a school and is assigned
as a teacher of engineering courses.
7. Management -
where the engineer is assigned to
manage groups of people performing
specific tasks.
THE ENGINEER IN VARIOUS TYPES OF
1. Level One -
those with minimal engineering
jobs like retailing firms.
2. Level Two -
those with a moderate degree of
engineering jobs like transportation
companies.
3. Level Three -
those with a high degree of
engineering jobs like construction firms.
Types of Organization anf the Management
Skills Required of Engineers
Management Skills Required at Various
Levels
level one - head a small engineering
unit of the firm,
level two firms - head the engineering
division.
Level three firms- provide the biggest
opportunity for an engineer to become the
president or general manager. In this case, the
engineer manager cannot function effectively
without adequate management skill
ENGINEERING MANAGEMENT
*The activity combining “technical
knowledge with the ability to organize and
coordinate worker power, materials,
machinery, and money”
* His main responsibility is to lead his
group into producing a certain output
consistent with the required specifications.
* the higher he goes up, the less
technical activities he performs, and the more
management task he accepts.
MANAGEMENT DEFINED
engineer manager is presumed to be
technically competent in his specialization.
MANAGEMENT defined as the "creative
problem solving-process of planning,
organizing, leading, and controlling an
organization's resources to achieve its mission
and objectives."
- is a process consisting of planning,
organizing, directing (or leading), and
controlling.
THE PROCESS OF MANAGEMENT
management must seek to find out the
objectives of the organization, think of ways on
how to achieve them, decide on the ways to be
adapted and the material resources to be used,
deter- mine the human requirements of the
total job, assign specific tasks to specific
persons, motivate them, and provide means to
make sure that the activities are in the right
direction.
REQUIREMENTS FOR THE ENGINEER
MANAGER'S JOB
1. a bachelor's degree in engineering
from a reputable school
2. a few years experience in a pure
engineering job;
3. training in supervision;
4. special training in engineering
management.
HOW ONE MAY BECOME A SUCCESSFUL
ENGINEER MANAGER
3 general preconditions for achieving lasting
success as a manager.
1. Ability
Managerial ability refers to the capacity
of an engineer manager to achieve
organizational objectives effectively and
efficiently.
* Effectiveness - refers to a description of
"whether objectives are accomplished"
*Efficiency - description of the relative amount
of resources used in obtaining effectiveness."
2. Motivation to Manage, and
John B. Miner, developed a
psychometric instrument to measure
objectively an individual's motivation to
manage. The test is anchored to the following
dimensions:
1. Favorable attitude toward those in
positions of authority, such as superiors.
2. Desire to engage in games or sports
competition with peers.
3. Desire to engage in occupational
4. Desire to assert oneself and take
charge.
5. Desire to exercise power and
authority over others.
6.Desire to behave in a distinctive way
7. Sense of responsibility
3. Opportunity.
The opportunity for successful management
has two requirements:
1. Obtaining a suitable managerial job,
and
2. Finding a supportive climate once on
the job.
A supportive climate is characterized by
the recognition of managerial talent through
financial and non financial rewards.
SUMMARY
Management is concerned with
planning, organizing, leading, and controlling
an organization's resources to achieve its
mission and objectives.
One may become a successful engineer
manager if the preconditions of ability,
motivation to manage, and opportunity to
manage are met.
LESSON 2 : DECISION MAKING

Managers of all kinds and types,
including the engineer manager, are primarily
tasked to provide leadership in the quest for
the attainment of the organization's objectives.
If he is to become effective, he must learn the
intricacies of decision-making.
The engineer manager's decision-
making skills will be very crucial to his success
as a professional.
Good decisions, on the other hand, will
provide the right environment for continuous
growth and success of any organized effort.
DECISION-MAKING AS A MANAGEMENT
RESPONSIBILITY
. The higher the management level is,
the bigger and the more complicated decision-
making becomes.
The production manager must now
make a decision. His choice, however, must
be based on sound arguments for he will be
held responsible, later on, if he had made the
wrong choice.
DECISION-MAKING
defined as "the process of identifying
and choosing alternative courses of action in a
manner appropriate to the demands of the
situation."
DECISION-MAKING PROCESS
according to David H. Holt, is a process
involving the following steps:
1. diagnose. problem
2. analyze environment
3. articulate problem or opportunity
4. develop viable alternatives
5. evaluate alternatives
6. make a choice
7. implement decision
8. evaluate and adapt decision results
Diagnose Problem
An expert once said. "identification of
the problem is tantamount to having the
problem half-solved."
What is a Problem? A problem exists
when there is a difference between an actual
situation and a desired situation.
Analyze the Environment
The identification of constraints, which
may be spelled out as either internal or
external limitations.
Example of internal limitations are as follows:
1. Limited funds available for the
purchase of equipment.
2. Limited training on the part of
employees. 3. Ill-designed facilities.
3. Strict enforcement of local zoning
regulations.
Examples of external limitations are as follows:
1. Patents are controlled by other
organizations.
2. Avery limited market for the
company's products and services exists.
3. Strict enforcement of local zoning
regulations.
Components of the Environment. The
environment consists of two major concerns:
1. internal
The internal environment refers to
organizational activities within a firm that
surrounds decision-making."
2. external.
The external environment refers to
variables that are outside the organization and
not typically within the short-run control of top
management.
Develop Viable Alternatives
The best among the alternative
solutions must be considered by management.
This is made possible by using a procedure
with the following steps:
1. Prepare a list of alternative solutions.
2. Determine the viability of each
solutions.
3. Revise the list by striking out those
which are not viable.
The list of solutions prepared by the
engineering manager shows the following
alternative courses of
action:
1. improve the capacity of the firm by
hiring more workers and building additional
facilities;
 2. secure the services of subcontractors;
3. buy the needed additional output from
another firm;
4. stop serving some of the company's
customers; and
5. delay servicing some clients.
Evaluate Alternatives
Proper evaluation makes choosing the
right solution less difficult.
How the alternatives will be evaluated
will depend on the nature of the problem, the
objectives of the firm, and the nature of
alternatives presented. Souder suggests that
"each alternative must be analyzed and
evaluated in terms of its value, cost, and risk
characteristics."
Make a Choice
Choice-making refers to the process of
selecting among alternatives representing
potential solutions to a problem. At this point,
Webber advises that"... particular effort should
be made to identify all significant
consequences of each choice."
Implement Decision
Implementation refers to carrying out the
decision so that the objectives sought will be
achieved. To make implementation effective, a
plan must be devised.
Evaluate and Adapt Decision Results
important for the manager to use control
and feedback mechanisms to ensure results
and to provide information for future decisions.
Feedback
refers to the process which
requires checking at each stage of the
process to assure that the alternatives
generated, the criteria used in
evaluation, and the solution selected for
implementation are in keep- ing with the
goals and objectives
Control
refers to actions made to ensure
that activi- ties performed match the
desired activities or goals, that have
been set.
APPROACHES IN SOLVING PROBLEMS
following approaches:
1. qualitative evaluation, and
2. quantitative evaluation.
1. Qualitative Evaluation.
evaluation of alternatives using intuition
and subjective judgment. Stevenson states
that managers tend to use the qualitative
approach when:
1. The problem is fairly simple.
2. The problem is familiar.
3. The costs involved are not
great. / low cost 4. Immediate
decisions are needed.
2. Quantitative Evaluation.
Refers to the evaluation of alternatives
using any technique in a group classified as
rational and analytical.
QUANTITATIVE MODELS FOR DECISION
MAKING
The types of quantitative techniques
which may be useful in decision-making are as
follows:
1. inventory models
2. queuing theory
3. network models
4. forecasting
5. regression analysis
6. simulation
7.linear programming
8. sampling theory
9. statistical decision theory
1. Inventory Models
1.1 Economic order quantity model
-this one is used to calculate the
number of items that should be ordered
at one time to minimize the total yearly
cost of placing orders and carrying the
items in inventory.17
1.2. Production order quantity model
-
this is an economic order quantity
technique applied to production orders.
1.3. Back order inventory model
this is an inventory model used
for planned shortages. 4. Quantity
discount model - an inventory model
used to minimize the total cost when
 quantity discounts are offered by
suppliers. 7.Linear Programming
a quantitative technique that is used to
2. Queuing Theory produce an optimum solution within the bounds
one that describes how to determine imposed by constraints upon the decision.
the number of service units that will minimize
both customer waiting time and cost of service 8.Sampling Theory
technique where samples of populations
3. Network Models are statistically determined to be used for a
where large complex tasks are broken number of processes, such as quality control
into smaller segments that can be managed and marketing research.
independently. Sampling, in effect, saves time and
money.

The two most prominent network
models are:
3.1. The Program Evaluation Review
Technique (PERT)
- a technique which enables
engineer managers to schedule,
monitor, and control large and complex
projects by employing three time
estimates for each activity.
3.2. The Critical Path Method (CPM)-
this is a net- work technique
using only one time factor per activity
that enables engineer managers to
schedule, monitor, and control large and
complex projects.
4. Forecasting
Forecasting may be defined as "the
collection of past and current information to
make predictions about the future.
9.Statistical Decision-Theory
Decision theory refers to the "rational
way to conceptualize, analyze, and solve
problems in situations involving limited, or
partial information about the decision
environment."
The purpose of Bayesian analysis is to
revise and update the initial assessments of
the event probabilities generated by the
alternative solutions. This is achieved by the
use of additional information.
Bayes criterion- When the
decision-maker is able to assign
probabilities to the various events, the
use of probabilistic decision rule,
SUMMARY
Decision-making is a very important
function of the engineer manager. His
organization will rise or fall depending on the
outcomes of his decisions. It is, therefore,
necessary for the engineer manager to develop
some skills in decision-making.

5. Regression Analysis
is a forecasting method that examines
the association between two or more variables.
It uses data from previous periods to predict
future events
simple regression -
When one independent variable
is involved.
multiple regression
when two or more independent
variables are involved.

6. Simulation
constructed to represent reality, on
which conclusions about real-life problems can
be used. It is a highly sophisticated tool by
means of which the decision maker develops a
mathematical model of the system under
consideration.
it can evaluate the alternatives fed into
the process by the decision-maker.
LESSON 3: PLANNING TECHNICAL
ACTIVITIES
THE NATURE OF PLANNING
A plan, which is the output of planning,
provides a methodical way of achieving desired
results. In the implementation of activities, the
plan serves as a useful guide.
PLANNING DEFINED
Planning, according to Nickels and
others, refers to "the management function that
involves anticipating future trends and
determining the best strategies and tactics to
achieve organizational objectives."
Aldag and Stearns,
planning as "the selection and
sequential ordering of tasks required to
achieve an organizational goal." This
definition centers on the activity required
to accomplish the goals.
Cole and Hamilton
is "deciding what will be done,
who will do it, where, when and how it
will be done, and the standards to which
it will be done."
planning as selecting the best course
of action so that the desired result may be
achieved. It must be stressed that the desired
result takes first priority and the course of
action chosen is the means to realize the goal.
PLANNING AT VARIOUS MANAGEMENT
LEVELS
Planning activities undertaken at various levels
are as follows:
1. Top management level strategic
planning
2. Middle management level -
intermediate planning
3. Lower management level-
operational planning.
Strategic Planning
* refers to the process of determining
the major goals of the organization and the
policies and strategies for obtaining and using
resources to achieve those goals. The top
management of any firm is involved in this type
of planning.
* its objectives and current resources.
*"the decision about long-range goals
and the course of action to achieve these
goals."
Intermediate Planning
refers to "the process of deter- mining
the contributions that sub units can make with
allocated resources."
Operational Planning
refers to "the process of determining
how specific tasks can best be accomplished
on time with available resources." This type of
planning is a responsibility of lower
management
THE PLANNING PROCESS
planning involves the following:
1. setting organizational, divisional, or
unit goals
2. developing strategies or tactics to
reach those goals
3. determining resources needed and
4. setting standards.
Setting Organizational, Divisional, or Unit
Goals
Goals
"precise statement of results
sought, quantified in time and
magnitude, where possible."
Developing Strategies or Tactics to Reach
Goals.
strategies
*The ways to realize the goals
are called
*Defined as "a course of action
aimed at ensuring that the organization
will achieve its objectives."
tactic
A is a short-term action taken by
management to adjust to negative
internal or external influences.
Determining Resources Needed 1.2. Procedures
they are plans that describe the
Setting Standards exact series of actions to be taken in a
Standard given situation.
defined as "a quantitative or
qualitative measuring device designed 1.3. Rules
to help monitor the performances of they are statements that either
people, capital goods, or processes." require or forbid a certain action.
TYPES OF PLANS
2. Single-use Plans.
Functional Area Plans These plans are specifically deve- loped
1. Marketing plan- to implement courses of action that are
this is the written document or relatively unique and are unlikely to be
blueprint for implementing and repeated.
controlling an organization's
marketing activities related to a Single-use plans may be further classified as
particular marketing strategy. follows:
2.1. Budgets
2. Production plan Weston and Brigham
this is a written document that is "a plan which sets forth
states the quantity of output a company the projected expenditure for a
must produce in broad terms and by certain activity and explains
product family where the required funds. will
come from
3. Financial plan 2.2. Programs
it is a document that summarizes is a single-use plan designed to
the current financial situation of the firm, coordinate a large set of activities.
analyzes financial needs, and
recommends a direction for financial 2.3.Projects.
activities single-use plan that is usually
more limited in scope than a program and
Plans With Time Horizon is sometimes prepared to support a program.
1. Short-range plans
these are plans intended to PARTS OF THE VARIOUS FUNCTIONAL
cover a period of less than one year. AREA PLANS
First-line supervisors are mostly
concerned with these plans. The Contents of the Marketing Plan
William Cohen maintains that the
2. Long-range plans following must be included in the marketing
these are plans covering a time plan:
span of more than one year. These are 1. The Executive Summary
mostly undertaken by middle and top which presents an overall view of
management. the marketing project and its
potential.
Plans According to Frequency of Use 2. Table of Contents
1. Standing Plans 3. Situational Analysis and Target
These are plans that are used again and Market
again, and they focus on managerial situations 4. Marketing Objectives and Goals
that recur repeatedly. 5. Marketing Strategies
6. Marketing Tactics
Standing plans may be further classified as 7. Schedules and Budgets
follows: 8. Financial Data and Control

1.1. Policies The Contents of the Production Plan

they are broad guidelines to aid 1.the amount of capacity the company
managers at every level in making must have
decisions about recurring situations or 2. how many employees are required
function.
 3.how much material must be 7. concentrating on only the controllable
purchased variables

The Contents of the Financial Plan
The components of the financial plan
1. An analysis of the firm's current
financial condition as indicated by an analysis
of the most recent statements
2. A sales forecast
3. The capital budget
4. The cash budget
5. A set of pro forma (or projected)
financial statements
6. The external financing plan
Contents of the Human Resources Plan
The human resources plan must contain the
following:
1.personnel requirements of
company
2. plans for recruitment and selection
3.training plan
4. retirement plan
Among the aids to planning that may be used
are:
1.Gather as much information as
possible
2. Develop multiple sources of
information 3. Involve others in the planning
process
SUMMARY
Technical activities, like other activities,
require effective planning, i.e., if objectives and
goals are to be realized.
A plan is a methodological way of
the achieving results. Planning is undertaken at
various management levels.

PARTS OF THE STRATEGIC PLAN

The strategic plan must contain the following:

1. Company or corporate mission.
2. Objectives or goals
3.Strategies

Company of corporate mission refers to

the "strategic statement that identifies why an
organization exists, its philosophy of
management, and its purpose as distinguished
from other similar organizations in terms of
products, services, and markets."

MAKING PLANNING EFFECTIVE

Planning is done so that some desired

results may be achieved. At times, however,
failure in planning occurs.

Planning may be made successful if the

following are observed:
1. recognize the planning barriers
2. use of aids to planning

The planning barriers, according to Plunkett

and Attner, are as follows:
1. manager's inability to plan
2. improper planning process
3. lack of commitment to the planning
process
4. improper information
5. focusing on the present at the
expense of the future
6. too much reliance on the planning
department

LESSON 4: ORGANIZING TECHNICAL
ACTIVITIES
REASONS FOR ORGANIZING
In turn, these will help facilitate the
assignment of authority, responsibility, and
accountability for certain functions and tasks.
ORGANIZING DEFINED
Organizing
is a management function which refers
to "the structuring of resources and activities to
accomplish objectives in an efficient and
effective manner."
Structure
The arrangement or relationship of
positions within an organization
The result of the organizing process is
the structure.
THE PURPOSE OF THE STRUCTURE
The structure serves some very useful
purposes. They are the following:
1. It defines the relationships between
tasks and authority for individuals and
departments.
2. It defines formal reporting
relationships, the number of levels in the
hierarchy of the organization, and the span of
control.
3. It defines the groupings of individuals
into departments and departments into
organization.
4.It defines the system to effect
coordination of effort in both vertical (authority)
and horizontal (tasks) directions."
When structuring an organization, the
engineer manager must be concerned with
the following:
1. Division of labor-
determining the scope of work
and how it is combined in a job.
2. Delegation of authority-
the process of assigning various
degrees of decision-making authority to
subordinates.
3. Departmentation
the grouping of related jobs,
activities, or processes into major
organizational sub units.
4. Span of control
the number of people who report
directly to a given manager.
5. Coordination
the linking of activities in the
organization that serves to achieve a
common goal or objective.
THE FORMAL ORGANIZATION
The formal organization is "the structure
that details lines of responsibilities, authority,
and position.
Formal organizations require the
formation of formal groups which will be
assigned to perform specific tasks aimed at
achieving organizational objectives. The formal
group is a part of the organization structure.
The formal structure is described by
management through:
1. Organization Chart
is a diagram of the organization's
official positions and formal lines of
authority.
2. Organizational Manual
provides written descriptions of
authority relationships, details the
functions of major organizational units,
and describes job procedures.
3. Policy Manuals.
describes personnel activities
and company policies.
INFORMAL GROUPS
Informal Organization
useful as it is, is "vulnerable to
expediency, manipulation, and opportunism,"
according to Valentine.
TYPES OF ORGANIZATIONAL
STRUCTURES
Organizations may be classified into three
types. They are the following:
1. Functional organization
this is a form of
departmentalization in which everyone
engaged in one functional activity, such
as engineering or marketing, is grouped
into one unit.
3. Product or market organization
 this refers to the organization of a
company by divisions that brings
together all those involved with a certain
type of product or customer.
4. Matrix organization
an organizational structure in
which each employee reports to both a
functional or division manager and to a
project or group manager.
Functional Organization
are very effective in smaller firms,
especially "single-business firms where key
activities revolve around well-defined skills and
areas of specialization."
Functional organizations have certain
advantages. They are the following:
1. The grouping of employees who
perform a common task permit economies of
scale and efficient
resource use.
1. Since the chain of command
converges at the top of the organization,
decision-making is centralized, providing a
unified direction from the top.
2. Communication and coordination
among employees within each department are
excellent.
4. The structure promotes high-quality
technical problem-solving.
5. The organization is provided with in
depth skill specialization and development.
6. Employees are provided with career
progress within functional departments."
The disadvantages of the functional
organization are the following:
1. Communication and coordination
between the departments are often poor.
2. Decisions involving more than one
department pile up at the top management
level and are often delayed.
3. Work specialization and division of
labor, which are stressed in a functional
organization, produce routine, nonmotivating
employee tasks.
4. It is difficult to identify which section
or group is responsible for certain problems.
5. There is limited view of organizational
goals by employees.
6. There is limited general management
training for employees.
Product or Market Organization
is "appropriate for a large corporation
with many product lines in several related
industries.
The advantages of a product or market
organization are as follows:
1. The organization is flexible and
responsive to change.
2. The organization provides a high
concern for customer's needs.
3. The organization provides excellent
coordina- tion across functional departments.
4. There is easy pinpointing of
responsibility for product problems.
5. There is emphasis on overall product
and division goals.
6. The opportunity for the development
of general management skills is provided.
The disadvantages of the product or market
organi- zation are as follows:
1. There is a high possibility of
duplication of resources across divisions.
2. There is less technical depth and
specialization in divisions.
3. There is poor coordination across
divisions.
4. There is less top management
control.
5. There is competition for corporate
resources.
Matrix Organization
Thompson and Strickland,
Matrix org. "is a structure with two (or
more) channels of command, two lines of
budget authority, and two sources of
performance and reward.
Higgins
declared that "the matrix structure was
designed to keep employees in a central pool
and to allocate them to various projects in the
firm according to the length of time they were
needed.
TYPES OF AUTHORITY
1. Line authority
a manager's right to tell subordinates
what to do and then see that they do it.
2. Staff authority
a staff specialist's right to give advice to
a superior.
Staff officers may be classified into the
following:
2.1. Personal staff
those individuals assigned-to a
specific manager to provide needed
staff services.
 2.2. Specialized staff
those individuals providing
needed staff services for the whole
organization.

3. Functional authority
a specialist's right to oversee lower
level personnel involved in that specialty,
regardless of where the personnel are in the
organization.

THE PURPOSE OF COMMITTEES

committee
Is a formal group of persons formed for
a specific purpose. For instance, the product
planning committee,

Committees may be classified as follows:

1. Ad hoc committee-
one created for a short-term
purpose and have a limited life. An
example is the committee created to
manage the anniver- sary festivities of a
certain firm.

2. Standing committee
it is a relatively per- manent
committee that deals with issues on an
ongoing basis. An example is the
grievance committee set up to handle
initially complaints from employees of
the organization.
 a system of regression
equations estimated from past
time-series data and used to
show the effect of various
independent variables on various
dependent variables.

c) leading indicators - refers to

LESSON 5: STAFFING THE ENGINEERING time series that anticipate business
ORGANIZATION cycle turns.
3. Monitoring methods
WHAT IS STAFFING? are those that provide early
warning signals of significant changes in
Staffing established patterns and relationships
may be defined as "the management so that the engineer manager can
function that determines human resource assess the likely impact and plan
needs, recruits, selects, trains, and develops responses if required.
human resources for jobs created by an
organization. 2.Recruitment
refers to attracting qualified persons to
THE STAFFING PROCEDURE apply for vacant positions in the company so
that those who are best suited to serve the
The staffing process consists of the following company may be selected.
series of steps:
Source of Applicants
1. Human Resource Planning
When management wants to fill up certain
Human resource planning may involve three vacancies, the following sources may be
activities, as follows: tapped:
1.1 Forecasting- 1. The organization's current
which is an assessment of employees.
future human resource needs in 2. Newspaper advertising.
relation to the current capabilities 3. Schools.
of the organization. 4. Referrals from employees.
5. Recruitment firms.
1.2 Programming 6. Competitors
which means translating
the forecasted human resource 3. Selection
needs to personnel objectives refers to the act of choosing from those
and goals. that are available the individuals most likely to
succeed on the job
1.3 Evaluation and control -
which refers to moni toring The purpose of selection is to evaluate
human resource action plans and each candidate and to pick the most suited for
evaluating their success. the position available.
Methods of Forecasting.
1. Time series methods Ways of Determining the Qualifications of a
which use historical data to Job Candidate
develop forecasts of the future.
2. Explanatory, or causal models - 1. Application blanks.
which are at- tempts to identify 2. References.
the major variables that are related to or 3. Interviews.
have caused particular past conditions 4. Testing.
and then use current measures of these
variables to predict future conditions. TYPES OF TESTS

The three major types of 1. Psychological tests -

explanatory models are as follows: which is "an objective, standard
a) regression models measure of a sample behavior". It is classified
into:
b) econometric models-
 a) aptitude test one used to measure a
per- son's capacity or potential ability to PROCUREMENT OF FUNDS
learn. 1. Short-term
2. Long-term
4. induction and orientation
5. training and development EFFECTIVE AND EFFICIENT USE OF
6. performance appraisal FUNDS
7. employment decisions (monetary rewards, 1. Short-term
transfers, promotions and demotions) and 2. Long-term
8. separations.
THE DETERMINATION OF FUND
LESSON 12: MANAGING THE FINANCE REQUIREMENTS
FUNTION Any organization, including the
engineering firm, will need funds for the
Engineering firms need funds to finance following specific requirements.
their operations. To be assured of continuous 1. To finance daily operation
supply of funds, there is a need to manage 2. To finance the firms credit services
properly the finance function. When funds are 3. To finance the purchase of major
made available in right amounts at the right assets
time, the engineering organization may be
expected to function properly. When funds are Financing Daily Operations
not enough to finance planned activities, the The day-to-day operations of the
risk of failure to achieve objectives becomes engineering firm will require funds to take care
apparent. of expenses as they come. Money must be
made available for the payment of the
The engineer manager must understand following.
that the finance function is very important 1. Wages and salaries
management concern. This is true because 2. Rent
without adequate funds it will be difficult, if not 3. Taxes
impossible to proceed with the production of 4. Power and light
products or services, the distribution of output, 5. Marketing expenses like those for
research and development, and others. advertising, entertainment, travel
espenses, telephone and telegraph,
WHAT THE FINANCE FUNCTION IS stationery and printing, postpage, etc.
6. Administration expenses like those for
The finance function is an important auditing, legal, services, etc.
management responsibility that deals with the
“procurement and administration of funds with Any delay in the settlement of the
the view of achieving the objectives of foregoing expenses may disrupt the
business.” If the engineer manager is running effective flow in the company. It may
the firm as a whole, he must be concerned with also erode the public’s confidence in the
the determination of the amount of funds ability of the company to operate on a
required, when they are needed, how to long-term basis. Cridetors, for instance,
procure them, and how to effectively and may withhold the extension of credit to
efficiently use them. the company.

In the performance if his duties, the Financing the Firm's Credit Services
engineer manager, at whatever management
level he is, must do his share in the It is oftentimes unavoidable for
achievement of the financial objectives of the firms to extend credit to customers. If
company. the engineering firm manufactures
products, sales terms vary from cash to
The finance function is one of the three basic 90-day credit extensions to customers.
management functions. The other two are Construction firms will have to finance
production and marketing. the construction of government projects
that will be paid many months later.
THE FINANCE FUNCTION: A Process Flow
When a new chemical
DETERMINATION OF FUND manufacturing firm finds difficulty in
REQUIREMENTS convincing distributors to carry their
1. Short-term products, a credit extension may solve
2. Long-term the problem. A new problem, however,
 will be created, i.e., how the credit
arrangement will be financed.
Financing the Purchase of Inventory
The maintenance of adequate inventory
is crucial to many firms. Raw materials,
supplies, and parts are needed to be kept in
storage so they will be available when needed.
Many firms cannot cope with delays in the
availability of the required material inputs in the
production process, so these must be kept
ready whenever required.
Col laterals are sometimes required by short-
term creditors.
Advantages of Short-Term Credits.
When the engineering firm avails of short-term
credits, the following advantages may be
derived:
1. They are easier to obtain. Creditors
maintain the view that the risk involved in
short-term lending 249

The purchase of adequate inventory,

however, will require sufficient funding and this
must be secured. Sometimes, inventories
unnecessarily tie-up large amount of funds.
The engineer manager must devise some
means to make sure this situation does not
happen.

Financing the Purchase of Major Asset

Companies, at times, need to purchase

major assets. When top management decides
on expansion, there will be a need to make
investments in capital assets like land, plant,
and equipment. It is obvious that the financing
of the purchase of major assets must come
from long-term sources.

THE SOURCES OF FUNDS

To finance its various activities, the

engineering firm will have to make use of its
cash inflows coming from various sources,
namely:
1. Cash sales. Cash is derived when the
firm sells its products or services.
2. Collection of Accounts Receivables.
Some engineering firms extend credit to
is also short-term. Thus, short-term credits are
customers. When these are settled, cash is
made easily available to qualified borrowers.
made available.
1. Short-term financing is often less costly.
3. Loans and Credits. When other
Since short-term financing is favored by
sources of financing are not enough, the firm
creditors, they make it available at less cost.
will have to resort to borrowing.
2. Short-term financing offers flexibility to the
4. Sale of assets. Cash is sometimes
borrower. After the borrower has settled his
obtained from the sale of the company's
short-term debt, he may consider other means
assets.
of financing, if he still requires it. Long-term
5. Ownership contribution. When cash is
financing, in contrast, eliminates this option. He
not enough, the firm may tap its owners to
is stuck with the long-term funds even if he no
provide more money.
longer requires it.
6. Advances from customers.
Sometimes, custo- mers are required to pay
Disadvantages of Short-Term Credits.
cash advances on orders made. This helps the
Short-term financing has also some
firm in financing its production activities.
disadvantages. They are as follows:
Short-Term Sources of Funds
1. Short-term credits mature more frequently.
Loans and credits may be classified as
This may place the engineering firm in a tight
short-term, medium-term, or long-term. Short-
position more often than necessary. When the
term sources of funds are those with
frequency of the firm's cash inflows are more
repayment schedules of less than one year.
than twelve months apart, the firm could be in
serious trouble meeting its short-term
obligations.
2. Short-term debts may, at times, be more
costly than long-term debts. When short-term
debts are used to finance long-term
expenditures, the fre- quent renewals,
adjustment of terms, and shop- ping for new
sources may prove to be more costly.
Supplies of Short-Term Funds. Short-
term financing is provided by the following: 1.
trade creditors
3. commercial banks
4. commercial paper houses
5. finance companies factors, and
6. insurance companies.
Trade creditors refer to suppliers
extending credit to a buyer for use in
manufacturing, processing, or reselling goods
for profit. The instruments used in trade credit
consist of the following: (1) open-book credit,
(2) trade acceptance, and (3) promissory
notes.
The open-book credit is unsecured and
permits the customer to pay for goods
delivered to him in a specified number of days.
For financially weak engineering firms, the
open-book credit is a very useful source of
financing.
The trade acceptance is a time draft
drawn by a seller upon a purchase payable to
the seller as payee, and accepted by the
purchaser as evidence that the goods shipped
are satisfactory and that the price is due and
payable. Under the terms granted in the trade
acceptance, the seller allows the buyer to pay
within a certain number of days. The
arrangement provides the buyer some relief in
financing his short-term requirements.
A promissory note is an unconditional
promise in writing made by one person to
another, signed by the maker, engaging to pay,
on demand or at a fixed or determinable future
time, a certain sum of money to, or to the order
of, a specified person or to bearer.
Commercial banks are institutions which
individuals or firms may tap as source of short-
term financing. Commercial banks grant two
types of short-term loans: (1) those which
require collateral, and (2) those which do not
require collateral. Examples of commercial
banks granting short- term loans are City Trust,
Premier Bank, and Land Bank.
Commercial paper houses are those
that help business firms in borrowing funds
from the money market. Under this scheme,
the business firm in need of funds issues a
commercial paper, which is a short-term
promissory note, generally unsecured, and
issued by large, estabished firms. The
commercial paper is sold to investors through
the commercial paper house.
Business finance companies are
financial institutions that finance inventory and
equipment of almost all types and sizes of
business firms. Examples of finance
companies in the Philippines are Philacor
Credit Corporation and Consolidated Orix
Leasing and Finance Corporation.
Factors are institutions that buy the
accounts receivables of firms, assuming
complete accounting and col- ection
responsibilities.' Engineering firms which
maintain sizable amounts of accounts
receivable may avail of the services of factors
when they are in dire need of cash.
Insurance companies are also possible
sources of short-term funds. Industry reports
indicate that insurance companies in the
Philippines regularly make investments in
short-term commercial papers and promissory
notes.
Long-Term Sources of Funds
There are instances when the
engineering firm will have to tap the long-term
sources of funds. An example is when
expenditures for capital assets become
necessary. After the amount required is
determined, a decision has to be made on the
type of source to be used.
Long-term sources of funds are
classified as follows:
1. long-term debts
2.common stocks, and
3. retained earnings.
Long-term debts are sub-classified into
term loans. and bonds
.
Term Loans. A term loan is a
"commercial or industrial loan from a
commercial bank, commonly used for plant and
equipment, working capital, or debt
repayment." Term loans have maturities of 2 to
30 years."
The advantages of term loans as a long-
term source of funds are as follows:
1. Funds can be generated more
quickly than other long-term sources.
2. They are flexible, i.e., they can be
easily tailored to the needs of the
borrower.
3. The cost of issuance is low
compared to other long- term sources.
 Bonds. A bond is a certificate of
indebtedness issued by a corporation to a
lender. It is a marketable security that the firm
sells to raise funds. Since the ownership of
bonds can be transferred to another person,
investors are attracted to buy them.

The type of bonds are shown in Figure

12.3.

Common Stocks. The third source of

long-term funds consists of the issuance of
common stocks. Since common stocks
In like manner, the sole owner of an
represent ownership of corporations, many
engineering firm may decide to reinvest
investors are placing their money in them.
whatever profits he derives from his business.
The same decision may be adapted by the
When properly utilized, common stocks
owners of a partnership.
can be cheaper and more stable sources of
long-term funds. Unlike bonds and term loans
THE BEST SOURCE OF FINANCING
which must be repaid at a certain date,
common stocks do not have maturity and
As there are various fund sources, the
repayment dates.
engineer manager, or whoever is in charge,
must determine which source is the best
Retained Earnings. Retained earnings
available for the firm.
refer to "corporate earnings not paid out as
dividends." This simply means that whatever
To determine the best source, Schall
earnings that are due to the stock- holders of a
and Haley recommends that the following
corporation are reinvested. Because these
factors must be considered:"1
retained earnings can be used by the firm
1. flexibility
indefinitely, they become an important source
2. risk
of long-term financing.
3. income
4. control
Figure 12.3 Types of Bonds
5. timing
TYPE OF BOND
6. other factors like collateral values,
flotation costs, speed, and exposure.
1. Debentures
2. Mortgage bond
3. Collateral trust bond
Flexibility
4. Guaranteed bond
Some fund sources impose certain
5. Subordinated debentures
restrictions on the activities of the borrowers.
6. Convertible bonds
An example of a restriction is the prohibition on
7. Bonds with warrants
the issuance of additional debt instruments by
8. Income bonds.
the borrower.
FEATURE
As some fund sources are less
no collateral requirement
restrictive, the flexibility factor must be
secured by real estate
considered. In general, however, short-term
secured by stocks and bonds. owned by
fund sources offer more flexibility than long-
the issuing corporation
term sources. This is so because after settling
payment of interest or principal is
the debt, short-term borrowers may shift to
guaranteed by one or more individuals or
other types of financing. Long-term borrowers
corporations
are given this opportunity only after a longer
with an inferior claim over other debts
period of waiting.
convertible into shares of common stock
warrants are options which permit the
Risk
holder to buy stock of the issuing company at a
When applied to the determination of
stated price
fund sources, risk refers to the chance that the
pays interest only when earned
company will be affected adversely when a
particular source of financing is chosen.
Generally, short-term debt "subjects the
borrowing firm to more risk than does financing
with long-term debt." This happens because of
two reasons:
1.short-term debts may not be renewed
with the same terms as the previous one, if
they can be renewed at all.
2. since repayments are done more
often, the risk of defaulting is greater.
Income
The various sources of funds, when
availed of, will have their own individual effects
in the net income of the engineering firm.
When the firm borrows, it must gene- rate
enough income to cover the cost of borrowing
and still be left with sufficient returns for the
owners.
It is possible that the owners were
enjoying higher rates of return on their
investments before borrowing was made. The
reverse may happen, however, at other times.
Nevertheless, the effects on income must be
considered in determining the source of
funding to be used.
Control
When new owners are taken in because
of the need for additional capital, the current
group of owners may lose control of the firm. If
the current owners do not want this to happen,
they must consider other means of financing.
Timing
The financial market has its ups and
downs. This means that there are times when
certain means of financing provide better
benefits than at other times. The engineer
manager must, therefore, choose the best time
for borrowing or selling equity.
Other Factors
There are other factors considered in
determining the best source of funds. They are
as follows:
1. Collateral values: Are there assets
available as collateral?
2. Flotation cost: How much will it cost
to issue bonds or stocks?
3. Speed: How fast can the funds
required be raised? 4. Exposure: To what
extent will the firm' be ex- posed to other
parties?
THE FIRM'S FINANCIAL HEALTH
In general, the objectives of engineering
firms are as follows:
1. to make profits for the owners;
2. to satisfy creditors with the repayment
of loans plus interest;
3.to maintain the viability of the firm so
that customers will be assured of a continuous
supply of products or services, employees will
be assured of employment, suppliers will be
assured of a market, etc.
The foregoing objectives have better
chances of achievement if the engineering firm
is financially healthy and has the capacity to be
so on a long-term basis.
INDICATORS OF FINANCIAL HEALTH
The financial health of an engineering
firm may be determined with the use of three
basic financial statements. These are as
follows:
1. Balance sheet-also called statement
of financial position;
2. Income statement also called
statement of operations;
3. Statement of changes in financial
position.
To be able to determine the financial
health of a firm, the appropriate financial
analysis must be undertaken. A full discussion
of financial statements and analysis are
indicated In Chapter 9. Examples of balance
sheet and income statements are also
presented in Chapter 9. An example of a
statement of changes in financial positions is
shown in Figure 12.4.
RISK MANAGEMENT AND INSURANCE
The engineer manager, especially those
at the top level, is entrusted with the function of
making profits for the company. This will
happen if losses brought by improper
management of risks are avoided.
Risk is a very important concept that the
engineer manager must be familiar with. Risks
confront people everyday. Companies are
exposed to them. Newspapers report on a daily
basis the destruction of life and property.
Companies that could not cope with losses are
forced to shut down, according to reports.
Fortunately, the engineer manager is
not entirely helpless. He can use sound risk
management practices to avoid the threat of
bankruptcy due to losses.
Risk Defined
Risk refers to the uncertainty concerning
loss or injury. The engineering firm is faced
with a long list of exposure to risks, some of
which are as follows:
1. fire
2. theft
Hid
Figure 12.4 A Sample Statement of Change in
Financial Position
SILVER LINING ELECTRONICS
CORPORATION Statement of Change in
Financial Position for the Year Ended
December 31, 1997
(P000)

3. floods.
4. accidents
5. nonpayment of bills by customers (bad
debts) 6. disability and death
7. damage claim from other parties.
Types of Risk
Risks may be classified as either pure or
speculative. Pure risk is one in which "there is
only a chance of loss."13 This means that
there is no way of making gains with pure risks.
An example of pure risk is the exposure to loss
of the company's motor car due to theft. Pure
risks are insurable and may be covered by
insurance.
Speculative risk is one in which there is
a chance of either loss or gain. This type of risk
is not insurable. An example of a speculative
risk is investment in common stocks. If one
wants to make gains in the common stock
market, the nuances and intricacies of
investments must be learned and properly
applied. Also, operating the engineering firm is
a kind of speculative risk. If profits are
expected, then proper management techniques
must be used.
What is Risk Management
Risk management is "an organized
strategy for protecting and conserving assets
and people." The purpose of risk management
is "to choose intelligently from among all the
available methods of dealing with risk in order
to secure the economic survival of the firm"15
Risk management is designed to deal
with pure risks, while the application of sound
management practices are directed towards
speculative risks that are inherent and cannot
be avoided.
Methods of Dealing with Risk
There are various methods of dealing
with risks. They are as follows:16
1. the risk may be avoided
2. the risk may be retained
3. the hazard may be reduced
4. the losses may be reduced
5. the risk may be shifted
A person who wants to avoid the risk of
losing a property like a house can do so by
simply avoiding the ownership of one. There
are instances, however, when ownership
cannot be avoided like those for equipment,
appliances, and materials used in the
production process. In this case, other
methods of handling risk must be considered.
Risk retention is a method of handling
risk wherein the management assumes the
risk. A planned risk retention, also called self-
insurance, is a conscious and deli- berate
assumption of a recognized risk. In this case,
management decides to pay losses out of
currently available funds. Unplanned risk
retention exists when management does not
recognize that a risk exists and unwisely
believes that no loss could occur.
Hazards may be reduced by simply
instituting appropriate measures in a variety of
business activities. An example is prohibiting
unauthorized persons to enter the cashier's
office. This will reduce the hazard of theft.
Another example is prohibiting company
drivers from taking alcohol or drugs while on
duty. Newspaper re- ports on the accidental
killing of three persons including Princess
Diana is a well-publicized case of drunken
driving.
When losses occur in spite of preventive
measures, the severity of loss may be limited
by way of reducing the concentration of
exposures.18 Examples of efforts on loss
reduction are as follows:
1. physically separating buildings to
minimize losses in case of fire;
2. using fireproof materials on interior
building construction;
3. storing inventory in several locations
to minimize losses in cases of fire and theft;
4. maintaining duplicate records to
reduce accounts receivable losses;
5. transporting goods in separate
vehicles instead of concentrating high values in
single shipments;
6. prohibiting key employees from
traveling together; and
7. limiting legal liability by forming
several separate corporations.
 Another method of handling risk is by
shifting it to another party. Examples of risk
shifting are hedging, subcontracting,
incorporation, and insurance.
Hedging refers to making commitments
on both sides of a transaction so the risks
offset each other.
When a contractor is confronted with a
contract bigger than his company's capabilities,
he may invite sub- contractors in so that some
of the risks may be shifted to them.
In a corporation, a stockholder is able to
make profits out of his investments but without
individual responsibility for whatever errors in
decisions are made by the management. The
liability of the stockholder is limited to his
capital contribution.
To shift risk to another party, a company
buys insurance. When a loss occurs, the
company is reimbursed by the insurer for the
loss incurred subject to the term of the
insurance policy.
Shown in Figure 12.5 is an example of
insurance products sold by a company.
Figure 12.5 Examples of Insurance Products
Sold by a Company
PEOPLE'S TRANS-EAST ASIA
INSURANCE CORPORATION
Mercantile Insurance Bldg.
Gen. Luna cor. Beaterio Sts.
Intramuros, Manila
Tel. Nos. 49-12-81 to 85
527-7611 to 15
(connecting all departments)
• FIRE
Fire and Allied Perils, Business
Interruption
• MARINE
Hull Insurance, Shipowner's Liability
Insurance Protection and Indemnity
• CASUALTY
Motorcar, Property Floater, Personal
Accident, Comprehensive General: Liability,
Money, Security and Payroll, Cash in Transit,
Burglary
• ENGINEERING
Contractor's All Risk, Machinery Break-
down, Contractor's Plant and Equipment All
Risks, Erector's All Risks, Boilers and
Explosion, Electronic Insurance, Consequential
Losses
• AVIATION
Hull and Liabilities Insurance, Airport
Operator Liability,
Hangarkeeper's
Liability, Aircraft Refueling
Liability,
Pilot's License Insurance,
Pilot/Crew
Personal Accident Cover
• BONDS
All Kinds of Bonds
SUMMARY
Financing the engineering firm is a very
important management activity. There is a
need to assure everyone concerned that funds
are available when they are needed.
The first area of concern is the
determination of fund requirements. If the
amount needed is already known, the next step
is to determine the appropriate source of
financing.
The various fund sources have their
own individual strengths and limitations. It is
wise to find out through analysis which will
benefit the engineering firm most.
When the internal sources of funds are
not enough to finance operations, external
sources like those granting loans and credits
may be tapped.
In the determination of the best source
of financing, the following factors must be
considered: flexibility, risk, income, control,
timing, and others.
To achieve its goals, the engineering
firm must be financially healthy. There are
certain indicators of financial health. They are
broadly classified into the following categories:
liquiZdity, efficiency, financial leverage, and
profitability.

An important aspect of managing the

finance function is risk management. When
assets and human resources are protected and
conserved, the engineering firm is well on its
way to achieve its objectives.

The various ways of handling risks are:

risk avoidance, risk retention, hazard reduction,
loss reduction, and risk shifting.