Professional Documents
Culture Documents
Lecture No.1
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Introduction and Motivation
Discussion Topics
Rational decision-making process
The role of engineers in business
Strategic decisions
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Rational Decision-Making Process
Recognize the decision
problem
Collect all needed
(relevant) information
Identify the set of feasible
decision alternatives
Define the key objectives
and constraints
Select the best possible
and implementable decision
alternative
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A Simple Illustrative Example: Car to
Lease – Saturn or Honda?
Recognize the decision Need to lease a car
problem
Collect all needed Gather technical and
(relevant) information financial data
Identify the set of feasible Select cars to consider
decision alternatives Wanted: small cash outlay,
Define the key objectives safety, good performance,
and constraints aesthetics,…
Select the best possible Choice between Saturn and
and implementable Honda (or others)
decision alternative Select a car (i.e., Honda,
Saturn or another brand)
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Financial Data Required to Make an
Economic Decision
5
Engineering Economic Decisions
Needed e.g. in the following (connected) areas:
Profit! Then continue
at the next stage…
Manufacturing
Design
Financial Investment
planning and loan Marketing
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What Makes Engineering Economic
Decisions Difficult? Predicting the Future
Estimating the required
investments
Estimating product
manufacturing costs
Forecasting the demand
for a brand new product
Estimating a “good”
selling price
Estimating product life
and the profitability of
continuing production
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The Role of Engineers in Business
• Engineering Projects
Financial Risk
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Accounting vs. Engineering Economy
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Key Factors in Selecting Good
Engineering Economic Decisions
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A Large-Scale Engineering
Project
Requires a large sum
of investment
Takes a long time to
see the financial
outcomes
Difficult to predict the
revenue and cost
streams
11
Types of Strategic Engineering Economic
Decisions in the Manufacturing Sector
Service Improvement
Equipment and Process Selection
Equipment Replacement
New Product and Product Expansion
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Service Improvement
How many more jeans would Levi need to sell to justify
the cost of additional robotic tailors?
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Equipment & Process
Selection
How do you choose between the Plastic
SMC and the Steel sheet stock for an auto
body panel?
The choice of material will dictate the
manufacturing process for an automotive
body panel as well as manufacturing costs.
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Which Material to Choose?
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Equipment Replacement Problem
Key question:
When is the right time to
replace an old machine or
equipment?
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New Product and Product Expansion
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Project
R&D investment: $750 million(!)
Product promotion through
advertising: $300 million(!)
Priced to sell at 35% higher than
the preceding Sensor Excel model
(i.e., about $1.50 extra per razor)
Question 1: Would consumers
pay $1.50 extra for a shave with
greater smoothness and less
irritation?
Question 2: What happens if the
blade consumption drops more
than 10% – due to the longer
blade life of the new razor?...
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Cost Reduction
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Further Areas of Strategic Engineering
Economic Decisions in the Service Sector
Commercial Transportation
Logistics and Distribution
Healthcare Industry
Electronic Markets and Auctions
Financial Engineering and Banking
Retail
Hospitality and Entertainment
Customer Service and Maintenance
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U.S. Gross Domestic Product (GDP)
Distribution by Sector
Manufacturing 14%
Healthcare 14%
Agriculture 2%
Total 30%
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The Four Fundamental Principles of
Engineering Economics
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Principle 1
An instant dollar is worth more than
a distant dollar…
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Principle 2
Only the cost (resource) difference
among alternatives counts
Option Monthly Monthly Cash paid Monthly Salvage
Fuel Cost Maintenance at signing payment Value at
(cash end of year
outlay ) 3
The data shown in the green fields are irrelevant items for decision
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making, since their financial impact is identical in both cases
Principle 3
Marginal (unit) revenue has to
exceed marginal cost, in order to
increase production
Marginal
cost
Manufacturing cost 1 unit
Marginal
revenue
Sales revenue 1 unit
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Principle 4
Additional risk is not taken without a
suitable expected additional return
Investment Class Potential Expected
Risk Return
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