1. Making Economic Decisions 2 Outline Types of Problems Role of - PDF document

Unit 3 – Systems Engineering Tools Engineering Decision Making, Interest and Equivalence, Present Worth Analysis Source: Engineering Economic Analysis, 10th edition, Newnan, Lavelle, and Eschenbach, Oxford University Press, 2009. 1 1. Making Economic Decisions 2

Outline  Types of Problems  Role of Engineering Economic Analysis  Decision-Making Process  Ethical Dimensions in Engineering Decision-Making 3 People are Surrounded by Problems • Which career to pursue? • What level of preparation is required for the career chosen? • Where may the preparation be obtained? • How to get up and get to class? The problems are often not isolated from each other. 4

Organizations Have Opportunities • Do we make part A or • Would a mechanized B today? or computerized drilling machine be • Should we use a the preferred drilling or boring alternative? machine? • Where do we locate • Should we purchase machinery in the a boring machine? plant? • When must we replace the drilling machine? Decisions concerning these opportunities may be arrived at with the help of economic analysis. 5 Types of Problems  Simple Problems  Should I buy metro-rail pass or pay every time?  Should our company pay the vendor cash or credit?  Intermediate Problems  Should I buy or lease my next car?  Which CNC machine should the company purchase?  Complex Problems  Feasibility study of a new automobile plant.  Planning for new highways. 6

Simple Problems • Can generally be worked in one’s head without extensive analysis. 7 Intermediate Problems • Must be organized and analyzed • Are sufficiently important to justify serious thought and action • Have significant economic aspects • Are primarily economic • Are the principal subject of this course • Assume an economic situation in equilibrium • Are generally adequately solved with single-criteria decision making 8

Complex Problems • Such problems represent a mixture of 3 elements: economic, political and humanistic. • Complex problems are beyond the scope of this course from a decision-making criteria point of view, but the economic aspects of complex problems will be discussed. 9 Engineering Economic Analysis  A systematic tool for comparing alternatives by their economic merits. Most suitable for problems  With importance, that require organized analysis of the economic aspects  Could apply to Product/Process Design, Purchase of Capital Equipment, Selection of Projects, Investment, and many other decision- making processes. 10

Role of Engineering Economic Analysis • Assists in making decisions where: – The decision is sufficiently important that serious thought and effort is required. – Careful analysis requires that the decision variables be carefully organized and the consequences be understood. – ECONOMIC ISSUES are a significant component of the analysis leading to a decision. 11 Decision-Making Process 1. Recognize Problem / Opportunity Overall Mission / Objectives 2. Define Goals/Objectives 3. Assemble Relevant Data 5. Select the Criterion 4. Identify Feasible Alts 6. Construct a Model 7. Predict Alts’ Outcomes 9. Audit the Results 8. Choose the Best Alt. 12

Decision-Making Process 1. Recognize Problem / Opportunity  Needs for New Products, Processes, or Facilities  Improvement of Products, Processes, or Facilities (TQM, CI)  SWOT (Strengths, Weaknesses, Opportunities, and Threats) Analysis  Investment/Financing 13 1. Recognize the Problem • A problem exists when: – A standard or expectation is not being met. – A new standard or expectation is established and needs to be achieved. (An opportunity.) – There are needs for new products, processes, or facilities – There are needs for improvement of existing products, processes, or facilities (TQM, CI) 14

2. Define the Goal or Objective • A goal or objective is the standard or expectation we wish to meet. – A goal is a general statement about what we expect. • Pay all our bills on time. – An objective is narrow and specific. • Pay the auto loan on Tuesday morning at the bank. 15 3. Assemble Relevant Data Economic analysis - Inside vs outside supplier – Information may be published or individual For: Large company Comparison: Inside vs. outside printing o knowledge. Requestor: Shipping department – Deciding which data is Unit affected: Printing department Supplier: Outside printer relevant may be a complex Requirements 30,000 copies process. Printing department – In engineering decision Apparent cost making two important Cost per Cost per Copies 1000 30,000 sources of data are the Direct labor $ 7.60 $ 228.00 organization’s accounting Materials and supplies $ 9.80 $ 294.00 and purchasing Overhead costs $ 9.05 $ 271.50 Total $ 26.45 $ 793.50 departments. Shipping department savings $ 111.00 16

4. Identify Feasible Alternatives – The best alternative should be implemented. Occasionally this is to maintain the existing situation. – Alternatives considered should include both conventional and innovative approaches. – Include as many as possible alternatives: • Do-nothing option • Simple solutions – Only feasible alternatives should be retained for further analysis. 17 5. Select the Criterion to Determine the Best Alternative – A criterion, or a set of criteria, is used to evaluate the alternatives to determine which is best. – The “best” alternative is relative. – Selecting criteria to use is not easy because different groups often support different criteria. – The criterion most often used in economic decision-making is to “use money in the most efficient manner.” 18

5. Criterion  Multiple criteria  Conflicting criteria  Integrating criteria  Most common criterion – Maximize profit Category Economic Criterion Fixed input Maximize the benefits or other outputs Fixed output Minimize the costs or other inputs Neither input Maximize the profits (Value of outputs nor output fixed – cost of inputs) 19 6. Construct the Model • Requires merging the various elements: objective, relevant data, feasible alternatives and selection criteria. • In economic decision making the models are usually mathematical. • A model is a representation of reality. – A model must represent the important parts of the system at hand. – Be adequate to solve the problem. – Describes the interrelationships among the relevant data and predicts the outcomes of various alternatives. 20

7. Predict Alternatives’ Outcomes  Comparable outcomes – Single criterion – Single composite criterion  Alternatives are stated in the form of money, i.e., costs/benefits.  Risk and uncertainty  Search for more information (loop)  Modification of alternatives (loop) 21 8. Choosing the Best Alternative – When choosing the best alternative both economic and non-economic criteria must be considered. – Only dominant alternatives may be included based on either economic or non-economic criteria. 22

9. Audit the Results • Compare the results of changes to the predictions to assure that the chosen alternative was implement as planned and the results are as expected. – Fix deviations from planned changes. – Make sure prediction errors are not repeated. – Identify added opportunities. • Audits promote realistic economic analysis and implementation. 23 Ethics  The concept of distinguishing between right and wrong in decision-making.  Ethics includes: – Establishing systems of beliefs and moral obligations – Defining values and fairness – Determining duty and guidelines for conduct 24

Code of Ethics National Soc. of Professional Eng. Engineers, in the fulfillment of their professional duties, shall: 1. Hold paramount the safety, health, and welfare of the public. 2. Perform services only in areas of their competence. 3. Issue public statements only in an objective and truthful manner. 4. Act for each employer or client as faithful agents or trustees. 5. Avoid deceptive acts. 6. Conduct themselves honorably, responsibly, ethically, and lawfully so as to enhance the honor, reputation, and usefulness of the profession. ( http://www.nspe.org/ethics/eh1-code.asp) 25 Ethical Dimensions in Engineering Decision-Making Decision Process Step Example Ethical Lapses 1. Recognize the problem • “Looking the other way”, or not to recognize the problem due to bribes or fear of retribution 2. Define goals/objectives • Favoring one group of stakeholders by focusing on their objective 3. Assemble relevant data • Using faulty or inaccurate data 4. Identify feasible alts. • Leaving legitimate alts out of consideration 5. Select criterion to • Considering only monetary consequences when other significant consequences exist determine best alt 26

Ethical Dimensions in Engineering Decision-Making Decision Process Step Example Ethical Lapses 6. Construct a model • Using a short horizon that favors one alt over another 7. Predict alts’ outcomes • Using optimistic estimates for one alt and pessimistic ones for the other alts 8. Choose the best alt • Choosing an inferior alt, one that is unsafe, adds unnecessary cost for user, harms the environment 9. Audit the result • Hiding past mistakes 27 2. Interest and Equivalence 28