MAKING ENGINEERING

DECISIONS
CHAPTER 1
1.1 INTRODUCTION TO ENGINEERING ECONOMICS
Engineering is a noble profession with a long history. The first engineers
supported the military using practical know-how to build bridges, fortifications, and
assault equipment. In fact, the term civil engineer was coined to make the
distinction between engineers who worked on civilian projects and engineers who
worked on military problems.

In the beginning, all engineers had to know were the technical aspects of
their jobs. Military commanders, for example, would have wanted a strong bridge
built quickly. The engineer would be challenged to find a solution to the technical
problem, and would not have been particularly concerned about the costs, safety,
or environmental impacts of the project. As years went by, however, the engineer’s
job became far more complicated.

All engineering projects use resources, such as raw materials, money,

labour, and time. Any particular project can be undertaken in a variety of ways, with
each one calling for a different mix of resources. For example, an incandescent light
bulb requires inexpensive raw materials and little labour, but it is inefficient in its
use of electricity and does not last very long. On the other hand, a high-efficiency
light bulb uses more expensive raw materials and is more expensive to
manufacture, but consumes less electricity and lasts longer. Both products provide
light, but choosing which is better in a particular situation depends on how the
costs and benefits are compared.
 Historically, as the kinds of projects engineers worked on evolved and technology
provided more than one way of solving technical problems, engineers were more often faced
with having to choose among alternative solutions to a problem. If two solutions both dealt
with a problem effectively, clearly the less expensive one was preferred. The practical science
of engineering economics was originally developed specifically to deal with determining
which of several alternatives was, in fact, the most economical.

Choosing the least expensive alternative, though, is not the entire story. Though a
project might be technically feasible and the most reasonably priced solution to a problem, if
the money isn’t available to do it, it can’t be done. The engineer has to become aware of the
financial constraints on the problem, particularly if resources are very limited. In addition, an
engineering project can meet all other criteria, but may cause detrimental environmental
effects. Finally, any project can be affected by social and political constraints. For example, a
large irrigation project called the Garrison Diversion Unit in North Dakota was effectively
cancelled because of political action by Canadians and environmental groups, even though
over $2 000 000 000 had been spent.

Engineers today must make decisions in an extremely complex environment. The

heart of an engineer’s skill set is still technical competence in a particular field. This permits
the determination of possible solutions to a problem. However, necessary to all engineering
is the ability to choose among several technically feasible solutions and to defend that choice
credibly. The skills permitting the selection of a good choice are common to all engineers
and, for the most part, are independent of which engineering field is involved. These skills
form the discipline of engineering economics.
1.2 What is Engineering Economics
Just as the role of the engineer in society has changed over the years, so has the
nature of engineering economics. Originally, engineering economics was the body of
knowledge that allowed the engineer to determine which of several alternatives was
economically best—the least expensive, or perhaps the most profitable. In order to make this
determination properly, the engineer needed to understand the mathematics governing the
relationship between time and money. Also, for many kinds of decisions, the costs and
benefits are the most important factors affecting the decision, so concentrating on
determining the economically “best” alternative is appropriate.

In earlier times, an engineer would be responsible for making a recommendation

on the basis of technical and analytic knowledge, including the knowledge of engineering
economics, and then a manager would decide what should be done. A manager’s decision
could be different from the engineer’s recommendation because the manager would take into
account issues outside the engineer’s range of expertise. Recently, however, the trend has
been for managers to become more reliant on the technical skills of the engineers, or for the
engineers themselves to be the managers. Products are often very complex, manufacturing
processes are fine-tuned to optimize productivity, and even understanding the market
sometimes requires the analytic skills of an engineer. As a result, it is often only the engineer
who has sufficient depth of knowledge to make a competent decision.

Consequently, understanding how to compare costs, although still of vital

importance, is not the only skill needed to make suitable engineering decisions. One must
also be able to take into account all the other considerations that affect a decision, and to do
so in a reasonable and defensible manner.
o ENGINEERING ECONOMICS can be defined as the science that deals with techniques of
quantitative analysis useful for selecting a preferable alternative from several technically
viable ones.
The evaluation of costs and benefits is very important, and it has formed the
primary content of engineering economics in the past. The mathematics for doing this
evaluation, which is well developed, still makes up the bulk of studies of engineering
economics.
However, the modern engineer must be able to recognize the limits and
applicability of these economic calculations and must be able to take into account the
inherent complexity of the real world.
1.3 DECISION MAKING
Decision Making is broad topic. It’s is a major aspect of every human existence. We
are surrounded by sea of problems which may be classified depending on difficulty level as
given below;
1. Simple Problems
2. Intermediate Problems
3. Complex Problems

o SIMPLE PROBLEMS
These are some simple situations:
• ·Should I pay cash or use my credit card? ·
• Do I buy a semester parking pass or use the parking meters? ·
• Shall we replace a burned-out motor? ·
• If we use three crates of an item a week, how many crates should we buy at a
time?
These are pretty simple problems, and good solutions do not require much time or effort.
o INTERMEDIATE PROBLEMS tend to have a substantial economic component, hence are
good candidates for economic analysis.
• ··Shall I buy or lease my next car? ·
• Which equipment should be selected for a new assembly line? ·
• Which materials should be used as roofing, siding, and structural support for a
new building? ·
• Shall I buy a 1- or 2-semester parking pass? ·
• Which printing press should be purchased? A low-cost press requiring three
operators, or a m9re expensive one needing only two operators?

o COMPLEX PROBLEMS
Complex problems represent a mixture of economic, political, and humanistic
elements.
• ·The decision of Mercedes-Benz to build an automobile assembly plant in
Tuscaloosa, Alabama, illustrates a complex problem. Beside the economic
aspects, Mercedes-Benz had to consider possible reactions in the American
auto industry. Would the German government pass legislation to prevent the
overseas plant? What about German labor unions? Which equipment should
be selected for a new assembly line? ·
• The selection of a girlfriend or a boyfriend (who may later become a spouse) is
obviously complex. Economic analysis can be of little or no help.
 • The annual budget of a corporation is an allocation of resources, but the
budget process is heavily influenced by noneconomic forces such as power
struggles, geographical balancing, and impact on individuals, programs, and
profits. For multinational corporations there are even national interests to be
considered.
 ROLE OF ENGINEERING ECONOMIC ANALYSIS
Engineering economic analysis focuses on costs, revenues, and benefits that occur
at different times.
Engineering economic analysis is most suitable for intermediate problems and the
economic aspects of complex problems. They have these qualities:
1. The problem is important enough to justify our giving it serious thought and
effort.
2. The problem can't be worked in one's head-that is, a careful analysis requires
that we organize the problem and all the various consequences, and this is just
too much to be done all at once.
3. The problem has economic aspects important in reaching a decision.
When problems meet these three criteria, engineering economic analysis is an
appropriate technique for seeking a solution. Since vast numbers of problems that one will
encounter in the business world (and in one's personal life) meet these criteria, engineering
economic analysis is often required.
Examples of Engineering Economics Analysis
When a civil engineer designs a road, a dam, or a building, the construction costs
occur in the near future; the benefits to users begin only when construction is finished, but
then the benefits continue for a long time.

Engineering economic analysis is used to answer many different questions.

• ·Which engineering projects are worthwhile? Has the mining or petroleum
engineer shown that the mineral or oil deposit is worth developing?
• Which engineering projects should have a higher priority? Has the industrial
engineer shown which factory improvement projects should be funded with
the available dollars?
• How should the engineering project be designed? Has the mechanical or
electrical engineer chosen the most economical motor size? Has the civil or
mechanical engineer chosen the best thickness for insulation? Has the
aeronautical engineer made the best trade-offs between 1) lighter materials
that are expensive to buy but cheaper to fly and 2) heavier materials that are
cheap to buy and more expensive to fly?
Engineering economic analysis can also be used to answer questions that are personally
important.
• ·How to achieve long-term financial goals: How much should you save each
month to buy a house, retire, or fund a trip around the world? Is going to
graduate school a good investment-Will your additional earnings in later years
balance your lost income while in graduate school?
• How to compare different ways to finance purchases: Is it better to finance
your car purchase by using the dealer's low interest rate loan or by taking the
rebate and borrowing money from your bank or credit union?
• How to make short and long-term investment decisions: Is a higher salary
better than stock options? Should you buy a 1- or 2-semester parking pass?
 THE DECISION MAKING PROCESS
A. Rational Decision Making is a
complex process that contains nine essential
elements, which are shown sequentially in
Figure 1-1.

Although these nine steps are shown

sequentially, it is common for decision making
to repeat steps, take them out of order, and do
steps simultaneously. For example, when a new
alternative is identified, then more data will be
required. Or when the outcomes are
summarized, it may become clear that the
problem needs to be redefined or new goals
established.
The value of this sequential diagram is
to show all the steps that are usually required, .
and to show them in a logical order.
Occasionally we will skip a step entirely. For
example, a new alternative may be so clearly
superior that it is immediately adopted at Step 4
without further analysis. The following sections FIGURE 1-1 One possible flowchart
describe the elements listed in Figure 1-1 of the decision process
 RATIONAL DECISION MAKING
1. Recognize the Problem is the starting point in rational decision making.
In typical situations, recognition is obvious and immediate. An auto
accident, an overdrawn check, a burned-out motor, an exhausted supply of parts all
produce the recognition of a problem. Once we are aware of the problem, we can
solve it as best we can. Many firms establish programs for total quality management
(TQM) or continuous improvement (CI) that are designed to identify problems, so
that they can be solved.

2. Define the Goal or Objective

The goal or objective can be a grand, overall goal of a person or a firm. For
example, a personal goal could be to lead a pleasant and meaningful life, and a
firm's goal is usually to operate profitably. The presence of multiple, conflicting
goals is often the foundation of complex problems.
But an objective need not be a grand, overall goal of a business or an
individual. It may be quite narrow and specific: "I want to payoff the loan on my car
by May," or "The plant must produce 300 golf carts in the next 2 weeks," are more
limited objectives. Thus, defining the objective is the act of exactly describing the
task or goal.
 RATIONAL DECISION MAKING
3. Assemble Relevant Data
To make a good decision, one must first assemble good information. In
addition to all the published information, there is a vast quantity of information that
is not written down anywhere but is stored as individuals' knowledge and
experience. There is also information that remains ungather. Making research or
other data gathering would be required to obtain the desired information.
From all this information, deciding which data are important and which
are not may be a complex task. The availability of data further complicates this task.
Some data are available immediately at little or no cost in published form; other
data are available by consulting with specific knowledgeable people; still other data
require surveys or research to assemble the information. Some data will be of high
quality-that is, precise and accurate, while other data may rely on individual
judgment for an estimate.

4. Identify Feasible Alternatives

One must keep in mind that unless the best alternative is considered, the
result will always be suboptimal.
There is no way to ensure that the best alternative is among the
alternatives being considered. One should try to be certain that all conventional
alternatives have been listed and then make a serious effort to suggest innovative
solutions. Even impractical alternatives may lead to a better possibility.
 RATIONAL DECISION MAKING
5. Select the Criterion to Determine the Best Alternative
The central task of decision making is choosing from among alternatives.
Logically, to choose the best alternative, we must define what we mean by best.
There must be a criterion, or set of criteria, to judge which alternative is best. Now,
we recognize that best is a relative adjective on one end of the following relative
subjective judgment:

Since we are dealing in relative terms, rather than absolute values, the
selection will be the alternative that is relatively the most desirable. In absolute
terms, neither alternative is good. But on a relative basis, one simply makes the best
of a bad situation.

6. Constructing the Model

At some point in the decision-making process, the various elements must
be brought together. The objective, relevant data, feasible alternatives, and
selection criterion must be merged.
Constructing the interrelationships between the decision-making
elements is frequently called model building or constructing the model. To an engineer,
modeling may be a scaled physical representation of the real thing or system or a
 RATIONAL DECISION MAKING
mathematical equation, or set of equations, describing the desired
interrelationships. In a laboratory there may be a physical model, but in economic
decision making, the model is usually mathematical.

7. Predicting the Outcomes for Each Alternative

A model and the data are used to predict the outcomes for each feasible
alternative. To choose the best alternative, the outcomes for each alternative must
be stated in a comparable way.

8. Choosing the Best Alternative

Choosing the best alternative may be simply a matter of determining
which alternative best meets the selection criterion. The selection of the feasible
alternatives may be the key item, with the rest of the analysis a methodical process
leading to the inevitable decision. We can see that the decision may be drastically
affected, or even predetermined, by the way in which the decision-making process
is carried out.
ENGINEERING DECISION MAKING FOR CURRENT COSTS
Some of the easiest forms of engineering decision making deal with problems of
alternate designs, methods, or materials. If results of the decision occur in a very short period
of time, one can quickly add up the costs and benefits for each alternative. Then, using the
suitable economic criterion, the best alternative can be identified. Three example problems
illustrate these situations.

EXAMPLE 1-1
A concrete aggregate mix is required to contain at least 31% sand by volume for
proper batching. One source of material, which has 25% sand and 75% coarse aggregate, sells
for $3 per cubic meter (m3). Another source, which has 40% sand and 60% coarse aggregate,
sells for $4.40/m3. Determine the least cost per cubic meter of blended aggregates.

SOLUTION:
The least cost of blended aggregates will result from maximum use of the lower-cost material.
The higher-cost material will be used to increase the proportion of sand up to the minimum
level (31%) specified.
Let x = Portion of blended aggregates from $3 .00/m3 source
1 – x = Portion of blended aggregates from $4 .40/m3 source
Sand Balance

. .
. .

Thus the blended aggregates will contain

60% of $3 .00/m3
40% of $4 .40/m3

The least cost per cubic meter of blended aggregates is

0.60($3 .00) + 0.40($4 .40) = 1.8 + 1.76
= $3.56/m3
EXAMPLE 1-2
A machine part is manufactured at a unit cost of 40 for material and 15 for direct
labor. An investment of $500,000 in tooling is required. The order calls for 3 million pieces.
Halfway through the order, a new method of manufacture can be put into effect that will
reduce the Unit costs to 34 for material and 10 for direct labor – but it will require $100,00
for additional tooling. This tooling will not be useful for future orders. Other costs are
allocated at 2.5 times the direct labor cost. What, if anything, should be done?

SOLUTION:
Since there is only one way to handle first 1.5 million pieces, our problem concerns only the
second half of the order.

Alternative A: Continue with Present Method

Material cost 1,500,000 pieces x 0.40 = $600,000
Direct labor cost 1,500,000pieces x 0.15 = 225,000
Other costs 2.50 x direct labor cost = 562,500
Cost for remaining 1,500,000 pieces $1,387,500
Alternative B: Change the Manufacturing Method
Additional Tooling cost $100,000
Material cost 1,500,000 pieces x 0.34 = 510,000
Direct labor cost 1,500,000pieces x 0.10 = 150,000
Other costs 2.50 x direct labor cost = 375,000
Cost for remaining 1,500,000 pieces $1,387,500

Before making a final decision, one should closely examine the Other costs to see
that they do, in fact, vary as the Direct labor cost varies. Assuming they do, the decision would
be to change the manufacturing method.

QUESTIONS, COMMENTS???
END OF THE LESSON 1