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Common Types of Strategic Engineering
Economic Decisions
The story of how the Toyota Corporation successfully introduced a new product and became
the market leader in the hybrid electric car market is typical: Someone had a good idea, executed
it well, and obtained good results. Project ideas such as the Prius can originate from many
different levels in an organization. Since some ideas will be good, while others 4 Toyota Motor
Corporation, Annual Report, 2005.
will not, we need to establish procedures for screening projects. Many large companies have a
specialized project analysis division that actively searches for new ideas, projects, and ventures.
Once project ideas are identified, they are typically classified as (1) equipment or process
selection, (2) equipment replacement, (3) new product or product expansion, (4) cost reduction,
or (5) improvement in service or quality. This classification scheme allows management to
address key questions: Can the existing plant, for example, be used to attain the new production
levels? Does the firm have the knowledge and skill to undertake the new investment? Does the
new proposal warrant the recruitment of new technical personnel? The answers to these questions
help firms screen out proposals that are not feasible, given a company’s resources.
The Prius project represents a fairly complex engineering decision that required the approval of
top executives and the board of directors. Virtually all big businesses face investment decisions
of this magnitude at some time. In general, the larger the investment, the more detailed is the
analysis required to support the expenditure. For example, expenditures aimed at increasing the
output of existing products or at manufacturing a new product would invariably require a very
detailed economic justification. Final decisions on new products, as well as marketing decisions,
are generally made at a high level within the company. By contrast, a decision to repair damaged
equipment can be made at a lower level. The five classifications of project ideas are as follows:
• Equipment or Process Selection. This class of engineering decision problems involves
selecting the best course of action out of several that meet a project’s requirements. For example,
which of several proposed items of equipment shall we purchase for a given purpose? The choice
often hinges on which item is expected to generate the largest savings (or the largest return on the
investment). For example, the choice of material will dictate the manufacturing process for the
body panels in the automobile. Many factors will affect the ultimate choice of the material, and
engineers should consider all major cost elements, such as the cost of machinery and equipment,
tooling, labor, and material. Other factors may include press and assembly, production and
engineered scrap, the number of dies and tools, and the cycle times for various processes.
• Equipment Replacement. This category of investment decisions involves considering the
expenditure necessary to replace worn-out or obsolete equipment. For example, a company may
purchase 10 large presses, expecting them to produce stamped metal parts for 10 years. After 5
years, however, it may become necessary to produce the parts in plastic, which would require
retiring the presses early and purchasing plastic molding machines. Similarly, a company may
find that, for competitive reasons, larger and more accurate parts are required, making the
purchased machines become obsolete earlier than expected.
• New Product or Product Expansion. Investments in this category increase company revenues
if output is increased. One common type of expansion decision includes decisions about
expenditures aimed at increasing the output of existing production or distribution facilities. In
these situations, we are basically asking, “Shall we build or otherwise acquire a new facility?”
The expected future cash inflows in this investment category are the profits from the goods and
services produced in the new facility. A second type of expenditure decision includes considering
expenditures necessary to produce a new product or to expand into a new geographic area. These
projects normally require large sums of money over long periods.
• Cost Reduction. A cost-reduction project is a project that attempts to lower a firm’s operating
costs. Typically, we need to consider whether a company should buy equipment to perform an
operation currently done manually or spend money now in order to save more money later. The
expected future cash inflows on this investment are savings resulting from lower operating costs.
• Improvement in Service or Quality. Most of the examples in the previous sections were
related to economic decisions in the manufacturing sector. The decision techniques we develop in
this book are also applicable to various economic decisions related to improving services or
quality of product.