What are the common types of Engineering Economic Decisions?

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What are the common types of Engineering Economic Decisions? Give an example of each?


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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.
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