Dept.

Industrial & System Engineering International University - VNU

ENGINEERING ECONOMY

Dept. Industrial & System

Engineering
1

Dept. Industrial & System Engineering International University - VNU

Syllabus
Text book:
1. Engineering Economy, 14th edition, W.G.
Sullivan, E.M. Wicks, Prentice Hall, 2009
2. Ref
3. Ref
Grading Policy:
Assignments/Quizzes:
15%
Group Project:
15%
Midterm Exam:
30%
Final Exam:
40%

Dept. Industrial & System Engineering International University - VNU

Chapter 1: Introduction to Engineering

Economy
1. Introduction
2. Principles of Engineering Economy
3. Engineering Economy and the Design Process

Dept. Industrial & System Engineering International University - VNU

Introduction
Engineering Economy involves the systematic evaluation of the
economic merits of proposed solutions to engineering problems.

What should be considered good solutions to engineering

problems:
Promote the well-being and survival of an organization
Embody creative and innovative technology and ideas
Permit identification and scrutiny of their estimated
outcomes
Translate profitability to the bottom line through a valid
and acceptable measure of merit

Dept. Industrial & System Engineering International University - VNU

Introduction
Engineering Economy is the dollars-and-cents aspect of an engineering
decision/operation/process
Answer the crucial questions:
Is it worth doing so?
Are we making the right decision?
Will we get profit from this project?
What kind of investments bring us the
most $$$

Dept. Industrial & System Engineering International University - VNU

Encourage us to take risk, to go big.

Dept. Industrial & System Engineering International University - VNU

Also prevent us from stupid decision

May not be the greatest skill, but will surely be the most useful tool for engineers

Dept. Industrial & System Engineering International University - VNU

The Principles of Engineering Economy

1. Develop the Alternatives
2. Focus on the Differences
3. Use a Consistent Viewpoint
4. Use a Common Unit of Measure
5. Consider All Relevant Criteria
6. Make Risk and Uncertainty Explicit
7. Revisit Your Decisions

Dept. Industrial & System Engineering International University - VNU

The Principles of Engineering Economy

1. Develop the Alternatives
Carefully define the problem! Then the choice (decision) is among
alternatives. The alternatives need to be identified and then defined
for subsequent analysis.
What are Alternatives ?
Doing nothing is considered as an alternative
Solutions for a
problem
Have a same objective
Developing
Alternatives are
basically essentialAlternati
for
ve 1
problem solving
process

Innovation

Problem
Creativity

Alternati
ve 2

Engineering
Technique

Technology

Doing
nothing

Alternat
ive

Implementa
tion

Dept. Industrial & System Engineering International University - VNU

The Principles of Engineering Economy

2. Focus on the Differences
Only the differences in expected future outcomes among the
alternatives are relevant to their comparison and should be
considered in the decision.

Choosing colors for a new car

Choosing between 2 exactly-the-same-in-every-aspects facility to
buy
Paying in wire-transfer (banking) or cash (different or not ?)
Focus only on aspects of the alternative that bring out the difference
When 2 alternatives are the same, try to look for another criterion

Dept. Industrial & System Engineering International University - VNU

The Principles of Engineering Economy

3. Use a Consistent Viewpoint
The prospective outcomes of the alternatives, economic and other,
should be consistently developed from a defined viewpoint
(perspective).

Dept. Industrial & System Engineering International University - VNU

The Principles of Engineering Economy

3. Use a Consistent Viewpoint
The prospective outcomes of the alternatives, economic and other,
should be consistently developed from a defined viewpoint
(perspective).

Dept. Industrial & System Engineering International University - VNU

The Principles of Engineering Economy

4. Use a Common Unit of Measure
Using a common unit of measurement to enumerate as many of the prospective
outcomes as possible will simplify the analysis of the alternatives.
As commensurable as possible
(directly comparable)
Monetary unit is the most common
measure

Cost

Labor

This process could take time and effort

Layout

Locati
on

Capaci
ty

Dept. Industrial & System Engineering International University - VNU

The Principles of Engineering Economy

4. Use a Common Unit of Measure
Custome
rs
Satisfac
tion

How about this time?

Public
Relation

Can we easily transform

these factors into dollars?

Environm
ent

Employe
e
Satisfac
tion

Safety

Dept. Industrial & System Engineering International University - VNU

The Principles of Engineering Economy

5. Consider All Relevant Criteria
Selection of a preferred alternative (decision making) requires the use of a
criterion (or several criteria). The decision process should consider both the
outcomes enumerated in the monetary unit and those expressed in some other
unit of measurement or made explicit in a descriptive manner.

6. Make Risk and Uncertainty Explicit

Risk and uncertainty are inherent in estimating the future outcomes of the
alternatives and should be recognized in their analysis and comparison.

7. Revisit Your Decisions

Improved decision making results from an adaptive process; to the extent
practicable, the initial projected outcomes of the selected alternative should be
subsequently compared with actual results achieved.

Dept. Industrial & System Engineering International University - VNU

Engineering Economy and the Design

Process
1. Problem Definition
2. Development of Alternatives
3. Development of Prospective Outcomes
4. Selection of a Decision Criterion
5. Analysis and Comparison of Alternatives
6. Selection of the Preferred Alternative
7. Performance Monitoring and Post-evaluation of Results

Dept. Industrial & System Engineering International University - VNU

Engineering Economy and the Design

Process
1.
Problem Definition
Redefini
Prerequisites for any analysis:
No problem => no need for
solutions
Provide direction for developing
solutions
Imagine youre trying to do a
project without knowing what
the real problem is

ng

Internal
Needs

External
Requireme
nts

Problem

Problem
Evaluati
on

Dept. Industrial & System Engineering International University - VNU

Engineering Economy and the Design

Process
2.
Development of Alternatives
Time

Money

Creativit
y

Efficienc
y

Capabili
ty

Great
Alternati
ve

Knowledg
e

Dept. Industrial & System Engineering International University - VNU

Engineering Economy and the Design

Process
BRAINSTORMING
4 RULES FOR A
SUCCESSFUL
BRAINSTORMING:

1. No Criticism, Judgment,
Evaluation just yet!!
(Most important)
2. Out-of-the-box ideas are
welcomed
3. Quantity is what were
seeking
4. Combination and
Improvement generation
after each round

Dept. Industrial & System Engineering International University - VNU

Engineering Economy and the Design

Process

OMG MY GROUP CANT WORK!! THEY TALK A LOT BUT CANT

GENERATE ANYTHING
5 RULES FOR A SMOOTH GROUP
BRAINSTORMING:
1. Have 1 note-taker: write down everything, even it
sounds stupid at first. Its ok to have duplicate ideas
2. Have 1 leader to control the process
3. Take turn to talk. Best is setup a rule: counterclockwise, clockwise, or controlled by the leader
4. Set time for a turn, if you cant say anything on
your turn, just say Pass
5. Utilize the others turn to think, generate ideas

Dept. Industrial & System Engineering International University - VNU

Engineering Economy and the Design

Process
2.
Development of Prospective Outcomes
Decision will be made by Evaluating the Outcomes based on Criteria
If problems outcomes can be quantified by monetary unit
net-value, cash-flow approach (Chapter 3)
Optimization technique: to minimize or maximize

Dept. Industrial & System Engineering International University - VNU

Engineering Economy and the Design

Process
3.
Selection of a Decision Criterion
To minimize Lost
Or
To maintain Reputation?
Or
To just go bankrupt

Dept. Industrial & System Engineering International University - VNU

Engineering Economy and the Design

Process
4.
Analysis and Comparison of Alternatives

Fancy financial portfolio

Simple Decision Tree

Dept. Industrial & System Engineering International University - VNU

Engineering Economy and the Design

Process
5.
Selection of the Preferred Alternative
Basically proposing the final Recommendation

6. Performance Monitoring and Post-evaluation of

Results
Collection Outcomes from the selected Alternative
Adjusting the projects execution to improve objective
Comparing Outcomes to see whether there is improvement or not?
In any project, planning is just 20%, execution is 80%

Unfortunately,
these things are
easier said than
done

Dept. Industrial & System Engineering International University - VNU

Engineering Economy

I do not own any of the images using in this

PowerPoint slide, credit to all the owners