1. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM Chapter 1 Introduction

2. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM Today’s Objectives: By the end of this lecture students will be able to understand: 1- The Problem Solving Process. 2 - Nonmonetary Considerations. 3 - Present Economy Examples.

3. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM WHAT IS ECONOMICS ? The study of how limited resources is used to satisfy unlimited human wants

4. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM Engineering economy is the application of economic analysis techniques In the comparison of engineering design alternatives. WHAT IS ENGINEERING ECONOMY ?

5. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM The Problem Solving Process 1- Formulating of the problem 2- Analysis of the problem 3- Search for alternatives solutions to the problem 4- Selecting of the preferred solution 5- Specification of the preferred solution

6. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM The problem solving or engineering design process begins when a decision maker is dissatisfied with something, or recognizes a need, and then decides to do something about it. The process ends with plans for correcting the dissatisfaction or satisfying the need.

7. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM 1.The formulation of the problem: involves the establishment of the boundaries for the problem. cause / effect relationship are not missed. Avoid being overly influenced by the presence of a present solution, because it produces a incremental improvements rather than radically new solutions.

8. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM 2- The analysis of the problem: consist of relatively phrasing of the characteristics of the problem, including restrictions and the criteria to be used in evaluating alternatives.( budget, quality, safety, personnel, environmental, and service level constrains).

9. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM 3- The search of alternative solutions: involves the use of the engineer’s creativity in developing feasible solutions. Use a team. Gender and racial diversity on the team. Brainstorming, total quality management, breakthrough thinking principles by Nadler and Hibino

10. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM breakthrough thinking principles by Nadler and Hibino: a)Uniqueness: each problem is unique and should be approached as such. b)purposes: focus on the underlying purposes to strip away nonessential and distracting aspects of the problem. c)solution after next: recognize that you are designing for the future, think about the next generation of designs. d) systems: solutions to problems seldom exist in isolation, there is a bigger system that will be impacted by your solution

11. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM e) limited information collection: there is a time for data collection, and it is not at the initiation of the problem solving process. f) problem design: people will be impacted by the solutions, then they should be involved in developing the solution. g) betterment timeline: one of the worst axioms ever articulated is “if it isn’t broken, don’t fix it”. If it isn’t broken break it. Fix it before it breaks. Whether it is broken or not, improve it.

12. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM 4- the selection of preferred solution, consist of the measurement of the alternatives, using the Appropriate criteria. The alternatives are compared with the constraint, and infeasible alternatives are eliminated. 5- the specification of the preferred solution consist of a detailed description of the solution to be implemented. Prediction of the performance Characteristics of the solution to the problem are included in the specification.

13. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM Example 1.1 As an illustration of the application of the problem solving approach, consider the case of locally owned electrical power generating company faced with an air pollution problem that had to be solved. The power plant was using low grade coal with sulfur content of 1.9% by weight, and the air pollution control board for the state directed the power plant to comply with newly adopted standards for air quality.

14. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM A consulting engineer was hired to study the problem and recommend the best course of action. A search for alternative solutions to the problem resulted in a consideration of bunker C fuel oil, low sulfur furnace fuel oil and natural gas. Compare the alternatives using benefit cost analysis.

15. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM Example 2.1: A leading manufacturer of automotive bearings was faced with the need to expand its distribution operations. A study team was formed to analyze the problem and develop a number of feasible alternative solutions. After analyzing the problem and projecting future distribution requirements, the following feasible alternatives were determined:

16. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM Consolidate all distribution activities and expand the existing distribution center, located in Michigan. Consolidate all distribution activities and construct a new center, location to be determined. Decentralize the distribution function and build several new distribution centers geographically dispersed in the United States. The officers of the company directed the study team to pursue the second alternative.

17. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM The location study resulted in five candidate locations being selected for final consideration, the criteria used to make the final selection included: Land cost and availability. Labor availability and cost. Proximity to supply and distribution points Taxes and insurance rates. Transportation Community attitudes. Building costs.

18. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM The officers of the company selected a site in Alabama. Then they directed the study team to develop design alternatives for the material handling system. Four alternatives were obtained: 1- Use of pallet racks, lift trucks and flow racks. 2- Use of automated stacker crane system, lift trucks, conveyors and flow racks. 3- Use of narrow aisle, guided picking machines, high rise shelving, conveyors, driverless tractor trains and lift trucks. 4- Use of an automated stacker crane system, a rail guided picking vehicle system, a sortation and accumulation conveyor system and a high rise narrow aisle lift trucks. For a planning of 10 years, the fourth alternative was the most economical and was recommended to top management.

19. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM Nonmonetary considerations: multiple criteria in the decision process Managers have multiple criteria to be considered in reaching a final decision about The alternative to be adopted. Some of these factors: Quality – safety – environmental impact – community attitudes – labor management relationship – cash flow position – risks – system reliability – system availability – system maintainability - system operability – system Flexibility – impact on personnel levels –etc.

20. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM Example 1.5 Present economy examples: The single product manufacturing company manufactures a single product but in six different styles. The market area for the product is intrastate only, and the company also owns six retail outlet stores within the state. Because of customer preferences, only certain styles are inventoried at each outlet store. The decision at the present time concerns the warehouse space at each outlet store. Based upon an analysis of past sales records and other current marketing information, an increase in future sales for each store is predicted. An increase in warehouse space at each store location is therefore required. If the company only has %100000 available for warehouse expansion, how much capital must be borrowed to finance the construction of the needed space?

21. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM Sales Volume Style Present Sales Volume (units/month) Predicted Sales Volume (percent of present volume) 1 860140 2 5300120 3 370150 4 90080 5 2200100 6 230200 Assume that the space required is proportional to the volume of product (style) manufactured per month. Relevant data are given in Tables 1.1 and 1.2. Table 1.1 Sales Volume Data

22. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM Space Requirements Outlet Styles Inventoried Present Warehouse Space (square feet) Cost od Additional Space (dollars/square foot) A1,2,5400035 B2,4200025 C3,5,6360040 D1,2,4740030 E1,3,670030 F3,5,6420025 Table 2.1 Space Requirement Data

23. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM The predicted sales for each style are: Style 1 = 860 × 1.4 = 1204 units/month Style 2 = 5300 × 1.2 = 6360 units/month Style 3 = 370 × 1.5 = 555 units/month Style 4 = 900 × 0.8 = 720 units/month Style 5 = 2200 × 1 = 2200 units/month Style 6 = 230 × 2 = 460 units/month

24. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM The present sale indices for each outlet store are: Store A = 860+5300+2200 = 8360 units/month Store B = 5300+900 = 6200 units/month Store C = 370+22000+230 = 2800 units/month Store D = 860+5300+900 = 7060 units/month Store E = 860+370+230 = 1460 units/month Store F = 370+2200+230 = 2800 units/month

25. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM The indices for each outlet store, based on forecast sales, are: Store A = 1204+6360+2200 = 9764 units/month Store B = 6360+720 = 7080 units/month Store C = 555+2200+460 = 3215 units/month Store D = 1204+6360+720 = 8284 units/month Store E = 1204+555+460 = 2219 units/month Store F = 555+2200+460 = 3215 units/month

26. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM An estimate of the total warehouse space needed at each store, are: Store A = 9764/8360×4000 = 4671.7704 square feet Store B = 7080/6200×2000 = 2283.871 square feet Store C = 3215/2800×3600 = 4133.5715 square feet Store D = 8284/7060×7400 = 8682.9461 square feet Store E = 2219/1460×700 = 1063.9041 square feet Store F = 3215/2800×4200 = 4822.5001 square feet

27. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM The cost of the additional warehouse space needed at each store is: Store A = [4671.7704-4000]×35 = $23511.964 Store B = [2283.871-2000]×25 = $7096.775 Store C = [4133.5715-3600]×40 =$21342.86 Store D = [8682.9461-7400]×30 =$38488.383 Store E = [1063.9041-700]×30 =$10917.123 Store F = [4822.5001-4200]×25 =$15562.502 Total = $116919.61 The company must borrow =$116919.61 -$90000 =$16919.61

28. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM Example 1.6 For one product that a company manufactures, the purchased raw material is 2 inch diameter × 10 feet long extruded aluminum bar stock. This material costs $1.05/pound. Since the company purchases an average of 100,000 pound/month, it is considering manufacturing the raw material, which would require the purchase of an extrusion machine and a cutoff saw. Raw material for the extruder can be purchased in 4 inch × 4 inch × 57 inch long cast aluminum ingots for $ 0.50/pound. The company’s process engineer estimates the extruding operation would cost $0.30/pound, and the subsequent cutoff operation would cost $0.05/pound. The engineer also estimates there would be a 10% scrap loss of material at the extrusion stage and a 5.7% loss of material at the cutoff operations.

29. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM 1.If the company manufactures the extruded rod, what are the estimated annual saving? 2. If the company manufactures the extruded rod, what is the production cost for each rod? (aluminum density = 0.1 pound/cubic inch)

30. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM Answer:

31. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM

32. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM

33. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM Example A group of 10 university students is planning a 7 day trip to Daytona beach, Florida. This destination is 950 miles (round trip) away from their campus. The group has decided to share automobile expenses equally and is considering three alternative car rentals. For simplicity, assume only the following cost data are relevant. The cost for car A is $16/day plus $0.15/mile traveled, and the capacity of car A is four people. The cost for car B is $27/day plus $0.10 per mile traveled., with capacity of four people. The cost for car C is $35/day plus $0.12 per mile traveled, with a capacity of six people. The group estimates that local travel in Daytona will be about 350 miles. What is the most economic alternative travel plan for the group of students?

34. ENGINEERING ECONOMY DR. MAISARA MOHYELDIN GASIM Car A: 4 people cost = 16*7+0.15*(950+350) = $307 10 people cost = 307 * 3 = $921 Car B: 4 people cost = 27*7+0.10*(950+350) = $319 10 people cost = 319 * 3 = $957 Car C: 4 people cost = 35*7+0.12*(950+350) = $401 10 people cost = 401 * 2 = $802 Car A + car C = 307 + 401 = $708 Car B + car C = 319 + 401 = $720 The most economical alternative travel plan is (car A + car C)