Contents

Foreword ...... (v) Preface ...... (vii) Acknowledgements ...... (ix) About the Author ...... (xxxi) Abbreviations ...... (xxxiii)

SECTION – I THEORIES AND OF

CHAPTER 1 Introduction to Economics 1.1 Engineering Economics ...... 3 1.2 Macro-Economics and Micro-Economics ...... 4 1.3 Engineering Economics vs. Theoretical Economics ...... 4 1.4 of Engineering ...... 5 1.5 Elements of Engineering Economies ...... 5 1.6 Cost Benefit Analysis ...... 6 1.7 Standard Operation Procedure for Cost Benefit Analysis ...... 6 1.8 History of the Cost Benefit Analysis ...... 7 1.9 Limitations of Cost Benefit Analysis ...... 7 1.10 Basic Approaches for Application of Cost Benefit Analysis for Resolving Environmental Problems ...... 7 1.10.1 Cost Oblivious Approach ...... 7 1.10.2 Cost Benefit Approach ...... 8 1.10.3 A Combination of Professional and Personal Ethics .... 8 1.11 Conclusion ...... 9 Further Reading ...... 9 Criteria Questions ...... 9

(xi) CHAPTER 2 The Basic Concepts of Economics 2.1 What is Economics? ...... 10 2.2 History of Economics ...... 10 2.2.1 Other Definitions of Economics ...... 11 2.3 Economic Theory ...... 12 2.4 Economic Principles Vary with Society...... 13 2.5 Basic Units of Study on Economics ...... 13 2.6 Broad Division of Economics ...... 13 2.7 Income ...... 13 2.8 Relationship between Income Groups and the Type of Expenditure ...... 14 2.9 Personal Income, Disposal Income ...... 14 2.10 National Income and Say’s ...... 15 2.11 The Marginal Propensity to Consume ...... 15 2.12 Marginal Propensity to Save ...... 16 2.13 Wealth vs Standard of Living ...... 17 2.14 Human Needs and Economic Wants ...... 17 2.14.1 Characteristics of wants ...... 17 2.14.2 Classification of wants ...... 18 2.14.3 Wants are Flexible...... 18 2.15 Maslow’s Theory of Hierarchy of Basic Needs ...... 18 2.16 Conclusion ...... 19 Further Reading ...... 19 Criteria Questions ...... 20

CHAPTER 3 Categories of 3.1 Introduction ...... 21 3.2 Capitalist ...... 22 3.2.1 Main Features of Capitalist Economy ...... 22

(xii) 3.3 Socialist Economy ...... 23 3.3.1 The Main Features of Socialist Economy ...... 23 3.4 Mixed Economy ...... 23 3.4.1 Can Pure Capitalism or Pure Socialism Exist? ...... 23 3.4.2 The Sense of Ownership in Mixed Economy ...... 24 3.5 Problems of an Underdeveloped Economy ...... 24 3.6 ...... 24 3.6.1 Essentials of a Market ...... 24 3.6.2 Types of Markets...... 25 3.7 Main Market Forms ...... 25 3.8 Market Situation under Perfect ...... 25 3.9 Market Situation under ...... 26 3.9.1 The Features of a Monopoly ...... 26 3.9.2 Distinguishing Features of ...... 26 3.10 Market Situation under ...... 27 3.11 Market Situation under Government Protection ...... 27 3.12 Representative Firm ...... 28 3.13 The Role of Planning Commissions in the Socialist Economy ..... 28 3.14 Conclusion ...... 28 Further Reading ...... 28 Criteria Questions ...... 29

CHAPTER 4 Laws of Demand and Supply 4.1 Introduction ...... 30 4.2 ...... 30 4.3 Total Utility ...... 30 4.4 Types of Economic ...... 31 4.5 Law of Diminishing Utility ...... 31 4.6 ...... 31 4.7 Some definitions on Marginal Utility ...... 32

(xiii) 4.8 Equimarginal Utility ...... 33 4.9 Factors Influencing Demand ...... 33 4.9.1 The above Factors can also be Represented by the Following Relationship ...... 33 4.10 Law of Demand ...... 33 4.11 Demand Schedule ...... 33 4.12 ...... 34 4.13 Market Demand Curve ...... 34 4.14 Law of Substitution ...... 34 4.15 of Demand ...... 35 4.15.1 Factors Governing the Elasticity of Demand ...... 35 4.15.2 Uses of the Concept of Law of Demand ...... 36 4.16 ...... 36 4.16.1 Factors Influencing Supply ...... 36 4.16.2 Supply Curve ...... 36 4.17 Elasticity of Supply ...... 37 4.18 and ...... 37 4.19 Review of the Definitions for Demand and Supply ...... 38 4.20 Conclusion ...... 38 Further Reading ...... 39 Criteria Questions ...... 39

CHAPTER 5 and Equilibrium 5.1 Economic Laws ...... 41 5.2 Commodities ...... 41 5.3 Value ...... 42 5.3.1 Utility Value ...... 42 5.3.2 Exchange Value ...... 42 5.3.3 Concept of Value as Applied in Value Engineering ... 42 5.4 Price ...... 43 5.5 Concepts of Pricing ...... 43

(xiv) 5.6 Equilibrium Price ...... 44 5.7 Temporary Equilibrium Price ...... 44 5.8 Equilibrium Price under Different Market Conditions ...... 45 5.8.1 Equilibrium Price under ...... 45 5.8.2 Equilibrium Price under Monopoly ...... 45 5.8.3 Equilibrium Price under Monopolistic Competition ... 45 5.8.4 Equilibrium Price under Oligopoly ...... 46 5.9 Effect of Time on Theory of Pricing ...... 46 5.10 Conclusion ...... 47 Further Reading ...... 47 Criteria Questions ...... 48

CHAPTER 6 Wealth and Time Value of 6.1 Wealth ...... 49 6.1.1 Classification of Wealth ...... 50 6.2 Money ...... 50 6.2.1 History of Money ...... 51 6.2.2 Functions of Money ...... 51 6.2.3 Types of Money ...... 51 6.2.4 Properties of Money ...... 52 6.2.5 Kinds of Money ...... 52 6.2.6 Credit Instruments ...... 52 6.3 Banking Operations ...... 52 6.3.1 Types of Banks ...... 52 6.3.2 Functions of Banks ...... 53 6.3.3 How the Reserve Bank Controls Credit in the Country ...... 53 6.3.4 Other Functions of Reserve Bank of India ...... 53 6.4 ...... 54 6.4.1 Contractionary and Expansionary Monetary Policies...... 54 6.4.2 Tools of Monetary Policy ...... 54

(xv) 6.4.3 ...... 54 6.4.4 Mudra Loans ...... 55 6.5 Asset Pricing Model (CAPM) ...... 55 6.6 Short-Term Financing and Long-Term Financing ...... 55 6.7 Optimal Capital Structure ...... 55 6.8 (GDP) ...... 55 6.8.1 On the other hand, Gross National Product (GNP) .... 56 6.8.2 Domestic Product (NDP) ...... 56 6.9 Cash Reserve Ratio ...... 56 6.9.1 Cash Reserve Ratio (CRR) ...... 56 6.9.2 Repo Rate ...... 56 6.9.3 Reverse Repo Rate ...... 56 6.9.4 Statutory Liquidity Ratio ...... 56 6.10 Money Market ...... 57 6.10.1 Share Market ...... 57 6.10.2 Mutual Funds ...... 57 6.11 International and Globalization ...... 57 6.12 The ...... 57 6.13 Simple and Compound Interest ...... 58 6.14 Gradient Series Factor or Gradient Interest Addition ...... 59 6.15 Discrete Compounding and Continuous Compounding ...... 59 6.16 Internal Rate of Return (IRR) ...... 60 6.17 Nominal vs. Real Values ...... 60 6.18 Modified Internal Rate of Return ...... 61 6.19 Expected Rate of Return ...... 61 6.20 Laws of Diseconomies of Scale ...... 61 6.20.1 The Law of Increasing ...... 61 6.20.2 Law of to Scale ...... 62 6.20.3 Law of Constant Returns to Scale ...... 62 6.21 Demand vs. Rate of Interest ...... 63 6.22 Marginal Efficiency of Capital ...... 63 6.22.1 Case A, where the Person Borrows Money ...... 63 6.22.2 Case B, where the Person Invests his Own Money ..... 63

(xvi) 6.23 Relationship Between r, Q, C & I ...... 64 6.24 Investment ...... 64 6.25 Exchange ...... 64 6.25.1 Advantages of Exchange ...... 64 6.26 Taxation Systems ...... 65 6.27 Trade Related Organizations ...... 66 6.28 Conclusion ...... 67 Further Reading ...... 67 Criteria Questions ...... 68

CHAPTER 7 Cost for 7.1 Why Finance and Cost Accounting for Engineers? ...... 69 7.2 Double-entry Bookkeeping and Trial Balance ...... 70 7.3 Annual Accounts ...... 70 7.4 Balance Sheet ...... 71 7.5 Depreciation, Amortization and Depletion ...... 71 7.6 Depreciation- Methods ...... 72 7.7 ...... 74 7.8 -Adjusted Return of Investment ...... 74 7.9 Cost Accounting ...... 74 7.10 Categories of Cost Accounting ...... 74 7.11 Cost Accounting vs. Financial Accounting ...... 75 7.12 Origin of Cost Accounting ...... 77 7.13 Implicit vs. Explicit Costs ...... 77 7.14 Cash Flow Diagrams ...... 77 7.14.1 Revenue Dominated Cash Flow Diagram ...... 79 7.14.2 Cost -Dominated Cash Flow Diagram ...... 79 7.15 Conclusion ...... 79 Further Reading ...... 79 Criteria Questions ...... 80

(xvii) CHAPTER 8 Corporate Social Responsibilities 8.1 Social Responsibility ...... 81 8.2 Categories of Social Responsibility ...... 81 8.3 Perspectives of the Social Responsibility...... 81 8.4 Points Favouring Social Involvement of an Organization ...... 82 8.5 Difficulties faced in the Social Involvement of Organizations (or points in favour of efficiency perspective) ...... 83 8.6 Social Audit ...... 83 8.7 Audit Terminology ...... 84 8.8 Ethical Audit Procedure ...... 85 8.9 Ethical Audit Reviews...... 85 8.10 Seven Key Features of Ethical Audit ...... 87 8.11 Community Information, Empowerment & Transparency (CIET) ...... 87 8.12 Conclusion ...... 87 Further Reading ...... 88 Criteria Questions ...... 88

SECTION – II PRINCIPLES OF ENGINEERING ECONOMICS

CHAPTER 9 Principles of Management 9.1 Role of Engineers in Management ...... 91 9.2 Definitions on Management ...... 91 9.3 Skill Types and Roles of Managers ...... 93 9.4 Evolution of Management Thinking ...... 93 9.5 Early Pioneers in Management Thinking – Pre-nineteenth Century ...... 93 9.6 Second Phase in the Development of Management thinking Leading to Scientific Management ...... 94

(xviii) 9.7 Concepts of Scientific Management ...... 95 9.8 Specific Aims of Scientific Management ...... 96 9.9 Advantages of Scientific Management ...... 96 9.10 Summary of the Features of Management as a System...... 97 9.11 Resistance to Scientific Management ...... 98 9.12 Conclusion ...... 98 Further Reading ...... 99 Criteria Questions ...... 99

CHAPTER 10 Factors for Production 10.1 The Concept of Production ...... 100 10.2 Factors of Production ...... 100 10.3 Characteristics of Land ...... 101 10.4 Characteristics of Labour ...... 101 10.5 Functions of Capital ...... 102 10.5.1 Forms of Capital ...... 102 10.6 Characteristics of Machinery ...... 103 10.7 Automation ...... 103 10.8 Functions of Entrepreneurship ...... 103 10.9 Conclusion ...... 104 Further Reading ...... 104 Criteria Questions ...... 105

CHAPTER 11 Cost of Production 11.1 Introduction ...... 106 11.2 Definitions of Terms Related to Production Cost ...... 107 11.3 Explicit and Implicit Costs of Production ...... 108 11.4 Tangible and Intangible Costs of Production ...... 109 11.5 Classification of the Tangible Costs ...... 109 11.5.1 Material Costs ...... 109

(xix) 11.5.2 Labour Costs ...... 109 11.5.3 Expense Costs ...... 109 11.6 The Philosophy of Fixing of Selling Price ...... 110 11.7 Economic Laws Governing Pricing Policy ...... 111 11.8 Total Cost/Marginal Costs under Long Run/ Short Run Conditions ...... 112 11.8.1 Short Run Total Costs ...... 112 11.8.2 Short-run Average and Marginal Costs ...... 113 11.8.3 Long Run ...... 114 11.8.4 Why the average cost curve is always cup shaped? .. 114 11.9 Total Average and Marginal Revenue ...... 114 11.9.1 Total Revenue ...... 115 11.9.2 Average Revenue ...... 115 11.9.3 Marginal Revenue ...... 115 11.9.4 Relationship between TR, AR & MR ...... 115 11.10 Selective Batch Size to Reduce Overall Production Cost ...... 115 11.11 Group Technology ...... 116 11.12 Conclusion ...... 117 Further Reading ...... 117 Criteria Questions ...... 118

CHAPTER 12 12.1 Economies of Scale ...... 119 12.2 Types of Economies of Scale ...... 120 12.2.1 Size Economies of Scale ...... 120 12.2.2 Technical Economies of Scale ...... 120 12.2.3 Managerial Economies of Scale ...... 120 12.2.4 Financial Economies of Scale ...... 120 12.2.5 Network Economies of Scale ...... 120 12.2.6 External Economies of Scale ...... 120 12.2.7 Diseconomies of Scale ...... 121 12.2.8 Factors for the Size of an Undertaking ...... 121

(xx) 12.3 Classes of Industries ...... 122 12.4 Factors for the Size of an Undertaking...... 122 12.5 Large Scale Industries ...... 122 12.5.1 Characteristics of Large-Scale Industry ...... 122 12.5.2 Advantages of Large-scale Production ...... 122 12.5.3 Limitations of Large-Scale Industries ...... 123 12.6 Small Scale Industries ...... 123 12.6.1 Characteristics of Small-Scale Industry ...... 123 12.6.2 Advantages of Small-Scale Industries...... 124 12.7 Cottage Industry ...... 124 12.8 Micro, Small & Medium Enterprises (MSME) ...... 124 12.9 Benefits of MSME Registration ...... 125 12.10 Conclusion ...... 125 Further Reading ...... 126 Criteria Questions ...... 126

CHAPTER 13 Demand Forecasting 13.1 Introduction ...... 127 13.2 Need for Demand Forecasting ...... 128 13.3 Definitions of Forecasting ...... 129 13.4 Basic Steps of Forecasting ...... 130 13.4.1 Characteristics of a Good Forecast...... 130 13.4.2 Basic Steps in the Forecasting Process ...... 131 13.5 Short-term, Medium-term and Long-term Forecasts ...... 131 13.6 Market Segmentation ...... 131 13.7 Techniques of Forecasting ...... 132 13.8 Qualitative Forecasting Methods ...... 132 13.8.1 Opinion Survey ...... 133 13.8.2 Aided Judgment ...... 133 13.8.3 Judgmental Bootstrapping ...... 134 13.8.4 Delphi Technique ...... 134 13.8.5 Jury of Executive-opinion ...... 134

(xxi) 13.8.5 Prediction Markets ...... 134 13.8.7 Marketing Trials ...... 134 13.8.8 Market Research...... 135 13.8.9 Simulated Interaction ...... 135 13.9 Quantitative Forecasting Methods ...... 135 13.9.1 Discrete Event Simulation ...... 136 13.9.2 Continuous Simulation ...... 136 13.9.3 Group Method of Data Handling (GMDH) ...... 136 13.9.4 Reference Class Forecasting ...... 136 13.9.5 Quantitative Analogies ...... 136 13.9.6 ...... 137 13.9.7 Conjoint Analysis ...... 137 13.9.8 Causal Models ...... 137 13.9.9 Segmentation ...... 138 13.9.10 Cross-sectional Forecasting ...... 138 13.10 Trend Analysis or Time Series in Forecasting ...... 138 13.10.1 Extrapolation ...... 139 13.11 Seasonal and Cyclic Fluctuations ...... 139 13.11.1 Seasonal Fluctuations ...... 139 13.11.2 Cyclic Fluctuations...... 139 13.11.3 Random Fluctuations ...... 140 13.12 Least Square Method...... 140 13.12.1 The Least-Squares Straight Line ...... 140 13.12.2 The Least-Squares Parabola ...... 141 13.12.3 Multiple Regression Least-Squares ...... 141 13.13 Moving Average Method ...... 141 13.14 Life Cycle Effect on Forecasting ...... 141 13.15 Forecasting Errors ...... 142 13.16 Cost of Forecasting ...... 143 13.17 Tracking Signals in Forecasting ...... 143 13.18 International Symposia on Forecasting ...... 144 13.19 Conclusion ...... 144 Further Reading ...... 144 Criteria Questions ...... 145

(xxii) CHAPTER 14 14.1 Significance of Decision Theory for Engineering Economics .... 146 14.1.1 Synonyms of Decisions ...... 146 14.2 Problem Analysis and Decision Making ...... 147 14.2.1 Problem Analysis ...... 147 14.2.2 Decision Making ...... 148 14.3 Situations Under which Decisions are Taken ...... 148 14.3.1 Decision Making under Certainty ...... 148 14.3.2 Decision Making under ...... 148 14.3.3 Decision Making under Risk ...... 148 14.3.5 Decision Making under Conflicts ...... 148 14.4 Classifications of Decisions ...... 149 14.4.1 Organizational and Personal Decisions ...... 149 14.4.2 Routine and Strategic Decisions ...... 149 14.4.3 Policy and Operative Decisions ...... 149 14.4.4 Programmed and Non-programmed Decisions ...... 149 14.4.5 Individual and Group Decisions ...... 149 14.5 Different Approaches to Decision Making ...... 150 14.5.1 Intuitive Decision Makingx ...... 150 14.5.2 Trial and Error Decision Making ...... 150 14.5.3 Follow the Leader Decision Making ...... 150 14.5.4 Scientific Decision Making ...... 150 14.5.5 Systematic Decision Making ...... 151 14.6 Bias in Decision Making ...... 152 14.7 Proper Management Decision (PMD) and Proper Engineering Decision (PED) ...... 153 14.8 Information Needed by the Decision Maker ...... 153 14.8.1 Operating Data ...... 154 14.8.2 Control Data ...... 154 14.8.3 Planning Data ...... 154 14.9 Inter-departmental Communication Flow ...... 154

(xxiii) 14.10 Lateral Information Flow ...... 154 14.11 Conclusion ...... 155 Further Reading ...... 155 Criteria Questions ...... 156

SECTION III

APPLICATIONS OF ENGINEERING ECONOMICS

CHAPTER 15 Total Productive Maintenance 15.1 Introduction ...... 159 15.2 TPM is an Application of Engineering Economics ...... 160 15.3 History of TPM ...... 160 15.4 The Meaning of TPM ...... 161 15.5 Definitions of TPM ...... 161 15.6 The Five Zeros of TPM ...... 162 15.7 What can TPM Achieve? ...... 163 15.8 The Three Levels of Autonomous Maintenance in TPM ...... 163 15.9 Procedure for the Implementation of TPM ...... 163 15.10 The Structure of TPM ...... 165 15.11 TPM, Terotechnology and Logistics – A Comparison ...... 166 15.12 5S vs TPM ...... 166 15.12.1 A place for everything and everything in its place (PEEP) ...... 167 15.12.2 Seiso (Shine, sweep or sanitize) ...... 167 15.12.3 Cleanliness in the Office Environment ...... 168 15.13 Maintenance Work Sampling ...... 168 15.14 Conclusion ...... 168 Further References ...... 169 Criteria Questions ...... 169

(xxiv) Chapter 16 Break-Even and Make or Buy Analyses 16.1 Introduction ...... 171 16.2 Definitions on Break-Even Analysis ...... 172 16.3 Break-even Chart ...... 174 16.4 Break Even Analysis Terminology ...... 174 16.5 Factors for Break Even Point ...... 175 16.6 Formula for Break Even Point ...... 175 16.7 Break Even Point vs. Payback Period ...... 176 16.8 Case Studies of Break Even Analysis as Applicable in Several Situations ...... 177 16.8.1 Production Batch Quantity, as illustrated in example 1 below ...... 177 16.8.2 Organizing Seminars as illustrated in example 2 below ...... 177 16.9 Economic Order Quantity ...... 178 16.10 Make or Buy Decision ...... 178 16.11 The Criteria that Influence Our Decision to Produce In-house ... 179 16.12 The Criteria that Influence Our Decision to Buy or Outsource .. 179 16.13 Impact of Control needed for the Make-or-buy Decision ...... 180 16.14 Thumb Rule for Outsourcing ...... 181 16.15 Some Definitions on Make-or-buy Decision ...... 181 16.16 Example for Make or Buy Decision ...... 182 16.17 Conclusion ...... 183 Further Reading ...... 183 Criteria Questions ...... 184

CHAPTER 17 Creativity and Kaizen 17.1 Significance of Creativity in Engineering Economics ...... 186 17.2 The Principles of Creativity ...... 188 17.2.1 Divide and conquer ...... 188

(xxv) 17.2.2 Set Quotas and Deadlines for Yourself ...... 188 17.2.3 Let Loose Your Mind ...... 188 17.2.4 Two Heads are Better than One ...... 189 17.2.5 Question Each and Every Detail ...... 189 17.3 Six Thinking Hats ...... 190 17.4 What is Kaizen? ...... 190 17.4.1 What is Kaizen’s role in Engineering Economics? ... 191 17.5 Why Continuous Improvement? ...... 191 17.6 Significance of Kaizen in Continuous Improvement ...... 192 17.7 How does Kaizen Improve ? ...... 192 17.8 Juran’s Methodology ...... 192 17.9 Illustrations of Kaizen Application ...... 193 17.10 Umbrella of Kaizen ...... 194 17.11 Other Continuous Improvement Techniques ...... 194 17.12 Conclusion ...... 194 Further Reading ...... 194 Criteria Questions ...... 195 Appendix ...... 196

CHAPTER 18 Material Layout Planning 18.1 Material Layout Planning ...... 198 18.1.1 Significance of Material Layout Planning ...... 198 18.1.2 Material Layout Planning Applied to Shearing Operations ...... 200 18.2 Case Study in Material layout planning ...... 200 18.2.1 Bill of Materials ...... 200 18.2.2 The Process for Fan Shaped Body ...... 201 18.2.3 Existing Operation Sequence for Producing the Blanks ...... 201 18.2.4 Recommended Material Layout and the Process ...... 202 18.2.5 Summary of Results Achieved ...... 205

(xxvi) 18.3 Conclusion ...... 206 Further Reading ...... 206 Criteria Questions ...... 207

CHAPTER 19 Value Engineering and Engineering Economics 19.1 Significance of Value Engineering to Engineering Economics .. 208 19.2 What is Value Engineering? ...... 208 19.3 Definitions of Value Engineering ...... 209 19.4 History of Value Engineering ...... 210 19.5 What is Value? ...... 211 19.6 Value Engineering ...... 213 19.7 Objectives of Value Engineering ...... 213 19.8 Functional Value of a Product ...... 214 19.9 Methodology of Value Analysis ...... 214 19.9.1 General Phase ...... 215 19.9.2 Information Phase ...... 215 19.9.3 Function Phase ...... 215 19.9.4 Investigation and Creative Phases ...... 216 19.9.5 Evaluation Phase ...... 216 19.9.6 Recommendation and Follow-up Phases ...... 217 19.10 DARSIRI Methodology for Value Analysis ...... 217 19.11 Function Analysis System Technique (FAST) ...... 217 19.12 Conclusion ...... 217 Further Reading ...... 218 Criteria Questions ...... 219

CHAPTER 20 Plant Location and Layout 20.1 Introduction ...... 220 20.2 Plant Location and Plant Layout ...... 220

(xxvii) 20.3 City vs Suburban vs Urban Location ...... 221 20.3.1 Conditions Suggesting a City Location ...... 221 20.3.2 Conditions Suggesting a Suburban Location ...... 221 20.3.3 Conditions Suggesting a Rural Location ...... 221 20.4 Other Factors Controlling Plant Location ...... 222 20.5 Cost Factors and Non-Cost Factors ...... 223 20.5.1 Cost Factors ...... 223 20.6 Least Cost Centre Analysis ...... 223 20.7 The Centre-of-gravity Method of Plant Location ...... 224 20.8 Non-cost Factors ...... 224 20.8.1 Proximity to Raw Materials and Markets ...... 225 20.8.2 Manpower ...... 226 20.8.3 Electric Power ...... 227 20.8.4 Fuel ...... 227 20.8.5 Water ...... 227 20.8.6 Government Policy...... 227 20.9 Illustrations of Typical Non-cost Factors ...... 228 20.9.1 Fish Canning Factory ...... 228 20.9.2 Oil Refineries ...... 228 20.9.3 Breweries ...... 228 20.9.4 Beach Hotels ...... 228 20.9.5 Airports ...... 228 20.10 Particle Swarm Optimization ...... 228 20.11 Plant Layout ...... 229 20.12 General Rules and Objectives of Successful Plant Layout ...... 230 20.13 Types of Plant Layout ...... 231 20.13.1 Fixed Position layout...... 231 20.13.2 Process or Functional Layout ...... 231 20.13.3 Product or Line Layout ...... 231 20.13.4 Combination Layout ...... 232 20.13.5 Cellular Layout ...... 232 20.14 Group Technology ...... 233 20.15 Conclusion ...... 234 Further Reading ...... 235 Criteria Questions ...... 235

(xxviii) CHAPTER 21 Scientific Inventory Control 21.1 Introduction - Relevance of Inventory Control to Engineering Economics ...... 237 21.2 What is Inventory? ...... 237 21.3 Types of Inventories ...... 238 21.4 Conditions Leading to Increased Inventory ...... 238 21.5 Costs Involved with Inventories ...... 239 21.6 Selective Control in Inventory Management ...... 239 21.7 Scientific Material Planning ...... 240 21.8 Classification and Codification ...... 240 21.9 ABC Analysis ...... 241 21.9.1 Procedure for ABC Analysis ...... 243 21.10 Inventory Control Parameters ...... 244 21.11 Economic Order Quantity ...... 245 21.11.1 Inventory Carrying Costs or Costs Resulting from Owning the item ...... 245 21.11.2 Stock-out or Down Time Costs ...... 245 21.12 Two-bin Inventory Control System ...... 247 21.13 Recent Trends in Inventory Control ...... 249 21.14 Suppler Partnership ...... 249 21.15 Collaborative Planning, Forecasting and Replenishment (CPFR) ...... 249 21.16 Conclusion ...... 250 21.17 Case Studies ...... 250 Further Reading ...... 251 Criteria Questions ...... 251

CHAPTER 22 Machinery Replacement Analysis 22.1 Introduction ...... 253 22.2 Why Equipment Replacement? ...... 254

(xxix) 22.3 Basic Strategies of Repair/Replacement ...... 254 22.4 Phases of Replacement Analysis ...... 255 22.5 Methods of Evaluation ...... 256 22.6 Traditional Methods ...... 256 22.6.1 Payback Period Method ...... 256 22.6.2 Total Life Average Method ...... 257 22.6.3 Average Rate of Returns Method ...... 257 22.6.4 Internal Rate of Return (IRR) and Average Rate of Returns (ARR) ...... 257 22.6.5 Disadvantages of the Traditional Methods ...... 257 22.7 Discounted Cash Flow Methods ...... 258 22.7.1 Net Present Worth (NPW) or Net Present Value (NPV) ...... 258 22.7.2 Profitability Method ...... 258 22.7.3 Internal Rate of Returns Method ...... 259 22.7.4 Differences between Net Present Worth and Internal Rate of Returns Methods ...... 259 22.8 MAPI Method ...... 259 22.9 Markov Analysis ...... 260 22.10 Conclusion ...... 261 Further Reading ...... 261 Criteria Questions ...... 261

APPENDIX I Syllaby of Indian Universities 263

APPENDIX II Syllaby of Foreign Universities 270

Bibliography 277 Index 283

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