Principles of Engineering Management

SEG 7410

What is Engineering Management?

What What Why

is Engineering? is Management?

Engineering Management?

What is Engineering?

What is Management?

The profession in which a knowledge of the mathematical and natural science gained by study, experience, and practice is applied with judgement to develop ways to utilize, utilize economically, the materials and forces of nature for the benefit of mankind (1979, US. Engineering societies).

A set of activities (including planning and decision making, organising, leading and control) directed at an organisations resources (human, financial, physical and informational) with the aim of achieving organisational goals in an efficient and effective manner. (Griffin)

What is Engineering Management?

Direct

supervision of engineers and/or the engineering function? Application of quantitative methods and engineering techniques to the practice of management? What engineering managers do!

Management of technical functions Management of (other) functions in a high-technology enterprise

Typical Engineering Management Textbook

Historical Development of Engineering Management. FUNCTIONS OF TECHNOLOGY MANAGEMENT.

Planning and Forecasting. Decision Making. Human Aspects of Organization. Controlling. Managing the Research Function. Managing Engineering Design. Planning and Managing Production Operations. Engineers in Marketing and Service Activities.

MANAGING TECHNOLOGY THROUGH THE PRODUCT LIFE CYCLE.

MANAGING PROJECTS.

Typical Engineering Management Textbook

Historical Development of Engineering Management. FUNCTIONS OF TECHNOLOGY MANAGEMENT.

Planning and Forecasting. Decision Making. Human Aspects of Organization. Controlling. Managing the Research Function. Managing Engineering Design. Planning and Managing Production Operations. Engineers in Marketing and Service Activities.

MANAGING TECHNOLOGY THROUGH THE PRODUCT LIFE CYCLE.

MANAGING PROJECTS.

SEG 7410
introduces

Aims and Objectives

some basic quantitative modelling tools and solution techniques for decisionmaking practice in building and manipulating these quantitative models using spreadsheets some understanding of when to use which tools (or when not to use)

DECISION MODELING WITH MICROSOFT EXCEL

Chapter 1 Introduction to Modeling

Copyright 2001 Prentice Hall

INTRODUCTION TO MODELING
Modeling Approach to Decision Making:
Involves spreadsheet based management models Uses spreadsheet software such as Excel This approach is easy for managers to use, Results in better management decisions, Provides important insights into problem.

THE MODELING PROCESS

Managerial Approach to Decision Making
Manager analyzes situation (alternatives) Makes decision to resolve conflict Decisions are implemented Consequences of decision
These steps Use Spreadsheet Modeling

THE MODELING PROCESS

The Role of Managerial Judgment in the Modeling Process:
Analysis

Model
Symbolic World Real World

Results

Managerial Judgment

Management Situation

Decisions
Intuition

Interpretation

Abstraction

THE MODELING PROCESS

Decision Support Models force you to
1. be explicit about your objectives. 2. identify and record the types of decisions that influence 3. 4. 5. 6. 7.

those objectives. identify and record interactions and trade-offs among those decisions. think carefully about which variables to include. consider what data are pertinent and their interactions. recognize constraints or limitations on the values. Models allow communication of your ideas and understanding to facilitate teamwork.

Models allow us to use the analytical power of spreadsheets hand in hand with the data storage and computational speed of computers.

TYPES OF MODELS
Physical Model
Characteristics
Tangible Easy to Comprehend Difficult to Duplicate and Share Difficult to Modify and Manipulate Lowest Scope of Use

Examples
Model Airplane Model House Model City

TYPES OF MODELS
(A set of relationships through a different, but analogous, medium.)

Analog Model

Characteristics
Intangible Harder to Comprehend Easier to Duplicate and Share Easier to Modify and Manipulate Wider Scope of Use

Examples
Road Map Speedometer Pie Chart

TYPES OF MODELS
(Relationships are represented mathematically.)

Symbolic Model Characteristics

Intangible Hardest to Comprehend Easiest to Duplicate and Share Easiest to Modify and Manipulate Widest Scope of Use

Examples
Simulation Model Algebraic Model Spreadsheet Model

MORE ON MODELS
A model is a carefully selected abstraction of reality. Symbolic models
1. always simplify reality. 2. incorporate enough detail so that the result meets your needs, it is consistent with the data you have available, it can be quickly analyzed.

Decision models are symbolic models in which some of the variables represent decisions that must or could be made. Decision variables are variables whose values you can control, change or set.

MORE ON DECISION MODELS

Decision models typically include an explicit performance measure that gauges the attainment of that objective. For example, the objective may be to maximize profit or minimize cost in relation to a performance measure (such as sales revenue, interest income, etc). In summary, decision models 1. selectively describe the managerial situation. 2. designate decision variables. 3. designate performance measure(s) that reflect objective(s).

BUILDING MODELS
To model a situation, you first have to frame it (i.e., develop an organized way of thinking about the situation). A problem statement involves possible decisions and a method for measuring their effectiveness. Steps in modeling:
1. Study the Environment to Frame the Managerial Situation

2. Formulate a selective representation 3. Construct a symbolic (quantitative) model

BUILDING MODELS
1. Studying the Environment
Select those aspects of reality relevant to the situation at hand.

2. Formulation
Specific assumptions and simplifications are made. Decisions and objectives must be explicitly identified and defined. Identify the models major conceptual ingredients using Black Box approach.

BUILDING MODELS
3. Model Construction
The next step is to construct a symbolic model. Mathematical relationships are developed. Graphing the variables may help define the relationship.
Var. Y
Co st B
A+B

Cost A

Var. X

To do this, use Modeling with Data technique.

MODELING WITH DATA

Consider the following data. Graphs are created to view any relationship(s) between the variables. This is the first step in formulating the equations in the model.

CLASSIFICATIONS OF MODELS
Decision making models are classified by the business function they address or by the discipline or industry involved. Classification
Business Function Discipline Industry Time Frame Mathematics Representation Uncertainty

Examples
Finance, Marketing, Cost Accounting, Operations Science, Engineering, Economics One Time Period, Multiple Time Periods Linear Equations, Non-Linear Equations Spreadsheet, Custom Software, Paper and Pencil Deterministic, Probabilistic

Military, Transportation, Telecommunications, Non-Profit

Organizational Level Strategic, Tactical, Operational

DETERMINISTIC AND PROBABILISTIC MODELS

Deterministic Models
are models in which all relevant data are assumed to be known with certainty. can handle complex situations with many decisions and constraints. are very useful when there are few uncontrolled model inputs that are uncertain. are useful for a variety of management problems. are easy to incorporate constraints on variables. software is available to optimize constrained models. allows for managerial interpretation of results. constrained optimization provides useful way to frame situations. will help develop your ability to formulate models in general.

DETERMINISTIC AND PROBABILISTIC MODELS

Probabilistic (Stochastic) Models
are models in which some inputs to the model are not known with certainty. uncertainty is incorporated via probabilities on these random variables. very useful when there are only a few uncertain model inputs and few or no constraints. often used for strategic decision making involving an organizations relationship to its environment.

MODELING AND REAL WORLD DECISION MAKING

Four Stages of applying modeling to real world decision making:
Stage 1: Study the environment, formulate the model and construct the model. Stage 2: Analyze the model to generate results. Stage 3: Interpret and validate model results. Stage 4: Implement validated knowledge.

MODELING AND REAL WORLD DECISION MAKING

Modeling Term
Decision Variable Parameter Consequence Variable Performance Measure

Management Lingo
Lever Gauge Outcome Yardstick

Formal Definition

Example
Investment Amount

Controllable Exogenous Input Quantity Uncontrollable Exogenous Input Quantity Endogenous Output Variable Endogenous Variable Used for Evaluation (Objective Function Value)

Interest Rat Commissions Paid Return on Investment

DECISION MODELING WITH MICROSOFT EXCEL

Chapter 2 Spreadsheet Modeling Part 1
Copyright 2001 Prentice Hall

In building spreadsheets for deterministic models, we will look at:

ways to translate the black box representation into a spreadsheet model. recommendations for good spreadsheet model design and layout suggestions for documenting your models useful features of Excel for modeling and analysis

Two ingredients combine to make Apple Pies: Fruit and frozen dough The Pies are then processed and sold to local grocery stores in order to generate a profit. Follow the three steps of model building.

Example 1: Simon Pie

Step 1: Study the Environment and Frame the Situation

Critical Decision: Setting the wholesale pie price Decision Variable: Price of the apple pies (this plus cost parameters will determine profits)

Step 2: Formulation
Using Black Box diagram, specify cost parameters
Pie Price Unit Cost, Filling Unit Cost, Dough Unit Pie Processing Cost Fixed Cost
Exogenous Variables

Model

The next step is to develop the logic inside the black box. A good way to approach this is to create an Influence Diagram. An Influence Diagram pictures the connections between the models exogenous variables and a performance measure (e.g., profit).

To create an Influence Diagram:

start with a performance measure variable. Decompose this variable into two or more intermediate variables that combine mathematically to define the value of the performance measure. Further decompose each of the intermediate variables into more related intermediate variables. Continue this process until an exogenous variable is defined (i.e., until you define an input decision variable or a parameter).

Start here:

Profit

performance measure variable

Decompose this variable into the intermediate variables Revenue and Total Cost

Profit
Revenue Total Cost

Now, further decompose each of these intermediate variables into more related intermediate variables ...

Profit
Revenue
Processing Cost Required Ingredient Quantities Pies Demanded

Total Cost

Ingredient Cost

Pie Price

Unit Pie Processing Cost

Unit Cost Filling

Unit Cost Dough

Fixed Cost

Step 3: Model Construction

Based on the previous Influence Diagram, create the equations relating the variables to be specified in the spreadsheet.

Profit
Revenue Total Cost

Profit = Revenue Total Cost

Profit
Revenue

Revenue = Pie Price * Pies Demanded

Pies Demanded

Pie Price

Profit
Total Cost

Processing Cost

Ingredient Cost

Total Cost = Processing Cost + Ingredients Cost + Fixed Cost

Fixed Cost

Profit
Total Cost

Processing Cost

Pies Demanded

Processing Cost = Pies Demanded * Unit Pie Processing Cost

Unit Pie Processing Cost

Profit
Total Cost

Ingredients Cost = Qty Filling * Unit Cost Filling + Qty Dough * Unit Cost Dough
Required Ingredient Quantities

Ingredient Cost

Unit Cost Filling

Unit Cost Dough

Simons Initial Model Input Values

Pie Price Pies Demanded and sold Unit Pie Processing Cost ($ per pie) Unit Cost, Fruit Filling ($ per pie) Unit Cost, Dough ($ per pie) Fixed Cost ($000s per week) $8.00 16 $2.05 $3.48 $0.30 $12

To represent this model in an Excel Spreadsheet, you should adhere to the following recommendations:
Present input variables together and label them. Clearly label the model results. Give the units of measure where appropriate. Store parameters in separate cells as data and refer to them in formulas by cell references. Use bold fonts, cell indentations, cell underlines and other Excel formatting options to facilitate interpretation.

Initial Simon Pie Weekly Profit Model

What if? Projection

Allows you to determine what would happen if you used alternative inputs. For example, what would the resulting Profit be if the Profit for Pie Price and Pies Demanded changed to $7.00 and 20,000 or $9.00 and 12,000, respectively. Simply change the values of these parameters in the spreadsheet to view the resulting Profit.

What if we change the values of two parameters?

What effect will that have on Total Cost and Profit?

Refining the Model

After reviewing the results, Simon has determined that this model treats the variables Pie Price and Pies Demanded as if they were independent of each other. Knowing this is not the case, Simon developed the following mathematical (linear) relationship:

Pies Demanded = 48 4 * Pie Price ($0 < price < $12)

Demand as a function of Price
50 40 30 20 10 0 0 2 4 6 Pie Price 8 10 12 Pie Demand

Refining the Model

Now, modify the spreadsheet to include this relationship. Keep in mind that the physical results should be separated from the financial or economic results.

More What if?

You can copy the model into adjacent columns and change specific values in order to compare and contrast the changes.

More What if?

Using Excels Chart Wizard, the resulting changes can be graphed in an X-Y Scatter plot for viewing.

Note that Profit is largest at a Pie Price of about $9.00 and that the break-even point of zero occurs at about $6.25.

Sensitivity Analysis
Examines what happens to one variable (usually a performance variable) when you change the values of another variable (usually an input variable). For example, examine the effect of a percentage change in Pie Price on the percentage change in Profit.

Now you can use trade-off analysis to determine how much of one performance measure (Profit) must be sacrificed to achieve a given improvement in another performance measure (Pies Demanded & Sold).

Example 2: Simon Pie Revisited

Simon suspects that the previous models Processing Cost formula produces the correct historical cost for the base case of 12 thousand Pies Demanded, but not for other values of Pies Demanded. Validate the model by using actual Processing Cost data for different levels of pie production. Use Excels Trendline capability to fit a trend equation directly to the actual cost data.

First, historical data (column B) are plotted along with projected data (column C) based on the initial model of 2.05*Pies Demanded (column A)

Next, right-click on the Processing Cost (Actual) series in the graph and choose the option Add Trendline.

After clicking this option, a dialog will open in which you can select Linear as the Type (for simplicity) and Processing Cost (Actual) as the Based on Series.

Next, click on the Options tab and select Custom as the Trendline Name. This will allow you to enter Linear Fit. Finally, click on the Display equation on chart option and click OK.

The resulting trend line gives a much better fit to the Processing Cost data and provides a more accurate equation:
Processing Cost = 3.375*Pies Demanded and Sold 14.339

What if? Projection

Applying this new Processing Cost equation to the spreadsheet model, you can see what will happen to your Profit.

Sensitivity Analysis

As in the previous example, use sensitivity analysis to determine what would happen to Profit if you change the values of Pie Price and Pies Demanded $ Sold.

Sensitivity Analysis

Again, using Excels Chart Wizard, the resulting changes can be graphed in an X-Y Scatter plot for viewing.

The Art of Modeling In setting up the model, you must anticipate the kinds of analyses you intend to do and pay attention to the layout of the model in order to produce a model that is: Logically Correct Presents major alternatives for comparisons Suitable for the manipulations necessary for analysis Easily understood by others Pleasing to the eye

The Art of Modeling Basic rules for creating good spreadsheet models:
1. Clearly define and label all variables 2. Clearly identify model inputs, decisions and parameters 3. Clearly identify model outputs, performance measure(s) and consequence variables 4. Do not hard wire parameter values into formulas; store in separate cells 5. Separate variables giving physical quantities from those that reflect them into accounting or financial consequences. 6. Use formatting option of Excel to improve appearance of model