MECHENG 587 & MFG587

Global Manufacturing

Business and the Manufacturing

Enterprise: Environment, Structure, &
Engineering Economics
September 22, 2020

Dr. Theodor Freiheit

Research Associate Professor
Department of Mechanical Engineering

Manufacturing Enterprise

Materials
Energy Products that
Design Make Satisfy
Information Societal Needs

Capital
Sell
Labor

Enabling Technologies
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 Outline

• The Environment of Competition

• Business Organization
• Engineering Economics

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This is important bc it gives you a

sense that what you should be doing

Corporate Mission
as an individual in the context of the
mission of the organization that we are
part of that. Beyond of our
responsibilities.

• The mission of the organization

– defines its purpose, i.e., what it contributes to society
– states the rationale for its existence what we do and what we don't do.
– provides boundaries and focus
– defines the concept(s) around which the company can
rally daily activities of the company

• Functional areas and business processes define

their missions such that they support the overall
corporate mission in a cooperative and synergistic
manner. such as meme near the machines
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 Corporate Mission Examples
• Merck:
– The mission of Merck is to provide society with superior products and
services-innovations and solutions that improve the quality of life and
satisfy customer needs-to provide employees with meaningful work and
advancement opportunities and investors with a superior rate of return.
• FedEx:
– FedEx is committed to our People-Service-Profit philosophy. We will
produce outstanding financial returns by providing totally reliable,
competitively superior, global air-ground transportation of high-priority
goods and documents that require rapid, time-certain delivery. Equally
important, positive control of each package will be maintained utilizing real
time electronic tracking and tracing systems. A complete record of each
shipment and delivery will be presented with our request for payment. We
will be helpful, courteous, and professional for each other, and the public.
We will strive to have a completely satisfied customer at the end of each
transaction.

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How a company can compete with

Defining the Corporate Strategy other competiters?

3D strategy
Responsiveness (Reliability; Quickness; Flexibility;
usually a all company are e.g., Dell, Overnight Delivery Services)
good in only maximum 2 of
these items.

Competitive Advantage through which

the company market share is attracted

Cost Leadership (Price;

e.g., Wal-Mart, Southwest
Airlines, Generic Drugs)

Differentiation (Quality; Uniqueness;

e.g., Luxury cars, Fashion Industry,
Brand Name Drugs)

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 How a company can compete with
other competiters?
Defining the Corporate Strategy what the tactics are - what should be
done in each functional area to get
competitive advantage.

• Corporate Strategy:
– The organization’s positioning in terms of
• responsiveness,
• cost leadership and
• product differentiation
• requirements, i.e., the sought competitive advantage(s).

• The corporate strategy dictates detailed strategies of functional area

(i.e., Operations, Finance, Marketing) but it is also affected by those
areas.

• Collectively, strategies seek to

– exploit (external) opportunities and (internal) strengths
– neutralize (external) threats
– address (internal) weaknesses

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Fundamental Strategy Requirements

Define
1. Market Segment
• Target & scope how much you want provide to your market segment

2. Value Added
• Customer oriented

3. Competitive Advantage what skills/resources/team you have?

4. Strategic Resources
5. Revenue Model
• Value creation & future growth every 6 months is a good period to
evaluate the revenue model.

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IMPORTANT

Good Strategy: Answer These Q’s

• What does winning look like?

• What markets should you play in?
• How can you win in that market?
• What are your company’s strengths (and
weaknesses) relative to your competitors?
• What needs to be managed for the strategy
to succeed?

Lafley & Martin, Playing to Win: How Strategy Really Works

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Corporate Strategy Mistakes

• Do-It-All Strategy You cannot do everything yourself; you must priorities your works based
on you resources.
– Failure to make real choices on priorities
• Don Quixote Strategy
– Unwisely attack strongest competitor first
• Waterloo Strategy
– Pursue too many fronts at once pretty much like do-it-all strategy

• Something-for-Everyone Strategy you should target a specific group of customers.

Mass customization is till need to be limited to some specific group of customers.
– Try to capture every sort of customer at once
• Program-of-the-Month Strategy must making priorities in each period

– Reject distinctiveness for what’s currently fashionable

• Dreams-that-Never-Come-True Strategy must always consider the resources before set goals.

– Never translate ambitious mission statements into clear choices

Lafley & Martin, Playing to Win: How Strategy Really Works
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 Competitive Strategy Context
Company Industry
Opportunities
Strengths
& Threats
& (Economic &
Weaknesses Technical)

Internal Competitive External

Factors Strategy Factors

Personal
Broader
Values
Societal
of the Key
Expectations
Implementers and leaderships

Source: Competitive
Strategy, Michael Porter ME587 Page 11

Forces Driving Competition

Potential Entrants

Threat of new entrants

Bargaining Power
of Suppliers Industry
Competitors more technical products, more
regulations need for selling your
Suppliers compete with competitors Buyers product and less buyers you will have.

other companies who make sub-assembly Rivalry Among Bargaining Power

parts affect your competition. Exisiting Firms of Buyers
Threat of Substitute
Products or Services

Substitutes
Source: Competitive
Strategy, Michael Porter
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 Factors in Competition
• Barriers to Entry
– Economies of Scale
– Product Differentiation
– Capital Requirements
– Switching Costs if you want to switch from one product to another
– Access to Distribution Channels
– Government Policy
• Industry Rivalry
– Numerous Competitors
– Slow Growth Industry
– High fixed costs
– Lack of Differentiation or Switching Costs if your product does not make cost for customer to switch then, you may easily lost your
customers!
– Capacity augmented in large increments if you want to increase your production capacity you need to invest largely.
– High strategic stake take a risk for investing on a highly competition environment.
– High exit barriers if it has lots of cost for the company to exit the market, he tries to remain and compete.
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Factors in Competition
• Power of Buyers
– Purchase large volume relative to sales if customers buy a large number of your products then, they have power over you!
– Product significant fraction of buyer’s costs if the raw ingredients are expensive then, competing and profitability is harder.
– Product standardized buyers can easily change their product if the product is standard.
– Few switching costs
– Earns low profit
– Credible threat to backward integration if buyers are not happy with the product they can change it(???)
– Industry product unimportant to quality of buyers product
– Buyer has full information
• Power of Suppliers
– Dominated by few companies
– Must contend with substitutes
– Not important customer when the supplier does not care about your company, for example bc you have a small buy from them.
– Supplier has built up switching costs
– Credible threat to forward integration
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 Business Organization

• Trade-off between
– Internal and External Needs
• Internal – Strengths, Weaknesses, Competences,
Leadership Style, Past Performance can effect our resources, reputation of our brand, etc.
• External – Opportunities, Threats, Uncertainty,
Resource Availability
– Flexibility and Control

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it is about scientific management

20th Century Organizational Structure scientific study of the process to find

the best.

Frederick Taylor (1856–1915)

• 19th century American mechanical engineer
– Sought to improve industrial efficiency
– Focused on the Task
• Father of scientific management: apply science to
engineering of processes and management
– Four Key Principles
• Replace rule-of-thumb methods with methods based on
scientific study of the tasks
• Scientifically select, train, and develop each employee
• Provide detailed instructions and supervision of each worker in
performance of the worker’s specific task
workers: physical tasks
• Divide work equally between managers and workers: managers managers: intellectual tasks
should apply scientific management principles to plan the work
vision of the work
• Organization based on the military system. Only example
of a “system” that functioned efficiently. on that time. ME587 Page 16

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 Taylor & Military Hierarchy

Company Headqurters

Finance Vice
Vice President
R&D President

General General General

Manager Manager Manager

Director Director Director

Manager Manager Manager

Supervisor Supervisor Supervisor

Worker Worker Worker

whitney.echomaryland.net

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Frederick Taylor
Separation of Thought & Action
Only enforced standardization and implementation of
methods will improve efficiency…enforcing this lies
with management alone
– Decisions should be made centrally; the rest need to
follow instructions later this ideas was changed to flexibility strategy that sometimes soldiers need to act against of instruction (in
military) to fulfil the final goal.
Workers are incapable of understanding what they
are doing, even for simple tasks
– People at the lower levels should follow instructions
rather than make decisions
– Employees are not expected to question decisions or to
contribute their experience to the decision-making
process
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 Different approach

Henri Fayol (1841-1925)

(Taylor Contemporary)
French Mining Engineer – Focused on Management
Functions of Management (First published 1916; English 1949)
1. Plan
• creating a plan of action for the future: establish goals and arranging
them in a logical order to fulfil the goals
2. Organize
• provide everything necessary to carry out plan: ID responsibilities and
specify organizational relationships.
3. Command
• implement the plan. Understand its strengths and weaknesses. Lead
people to achieve goals.
4. Coordinate
• "harmonize" activities to facilitate organizational success.
Communication is the prime coordinating mechanism.
5. Control
• compare activities to the action plan of action ME587 Page 19
TIF SEP2018

Active Learning Discussion

20th Century Organizational Structure
Has management philosophy changed? If so,
how?

What do you think are the catalysts for this 1. we should respect people more.
2. automation
3. more sophisticated jobs
change? 4. increasing educated people
5. People have substitute to change
their company.

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 Basic Functional Areas
of Technical Businesses
• Engineering highly skilled people to do technical work.
• Operations
• Purchasing for supplying the required components.
• Marketing and Sales
• Finance
• Management and Support Services
– Can include
• Technical service
• R&D
• Administrative support

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Business Organization

• Two examples From mass manufacturing we go towards

non-mass manufacturing depneds of the
environment. We use Matrix approach where we use
– Functional Silos product families.

– Matrix newer
Marketing & Sales

Marketing & Sales

Product
A
Engineering

Engineering
Operations

Operations

Product
B

Product
C

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 Organizational Interdependence
The amount of coordination you need
Interdependence High Coordination is really depends about the kind of
things that you are doing.
Reciprocal Unscheduled meetings,
(new product development) face-to-face, cross-departmental
Hospital Highly interdependent tasks such as
teams developing a new product needs much
more coordination.
Horizontal Communication
Sequential
(product manufacture) Scheduled meetings,
Assembly committees
Line
Vertical Communication
Pooled
(product delivery) Plans

Bank Teller Rules

Low
Key is level of communication/ coordination/ proximity
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Role of Employees:
The Potential for a Bloated Hierarchy
Complexity Level Stratum Complexity Level Example Employee Role

Construct and pursue world wide 
Most Complex 8 strategic plans in the largest of  Super Corporation CEO
the world’s corporations.
Construct and pursue world wide 
7 strategic plans. Place businesses  Corporate CEO
in the world.
Lead the accumulated impact of 
6 Corporate EVP
multiple business units.
Optimize the function of a single 
Vice President Business Unit 
5 business unit or corporate 
President
support staff.
Manage multiple, 
interdependent serial projects. 
4 Director General Manager
Balance resources among a 
number of departments.

Plan and carry out sequential 
Regional Manager Unit Manager 
3 projects while considering 
Manager of Managers
contingencies and alternatives.
Accumulate bits of information 
to diagnose and anticipate  District Manager First Line 
2
problems. Proactivity appears.  Manager Supervisor
Trends are noticed.
Follow predefined procedures. 
When an obstacle is 
Shop Floor Operator Clerk 
Least complex 1 encountered, seek help. No 
Cashier
anticipation of problems is 
expected.
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Cashflow:
the total amount of money being
transferred into and out of a business
In general terms interest equivalent to [rate of inflation + the value of money that people perceive in the future]
Overlong term the value of money in the equation above is 3%.
Engineering Economics
simple economic model that
engineering use for make decision
(buy a piece of equipment or not)
• Economics Business Decisions
To make business decisions, we more
likely are concern about probability
rather than the timing of cash flow
– less concerned with timing of cash flow (revnue that comes in and the loan
and the cash we have, etc.)
– more concerned with overall profitability We determine if what is the superior
expenditure plan overtime. (out flows
• Need a method for comparison and in flows of cash)
– fund receipts and disbursements over time
• General metric: Net Present Value (NPV) represents a basis for what the value of
money at a specific given moment.
Money today is more valuable than the
– Other metrics such as average monthly cost are money in the future.
also used.
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Engineering Economics
• Measuring value over time: Interest the rate that is charged for use of money
– What do you choose? (You can only spend it in IMPORTANT NOTE:
when we talk about finance we
2 years when you go to college) usually make assumption about
future based on valuation as of
• Grandma gives your college fund today.
–$100 now
In business we do not use the
–$105 in one year interest of back account but in
finance, we use the expected rate
–$110.25 in two years of return typical for our industry.
– Note: Your own bank account pays you 5% a
year! 3% value of money to encourage your willingness for putting your money
in the back account + 2% inflation
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 Engineering Economics
We use cash flow diagram to
organize the information. It helps us • Cash flow diagrams (for discrete or simple
interest, not continuous)
to visualize the money expended or
receive.

– Inflows – arrows up
– Outflows – arrows down
– Length of arrow is (roughly) magnitude of cash flow
Sell machine as
scrap at end of
Goods sold
useful life
inflows

time
outflows
Maintenance performed
Purchase machine ME587 Page 27

Engineering Economics

• Examples
– If we invest $1 today at 3% annual interest rate, what is
it worth in 10 years?
• Convert P to F: F = P*(F/P,3%,10yrs)=$1.3439
– Which shed is a better choice, brick or wood, given that
we have to borrow money at 7%?

Type Brick Wood

Life 30 yrs 10 yrs
Cost $1800 $450
Maintenance $5/yr $20/yr
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 Engineering Economics

• Brick or Wood – what is the annual cost?

– Convert initial cost to annual (P to A) and add annual
costs (maintenance):
A=P*(A/P,7%,n)
– Brick A=$1800*(A/P,7%,30)+$5 = $150
– Wood A=$450*(A/P,7%,10)+$20 = $84
– This annual comparison is good for the 1st 10 years.
How would you address the 2nd & 3rd 10 yrs for the
wood shed?

$5 $5 $150
$1800
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Engineering Economics
If I want to break even on an investment of $5M in
machinery over five years, how much do I need to
sell each month to pay back an up-front loan? I am
borrowing at a 12% annual interest rate.
– 5yrs*12 mo. = 60 mo.
– Interest = 12%/12 mo. = 1% per month
– Convert initial investment into monthly cash flow:
A=P*(A/P,1%,60)= $5M * .0222 = $111,222/mo.

If the machinery is capable of making 3000 parts per

month, what is the minimum net profit per part to
cover the loan cost?
– $111,222/3000 parts = $37.07/part

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 Active Learning:
Engineering Economics
If I make an investment today of $1M, and I price my
product at $16 each and sell an average monthly
volume of 2500, what is the value of the product
made on a machine over the next five years, what is
it worth today at a 12% annual interest rate (required
return on capital)?
– Calculate NPV
– 5yrs*12 mo. = 60 mo.
– Simple Interest = 12%/12 mo. = 1% per month
– Monthly cash flow to present value and subtract present
cost: monthly cash flow is 2500*$16 = $40k
NPV = P-$1M = A*(P/A,1%,60)-$1M = $40k*44.955-
$1M
= $1,798,200-$1,000,000 = $798,200 ME587 Page 31

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