Step Two:
Identify Relevant Costs
What costs should be considered?
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Massachusetts Institute of Technology
Department of Materials Science & Engineering
Engineering Economic Analysis: Slide 36
Creating a PBCM: Step Two
• Identify Relevant Costs
– Pertinent to Decision
– Necessary for Completeness / Credibility
Elements of
Manufacturing Cost
Relevant Elements
of Cost
Material
Tooling
Material
Tooling
Energy
Overhead
Energy
Overhead
Labor
Building
Equipment
Transportation
Marketing
Packaging
Advertising
Insurance
Massachusetts Institute of Technology
Department of Materials Science & Engineering
Exclude
Unimportant
Elements
Labor
Building
Equipment
Transportation
Marketing
Packaging
Advertising
Insurance
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 37
1
Common Relevant Cost Elements
• Variable
– Materials (Raw Materials & Consumables)
– Labor
– Energy
• Fixed
– Equipment (including Maintenance)
– Tooling
– Building
– Overhead
• Begin With These, But Always Ask Whether Others Are Important
– Tradeoff Amongst Time, Resources, and Available Knowledge
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Massachusetts Institute of Technology
Department of Materials Science & Engineering
Engineering Economic Analysis: Slide 38
Creating A PBCM: Step Three
• Diagram Process Flows
– Draw In Materials Flowing Into AND Out Of
– Catalog For Each Process Step
• Equipment
• Labor
• Energy
e.g., Sheet Metal Stamping
Forming Between Two Matched Dies
Blanking
Coil
Massachusetts Institute of Technology
Department of Materials Science & Engineering
Stamping
Blanks
Parts
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 39
2
Diagramming Flows Example: Stamping
Catalog For Each Process Step
-- Labor
-- Energy
-- Equipment
Coil
Lube Oil
Stamping
Blanking
L:
E:
Q:
T:
Operators
Electricity
Blanking Press
---
Trim/
Trim/
Delivery
Delivery
-- Tools
Blanks
Rejects
Rejects
Massachusetts Institute of Technology
Department of Materials Science & Engineering
L:
E:
Q:
T:
Operators
Electricity
Stamping Press
Multiple
Trim/
Trim/
Delivery
Delivery
Parts
Rejects
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 40
Cost Modeling Challenge
• How much equipment to
buy?
• What is the cost of
producing your various
products?
… for your business…
Massachusetts Institute of Technology
Department of Materials Science & Engineering
?
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 41
3
Your Business
Massachusetts Institute of Technology
Department of Materials Science & Engineering
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 42
Modeling the Cost of Pizza Manufacture:
Defining Scope
• Cost to Whom?:
War & Pizza
– High volume (50K/y) pizza
maker
• Cost of What?
– How much does a pizza
cost to make ?
• Cost Varying How?
?
– … with design changes?
– … with scale up to 100K/yr ?
Massachusetts Institute of Technology
Department of Materials Science & Engineering
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 43
4
Diagramming Flows Example: W & P
Catalog For Each Process Step
-- Labor -- Energy -- Equipment -- Tools
Pie Prep
Baking
L: Chef
E: Electricity
Q: Roller
T: Pans
L: Asst Chef
E: Nat. Gas
Q: Oven
T: Pans
Trim/ Rejects
Delivery
Figure by MIT OCW.
Massachusetts Institute of Technology
Department of Materials Science & Engineering
Rejects
Trim/
Delivery
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 44
Data Collection & Model Development
• For each resource in your diagram
– How much does a unit cost?
– How many units are required?
• Begin data collection early!!!
– Start with low risk sources
• Probably smaller firms
– End with high value sources
Massachusetts Institute of Technology
Department of Materials Science & Engineering
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 45
5
Step Four: Relate Costs to What is Known
• Process Involves Four Steps
1) Begin At The Current Endpoint (initially, the costs)
2) Ask: How Can That Quantity Be Broken Down?
-- Initially, How Many Do I Need x How Much Does Each Cost
3) Analyze Required Information (i.e. parameters)
-- Are Those Parameters Acceptable Endpoints?
-- Can I (the model) Derive Them From A Simpler Or More Relevant Set
Of Information?
4) If No, Repeat 1 With New Endpoints
• Watch Out For Interdependent Parameters
–
e.g. Part Mass & Part Dimensions
Massachusetts Institute of Technology
Department of Materials Science & Engineering
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 46
Step Four Example: Pepperoni Costs
• Start at the end
• Think in terms of annual quantities
Pie Prep
Baking
Rejects
Trim/
Delivery
Rejects
Trim/
Delivery
Figure by MIT OCW.
Massachusetts Institute of Technology
Department of Materials Science & Engineering
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 47
6
Two Important Quantities
• Production Capacity =
Qty. of "Good" Parts Capable of Being Produced
– How much CAN a plant produce?
• Production Volume =
Quantity of "Good" Parts Produced
– How much DOES a plant produce?
Generally, Both Are Measured In Units Per Year
(e.g., parts / year, kgs / year)
Massachusetts Institute of Technology
Department of Materials Science & Engineering
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 48
Slices per Pizza
• General area covering is difficult to solve
– Solutions for small number of circumscribed circles has
been solved
• Approximate:
78%
Massachusetts Institute of Technology
Department of Materials Science & Engineering
90%
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 49
7
Calculating Effective Production Volume:
Work Backwards from Final Step
Prepped Pizzas Produced / Year =
effective PVPrepping =
Good Preps +
PVPrepping +
Rejects
Rejects
Can model Rejects as % of total production
effPVPrep = PVPrep + R x effPVPrep
effPVPrep = PVPrep
(1 - R)
But what is PVPrep?
Assume that PVPrep = Total Pizzas Baked / Year (i.e., effPVBaking)
effPVi
= effPVi+1
(1 - R)
For last step, substitute PV for effPVi+1
Massachusetts Institute of Technology
Department of Materials Science & Engineering
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 50
Next Question …
What is the cost of equipment?
How much equipment to buy?
Massachusetts Institute of Technology
Department of Materials Science & Engineering
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 51
8
A Little Intro http://www.remcousa.com/flash.html
Massachusetts Institute of Technology
Department of Materials Science & Engineering
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 52
A Little Intro http://www.remcousa.com/flash.html
Massachusetts Institute of Technology
Department of Materials Science & Engineering
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 53
9
Key Structuring Constraint -- Time
• Hours of daily operation an operational constant
• To get more than a day’s production, you need
more resources
• Inverting that calculus can be used to scale/size
an operation
• Defines capital requirements
Massachusetts Institute of Technology
Department of Materials Science & Engineering
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 54
Determining Equipment Requirements: Compare
Time Needed With Time Available
• Time Needed
– To Make Product + To Load/Unload
– Total Number of Pies (effective PV)
– Cycle Loading (Analogous To Multiple Cavities)
• Time Available
– Shifts, Days
– Less Breaks, Downtime, Maintenance
• Ratio: Line Utilization/Requirements
Massachusetts Institute of Technology
Department of Materials Science & Engineering
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 55
10
Determining Equipment Requirements: Compare
Time Needed With Time Available
• Minimum equipment requirement:
Annual Required Production Time
Annual Available Operating Time
Massachusetts Institute of Technology
Department of Materials Science & Engineering
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 56
Cycle Time as Basis, but Other Issues are Critical
• Total processing time
• Other times
– Downtime Due To
Scheduled Breaks
– Processing
– Load/Unload Time
– Unscheduled Downtime
– Time spent making
bad/unsold pizza
Line Utilization for a 24 hour day
Uptime
Analyzed
Part
Mfg. Time
Other
Parts
Mfg. Time
Downtime
Idle
Available
Massachusetts Institute of Technology
Department of Materials Science & Engineering
Unplanned
Breakdowns
Paid Unpaid
Breaks Breaks
On Shift
Maint.
No Shifts
Unavailable
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 57
11
Considering Process Time for W&P
• Assumptions:
– Initial temp: 20˚C
120
Centerline Temp (C)
– Oven temp: 225˚C
– α: 7.5E-9
– Thickness: 10 mm
• How long will it take to
cook?
100
80
60
40
20
0
• What’s the centerline
0
temperature reach target?
… 80 ˚C
100 200 300 400 500 600
Time
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Massachusetts Institute of Technology
Department of Materials Science & Engineering
Engineering Economic Analysis: Slide 58
Considering Process Time for W&P Breadmaking:
Temperatures
crust Maillard Reaction [30-100C]
starch gelatinization [70-92C]
protein denaturization [70-80C]
volatilization of alcohol [78-79C]
death of yeast cell [60C]
rapid expansion & production of CO2 and alcohols
[37-60C]
20
30
40
50
60
70
80
90
100
Temperature [C]
Ref:
Oregon State; Nutrition & Food Management (NFM236)
http://oregonstate.edu/instruct/nfm236/bread/index.cfm
Massachusetts Institute of Technology
Department of Materials Science & Engineering
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 59
12
Heat Transfer, Non-Steady State
• Let’s rely on some experts
– Tufts’ Gourmet Engineering class, EN43
– Assume constant surface temperature:
T(x,t) - Tsurface
Ti - Tsurface
=
x
erf 2√αt
{
}
A relation between time, temperature and position
Massachusetts Institute of Technology
Department of Materials Science & Engineering
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 60
Centerline Temp (C)
Time, Temperature and Thickness
200
180
160
140
120
100
80
60
40
20
0
In
cr
ea
sin
g
Th
ick
ne
ss
0
600
2mm
4mm
6mm
8mm
10mm
1200
1800
Time (seconds)
Massachusetts Institute of Technology
Department of Materials Science & Engineering
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 61
13
Distribution of Capital Costs Over Time
• Simplicity Is Best At Outset
– Complex capital accounting relies on extra
knowledge, usually case specific
• Simple amortization -- opportunity cost of capital
– Distributed over goods sold, not made
Massachusetts Institute of Technology
Department of Materials Science & Engineering
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 62
Dedicated Capital Or Not?
• Dedicated: Can only be used to make a single
good
• Non-dedicated: Can be used to make other goods
– Note: Just because it can be used doesn’t
necessarily mean it will be used!
Massachusetts Institute of Technology
Department of Materials Science & Engineering
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 63
14
Relating a Uniform Series of Payments to P or F
• Uniform series of payments – often called an
Annuity
P
• By convention:
– P at time 0
?
F
A A A
– A at end of period
A A
?
– F at end of period
…
Therefore:
n-1 n
0
– 1st A, 1 period after P
– Last A, coincident with F
Massachusetts Institute of Technology
Department of Materials Science & Engineering
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 64
Formulas for N Periods
Finite Series of Equal Payments
a) Future Value (F)
N
= ∑ A(1 + r )i
i
[(1+r) N ]
[(1 + r) N -1]
A A A
0
= P×r
P
A A
…
[(1 + r )N - 1]
r
b) Payment (A)
=A
n-1 n
= P (crf)
crf
= Capital Recovery Factor
Massachusetts Institute of Technology
Department of Materials Science & Engineering
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 65
15
Consequences of Capital Utilization
Cap i tal Cost/Un it
$5.00
$4.00
100
200
300
400
500
$3.00
$2.00
$1.00
$0.00
0
100
200
400
300
500
Production (1000/yr)
Massachusetts Institute of Technology
Department of Materials Science & Engineering
3.080 Econ & Enviro Issues In Materials Selection
Randolph Kirchain
Engineering Economic Analysis: Slide 66
16