Department of Industrial Engineering - Value to be Created for the Organization and Society

 2025 - A to Z Industrial Engineering - Blogging Theme - Industrial Engineering Benefits the Society and Organizations

Industrial Engineering - Methods Improvement Using Engineering solutions creatively.

Industrial Engineering - Prime focus - Productivity Improvement.

Productivity improvement gives National Prosperity and Organization Prosperity.

Source: https://www.linkedin.com/posts/national-productivity-council-gandhinagar_cartoonseriesabr10-productivity-economicgrowth-activity-7301162658278379520-eyyl

A to Z of Industrial Engineering - Blogging Challenge April 2025 - Proposed Posts

https://nraoiekc.blogspot.com/2025/02/a-to-z-of-industrial-engineering.html

Existing Collection of Articles

A to Z of Industrial Engineering - Principles, Methods, Techniques, Tools and Applications

https://nraoiekc.blogspot.com/2018/06/a-to-z-of-industrial-engineering.html

Department of  Industrial Engineering - Value to be Created for the Organization and Society

Department of Industrial Engineering is an important department to be set in engineering organizations of all branches of engineering. It is of utility in all engineering tasks like design, manufacturing, construction, operation of power plants, telephone exchanges or mobile communication systems, rail transportation systems, air travel systems, information systems etc.

What is the purpose of industrial engineering department. It is primarily profit improvement through revenue growth and cost reductions achieved through productivity improvement of resources. From where does the productivity improvement come? From engineering and technology developments that keep appearing. Industrial engineering is concerned with incremental improvements in processes, products and facilities. It also does productivity evaluation and improvement as the design stage of products and processes and selection of facilities.

What is the possible value addition?

Value Creation Model for Industrial Engineering

For $100 million cost, there can be one MS IE and 6 BSIEs. Value created: $3,600,000 per year on $100,000,000 cost of production per year.  Value to be created by IE department is 3.6% of the cost of production per year. Its cost of operating the department has to be 20% or one-fifth of the savings. Investment in improvement projects is addition to it.

Explanation
We start with a MS Industrial Engineer earning $12,000 per month. He is expected to have 6 BS industrial engineers under him. Each BS industrial engineer is earning a salary of $6000 per month.

Let us take a team of one  BS industrial engineer + Supervision by MSIE + staff support totaling $10,000 per month. which is equal to $120,000 per year.

This team is expected to generate a saving of $600,000 per year in 50 IE projects. That means each project has to save 12,000 dollars on average.

Let us assume each project is on an operator earning $3000 per month. The total cost of the work center can be taken as $30,000 per month. Which means $360,000 per year. Industrial engineers have to find $12,000 savings out of that expenditure every year assuming that a BSIE is responsible for work of 50 operators . Operation Analysis is used on One Machine + Operator combination. It is possible that multiple machines are operated by one operator in which case we may think of one machine + part operator.  Maynard and Stegemerten authored a full book on operation analysis and Niebel explained it well in a chapter in his book on Motion and Time Study.

The IE department's expenditure per month is $60,000 ((1 MSIE + 5 BSIEs + Staff)). They have to find savings of $300,000 per month. $3,600,000 per year on $100,000,000 cost of production per year.

Are they able to find such cost savings year after year and justify their compensation?

Breakup of Productivity Benefit  - Sharing Scheme

Savings of $300,000 per month

Benefit break up:

IE department staff: $60,000
Investment in projects: $60,000
Increase in benefits to other employees:$60,000
Benefit to customers: $60,000
Increase in profits of the company: $60,000

In the second year, the share of IE department staff and Investment in projects may get reduced to $30,000 and $90,000 may be given customers thus increasing the demand for the product to absorb the increased productivity.

An alternative benefit breakup model. Is it more sustainable?

Savings of $300,000 per month

Benefit break up:

IE department staff: $60,000

Increase in benefits to other employees:$30,000

Increase in profits of the company: $30,000

Investment in projects: $30,000  - This point needs to be discussed and understood better. Investment in IE or productivity projects can be in multiples $60,000 if you think it is contributing to the cost of capital of the company.

Benefit to customers: $150,000

Look forward to comments from Industrial Engineers on the feasibility of achieving productivity savings year after year and sharing them with other employees, shareholders and consumers apart from taking their compensation.

You can use the numbers in the model to calculate payback period and NPV

Let us say one BSIE IE team will have per annum $120,000 department expenses (personal sal + department office expenses)

Per annum investment in productivity projects is $120,000. So total investment in productivity improvement can be taken as $240,000.

While it gives savings of $600,000, from 2nd year onwards, $360,000 is shared with consumers. $120,000 is shared with employess. $120,000 is the return to capital invested.

Hence we can as investment: $240,000

From 2 year end every year there is cash inflow of $120,000. This will give payback period of 3 years because in the first year we are assuming that there is no cash inflow.

The NPV at the end of four years at a discount rate of 10% is $52,680.

As an Industrial Engineer, and IE manager are you following value addition and value allocation?

Taylor rubric: "an increase in productivity was allocated (1) one-third to the worker in the form of increased wages, (2) one-third to the owners in the form of stock dividends and capital investment, and (3) one-third to consumers in the form of lower prices for the products the company produced."

Source: https://nraoiekc.blogspot.com/2020/03/value-creation-model-for-industrial.html