الجامعة التكنولوجية قسم الهندسة الكيمياوية ادارة صناعية

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1 الجامعة التكنولوجية قسم الهندسة الكيمياوية الثانية المرحلة ادارة صناعية ا.م.د. رياض صادق Save from:

2 P edition P Semester P University of Technology Department of Chemical Engineering Program Industrial & Petroleum Pollution Engineering Course Code Course Title Term 1Pst UEnvironmental Engineering Management Credits hr Theoretical Practical Tutorial Total Prerequisite(s) Units Course Description The course contents the important environmental management issues and the economics related to Plants Projects Course Text st Dhamaja S; ' Environment Engineering and Management " P P edition S.K,Kataria & Sons Towler G. and Sinnott R " Chemical Engineering Design " 2P nd edition 2013 Elesvier - Peters M., Timmerhaus D. and West R. " Plant Design and Economics for chemical Engineers th 2005 McGraw-Hill " 5P Course Objectives : at the end of the semester the student should be able to :- 1. Provide knowledge to the concept of environment management laws and national obligations 2. Understand the characterization of ISO 1400 fundamental basics,and EIA. 3.How to prepare feasibility study and methods to estimate project cost.

3 University of Technology Department of Chemical Engineering Topics Covered (Syllabus)/ Course Title No. 1 Contents National and international Laws and Legislation Explain the main national and international laws which concern with environment and international protocols. Units 2 Theoretical 2hr/week Tutorial 1 hr/week Practical - hr/week Duration 4hr Environmental Audit Defines environmental audit and concept of ISO, ISO Fate and Transport of Contaminated in Natural System Modelling of volatilization sorption / desorption, chemical, photochemical and biological transformation Environmental Impact Assessment Define the basic concept and principle of (EIA) Sustainable development Engineering Introduction to sustainable development, Social dimensions 4hr 4hr 6hr 4hr 6 The basic principles of plant economy Fied and working investment Planning and preparation, economic feasibility study, plant layout, cost (fixed cost, working cost, cost index, project cash flow diagram, tax, budgetary control 8hr Topics Covered (Syllabus)/ Course Title 6

4 UPROCESS ENGINEERING ECONOMICS Economics is ever present in our lives because we earn money from our jobs and we spend money allocated by our personal budgets for housing, clothing, transportation, entertainment, etc. We spend money for these items based upon the perceived economic utility. Further, economics is the engine that drives industry. Chemical engineers in the performance of their jobs will employ economics in the preparation of capital cost estimates, operating expense estimates, profitability analyses including the time value of money, feasibility studies, and to perform sensitivity and uncertainty analyses considering many alternatives. To move up the management ladder, they must have a working knowledge of balance sheets, income statements, and financial analyses of a corporate venture. A business plan must be developed before any funds are sought for a new product or venture. The capital budgeting function may be divided into several categories depending upon the time frame involved. Strategic planning involves setting the goals, objectives, and broad business plans for a 5- to 10-year time period in the future.. Tactical planning involves the detailing of the strategic planning for say 2 5 years in the future.. Capital budgeting involves a request, analysis, and approval of expenditures for the coming year. Business plans minimally consist of the following information along with a projected timetable:. Perceived goals and objectives of the company A-. Market data Projected share of the market Market prices Market growth Markets the company serves Competition, both domestic and global Project and/or product life. B- Capital requirements Fixed capital investment Working capital Other capital requirements 1

5 . C- Operating expenses Manufacturing expenses Sales expenses General overhead expenses.d- Profitability Profit after taxes Cash Flow Payout period Rate of return Returns on equity and assets Economic value added E-. Projected risk Effect of changes in revenue Effect of changes in direct and indirect expenses Effect of cost of capital Effect of potential changes in market competition SOURCES OF FUNDS The funding available for corporate ventures may be obtained from internal or external sources. A- Internal Sources The capital from internal sources is from retained earnings or from an allowance known as reserves. Internal financing is owned capital, and it is argued that it could be loaned or invested in other ventures to receive a given return. In determining the cost of owned capital, interest to be paid on this capital is equal to the present return on all the company s capital B- External Sources There are three sources of external financing: debt, preferred stock, and common stock. These sources vary widely with respect to the cost and the risk the company assumes with each of these financing sources. The cheapest form of capital is the least risky. A general rule is the riskier the project, the safer should be the type of financing the capital used. A new venture with modest capital requirements could be funded by common stock. In contrast, a well-established business area may be financed by debt. Estimation of Capital Requirements Total capital investment includes funds required to purchase land, design, purchase, and install equipment and buildings, as well as to bring the facility into operation 2

6 A list of these items includes: 1. Land 2. Fixed capital investment 3. Offsite capital 4. Allocated capital 5. Working capital 6. Start-up expenses 7. Other capital items (Interest on borrowed funds, Catalyst and chemicals, Patents, licenses, and royalties ) 2- FIXED CAPITAL INVESTMENT The fixed capital investment for a plant includes the manufacturing equipment, piping, ductwork, automatic control equipment, structures, insulation, painting, site preparation, and environmental control equipment, as well as engineering and contractor s costs. 2.1 Capital Cost Estimates When a firm considers a project to manufacture a product, a capital cost estimate is prepared. An in-house engineering staff may develop the estimate, if the staff is large enough, or the estimate may be outsourced to an engineering or consulting company Classification of Estimates There are two broad classes of cost estimates: grass-roots and batterylimits estimates. The former, also called a green-field estimate, is a descriptive term. It means the entire facility is estimated starting with site preparation and includes building and structures, processing equipment, utilities, service facilities, storage facilities, railroad yards, and docks. A battery-limits estimate is one in which there is an imaginary boundary drawn around the facility to be estimated. It is assumed that all raw materials, utilities, services, etc. are available at the boundary in the proper quantity and with the desired quality to manufacture the product in question. Only costs within this boundary are estimated hence the name battery-limits estimate Quality of an Estimate Capital cost estimation is more an art than a science. An estimator must use a great deal of judgment in the preparation of an estimate. As the estimator gains experience, the accuracy of the estimate improves Equipment Cost Data The foundation of a fixed capital investment estimate is the equipment cost data. From these data, through the application of factors or 3

7 percentages based upon experience, a fixed capital investment estimate may be prepared. It is essential to have reliable equipment cost data but the engineer preparing the estimate must exercise good judgment in the selection and application of the data. There are many sources of data listed in the literature, but some are old and the latest data published was in There has been no significant cost data published in the open literature since that date. It is essential for the estimator to know:. Source of the data. Basis for the cost data. Date of the cost data. Potential errors in the cost data. Range over which the cost data apply Data Presentation. Cost data are stated as purchased, delivered, or installed costs. Purchased cost is the price of the equipment FOB (free on board) at the manufacturer s plant. Delivered cost is the price of the equipment plus delivery charges to the purchaser s plant FOB. Some cost data are reported as installed cost. This means the equipment item, for instance, a centrifugal pump has been purchased, delivered, uncrated, and placed on a foundation in an operating department but does not include piping, electrical, insulation costs. Perhaps a more accurate term would be set-in place cost 4

8 Example 4.1 Problem Statement: Recently a cast iron leaf pressure filter with 100 ft2 was purchased for clarifying an inorganic liquid stream for $15,000. In a similar application, the company will need a 450 ft2 cast iron leaf pressure filter. The size exponent for this type filter is 0.6 (see Appendix D). Estimate the purchased price of the 450 ft2 unit Algorithm Format. A more convenient way to display costcapacity data is by an algorithm. Correlations for base cost, design type factor, material of construction factor, and design pressure factor can be developed as secondary algorithms: Base cost: 5

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10 2.1.4 Equipment Sizing Before equipment costs can be obtained, it is necessary to calculate equipment sizes, specify operating temperatures and pressures as well as materials of construction. To size equipment, one must prepare material and energy balances to determine the quantities of material processed and the amount of energy transferred. With the above information, preliminary equipment sizes may be determined. In this text, it shall be assumed that a preliminary cost of equipment is to be developed. Example 4.2 Process design of a shell-and-tube heat exchanger Problem Statement: An oil at a rate of 490,000 lb/hr is to be heated from 100 to 170 F with 145,000 lb/hr of kerosene at initially at 390 F from another plant unit. The oil stream enters at 20 psig and the kerosene stream at 25 psig. The physical properties are: Oil 0.85 sp. gr.; 3.5 cp at 135 F; 0.49 sp.ht. Kerosene 0.82 sp.gr.; 0.4 cp; 0.61 sp.ht. Estimate the cost of an all carbon steel exchanger in late Assume a counterflow 1 2 shell-and-tube heat exchanger. 7

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12 2.1.5 Cost Indexes Cost data are presented as of a specific date. They are adjusted through the use of cost indexes that are based upon constant dollars in a base year and actual dollars in a specified year Marshall and Swift Cost Index (M&S). The Marshall and Swift Index, originally known as the Marshall and Stevens Index, was established in the base year, 1926, with a value of 100. The index is reported as a composite of two major components, namely, a processindustry equipment average and all industry equipment average Chemical Engineering Index (CE). The Chemical Engineering Index was established in the early 1960 s using a base period of as Nelson Farrar Indexes (NF). The Nelson Farrar Indexes were originally known as the Nelson Refinery Construction Indexes The choice of the index to use is based upon the industry in which the person works. An engineer in the petroleum or petrochemical business might find the NF Index suitable. In the chemical process industries, either the CE or the M&S are adequate. 9

13 Effect of Inflation and Escalation Inflation refers to the increase in the price of good without a corresponding increase in productivity Escalation is a more all-inclusive term used to reflect price increases due not only to inflation but also due to supply demand factors and engineering advances. Projected escalation factors are based on past inflation rates and estimates of where these rates might be in the future. An effective way is to estimate what the inflation rate might be 1, 2, 3, etc. years in the future and then adjust the rates later as more reliable data become available. For example, initially a cost escalated for a 3-year period from the present will disused in the next example 10

14 2.2 ESTIMATION OF FIXED CAPITAL INVESTMENT Numerous techniques are available for estimating the fixed capital investment. The methods vary from a simple single factor to a detailed method using a code of accounts that involves item-by-item costing Order-of-Magnitude Estimates A project scope is essential before preparing an estimate irrespective of the quality of the estimate Turnover Ratio This is a rapid, simple method for estimating the fixed capital investment but is one of the most inaccurate. The turnover ratio is defined as 11

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16 Fixed Investment per Annual Ton of Capacity Fixed capital investments may be calculated in an approximate manner using this method. The data for this method are often in the open literature or from information that will allow one to calculate this information. Chemical Week or Hydrocarbon Processing are potential sources. 13

17 Example 4.6 Problem Statement: Estimate the fixed capital investment of a 75,000 ton/yr maleic anhydride plant using the data for fixed investment per annual ton capacity in Table Seven-Tenths Rule It has been found that cost-capacity data for process plants may be correlated using a logarithmic plot similar to the 0.6 rule. Remer and Chai have compiled exponents for a variety of processes and most are between 0.6 and 0.8. The use of an average value 0.7 is the name of this method. Table 4.8 and Appendix E contain appropriate data. The equation is 14

18 2.2.2 Study Estimates The information needed to prepare a study estimate includes a project scope, preliminary material and energy balances, preliminary flowsheets, rough sizes of equipment, rough quantities of utilities, rough sizes of building and structures, etc. Study estimates have an accuracy of 230% to 40% Lang Method Lang developed a method for obtaining quick estimates of the capital investment based upon information gathered on 14 processing plants of various sizes and types. 15

19 These factors include process equipment, instrumentation and automatic control equipment, piping, insulation, electrical, engineering costs, etc., but do not include a contingency factor. The Lang factor method has a tendency to produce high results. The factors are found in Table

20 2.3 OFFSITE CAPITAL The offsite facilities include all structures, equipment, and services that do not directly enter into the manufacture of a product. These costs are estimated separately from the fixed capital investment. They are not easy to estimate. Offsite capital would include the utilities and services of a plant. Among the utilities are: 1. Steam-generating and distribution 2. Electrical-generating and distribution 3. Fuel gas distribution 4. Water-well, city, cooling tower, and pumping stations for water distribution 5. Refrigeration 6. Plant air 7. Environmental control systems The service facilities might include 1. Auxiliary buildings 2. Railroad spurs 3. Service roads 4. Warehouse facilities 5. Material storage raw material as well as finished goods 6. Fire protection systems 7. Security systems For preliminary estimates, it is suggested that offsite investment be a percentage of the processing unit s fixed capital investment. 2.4 WORKING CAPITAL Working capital are the working funds necessary to conduct a day-today business of the firm. These funds are necessary to pay wages and salaries, purchase raw materials, supplies, etc. Although the initial input of working capital funds come from the company s financial resources, it is regenerated from the sale of products or services. Working capital is continuously liquidated and regenerated but is generally not available for another purpose, so it is regarded as an investment item. Several methods are available for estimating an adequate amount of working capital for a proposed venture. These methods may be classified into two broad categories: Percentage methods Inventory method 17

21 2.4.1 Percentage Methods These methods are adequate for order-of-magnitude, study, and preliminary methods of estimating. The working capital requirements are based upon either annual sales or capital investment Percentage of Capital Investment Methods The ratio of working capital to total capital investment varies with different companies and different types of business. If a company manufactures and sells a product at a uniform yearly rate, then 15 25% of the total capital investment is an adequate amount of working capital. 18

22 4.5 START-UP EXPENSES When a process is brought on stream, there are certain one-time expenses related to this activity. From a time standpoint, a variable undefined period exists between the nominal end of construction and the production of quality product in the quantity required. This period is loosely referred to as start-up. In this period expenses are incurred for operator and maintenance employee training, temporary construction, auxiliary services, testing and adjustment of equipment, piping, and instruments, etc. 19

23 UEconomic evaluation of projects As the purpose of investing money in chemical plant is to earn money, some means of comparing the economic performance of projects is needed. Before a company agrees to spend a large amount of capital on a proposed project, the management must be convinced that the project will provide a sound investment compared to other alternatives. This section introduced the principal methods used for making economic comparisons between projects. Cash flow and cash flow diagrams During any project, cash initially flows out of the company to pay for the costs of engineering, equipment procurement and plant construction. Once the plant is constructed and begins operation, then the revenues from sale of product begin to flow into the company. The 'net cash flow' at any time is the difference between the earning and expenditure. A cash flow diagram, such as that shown in the following figure, shows the forecast cumulative net cash flow over the life of a project. The cash flows are based on the best estimates of investment, operating costs, sales volume and sales price that can be made for the project. A cash-flow diagram gives a clear picture of the resources required for a project and the timing of the earning. The diagram can be divided into the following characteristic regions: 20

24 Fig 13: Project cash-flow diagram A-B The investment required to design the plant. B-C The heavy flow of capital to build the plant and provide funds for start-up, including working capital. C-D The cash flow curve turns up at C, as the process comes on stream and income is generated from sales. The net cash flow is now positive but the cumulative amount remains negative until the investment is paid off, at point D. Point D is known as the break even point and the time to reach the break-even point is called the pay back time. (In a different context, the term break-even point is also sometimes used for the percentage of plant capacity at which the income equals the cost of production). 21

25 D-E In this region the cumulative cash flow is positive. The project is earning a return on the investment. E-F Toward the end of project life the rate of cash flow may tend to fall off, due to increased operating costs and falling sales volume and price due to obsolescence of the plant, and the slope of the curve changes. The point F gives the final cumulative net cash flow at the end of the project life. Net cash flow is a relatively simple and easily understood concept, and forms the basis for the calculation of other, more complex, measures of profitability. Taxes and the effect of depreciation are usually not considered in cash flow diagrams. Simple methods for economic analysis Pay-Back time A simple method for estimating the pay back time is to divide the total initial capital (fixed capital plus working capital) by the average annual cash flow: Simple pay back time = total investment average annual cash flow This is not the same pay-back time indicated by the cash-flow diagram, as it assumes that all the investment is made in year zero and revenues begin immediately. For most chemical plant projects, this is not realistic as investments are typically spread over 1 to 3 years and revenues may not reach 100% of design basis until the second year of operation. The simple pay-back time also neglects taxes and depreciation. 22

26 Return on investment Another simple measure of economic performance is the return on investment (ROI) the ROI is defined in a similar manner to ROA and ROE: ROI = net annual profit total investment 100% If ROI is calculated as an average over the whole project then: ROI = cumulative net profit 100% plant life initial investment Calculation of the after tax ROI is complicated if the depreciation term is less than the plant life and if an accelerated method of depreciation such as declining balance or MACRS is used. In such cases, it is just as easy to calculate one of the more meaningful economic criteria such as net present value or discounted cash-flow rate of return, described below. Because of this complication, a pre-tax ROI is often used instead: pre tax ROI = pre tax cash flow 100% total investment Note that pre-tax ROI is based on cash flow, not profit or taxable income, and therefore does not include a depreciation charge. Return on investment is also sometimes calculated for incremental modifications to a large project. 23

27 Time value of money In project cash-flow diagram, the net cash flow is shown at its value in the year in which it occurred. So the numbers on the ordinate show the 'future worth' of the project. The cumulative value is the 'net future worth' (NFW). The money earned in any year can be reinvested as soon as it is available and can start to earn a return. So money earned in the early years of the project is more valuable than that earned in later years. This 'time value of money' can be allowed for by using a variation of the familiar compound interest formula. The net cash flow in each year of the project is brought to its 'present value' at the start of the project by discounting it at some chosen compound interest rate. The future worth of an amount of money, P, invested at interest rate, i, for n years is: Future worth in year n = P (1 + i)p n Hence the present value of a future sum is: present value of future sum = future worth in ( 1+ i) n year n The interest rate used in discounting future values is known as the discount rate and is chosen to reflect the earning power of money. In most companies the discount rate is set at the cost of capital. Discounting of future cash flows should not be confused with allowing for price inflation. Inflation is a general increase in prices and 24

28 costs, usually caused by imbalances between supply and demand. Inflation raises the costs of feed, products, utilities, labour and parts, but does not affect depreciation charges, which are based on original cost. Discounting, on the other hand, is a means of comparing the value of money that is available now (and can be reinvested) with money that will become available at some time in the future. All of the economic analysis methods can be modified to allow for inflation. In practice, most companies assume that although prices may suffer inflation, margins and hence cash flows will be relatively insensitive to inflation. Inflation can therefore be neglected for the purposes of comparing the economic performance of projects. DEPRECIATION Depreciation is a decrease in value of a property over a period of time. Events that can cause a property to depreciate include wear and tear, age, deterioration, and normal obsolescence, according to the Internal Revenue Service [1]. In order for a property to be depreciated, it must meet the following requirements:. It must be used in a business or held to produce income.. It must be expected to have a useful life of more than 1 year.. It must be something that wears out, decays, gets used up, becomes obsolete, and loses its value from natural causes Depreciation reserve:- is the accumulated depreciation at a specific time. Book value:- is the original asset investment minus the accumulated depreciation. Service life :-is the time period during which an equipment item or asset is in service and is economically feasible. Salvage value:- is the net amount of money obtained from the sale of a used property over and above any charges involved in the removal and sale of the property. 25

29 Scrap value:- implies that the asset has no further useful life and is sold for the value of scrap material in it. Types of depreciation For further understanding depreciation can be classified as under: UFig: Classification of depreciation (a) Depreciation due to wear and tear. Everybody knows that when any machinery performs work, wear and tear of certain components takes place, although sufficient precautions are taken, i.e. proper lubricating and cooling is done, which minimize wear and tear but it cannot be totally prevented. Hence the cost of replacement because of this cause is the value of depreciation due to wear and tear. (b) Depreciation due to "physical decay". There are certain items in a factory, such as insulation of materials, furniture, electric cables, buildings, chemicals, vessels etc., which get decay, because of climatic and atmospheric effect, with the result the value of these articles goes on reducing with the lapse of time. Although every effort is made by the owner to keep them in serviceable condition even then because of climatic and atmospheric effect, there will be reduction in their costs. This reduction in cost is depreciation due to physical decay. 26

30 (c) "Accidental" depreciation. Although, the machine might have installed even few days back and sufficient care is taken to prevent accident, even then, accident may occur due to some wrong operation, or some loose component or some other cause which may result in heavy damages. The depreciation in a machine caused due to this reason is called accidental depreciation. Now-a-days, to cover this risk, most of the owners get their equipment insured with the insurance companies. For this, owners have to pay certain premium yearly. The amount of premium depends upon the estimated cost and life of equipment. (d) Depreciation due to "deferred maintenance and neglect". Every manufacturer supplies certain instructions for the smooth and efficient running of equipment. For example, in the case of a vehicle, a manufacturer gave the following instructions: (i) Lubricating oil of particular grade should be used in engine. (ii) Oil should be drained and new oil should be refilled after first 1000 km running, and then every 5000 km. (iii) All the bolts and nuts should be re-tightened after 5000 km running. (iv) Decarburizing after km running and so on. If these instructions are not followed because of neglect, and proper maintenance is not done as recommended by manufacturer, then the life of the vehicle may be reduced. Depreciation in value because of this, is called depreciation due to deferred maintenance and neglect. (e) Inadequacy. This is the form of functional depreciation. Inadequacy means reduction in efficiency of an asset. This may result even if any equipment is servicing under proper precautions and sufficient maintenance is provided, there is fall in efficiency with the lapse of time. Secondly, suppose after 2-3 years of running, the demand of products manufactured by certain plant is increased. But the plant cannot cope with the 27

31 increased demand. This needs additional money either to replace with the bigger size machinery or installation of more similar size plants. This is, known as depreciation due to inadequacy. (f) Depreciation by obsolescence. Now-a-days because of rapid scientific advancement, there are frequent changes. If a new machine comes in the market which is more efficient because of new invention or better design than the existing one, manufacturing same type of products by the new one are much cheaper and better than the existing one, then the existing machinery has to be replaced to withstand market competition. This is called depreciation by obsolescence. DEPRECIATION EQUATIONS In this section, the current methods for determining annual depreciation charges are presented. The following methods will be discussed: Straight line Declining balance A- Straight-Line Method In this method the cost of an asset is distributed uniformly over its expected useful life. If I is the cost of the asset, n is the expected service life, then the annual depreciation charge is I=n: If salvage value is estimated, then the annual depreciation is B-Declining-Balance Method The declining-balance method is also called the fixed-percentage method. It is the basis for the Modified Accelerated Cost Recovery System (MACRS) that will be presented in a later section. 28

32 UI.S.O. Introduction ISO is the international organization for standardization. It is located in Switzerland and was establish in 1947 to develop common international standards in many areas. Its member comes from over 130 national standards bodies. ISO first published its quality standards in 1987, revised them in 1994, and then republished an updated version in Standards presently applicable are known as" ISO: 2000 standards", and facilitate international trade by providing a single set of standards that people everywhere would recognize and respect. ISO-9000 refers to a set of standards and is the only available internationally accepted standard for quality management system in the world. It is rapidly becoming the most important quality standard and hundreds of thousands companies in over 100 countries have already adopted it. ISO-9000 is applicable to all types of organizations in manufacturing or service sectors. It is a documentation oriented system which allows complete freedom selection and use of process and farming of operating procedures and work instructions. This is a widely recognized quality management tool and meets the quality requirements of every kind of products or services. Production of consistently good quality product or service is very important for customer Confidence Company who wants to survive and grow, have either adopted this standard or in the process of adopting it. A properly established quality management system will help to reduce cost, improve quality, and develop confidence and a good image in the minds of customers and public. This requires consistent implementation, careful auditing and total commitment of the whole organization. ISO-9000 set of standards are" generic management system standards". This means that the same standards can be applied: 29

33 - To any organization, large or small, whatever its product; - Including whether its" product " is actually a service; - In any sector of activity; and - Whether it is a business enterprise, a public administration, or a government department. The "ISO-9000 quality management system" adopting organization fulfills: - The customers quality requirements; - Applicable regulatory requirements; - Enhance customer satisfaction; and - Achieve continual improvement of its performances Many companies require their suppliers to adopt ISO-9000 and get registered. Registered companies find that their market opportunities have increased as it ensures a sound quality management system. Registered companies had reduction in customer complaints significant reductions in operating costs and increased demand for their product and services. Other benefits can include better working conditions, increased market share, and increased profits. Characteristics of ISO ISO 9000 is the only available internationally accepted standard for quality management system. - It does not replace but complements the products standards. - ISO 9000 is applicable to all types of industries or organization in manufacturing or service sector. - It stands for systematic standardization and certification rather than product standardization and certification. - ISO 9000 is a documentation oriented system which allows complete freedom on selection and use of processes and framing of operating procedures and work instructions. - A mistake made in selection of proper product standard can never be compensated by ISO 9000 implementation. 30

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