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Krause corporation ops4505

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Krause corporation ops4505

  1. 1. Krause CorporationAnalyzing the facts of manufacturing or buying HVAC piping By: Ken Hogan
  2. 2. HVAC Piping 101I am assuming that most of you have never dealtwith cost estimating HVAC piping, so let us startwith a basic idea of what HVAC piping is andhow it works. In this case study we will bedealing with “mechanical" or "forced"ventilation that provides air handling to controlindoor air quality, odors, toxic fumes, andcontaminants can often be controlled viadilution or replacement with outside air. Let’slook a t some pictures…
  3. 3. House HVAC Piping If you are not familiar with HVAC piping here is a typical HVAC piping of a house.
  4. 4. Complex Industrial HVAC Piping This is a more complex industrial HVAC piping project.
  5. 5. Simple HVAC OperationThis is a simple HVAC piping operation where air is forced into a room.
  6. 6. Vent Piping Identification Vent Pipe Elbow Weld Joint
  7. 7. HVAC Piping 101I hope this general explanation help you allvisualize the case study and understand some ofthe language that will be used to determine acost estimation and the best option for thecustomer and the company.NOTE: I have made notes in that will be BOLDand Italic to identify important points toconsider.
  8. 8. What needs to be done?Steve Rothel was supply manager for the Midwest division of the Krause Corporation. Shortlybefore his company was to install an exhaust system in a new construction project, Steve was asked tocompare fabricating the pipe with buying the pipe from an outside source.Krause CorporationKrause Corporation, a mechanical and sheet metal contractor, was founded over 50 years ago. Althoughit had a number of branches in the United States, the majority of its metal fabrication work wasperformed in its Midwest facility. The company mission stressed quality workmanship, competitivepricing, and timely performance. This is an to know considering the final product must be 100%A Laboratory Exhaust SystemKrause recently was awarded the bid to provide the HVAC system in a corporate headquarters buildingthat housed a research laboratory. This was a complex project with many nonstandard features due tothe specialized use of the building. The system included a need for over 6,500 feet of 10-inch diameter,16-gauge stainless steel pipe. This piping would be used for the venting of the laboratory exhaust.When the cost estimation department at Krause prepared the original bid, they had planned tofabricate this pipe at their Midwest facility. Piping wallFact Point:16-gauge = .065” thickness of the piping wallLaboratory exhaust can consist of toxic gases/fumes
  9. 9. Pipe Joints Welded Joints Welded JointsA project of this size has a lot of room for error. Look at all the joints that need to be welded and tested for leaks.
  10. 10. A Request for Cost ReductionAs the project got under way the vice president ofsheet metal fabrication asked Steve Rothel “if it wouldbe possible to provide the stainless steel pipe at alower cost than the original estimate.” Steve knew, ofcourse, that any reduction in cost must not come at asacrifice of quality. Because of toxins that would bepresent in the laboratory exhaust, it was critical thatthis system be absolutely leak proof.Every pipe run would be individually tested to insureintegrity If leaks were uncovered in the welds, itwould require a time-consuming effort to reweld thejoints on site. Steve realized that there were twoapproaches to providing the pipe. We want to avoid Welded jointunnecessary work, it cost $$$.Krause could proceed as planned and fabricate the pipe in-house, usingthe lowest-cost, acceptable quality steel available on the market. Thisis risky considering the toxic fumes and inferior material.The second possibility would be to find a supplier who could providethe pipe already formed at a better cost.
  11. 11. The Purchase OptionSteve first explored the purchase option. He did a thorough search of themarket, and found that most suppliers were asking from 23 to 28 dollars perlinear foot (delivered) for 10-inch-diameter, 16-gauge stainless steel pipe. Hewas pleasantly surprised, however, to find a supplier who would provide thepipe for $18.10 per linear foot. This supplier provided the pipe in 20-footsections and guaranteed the pipe to be sound (no leaks). In addition, theirpipe was “perfectly” true (round), a trait that Krause’s current equipmentcould not always provide This is important because rework cost $$$. linear feet of pipe X cost per linear foot= cost of pipeThis feature would reduce the time needed to make connections betweensections of pipe and reduce the likelihood of a bad weld joint. Although thisoption sounded very attractive, Steve, a veteran in the supply managementarea with almost 14 years of experience, knew he couldn’t rely on firstimpressions to make important management decisions. He would have tosubject his options to a thorough analysis to ensure a wise decision.
  12. 12. The Make OptionSteve had access to the data necessary formanufacturing cost estimating. He knew that theprocess of making pipe required two steps.1. A flat sheet of steel is formed into a cylinder through the process of “rolling.”2. Then the seam is joined in a welding process. For a 10-inchdiameter pipe of 16-gauge steel, it takes about six minutes per piece to roll, including loading and unloading the part.The equipment Krause had available for this processcould roll lengths up to eight feet. We need 20 footsections for this project; consider the extra time itwill take to weld sections together to form a 20 footsection. We would have to connect 3 sectionstogether 8’x3’=24’ then cut to size. Remember we Welding Seams/Jointsneed 6500 feet! 6500/24= how many sections?
  13. 13. The Make OptionThe welding process was estimated to take ten minutes foran eight-foot section (10x8=80minutes). The figure thecompany used for cost estimating purposes for hourly laborrate was $32.60 per hour. An overhead charge of 40 percentwas added to the variable costs, figure at least 2-3employees x 32.60=X. It would take at least 2 employees toroll the sheet metal and at a minimum of 1 employee toweld the joints.Stainless steel sheets were available in 36-inch, 48-inch, and60-inch widths at any length up to 10 feet, with the bestprice being $1.80 per pound. A square foot of 16-gauge steelweighs two and one-half pounds. (1.80 x 2.5 pounds=X)The welding process required welding wire and welding gas.Welding wire cost around $5.20 per pound and .03 poundswere needed per foot of weld. (5.20 x X feet=X) Rolling Sheet MetalWelding gas cost around 25 cents per eight-foot seam. Manyof the lengths of pipe needed in the project were longerthan eight feet. (.25 x X feet=X)
  14. 14. The Make OptionThus, Steve thought it necessary to include the cost of an extra joint(which, for example, would make two eight-foot lengths into onesixteen-foot length) in the “make in-house” alternative. Such a jointrequired welding around the diameter of the pipe, a process that, withsetup, would take around 18 minutes per joint. Steve wondered whichoption would be best.Should Steve recommend buying the pipe or making it?• Adapted from a case copyrighted by the Institute for Supply Management (formerly the National• Association of Purchasing Management). Reproduced by permission. Brad C. Meyer wrote this• case during one of the ISM-sponsored case writing workshops.
  15. 15. The Make OptionKey factors to consider:1. Manufacturing the piping will be difficult since the equipment at Krause can only handle 8 foot sections.2. 20 foot sections is ideal to avoid any leaks and reduce installation time.3. A well sealed system is highly desired because of toxic fumes.4. Craftsmanship is part of the company’s reputation.5. Cost verses quality.6. Rework cost $32.60 an hour per person.
  16. 16. Compare the OptionsMake Option Cost AnalysisCost of manufacturing the pipe: Buy Option Cost Analysis1. 6500 feet of piping needs to be Cost of the pipe: manufactured & installed at 8 foot sections. Takes 18 minutes per weld. 1. Cost of manufactured pipe2. The welding process was estimated would cost from 23 to 28 to take ten minutes for an eight-foot dollars per linear foot section (10x8=80minutes)3. Let’s figure at least 2-3 employees x (delivered) for 10-inch- 32.60=X. It would take at least 2 diameter, 16-gauge employees to roll the sheet metal and at a minimum of 1 employee to stainless steel pipe. weld the joints. 2. Steve did find a supplier4. A square foot of 16-gauge steel weighs two and one-half pounds. who would provide the (1.80 x 2.5 pounds=X) pipe for $18.10 per linear5. Many of the lengths of pipe needed in the project were longer than eight foot. feet. (.25 x X feet=X) 3. Cost of welding all the 20 foot sections together.