Krause Corporation is evaluating whether to manufacture HVAC piping for a new laboratory building internally or purchase pre-made piping from an outside supplier. Manufacturing the piping would require joining multiple 8-foot sections to create the desired 20-foot lengths, increasing labor and welding costs. Purchasing piping at $18.10 per linear foot from a supplier who provides sealed 20-foot sections could save on installation time and costs compared to manufacturing, but may sacrifice quality control. A thorough cost analysis is needed to determine the most cost-effective option while ensuring leak-proof piping for toxic laboratory exhaust.

1. Krause Corporation
Analyzing the facts of manufacturing
or buying HVAC piping
By: Ken Hogan

2. HVAC Piping 101
I am assuming that most of you have never dealt
with cost estimating HVAC piping, so let us start
with a basic idea of what HVAC piping is and
how it works. In this case study we will be
dealing with “mechanical" or "forced"
ventilation that provides air handling to control
indoor air quality, odors, toxic fumes, and
contaminants can often be controlled via
dilution or replacement with outside air. Let’s
look a t some pictures…

3. House HVAC Piping
If you are not familiar
with HVAC piping here is a
typical HVAC piping of a
house.

4. Complex Industrial HVAC Piping
This is a more complex industrial HVAC piping project.

5. Simple HVAC Operation
This is a simple HVAC piping operation where air is forced into a room.

6. Vent Piping Identification
Vent Pipe
Elbow
Weld
Joint

7. HVAC Piping 101
I hope this general explanation help you all
visualize the case study and understand some of
the language that will be used to determine a
cost estimation and the best option for the
customer and the company.
NOTE: I have made notes in that will be BOLD
and Italic to identify important points to
consider.

8. What needs to be done?
Steve Rothel was supply manager for the Midwest division of the Krause Corporation. Shortly
before his company was to install an exhaust system in a new construction project, Steve was asked to
compare fabricating the pipe with buying the pipe from an outside source.
Krause Corporation
Krause Corporation, a mechanical and sheet metal contractor, was founded over 50 years ago. Although
it had a number of branches in the United States, the majority of its metal fabrication work was
performed in its Midwest facility. The company mission stressed quality workmanship, competitive
pricing, and timely performance. This is an to know considering the final product must be 100%
A Laboratory Exhaust System
Krause recently was awarded the bid to provide the HVAC system in a corporate headquarters building
that housed a research laboratory. This was a complex project with many nonstandard features due to
the 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 to
fabricate this pipe at their Midwest facility.
Piping wall
Fact Point:
16-gauge = .065” thickness of the piping wall
Laboratory exhaust can consist of toxic gases/fumes

9. Pipe Joints
Welded Joints
Welded Joints
A 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. A Request for Cost Reduction
As the project got under way the vice president of
sheet metal fabrication asked Steve Rothel “if it would
be possible to provide the stainless steel pipe at a
lower cost than the original estimate.” Steve knew, of
course, that any reduction in cost must not come at a
sacrifice of quality. Because of toxins that would be
present in the laboratory exhaust, it was critical that
this system be absolutely leak proof.
Every pipe run would be individually tested to insure
integrity If leaks were uncovered in the welds, it
would require a time-consuming effort to reweld the
joints on site. Steve realized that there were two
approaches to providing the pipe. We want to avoid Welded joint
unnecessary work, it cost $$$.
Krause could proceed as planned and fabricate the pipe in-house, using
the lowest-cost, acceptable quality steel available on the market. This
is risky considering the toxic fumes and inferior material.
The second possibility would be to find a supplier who could provide
the pipe already formed at a better cost.

11. The Purchase Option
Steve first explored the purchase option. He did a thorough search of the
market, and found that most suppliers were asking from 23 to 28 dollars per
linear foot (delivered) for 10-inch-diameter, 16-gauge stainless steel pipe. He
was pleasantly surprised, however, to find a supplier who would provide the
pipe for $18.10 per linear foot. This supplier provided the pipe in 20-foot
sections and guaranteed the pipe to be sound (no leaks). In addition, their
pipe was “perfectly” true (round), a trait that Krause’s current equipment
could not always provide This is important because rework cost $$$.
linear feet of pipe X cost per linear foot= cost of pipe
This feature would reduce the time needed to make connections between
sections of pipe and reduce the likelihood of a bad weld joint. Although this
option sounded very attractive, Steve, a veteran in the supply management
area with almost 14 years of experience, knew he couldn’t rely on first
impressions to make important management decisions. He would have to
subject his options to a thorough analysis to ensure a wise decision.

12. The Make Option
Steve had access to the data necessary for
manufacturing cost estimating. He knew that the
process 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 process
could roll lengths up to eight feet. We need 20 foot
sections for this project; consider the extra time it
will take to weld sections together to form a 20 foot
section. We would have to connect 3 sections
together 8’x3’=24’ then cut to size. Remember we Welding Seams/Joints
need 6500 feet! 6500/24= how many sections?

13. The Make Option
The welding process was estimated to take ten minutes for
an eight-foot section (10x8=80minutes). The figure the
company used for cost estimating purposes for hourly labor
rate was $32.60 per hour. An overhead charge of 40 percent
was added to the variable costs, figure at least 2-3
employees x 32.60=X. It would take at least 2 employees to
roll the sheet metal and at a minimum of 1 employee to
weld the joints.
Stainless steel sheets were available in 36-inch, 48-inch, and
60-inch widths at any length up to 10 feet, with the best
price being $1.80 per pound. A square foot of 16-gauge steel
weighs 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 pounds
were needed per foot of weld. (5.20 x X feet=X) Rolling Sheet Metal
Welding gas cost around 25 cents per eight-foot seam. Many
of the lengths of pipe needed in the project were longer
than eight feet. (.25 x X feet=X)

14. The Make Option
Thus, Steve thought it necessary to include the cost of an extra joint
(which, for example, would make two eight-foot lengths into one
sixteen-foot length) in the “make in-house” alternative. Such a joint
required welding around the diameter of the pipe, a process that, with
setup, would take around 18 minutes per joint. Steve wondered which
option 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. The Make Option
Key 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. Compare the Options
Make Option Cost Analysis
Cost of manufacturing the pipe:
Buy Option Cost Analysis
1. 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 pipe
2. 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 supplier
4. 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 linear
5. 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.