The case study for the week is the Johnson Sheet Metal case study. This is a word problem, similar to what you would find in Purchasing. All the information needed is in the case study. Try to solve the case study first. If you are having trouble, then let me know. If you wish, you can use a spread sheet program to make the calculations.

Jim Kent, Georges twin brother, was the Supply Manager for Johnson Sheet Metal. Johnson Sheet metal is a large mechanical and sheet metal contractor, with numerous facilities throughout the US.

They recently were awarded the bid to provide a new HVAC system for the US Armys new facility. This was a very complex project, not only due to the various military regulations, but due to the necessary non-standard products needed.

Part of the new HVAC system required 7,000 linear feet of 11.50 inch +- .25-inch diameter 16-gauge stainless steel pipe. This piping had to be leak proof, as any fumes must be scrubbed prior to release into the atmosphere. If a leak was found, the pipe would need to be repaired in place. This piping would be used to vent the dorms, kitchen areas and laboratories. When the original bid was prepared, the cost estimation department had planned on fabricating this pipe at one of the Johnson Sheet Metal facilities.

As the project was underway, the Project Manager asked Jim if there was a way to get this pipe at a lower price.

Jim explored the option of purchasing the pipe outside. Most places were quoting $25 to $30 per linear foot for 11.50-inch diameter, 16-gauge stainless steel pipe. He did find a supplier who could provide the product for $22.50 per linear foot, in 20-foot sections, perfectly true (round) and no seams. This feature would make the connections between pipe easier and reduce the likelihood of leaks.

He next explored the possibility of making the product in house. First, a flat sheet of steel is formed into a cylinder shape via various rolling die. Next, the seam is welded together. The rolling process took 6 minutes, including loading and unloading of the part. The equipment could only handle an eight-foot section of steel sheet. The welding process took 10 minutes for an eight-foot section. The hourly rate was calculated at $32.60 per hour. Overhead rate of 40% was added to labor, material and supplies.

The stainless-steel sheets were available in 36-inch, 48-inch, and 60-inch wide sheet at lengths up to 10 feet, with the best price at $2.00 per pound. A square foot of 16-gauge material weighs 2 pounds. The welding process requires welding wire and welding gas. Welding wire cost $5.50 per pound and .03 pounds was needed per foot of weld. Welding gas cost around $.25 per eight-foot seam.

Many of the pipes needed were longer than eight feet. For example, two eight-foot sections would be needed to make one sixteen-foot section. These joints would require welding around the circumference of the pipe, a process, including set-up, would take 18 minutes per joint.

9-4-1. Create a cost chart, including a breakdown for each cost category, for producing the product in house. Include in the chart the cost to purchase the product outside.

9-4-2. Should Jim recommend buying the pipe or making it?