Make vs. Buy
By: SCOTT BOGGS, SAMSON ROLL FORMED PRODUCTS COMPANY
The make versus buy decision is a capital budgeting decision that is complicated, more or less, by the experience of the decision maker and the nature of the job. A proprietary roll former, for example, is more familiar with the complexities of the roll forming process than a company that has never done any roll forming.
Roll forming becomes an economical alternative to predecessor processes such as brake forming when the demand reaches approximately 10,000 feet; or, when several operations can be combined into one roll forming process, albeit the set-up quality is relatively small. Custom roll formers are the logical alternative at this point because the volume can be more economically manufactured by means of roll forming, but the cost to purchase a roll forming line and manufacture the product in “house” usually cannot be justified. As the volume grows, the decision becomes easier to justify, but all too often companies oversimplify the decision-making process, especially companies with no roll forming experience.
Companies considering roll forming for the first time all too often make the mistake of failing to consult with a custom roll former to learn more about the process and the services the custom roll former can offer. Instead, their first introduction to roll forming is usually from a machinery manufacturer whose propensity is to encourage the purchase of a roll forming line.
The purpose of this lecture is to familiarize the listener with many of the factors that should be considered in the make or buy decision.
Capital budgeting problems are basically revenue expansion and/or cost reduction problems. The procedure involves estimating after-tax cash flows for mutually exclusive alternatives for the same period of time and then discounting future cash flows to find the net present value so that they can be compared on a common basis; or, to find the rate of return for each alternative using the internal rate of return method. The payback method is another method that is commonly referred to. However, the payback method is not the method of choice because the payback method ignores cash flows beyond the payback period.
Financial analysts generally divide cash flows into three general categories: initial cash flows, operating cash flows, and terminal cash flows. Initial cash flows usually include the cost of the asset, transportation and installation costs, one-time costs associated with the initial cash outlay such as training or engineering costs, networking capital, and replaced asset adjustment costs (if applicable).
Depending on the amount of work being done to the part and the complexity of the shape, a roll forming line could consist of many components. A basic line will probably consist of a decoiler, a pre-notch press, a roll former, a cut-off press, and a runout table. The cost of such a line can range from fifty thousand dollars to several hundred thousand dollars. Ancillary equipment, such as servo-feeds, batch counters, accumulators, welders, etc., can drive the cost much higher.
What specific equipment to purchase is critical and is very confusing to the inexperienced. When considering what type of roll former to purchase, for example, factors like pitch diameter, horizontal centers, spindle diameter, the type of drive, etc. will affect future costs – tooling cost, labor cost, material cost, etc. The custom roll former is the expert in roll forming, not the machinery manufacturer, and therefore, any make or buy decision should not overlook this important source of information.
If you purchase a line, you must find a place to put it and include the means to operate it. Thus, installation costs include plant layout costs, space utilization costs, the cost of installing air and electricity, etc. And, depending on how you intend to handle the raw material, there may be the cost to install a bridge hoist and superstructure.
Space will also be required for inventory – raw material, work-in-process, and finished goods. Raw material will include not only the metal that will be roll formed into a product, but also shipping supplies, lubricants, maintenance and tool supplies, etc. Space may also be required for complementary products purchased from outside sources.
Inventory is a current asset. Current assets less current liabilities equal networking capital. The purchase of a roll forming line usually requires an increase in working capital. Inventory and accounts receivable are typically the two largest current assets that require financing. Inventory is subject to obsolescence, shortage rejection, etc., which create expenses that affect operating cash flow. Accounts receivable problems create bad debt expense.
Operating cash flows, of course, are a function of revenue and expense. Expenses include costs such as: raw material cost, indirect labor and their associated benefits, overhead costs such as maintenance and repair costs, electricity, depreciation, etc.
Although the names of these expenses may be common to any manufacturing activity, the way in which they evolve in a roll forming environment and thus, the ability to control them, requires an understanding of the nature of roll forming. The process itself often looks simple to the casual observer, but as the maxim says, “If it looks to good to be true, it probably is.”
What are some of the problems that increase the apparent costs of roll forming?
Roll forming tooling is designed for a certain thickness of metal. Oftentimes the metal that the roll former receives varies significantly in thickness which causes increase in set up costs since more set up adjustment is required. This problem usually does not go away once the set up is complete because material thickness may vary not only from coil to coil, but within a coil, which forces the operator to have to frequently readjust the set up. This in turn, has an effect on productivity since the machine is now incurring more downtime related to set-up adjustment, which is caused by excessive material thickness variation. Depending on the severity of the problem, the operator may have to take a partially used coil off the coil reel and try another one.
Loss of productivity causes scheduling problems. Loss of productivity means late deliveries and dissatisfied customers unless something can be done to compensate for the problem. Usually that something is an increase in overtime to catch up.
Skilled labor is scarce. Roll form set up people are highly skilled people who are very difficult to find. There is no vocational school one can turn to, to find these individuals. Custom roll formers usually have to establish training programs to develop this skill and ability. More than one company has invested in roll forming equipment only to discover too late that they can find no one who can set up and trouble shoot the many unanticipated problems that invariably arise. The custom roll former has encountered these problems many times, and therefore, has gained the experience to solve them.
Another misconception that exists is that running speed and rolling rate is the same thing. When talking to a machinery manufacturer, one often comes away with the impression that the product will be produced at a phenomenal rate. They often say that the machine will run at a rate of one hundred to two hundred feet per minute. To the casual observer that translates into six thousand to twelve thousand feet per hour. That assumes, however, that the machine will run 100% of the time, that there will be no downtime related to material problems, or to changing coils, etc. The question that should be asked is, “What is the average rolling rate (the yield)?” The answer to that question will give you a better estimate of productivity. The factors that affect productivity are many and varied. I have only mentioned a few for illustrative purposes.
Next, are the terminal cash flows that usually include salvage value of the equipment and release of net working capital, etc. Buying roll-forming equipment can be likened to buying an automobile. Among other considerations, you want to buy a car that will have good resale value. The same is true of roll formers. More than one company has purchased equipment without regard for the marketability of that equipment, and hence its salvage value has been greatly diminished.
In summary, roll forming is a process that is much more complex than it looks. In any make or buy situation, my advice is to buy the product from a custom roll former and if the volume eventually reaches a level that would justify in house manufacturing, you will have gained experience working with the custom roll former and he can assist you in developing a turn key that will save you money.