A hybrid approach to minimising manufacturing costs – study in a heating ventilation and air conditioning industry

A leading producer of commercial air-conditioning equipment faces the need to update its sheet metal operations in support of its commercial chiller product line. Currently, the producer meets the majority of its sheet metal needs through in-house manufacturing operations. Thus, three basic alternatives confront the producer. Capital can be invested to maintain existing in-house operations. It could also be invested to develop outsource suppliers to completely fill the sheet metal requirements. Finally, an investment could be made involving substantial reliance on both in-house and outsource suppliers. To effectively analyse the true cost associated with each alternative, realistic cost structures are derived employing activity-based costing (ABC) techniques in conjunction with probabilistic market forecast data. The alternative including both in-house manufacturing and outsource suppliers was identified as optimal through linear programming (LP) techniques. The implementation of this optimal solution is then analysed using the programme evaluation and review technique (PERT).