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An enterprise may decide to purchase the product rather than producing it, if is cheaper to
buy than make or if it does not have sufficient production capacity to produce it in-house.
With the phenomenal surge in global outsourcing over the past decades, the make-or-buy
decision is one that managers have to grapple with very frequently.
Changing demand, for example if volumes sold rise significantly, leaving the current method
of production no longer the cheapest or the most appropriate.
Reduction in capacity. Demands on floor space, skills, equipment or some other variable,
mean the existing way parts are supplied may not be the most efficient use of resources.
Problems with existing suppliers, this includes availability of supply and logistics.
Speed suppliers may be able to produce parts far quicker than you could ever dream of.
Inadequate internal quality control or processes to produce items to the required specification.
A patent may protect certain components; therefore you cant legally reproduce them.
Maintain supplier commitment and relationship, as well as obtain know-how for strategic
reasons.
On-Time Delivery: If this is a critical factor, which option is positioned to best meet and
guarantee it?
Economies of Scale: Depending on the volume to be produced there may a natural limit on
how much can be manufactured internally.
If greater production volumes are needed in the future, is there the capacity to deliver using
your preferred method of supply?
What is the probability of success for either making or buying? What are the risks, likelihood
and consequences of each?
Are they likely to deliver on time, to the right quality and at the right price?
Consider outsourcing if the activity does not add value and is not strategic to the business. For
example, only keep the task in-house if it helps build core competencies and specialist skills,
or the activity is critical to the success of the product (often quality related).
The 2 biggest factors to help decide will be cost and available capacity.
For cost, consider and compare the total costs of both in-house production and outsourcing.
Available capacity applies only to the make in-house option. Here you need to understand
what else you are committed to produce. Consider existing production schedules, as well as
the skills available.
Also take into account other factors from the list provided earlier for buy and make
respectively. Similarly, consider broader considerations that apply equally to both, like delivery
times, production volumes and responsiveness.
If you decide to outsource, visit a supplier if possible to get a feel for their ability to deliver, as
well as their sense of values. What is your gut feeling about them? What does their track
record look like? How do they operate contractually and is it an arrangement you can work
with?
Why not bring experience into your make versus buy decision and get a few knowledgeable
employees together before making a judgement call. At minimum, get the opinions of both
production and procurement employees.
Carefully consider all these points before being decisive, putting together a plan and executing it.
Monitor and review how things are going, before making slight adjustments if you feel you need to.
Lean manufacturing businesses realise the importance of make or buy decisions as part of their
manufacturing strategy. For the most successful firms, it is central to cutting out non-value added
activities and therefore focussing on making the most efficient use of their resources. Why not make it
your aim too?
only the former. The study should also look at the availability of the product and its
quality under each of the two situations.
Lack of expertise
Small-volume needs
Brand preference
Transportation expenses
MakeorBuyDecisions
Notallthecomponentsthatmakeupaproductareproducedinhouse.Somemaybe
purchasedfromasupplier.Thedecisionconcerningwhichitemswillbepurchased
andwhichitemswillbemadeisreferredtoassourcing,verticalintegration,or
themakeorbuydecision.
Themakeorbuydecisionrestsonanevaluationofthefollowingfactors:
1. Cost.Woulditbecheapertomaketheitemorbuyit?Toperformtheservice
inhouseorsubcontractitout?Thisistheprimaryconsiderationinmostmake
orbuydecisions.Althoughthecostofbuyingtheitemisrelatively
straightforward(i.e.,thepurchaseprice),thecostofmakingtheitemincludes
overheadallocationsthatmaynotaccuratelyreflectthecostofmanufacture.In
addition,therearesituationsinwhichacompanymaydecidetobuyanitem
ratherthanmakeit(orviceversa)when,fromacoststandpoint,itwouldbe
cheapertodootherwise.Theremainingfactorsinthislistrepresent
noneconomicfactorsthatcaninfluenceordominatetheeconomic
considerations.
2. Capacity.Companiesthatareoperatingatlessthanfullcapacityusuallymake
componentsratherthanbuythem,especiallyifmaintainingalevelworkforce
isimportant.Sometimestheavailablecapacityisnotsufficienttomakeallthe
components,sochoiceshavetobemade.Thestabilityofdemandisalso
important.Typically,itisbettertoproduceinhousethosepartsorproducts
withsteadydemandthatconsumeasetcapacity,whereasthosewhosedemand
patternsareuncertainorvolatileareusuallysubcontracted.
3. Quality.Thecapabilitytoprovidequalitypartsconsistentlyisanimportant
considerationinthemakeorbuydecision.Ingeneral,itiseasiertocontrolthe
qualityofitemsproducedinyourownfactory.However,standardizationof
parts,suppliercertification,andsupplierinvolvementindesigncanimprovethe
qualityofsuppliedparts.Poormanufacturingpracticesinthe1970sforced
manyU.S.companiesinthe1980stopurchasemajorcomponentsfromforeign
competitorstomeetcustomerqualityexpectations.Thisledtothecreationof
"hollow"corporationsthatfarmedouteverytaskexceptputtingthefinallabel
on.
4. Speed.Sometimescomponentsarepurchasedbecauseasuppliercanprovide
goodssoonerthanthemanufacturer.Thesmallersupplierisoftenmore
flexible,too,andcanadaptquicklytodesignandtechnologychanges.Of
course,speedisusefulonlyifitisreliable.
5. Reliability.Suppliersneedtobereliableinboththequalityandthetimingof
whattheysupply.Unexpecteddelaysinshipmentsorpartiallyfilledorders
becauseofqualityrejectscanwreakhavocwiththemanufacturingsystem.
Manycompaniestodayarerequiringtheirsupplierstomeetcertainqualityand
deliverystandardstobecertifiedasanapprovedsupplier.ISO9000isthe
EuropeanCommunity'squalitycertificationprogram.Thoseforeigncompanies
thatarenotcertifiedsimplymaynottradeinEurope.Othercompaniesassess
hugepenaltiesforunreliablesupply.DaimlerChrysler,forexample,finesits
suppliers$30,000foreachhouranorderislate.
6. Expertise.Companiesthatareespeciallygoodatmakingordesigningcertain
itemsmaywanttokeepcontrolovertheirproduction.CocoaColawouldnot
wanttoreleaseitsformulatoasupplier,eveniftherewereguaranteesof
secrecy.Althoughautomakersmightoutsourcemanyoftheircomponentparts,
theyneedproprietarycontrolovermajorcomponentssuchasengines,
transmissions,andelectronicguidancesystems.Japanese,Taiwanese,and
KoreanfirmsarecurrentlylearningAmericanexpertiseinaircraftdesignand
manufacturebyservingassuppliersofcomponentparts.Thedecisionof
whethertoshareyourexpertisewithasupplierforeconomicgainsisadifficult
one.
Companiesthatcontroltheproductionofvirtuallyalloftheircomponentparts,
includingthesourceofrawmaterials,aresaidtobeverticallyintegrated.This
strategywaspopularformanyyearswhencompaniesdidnotwanttobedependenton
othersfortheirlivelihood.Today,buyingcomponentsandrawmaterialsfromvendors
ismorecommon,butrelationshipswithvendorshavebeenstrengthened.Supplier
partnershipsarevaluableassetsingainingacompetitiveedge.Chapter9,"Supply
ChainManagement,"discussestheimportanceofsupplierrelationshipsfromaglobal
perspective.