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Buy Revisited
Reassessing your companys manufacturing strategy
M
ake or buy? The classic manufacturing question still has no
easy answer. Amid signs of demand recovery, but with capital
still limited and resources thinned by restructuring, top execu-
tives today are revisiting the issue. To come to the right make-or-buy
decision, leading companies resist the temptation to feed the beast.
Instead of focusing only on short-term gains, these leaders keep their
long-term strategy and corresponding core competencies in mind. They
adopt a clearly defined manufacturing strategy, and then adopt the right
tactics that can lead to smart decisions and a competitive advantage.
The trade-offs between making a product in- manufacturing strategies, and then using the right
house and buying it externally are well known to tactics to implement them. By supporting and
most senior executives. The buy approach applying the criteria for decision-making in a
a manufacturer purchasing a necessary part from consistent and comprehensive manner, companies
an outside sourcefrees up resources, reduces can make the right make-or-buy decision 100 per-
capital demands, increases flexibility and improves cent of the time and thereby gain a competitive
returns on capital employed, but in a tough advantage.
market companies may seek to avoid potential
quality concerns and supply risks. On the other Getting Down to the Core
hand, a make approachdeveloping and build- Making the right make-or-buy decision depends
ing that same necessary part internallyenables first on having a manufacturing network that
the company to utilize available internal capacity, consists exclusively of high-performing plants
absorb fixed costs and protect intellectual prop- aligned to company strategy. We advise our cli-
erty, but it can lead to unnecessary complexity ents to begin their make-or-buy decision by
and divert time and attention away from higher- assessing the strategic value and performance of
value activities. every plant, technology and technology-plant
Choosing make simply because the capacity pair (also known as a logical manufacturing unit,
already exists, or buy to avoid investment in or LMU) in their network. By determining which
a time of limited capital, may work 90 percent of operations are worth keeping in-house, a com-
the time, but that 10 percent when its wrong pany can effectively determine whether a product
can have dramatic, long-lasting consequences. should be made in-house.
Considering this, we have developed a compre- We divide plants, technologies and LMUs
hensive framework that helps our clients answer into four categories of operations that represent
the make-or-buy question by reassessing their their relative importance to the network and, by
Figure 1
Sample criteria for evaluating strategic value and performance
Figure 2
Manufacturing assessment approach
Secondary Core
High
Core
Supporting uncertainty and to facilitate the
Secondary
Marginal
manufacturing consolidation effort.
Plant A
Their long-term presence in the
Plant B
manufacturing network, however,
will be constantly questioned during
Strategic value
Figure 3
After the analysis, our client had a leaner asset structure
High
Strategic value
Strategic value
Low
Low
Figure 4
Six assessments to answer the make-or-buy question
A Technology Analysis
Our client performed the manu- inary conclusion was that not all To understand the viability of
facturing assessment analysis for technologies, including some that different technologies within the
nine technologies, selecting five to scored high in strategic value, manufacturing network, a cosmet-
keep and four for rationalization should be maintained in all facilities. ics company applied this framework
(see figure A). Technologies 1 and 2 Which technologies to keep will by overlapping the plant and tech-
were deemed core; the remaining depend on the relative value and nology dimensions (see figure B).
were either supporting, secondary, performance of the technology- Two technologies in particular
or marginal. In this case, the prelim- plant pairing. highlight the decision this com-
pany made:
Technology 5. This technology
Figure A: A sample analysis of technology value and performance on its own was of high overall strate-
gic value, but when it was analyzed
High
Core
Supporting, within the context of different
secondary plants, its value and performance
or marginal
were questionable. As a result, the
Technology 5 internal manufacturing of products
Technology 1 using Technology 5 was to be revis-
Strategic value
on the relatively high strategic value ogy because of its fragmented foot- too fragmented. Compared to
of this technology, it will be main- print and relatively low performance. other technologies, Technology 8
tained in-house in three core facili- Production volumes using this tech- had the lowest strategic value and
ties as long as performance is nology represented a relatively small one of the lowest performance scores.
improved. portion of the total in-house produc- As a result, the company discontin-
Technology 8. The company tion of the client, and with nine ued using the technology internally
questioned the value of this technol- capable facilities, production was for all facilities.
High
Plant C Plant A
Strategic value
Strategic value
Plant I
Plant B
Plant K Plant E Plant C Plant A
Plant F
Plant G Plant B Plant E
Plant D Plant J Plant D
Plant H Plant J Plant H Plant G
Low
Low
Figure 5
A sample make-or-buy decision tree
Yes Yes
Buy from contract
Is making in-house Is there a strong manufacturer
cost-competitive? business case for
No making in-house?
No Invest to make
in-house
Yes
Authors
Sean Monahan is a partner in the New York office and can be reached
at sean.monahan@atkearney.com.
Patrick Van den Bossche is a partner in the Washington, D.C., office and can be reached
at patrick.vandenbossche@atkearney.com.
Fidel Tamayo is a consultant in the Washington, D.C., office and can be reached
at fidel.tamayo@atkearney.com.
Copyright 2010, A.T. Kearney, Inc. All rights reserved. No part of this work may be reproduced in any form
without written permission from the copyright holder. A.T. Kearney is a registered mark of A.T. Kearney, Inc.
A.T. Kearney, Inc. is an equal opportunity employer.
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