Chapter 5: Make vs. Buy Decision

Make vs. Buy Decision

the act of deciding whether to produce an item internally or buy the item from an outside supplier

Backward vertical integration

- Refers to a company acquiring one or more of their suppliers. Example: a manufacturer buying the key supplier of a critical material to take ownership of this aspect of their supply chain.

Risks of buying/outsourcing

Potential loss of control Over production decisions, intellectual property, etc. Increased reliance on suppliers Increased need for supplier management

make

Producing (i.e., manufacturing) materials or products internally (i.e., in operations owned by the company).

Forward Vertical Integration

Refers to a company acquiring one or more of their customers. Example: a manufacturer buying a wholesaler/distributor to take ownership of this aspect of their supply chain.

In-sourcing (back sourcing)

Reverting to in-house production when external quality, delivery, and services do not meet expectations

Co-sourcing:

The sharing of a process or function between internal staff and an external provider. Using dedicated staff at an external provider that works exclusively under your control and direction

Reasons for making (2)

Use existing idle capacity - Company can make use of excess capacity by making a material instead of letting the capacity sit idle. Control of transportation and warehousing costs - If you make an item in-house, you avoid transportation costs, and may be able to keep warehousing costs to a minimum. Control of lead-time - You may feel that you have more control over the lead time to produce the material / product than a supplier.

Reasons for buying/outsourcing (1)

Non-Strategic - If it is a non-strategic item Cost Advantage - Suppliers may provide the benefit of economies of scale, especially for components that are non-vital to the organization's operations. Insufficient Capacity - A firm may be at or near capacity and subcontracting from a supplier may make better sense. Temporary Capacity Constraints - the concept of "extended workbench" which involves short-term supplementing internal capacity with external capacity during time of constraint or overloaded work centers. Lack of Expertise - Firm may not have the necessary technology and expertise

buy/outsource

Buying materials, components, or products from a supplier(s) instead of, or in addition to, making them in-house (i.e., buying from a 3rd-party external source).

Benefits of buying/outsourcing

Concentrate on core capabilities Reduce staffing levels Accelerate reengineering efforts Reduce internal management problems Improve manufacturing flexibility

Reasons for making (1)

Protect proprietary technology - You may not want your intellectual property to be out in the public domain. Even if you have a confidentiality agreement, there is always a risk. No competent supplier - There may simply not be an existing supplier in the market and you may not want to spend the time or effort to develop one. Overall lower cost - You may be able to produce the material or product at a lower cost as you will avoid paying a 3rd party's profit margin. Better quality control - You may feel that you have more control of the quality of the material / product than a supplier.

Reasons for buying/outsourcing (2)

Quality - Suppliers may have better technology, processes, skilled labor, etc. Multi Sourcing Strategy - To achieve a multi sourcing strategy using an external supplier in addition to an internal source. Inventory Considerations - opting to have the supplier hold inventory of the item or the materials required to produce the item. Brand Strategy - take advantage of a supplier's brand image, reputation, popularity, etc.

Key factors to be considered

Quantitative Factors primarily involve the incremental costs of either making or purchasing the item, such as the availability of manufacturing facilities, needed resources, and manufacturing capacity. Qualitative Factors are more subjective and include such things as control over quality, the reliability and reputation of the potential suppliers (internal or external), and the impact of the decision on customers and suppliers.