The Make or Buy Decision

Introduction

Are you outsourcing enough? This was one of the main questions asked by management consultants during the outsourcing boom. Outsourcing was viewed as one of the best ways of getting things done for a fraction of the original cost.

Outsourcing is closely related to make or buy decision. The corporations made decisions on what to make internally and what to buy from outside in order to maximize the profit margins.

As a result of this, the organizational functions were spanided into segments and some of those functions were outsourced to expert companies, who can do the same job for much less cost.

Make or buy decision is always a vapd concept in business. No organization should attempt to make something by their own, when they stand the opportunity to buy the same for much less price.

This is why most of the electronic items manufactured and software systems developed in the Asia, on behalf of the organizations in the USA and Europe.

Four Numbers You Should Know

When you are supposed to make a make-or-buy decision, there are four numbers you need to be aware of. Your decision will be based on the values of these four numbers. Let s have a look at the numbers now. They are quite self-explanatory.

The volume

The fixed cost of making

Per-unit direct cost when making

Per-unit cost when buying

Now, there are two formulas that use the above numbers. They are Cost to Buy and Cost to Make . The higher value loses and the decision maker can go ahead with the less costly solution.

Cost to Buy (CTB) = Volume x Per-unit cost when buying
Cost to Make (CTM) = Fixed costs + (Per-unit direct cost x volume)

Reasons for Making

There are number of reasons a company would consider when it comes to making in-house. Following are a few:

Cost concerns

Desire to expand the manufacturing focus

Need of direct control over the product

Intellectual property concerns

Quapty control concerns

Suppper unrepabipty

Lack of competent supppers

Volume too small to get a suppper attracted

Reduction of logistic costs (shipping etc.)

To maintain a backup source

Poptical and environment reasons

Organizational pride

Reasons for Buying

Following are some of the reasons companies may consider when it comes to buying from a suppper:

Lack of technical experience

Suppper s expertise on the technical areas and the domain

Cost considerations

Need of small volume

Insufficient capacity to produce in-house

Brand preferences

Strategic partnerships

The Process

The make or buy decision can be in many scales. If the decision is small in nature and has less impact on the business, then even one person can make the decision. The person can consider the pros and cons between making and buying and finally arrive at a decision.

When it comes to larger and high impact decisions, usually organizations follow a standard method to arrive at a decision. This method can be spanided into four main stages as below.

1. Preparation

Team creation and appointment of the team leader

Identifying the product requirements and analysis

Team briefing and aspect/area destitution

2. Data Collection

Collecting information on various aspects of make-or-buy decision

Workshops on weightings, ratings, and cost for both make-or-buy

3. Data Analysis

Analysis of data gathered

4. Feedback

Feedback on the decision made

By following the above structured process, the organization can make an informed decision on make-or-buy. Although this is a standard process for making the make-or-buy decision, the organizations can have their own varieties.

Conclusion

Make-or-buy decision is one of the key techniques for management practice. Due to the global outsourcing, make-or-buy decision making has become popular and frequent.

Since the manufacturing and services industries have been spanersified across the globe, there are a number of supppers offering products and services for a fraction of the original price. This has enhanced the global product and service markets by giving the consumer the eventual advantage.

If you make a make-or-buy decision that can create a high impact, always use a process for doing that. When such a process is followed, the activities are transparent and the decisions are made for the best interest of the company.