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Make or Buy decision

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Make or Buy Decisions

It is the act of making a strategic choice between producing anitem internally (in-house) or buying it externally (from an outside

supplier).

A firms Make-or-Buy choices should be based on the followingconsiderations:

Strategic impact

Available capacity

Expertise

Quality considerations

Speed

Cost (fixed cost + variable cost)make = (fixed cost + Variable cost)buy

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Factors

-- Impact on current vendor relation

-- Nature of demand

-- Availability and lead time for acquiring the technical expertise

for producing the item.

-- Current capacity utilization

-- Develop new strategic process capabilities.

-- Break even analysis.

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Operations StrategyDesigning the

Operations Function

Business Strategy

Define short-term & long-term decision compatible with companiesrequirements

Operation Strategy

Develops a plan for the operation function focusing on competitive priorities inorder to meet short & long term

Comparative : Cost, Quantity, Quality, Time Flexibility.

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Make or Buy

These considerations that favor making a part in-house:

Cost considerations (less expensive to make the part)

Desire to integrate plant operations

Productive use of excess plant capacity to help absorb fixed overhead

(using existing idle capacity) Need to exert direct control over production and/or quality

Better quality control

Design secrecy is required to protect proprietary technology

Unreliable suppliers

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continued

No competent suppliers

Desire to maintain a stable workforce (in periods of declining

sales)

Quantity too small to interest a supplier

Control of lead time, transportation, and warehousing costs

Greater assurance of continual supply

Provision of a second source

Political, social or environmental reasons (union pressure)

Emotion (e.g., pride)

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Factors that may influence firms to

buy a part externally Lack of expertise

Suppliers' research and specialized know-how exceeds that of

the buyer

cost considerations (less expensive to buy the item)

Small-volume requirements

Limited production facilities or insufficient capacity

Desire to maintain a multiple-source policy

Indirect managerial control considerations

Procurement and inventory considerations Brand preference

Item not essential to the firm's strategy

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Two most important factors

Cost and the availability of production

capacity.

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Elements of the "make" analysis

include Incremental inventory-carrying costs

Direct labor costs

Incremental factory overhead costs

Delivered purchased material costs

Incremental managerial costs

Any follow-on costs stemming from quality and related problems

Incremental purchasing costs

Incremental capital costs

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Cost considerations for the "buy"

analysis include

Purchase price of the part

Transportation costs

Receiving and inspection costs

Incremental purchasing costs

Any follow-on costs related to quality or

service