Chapter 18

Make or Buy, Insourcing and

Outsourcing

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Reasons to Make Instead of Buy

• Quantities are too small and/or no supplier is interested• Quality requirements are too exacting or unusual and require special

processing methods• Greater assurance of supply• Closer coordination of supply and demand• Preserve technological secrets• To take advantage of unused capacity• Keep our capacity utilization high and outsource the rest• Avoid supply dependency• Competitive, political, social or environmental factors• Personal preference• Preservation of the status quo: Decisions to make are hard to reverse

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Reasons to Buy Instead of Make

• Lack of administrative or technical experience• Excess production capacity• Customer preference for a particular brand• Problems maintaining technological leadership for a noncore

product• Preservation of the status quo: Decisions to outsource are hard

to reverse• Flexibility• Trend to outsourcing: Focus on core activities and outsource

the balance of the company’s requirements• Superior supply management expertise• Lower overhead costs

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Research: Reasons for Outsourcing

• 1995• Cost reduction• Headcount reduction• Focus on core competencies• Acquire and deploy peripheral

knowledge or process technology• Minimize inventory and materials

handling• Reduce development and production

cycle times• Improve efficiency• Reaction to positive media reports

1998• Reduce and control operating costs• Improve company focus• Gain access to world-class capabilities• Free internal resources for other

purposes• Resources are not available internally• Accelerate reengineering benefits• Function difficult to manage/out of

control• Make capital funds available• Share risks• Cash infusionSource: Information drawn from the following sources: Leenders, et

al., “Fleet Management’s Contribution and Outsourcing,” op. cit. pp. 38-40; “Making Way for the Virtual Enterprise,” Purchasing, December 15, 1994, p. 18; and Mary C. Lacity and Rudy Hirscheim, Information Systems Outsourcing, (New York: John Wiley & Sons, 1993).

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Risks of Outsourcing

• Loss of control• Higher exit barriers• Exposure to supplier risks

- e.g., financial, commitment to relationship, response time, quality, service

• Unexpected/unanticipated costs• Difficulty quantifying economies• Conversion costs• Supply restraints• Possibility of being tied to obsolete technology• Concerns with long-term flexibility

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The Outsourcing Matrix

1 2

3 4

Should BeIn-House

Should BeOutsourced

CurrentlyIn-House

CurrentlyOutsourced

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The Outsourcing Decision

Is the activity strategic?

Is the activity critical to thebusiness but not strategic?

Create a RFP.Gather supplier bids/proposals.

Is the supplier’s bid/proposal more desirable than the internal option?

Could the internal option achievesimilar results?

Negotiate a contract to ensurethat expectations are realized

No

No

No

No

No

Keep the functionin-house

Keep the functionin-house

Keep the functionin-house

Keep the functionin-house

Yes

Yes

Yes

YesIs the activity strategic?

Is the activity critical to thebusiness but not strategic?

Create a RFP.Gather supplier bids/proposals.

Is the supplier’s bid/proposal more desirable than the internal option?

Could the internal option achievesimilar results?

Negotiate a contract to ensurethat expectations are realized

No

No

No

No

No

Keep the functionin-house

Keep the functionin-house

Keep the functionin-house

Keep the functionin-house

Yes

Yes

Yes

Yes

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Purchasing’s Role in Outsourcing

• Providing a comprehensive, competitive process

• Identifying opportunities for outsourcing

• Aiding in selection of sources

• Identifying potential relationship issues

• Developing and negotiating the contract

• Ongoing monitoring and management of the relationship

Source: Lisa Ellram and Arnold Maltz, Outsourcing: Implications for Supply Management, Tempe, AZ: Center for Advanced Purchasing Studies, 1997.