By James, Derek, Charles, Hassan
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http://www.youtube.com/watch?v=04KKbfL
GI7g
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Enjoy!
A company’s decision to “make” or “buy” is
essential to the growth of the business as a
whole. Companies have to make sure that their
decision does not restrict them in the future
 To “Make” a product means that a company
would need to keep its manufacturing process’s
in house, rather than outsource.
 To “Buy” would mean a company does the exact
opposite. A company would need to purchase its
products from outside sources/suppliers.
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There are some key numbers you’ll need to
analyze when deciding to “make” or “buy” a
product
Volume
Fixed cost of manufacturing
Per-Unit direct cost when buying
Per-Unit direct cost when making
Two Fundamental formulas utilize these
numbers, cost to buy (CTB) and CTM)
CTB=Volume *Per-Unit cost when buying
CTM=Fixed costs +(Per-Unit direct cost*Volume)
1)
What are the Four
Numbers you need to
know when making the
“make or buy”
decision?
Volume
Fixed cost of
manufacturing
 Per-unit direct cost
when buying
 Per-unit direct cost
when making
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external environmental factors coupled with triggers
help form the decision to “make or buy”. These
triggers help pinpoint the specific decision in the
make or buy process. Cost reduction, lack of capacity,
new products and skill shortages all play a key role in
developing the strategy.
 Technology and manufacturing make or break the
decision when “making or buying”. obsolete
technology, inefficient manufacturing processes, poor
supply chain management, and poor support systems
would lead in the “Buy” direction. The opposite would
lead you a company to “make” their own products.
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The Process
These steps illustrate the
way a company can
identify weather they can
“make or buy” a product
on a smaller scale. By
assembling a team
collecting and analyzing
data and receiving
feedback, a company can
determine whether they
made an educated
decision or not.
1) In the “Make or
Buy” decision
process, what
Follows the
Preparation Phase?
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Answer:
Data Collection
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Companies choose to keep functions that
core in their technological aspects of the
business
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This keeps the design quality, product/brand
identity and the security of the design within
the company. The additional benefit of this is
that the company remains linked to their
customers.
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Some Additional reasons for making include
but are not limited too…
Cost Concerns
Expansion
Direct Control over the product
Quality Control concerns
Supplier Unreliability
Supplier Competence
Order Volume Too small
Organizational Pride
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Lack Of Experience
Supplier Expertise
Cost
Small manageable Volume
Insufficient In House capacity
Strategic partnerships
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The volume of products produced plays a major
role in the “make or “buy” decision. Companies
faced with the tasks of manufacturing high and
low volumes can look to adopt a “plant-within-aplant” alternative when aiming to efficiently
“make” their product.
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Companies can also look to outsource products
with low volume demand.
 Leading to a narrowing of the internal span of process.
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Trade barriers across much of the world have
greatly declined.
 In 1990 the average tariff was 7%, or less than 1/5
of that in 1960.
 We have seen a range of new markets open in Asia
and Eastern Europe, and foreign investments.
 Markets that previously favored local production
facilities due to high tariff levels can now be
supplied by imports.
3. Trade barriers across much of the world have
greatly _________?
A. Inclined
Answer: B. Declined
B. Declined
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Faced with a decline in demand and
associated capacity requirements:
 companies are being confronted with the
necessity to decrease their span of process of
many fronts.
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Difficult to align functional objectives
(manufacturing tasks) with business
strategies.
Estimates of cost and savings must be
realistic.
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An effective sourcing strategy has become a strategic issue in
determining sustainable competitive advantage for firms.
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An effective sourcing strategy has the ability to:
(a) decide between ‘Make’ versus ‘Buy’ decision based on transaction
cost theory.
(b) integrate sourcing strategies with company strategies.
(c) convert fixed costs into variable costs.
(d) deliberate reduction of vertical integration .
(e) determine the total cost ownership and purchasing strategy.
(f) develop the process of designing and managing supply networks in
line with operational and organizational performance objectives .
(g) plan, evaluate, implement, and control the sourcing decisions.
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2. What can a company faced with the task of
manufacturing high and low volume products
do?
A. Outsource all manufacturing.
B. Adopt a plant-within-a-plant strategy.
C. Outsource products with high volume demand.
Answer: B. Adopt a plant-within-a-plant
strategy.
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A company may opt for ‘Make’ strategy when external
capabilities do not exist outside or even if they do exist, they
cannot be traded through markets or across companies.
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Also will opt to make when suppliers do not want to trade
unique and valuable resources.
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To remain competitive, companies need to develop the
ability to recombine there internal capabilities into new
configurations of capabilities. This clearly indicates its strong
association with related product diversification strategy.
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Traditionally, organizations opt for ‘Buy’ strategy.
▪ Largely on the basis of obtaining the best price.
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Companies nowadays tend to contract out more
manufacturing and service activities than they did a
decade ago.
▪ This trend has been driven by changes in the business environment and
the pursuit of lean operations.
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The ‘Buy’ strategic option has enabled companies to
secure advantages such as:
▪ Economies of scale (mass production) and scope (specialization), cost
reduction, quality, service and delivery improvement, organizational
focus, and product flexibility enhancement .
1. Which Strategy did organizations
traditionally opt for?
A. Make
B. Buy
Answer : Traditionally, organizations opted for
‘Buy’ strategy which was done largely on the
basis of obtaining the best price.
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A study conducted based on 314 respondents
out of a population of 1300 generated several
interesting outcomes.
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The research is based on the Transaction Cost
Theory, and the Resource Based View (RBV).
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Paper proposed the hypothesis that there is a
significant difference in the performance of
companies that opted for ‘Make’ or ‘Buy’
strategy.
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The total numbers of respondents were 314 or 24% from 1300 population
(total number of member of the Federation of Malaysian Manufacturers).
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From four major manufacturing sectors in Malaysia. (electrical and
electronics, chemicals including petroleum, food and beverages, and
fabricated metal).
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Out of these, 153 of them exercised the ‘Make’ strategy while 161 opted
for the ‘Buy’ strategy.
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Questionnaires were mailed specifically to individuals holding senior
positions (CEOs, managing directors, and general managers) of
organizations that would be able to respond comfortably to the issues
studied.
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The data for this study was collected between May 2008 and July 2008 using a mail survey
approach.
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Sourcing strategy instruments were adapted and Twelve questions on various sourcing
practices were used such as:
(1) lower prices,
(2) better quality
(3) better delivery performance
(4) better availability
(5) access to advanced technology
(6) better customer service
(7) easy to change product design
(8) enhanced competitive position
(9) helps meet countertrade obligation
(10) easy to resolve problems
(11) better communication
(12) better geographic location.
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Respondents were required to determine the degree to which the items are “not
important at all” or “extremely important” based on a Likert scale continuum from 1 to 7
(scale 1 = not at all important to scale 7 = extremely important) in their extent of usage so as
to be competitive in their respective industry.
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Cost and Investments
 The level of investment will determine the width
of Internal Process to a business and In doing so
will have a direct bearing on the levels of cost
involved.
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Strategic Considerations
 Important general considerations help for the
basis for strategic action.
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The principle areas of cost associated with span-of-process
decisions are…
 Transaction costs concerned with buying, selling and physically handling
materials throughout relevant processes.
 The costs associated with improving the coordination between the supply
production, and distribution activities.
 The costs associated with combining similar overhead activities. Companies
can do this when they widen their span of process. (Centralizing activities
makes it difficult to achieve the apparent overhead gains when internal span
of process is narrowed)
 The investment of hardware, controls, procedures, and other relevant,
infrastructure requirements.
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High Entry Barriers
 Industries where a wide span of process bring a set of distinct entry-
barrier advantages, increasing the internal span will raise the financial
and managerial resources required for a company to enter and
compete effectively with existing businesses.
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Supply Assurance
 The supply of critical materials may well be of such importance to a company
that this gain alone would be sufficient justification for the investment
involved.
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Secured Outlets
 Securing outlets can result from integrating forward. Additional advantages
also accrue with this move. Improved feedback leads to a position of being
more aware of demand changed and provides an opportunity to increase the
accuracy of forecasts.
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In my source I found…
 Suggestions regarding considerations that favor
making a part in-house.
 Factors that may influence a firm to buy a part
externally.
 The two most important factors to consider in a
make-or-buy decision.
 Cost considerations for the “buy” analysis.
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In the book World Class Supply Management the authors (David
Bury, Donald Dobler, Stephen Starling) stated a rule of thumb for
out-sourcing.
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It proposes that a firm should outsource all items that do not fit in one of
the following three categories:
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(1) The item is critical to the success of the product, including customer
perception of important product attributes.
 (2) The item requires specialized design and manufacturing skills or
equipment, and the number of capable and reliable suppliers is extremely
limited.
 (3) The item fits well within the firm's core competencies, or within those
the firm must develop to fulfill future plans. Items that fit under one of
these three categories are considered strategic in nature and should be
produced internally if at all possible.
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What are 2 factors that may influence firms
to buy a part externally?
Answer:
1. Lack of Expertise
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2. Limited production facilities or insufficient
capacity.
The Goal:
During Rogo’s Plant crisis, he was initially
faced with two bottlenecks, the NCX-10 & the
”Heat and Treat” machine.
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To help solve this problem some of the “Heat
and Treat” parts were outsourced to local
vendors to increase capacity
-Noted on Page 190
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The “Make” or “Buy” decision is a complex
process, which consists of preparation, data
collection, Data Analysis, and feedback.
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These process’s are governed buy different
technologies, costs, support systems, and
logistics.
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Globalization of world trade has changed the
way countries traditionally did business.
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Places which normally made there own
products turned to outsourcing them to save
costs
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High entry volumes, supplied assurance, and
secured markets are some of the strategic
considerations that business’s need to
consider prior to making the decision to
“make or buy”