EDUCATION 101: Supplier Sourcing

SOURCING POLICIES

sourcing1

MAKE OR BUY DECISIONS

Make or buy decisions compare the cost of producing a component or providing a service internally with cost of purchasing a component or service from an external supplier.

Three levels of make or buy have been identified which are linked to overall organization strategy.

STRATEGIC MAKE OR BUY

This is undertaken by top management levels and seeks to;

Determine the shape and capability of the organizations manufacturing operations by influencing

  1. What products to make
  2. What investments to make in machines and labor
  3. Ability to develop new products and processes
  4. Profitability, risk and flexibility

Provide the framework for short-term tactical and component decisions

TACTICAL MAKE OR BUY

The tactical decisions are undertaken by middle level managers and deals with the issue of temporary imbalance of manufacturing capacity. It considers the acquisition of additional machine, tools and other resources in order to manufacture internally what would otherwise been bought or the divestment of minor resources in order to source externally.

 

COMPONENT MAKE OR BUY

Here decisions are made ideally at the design stage and relate to whether a particular component of the product should be made in-house or brought in.

 

REASONS FOR MAKE OR BUY DECISION

Deterioration in suppliers quality performance.

Delivery failure or poor service by the existing source

Large price increase

Volume changes; much larger or smaller quantity requirements for item concerned

Pressure to reduce costs.

Desire to concentrate internal resources on areas of special competence.

Need for design secrecy

Import substitution.

Others;

To gain access to world class capabilities.

Reduction in staff management problems

Reduced capital requirements

To improve organizational focus

To increase flexibility

 

The supply market should be researched to discover changes, which may have occurred to evaluate comparative production costs and other factors relevant to the decisions.

FACTORS IN FAVOUR OF MAKING

Chances to use up idle capacity and resources

Potential lead time reduction.

Possibility of scrap utilization

Greater purchasing power with larger orders of a particular material

Minimized exchange rate risks

Cost of work is known in advance

Ability to manage resources

Commercial and contractual advantages

Maintaining secrecy

Worries over stability and continuing viability of suppliers are eliminated.

 

FACTORS IN FAVOUR OF BUYING

Quantities required too small for economic production

Avoidance of costs of specialist machinery or labor

Reduction in inventory

Spread of financial risk between supplier and purchaser

Ability to control quality when purchased from outside

Availability of vendors specialist expertise machinery and so on.

 

 

 

 

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