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
- What products to make
- What investments to make in machines and labor
- Ability to develop new products and processes
- 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
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
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.