MAKE / BUY ANALYSIS Dr.
Khalid Ahmad Khan
MODULE 4
MAKE/BUY DEFINITION
“Make-or-Buy decisions compare the cost of
producing a component or providing the service
internally with the cost of purchasing the
component or service from an external supplier”
Tactical – deals with Strategic – affects the
issues of temporary shape & capabilities
imbalances of of the organisation
capacity
BASIC MAKE-BUY ANALYSIS
A comparison of cost of making
ourselves versus buying
• What volume do we expect to require
• What quantities involved interest an
outside supplier
• What will be our peak demand
• What capital investment is required to
make the goods
BASIC MAKE-BUY ANALYSIS
A comparison of cost of making ourselves
versus buying
• How much risk is associated with the choice
• Is the activity/function part of our core competence
• To what extent does the process have an impact on
other products or services
• What is the expected life?
• Are we satisfied that the current supplier is the most
economical source
TACTICAL MAKE/BUY DECISIONS
Reasons: Considerations:
• Deterioration in an existing • Medium term decisions
suppliers performance • Competitive strategy
• Delivery failure or poor service • Capitalizing on market
by existing source opportunities
• Large price increases • New products/services
• Volume changes much larger or • The true cost of alternative
smaller quantity requirements for supplier at present and in future
the item concerned
STRATEGIC MAKE/BUY DECISIONS
Reasons: Considerations:
• Pressure to reduce costs • Long term decision making
• Desire to concentrate internal • Overall purpose and scope
resources on areas of special • Adding value to shareholder
competence investment
• The need for design secrecy • Portfolio issues
• Opportunity to use resources • Corporate strategy
involved in the current activity in
alternative work
OUTSOURCING OR SUB-
CONTRACTING
“ if you want the most beautiful lawn in the
neighbourhood and you hire someone to
take care of every aspect of lawn care,
including cutting the grass, weed control,
watering and fertilising it’s strategic
sourcing. But hiring someone to only cut the
lawn is subcontracting.”
OUTSOURCING
Activity/Functions is
transferred to an external
party on a long-term
basis. Types of
Outsourcing:
Body shop outsourcing – a
means of meeting short Project outsourcing – for Total outsourcing –
term requirement, all parts of a particular supplier given full
shortage of in-house skills project, new IT project, responsibility for selected
to meet temporary training requirement function, catering, security
demand.
WHEN TO USE OUTSOURCING?
Functions most easily outsourced:
Resource intensive activities – high labour/ capital
costs
Relatively discrete areas of the organisation,
specialist areas
Areas characterised by fluctuating work patterns in
loading and throughput
Subject to dynamic market conditions for which it is
costly to recruit & retain staff
Subject to rapid changes in technology with high
investment
WHEN NOT TO USE OUTSOURCING
Functions that should not be outsourced
Management of strategic planning
Management finances
Control of suppliers
Quality & environmental management
Supervision of regulatory requirements, product
liability, environmental regulations, staff health &
safety, public safety product & services safety
Long term use of Outsource can lead
to:
Dependence on suppliers
Reduction in flexibility
Quality of service issues
High staff turnover
Complacency over time
Lack of commitment to client or
industry
Lack of control over larger suppliers
PROBLEMS WITH OUTSOURCING
SUB-CONTRACTING
Where the buyer
organisation is the main
contractor, some work
can be sub-contracted.
Type of sub-contracts:
Turnkey components of Supply of services or Specialized works
a larger project materials
WHEN TO USE SUB-CONTRACTING
Typical scenarios when sub-contracting
can be used:
Over loading of machinery or labour
Meeting time deadline
Lack of specialist machinery or knowledge
Wishing to avoid acquiring long-term capacity
when future demand uncertain
Cheaper to subcontract than manufacture
internally
WHEN NOT TO USE A SUB-CONTRACTOR
Scenarios when using a sub-contractor is
not advisable:
When the function is one of the buyer
company’s specialisations
When the there is little market experience in the
required field
When sub-contractor failure has a
disproportionate effect on the final product
When a sub-contractor has the potential to
become a competitor
PROBLEMS IN SUB-CONTRACTOR
Problems when using sub-contractors
Their quality systems are inadequate
They don’t follow our standards
They are not reliable at meeting targets
They have inadequate financial resources
They have too many order on their books
They further subcontract the work (additional
risk)
OUTSOURCING VS. SUB-CONTRACTING
Outsourcing
• Use of resource from external organizations to handle
activities typically performed internally
• Corporate restructuring is involved as organization focuses on
core competencies
• Driven by efficiency considerations
Sub-contracting
• Tactical use of resources from external organizations to
handle activities that are either not handled internally or are
in short supply internally
• Driven by cost and availability considerations
Q&A Dr. Khalid Ahmad Khan
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