make buy decision

8/7/2019 make buy decision

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WHAT GUIDES THE MAKEOR BUY DECISIONS OF A

BUSINESS



The make-or-buy decision is the act

of making a strategic choice between

producing an item internally (in-

house) or buying it externally (from

an outside supplier). The buy side of

the decision also is referred to asoutsourcing.



Make-or-buy analysis is conducted at

the strategic and operational level.

Strategic level is the long-range of

the two.

Variables considered at the strategic

level include analysis of the future, as

well as the current environment.



A firm can outsource all items that donot fit one of the following threecategories:1. the item is critical to the success of the

product, including customer perception of important product attributes,

2. the item requires specialized design andmanufacturing skills or equipment, and thenumber of capable and reliable suppliers is

extremely limited,3. the item fits well within the firm's core

competencies, or within those the firm mustdevelop to fulfill future plans.



Items that fit under one of these threecategories are considered strategic innature and should be producedinternally if at all possible.

Firms should make items thatreinforce or are in-line with their corecompetencies. These are areas inwhich the firm is strongest and whichgive the firm a competitiveadvantage.



Make-or-buy decisions also occur atthe operational level. The followingconsiderations are consideredfavorable for making a part in-house:

± Cost considerations, ± Desire to integrate plant operations, ± Productive use of excess plant capacity to help

absorb fixed overhead,

± Need to exert direct control over productionand/or quality, ± Better quality control, ± Design secrecy is required to protect

proprietary technology,



± Unreliable suppliers,

± No competent suppliers,

± Quantity too small to interest a supplier,

± Greater assurance of continual supply,

± Political, social or environmental reasons,

± Emotion.



Factors that may influence firms to buy a

part externally include: ± Lack of expertise, ± Suppliers' research and specialized know-how

exceeds that of the buyer,

± cost considerations (less expensive to buy), ± Small-volume requirements, ± Limited production capacity, ± Desire to maintain a multiple-source policy,

± Indirect managerial control considerations, ± Procurement and inventory considerations, ± Brand preference, ± Item not essential to the firm's strategy.



The two most important factors to

consider in a make-or-buy decision

are

± Cost, and

± The availability of production capacity.

Cost considerations should includeall relevant costs and be long-term in

nature.



The buying firm will compare production

and purchase costs. Elements of the"make" analysis include: ± Incremental inventory-carrying costs ± Direct labor costs ± Incremental factory overhead costs ± Delivered purchased material costs ± Incremental managerial costs ± Any follow-on costs stemming from quality and

related problems ± Incremental purchasing costs ± Incremental capital costs



Cost considerations for the "buy"analysis include: ± Purchase price of the part ± Transportation costs

± Receiving and inspection costs ± Incremental purchasing costs ± Any follow-on costs related to quality or

service



Essex manufactures part 4 A that isused in one of its products.The unit product cost of this part is:

irect materia s $ 9irect a or 5aria e o erheadepreciation of specia e uip.upe r isor s sa a r enera factor o erhead 0

Unit product cost 0$



The special equipment used to

manufacture part 4 A has no resale value.The total amount of general factoryoverhead, which is allocated on the basisof direct labor hours, would be unaffectedby this decision.The 3 unit product cost is based on2 , parts produced each year.An outside supplier has offered to provide

the 2 , parts at a cost of 2 per part.Should Essex accept the supplier¶sShould Essex accept the supplier¶soffer?offer?



Should Essex make or buy part 4 A?Should Essex make or buy part 4 A?Answer:Answer: Make!Make!



Thank You

make buy decision

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