The Make or Buy decision

In order to verify whether our company is going to make or buy, we have considered several
matters:

There are number of reasons should be considered when it comes to in-house making:

• Cost concerns
• Desire to expand the manufacturing focus
• Need of direct control over the product
• Intellectual property concerns
• Quality control concerns
• Supplier unreliability
• Lack of competent suppliers
• Volume too small to get a supplier attracted
• Reduction of logistic costs (shipping etc.)
• To maintain a backup source
• Political and environment reasons
• Organizational pride

Following are reasons that EZ Tech should buy from the supplier:

• Lack of technical experience

• Supplier's expertise on the technical areas and the domain
• Cost considerations
• Need of small volume
• Insufficient capacity to produce in house
• Brand preferences
• Strategic partnerships
In many instances make-or-buy decisions are more strategic and can affect a company’s
competitive position. To determine whether a product should be purchased or produced,
managers consider
• the role of the process technology in providing a competitive advantage for the firm
• the maturity of the process technology
• competitors’ technology position

The Make-or-Buy Framework

The framework depicted in Figure 1 provides a graphical representation of why operational

make-or-buy decisions are made and shows relevant dimensions to be studied in approaching
such decisions. In contrast with existing frameworks, this provides a holistic view of make-
or-buy and captures relevant factors in a structured manner. Additionally, it takes a first step
towards providing performance measures for the assessment of the business benefits
delivered by individual make-or-buy decisions.

The external environment, on which the company has little or no influence, usually activates
triggers for the make-or-buy analysis. For instance, increased price competition in the market
place usually forces companies to reduce costs. The triggers are the reason(s) for undertaking
the make-or-buy review and can be easily identified by asking why the decision is being
made. In this example, the cost reduction trigger raises the make-or-buy question. The
framework clusters factors relevant to make-or-buy into four areas: technology and
manufacturing processes; cost; supply chain management and logistics; and support systems.
The performance measures are closely linked to the triggers. They aim at providing some
criteria to evaluate the extent to which the targets suggested by the triggers are achieved. For
instance, if the trigger is cost reduction, cost saving should be the key performance measure.
However, other measures such as flexibility and quality should not be neglected. Finally, the
arrows coming out from the performance measures to the external environment show that
make-or-buy is not a static issue. The performance measures for these decisions feed back
into the external environment and possibly activate other triggers that raise again the make-
or-buy question.
The Make-or-Buy Process
The preparations phase, which entails creating a multi-disciplinary team, selecting the part,
assembly or family of parts for analysis and briefing the team.

In the stage of data collection, three workshops are organized in order to collect the
information required to carry out the analysis. Workshop 1 consists of prioritizing the make-
or-buy areas and factors. Using the rankings, weightings are generated using the centered
method. The weightings generated should reflect the relative importance of each area and its
sub-factors to the decision under consideration. Workshop 2 is concerned with the assessment
of internal and external capabilities using a set of proformas, which cover the four relevant
areas. These proformas use a five-point scale for the assessment. Workshop 3 consists of
capturing the costs incurred in both producing internally and externally. These costs are then
compared and rated on a five-point scale.

Data analysis using a spreadsheet which provides the following:

• Final scores for in-house and for the supplier. The highest score indicates the best
option.
• Weighted gaps for each factor area, highlighting the strengths and weaknesses of this
option.
• A sensitivity analysis which tests the robustness of the final outcome.

Final stage is obtaining feedback.

Make or buy decision is one of the key techniques for management practice. Due to the
global outsourcing, make or buy decision making has become popular and frequent.

Since the manufacturing and services industries have been diversified across the globe, there
are a number of suppliers offering products and services for a fraction of the original price.
This has enhanced the global product and service markets by giving the consumer the
eventual advantage.
So, in order to reduce the cost of our company, EZ Tech has decided to outsourcing, which
means, we want to buy instead of making. When such a process is followed, the activities are
transparent and the decisions are made for the best interest of the company.