Class #11 - Chapter 5

Make or Buy,
Insourcing,
and
Outsourcing
Part 1

McGraw-Hill/Irwin

Copyright 2011 by The McGraw-Hill Companies, Inc., All Rights

Reserved.

5-2

Reasons to Make Instead of Buy

Quality requirements are exacting / special processing needed

Greater assurance of supply
Preserve technological secrets
Lower cost
To take advantage of unused capacity/avoid having idle equipment
Maintain control of a core competency
Avoid single-source dependency
Reduce extended supply chain risk
A significant customer requires it
Distance from the closest available supplier is excessive
Future market potential for the product or service is expanding rapidly
Forecasts of future shortages in the market or rising prices
Quantities are too small and/or no supplier is interested

5-3

Reasons to Buy Instead of Make

Lack of managerial or technical production experience

Lack of production capacity
Customer preference for a particular brand
Challenges of maintaining technological leadership for non-core activity
Lower cost
Enables greater operational flexibility and resource utilization
There are more options in potential sources and substitute items
Insufficient volume to justify in-house production
Forecasts show great demand and/or technological uncertainty
Availability of a highly capable supplier nearby
May open up markets for firms products and services
Bring a product or service to market faster
Superior supply management expertise

5-4

Risks of Outsourcing

Loss of control in your supply chain

Exposure to supplier risks such as: financial, loss of supplier
commitment, response time, quality, poor service, cultural issues
Unexpected/unanticipated costs
Difficulty quantifying economics, conversion costs
Supply availability constraints
More attention required by senior management
Possibility of being tied to obsolete technology
Concerns with long-term flexibility and meeting changing
requirements
Reduced employee morale / union opposition

5-5

The Outsourcing Decision

Is the activity strategic?
No
Is the activity critical to the
business but not strategic?

Yes

Keep the function

in-house

Yes

Keep the function

in-house

Yes

Keep the function

in-house

Yes

Keep the function

in-house

No
Create a RFP.
Gather supplier bids/proposals.
No
Is the suppliers bid/proposal more
desirable than the internal option?

No
Could the internal option achieve
similar results?

No
Negotiate a contract to ensure
that expectations are realized

5-6

Purchasings Role in Outsourcing

Providing a comprehensive, competitive process

Identifying opportunities for outsourcing
Aiding in selection of supplier sources
Identifying potential relationship issues
Developing and negotiating contracts
Ongoing monitoring and management of the supplier
relationship (SRM)

Source: Lisa Ellram and Arnold Maltz, Outsourcing: Implications for Supply Management, Tempe, AZ:
Center for Advanced Purchasing Studies, 1997.

5-7

Assignment for Next Class:

Alicia Wong
Case 53

p.133

Discussion Questions:
1) What is your financial analysis for the make or buy
decision for mustard? (perform all calculations on a
per liter basis)
2) What benefits would accrue to TFL from making
mustard in-house?
3) What risks would there be for TFL?
4) Are there other alternatives to consider?
5) What should Alicia emphasize to the CEO?