Make-or-Buy Decisions in Purchase Management

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 as outsourcing. Make-or-buy decisions usually arise when a firm that has developed a product or part–or significantly modified a product or part–is having trouble with current suppliers, or has diminishing capacity or changing demand.

Make-or-buy analysis is conducted at the strategic and operational level. Obviously, the strategic level is the more long-range of the two. Variables considered at the strategic level include analysis of the future, as well as the current environment. Issues like government regulation, competing firms, and market trends all have a strategic impact on the make-or-buy decision. Of course, firms should make items that reinforce or are in-line with their core competencies. These are areas in which the firm is strongest and which give the firm a competitive advantage.

Considerations that favor making a part in-house:-

  • Cost considerations (less expensive to make the part)
  • Desire to integrate plant operations
  • Productive use of excess plant capacity to help absorb fixed overhead (using existing idle capacity)
  • Need to exert direct control over production and/or quality
  • Better quality control
  • Design secrecy is required to protect proprietary technology
  • Unreliable suppliers
  • No competent suppliers
  • Desire to maintain a stable workforce (in periods of declining sales)
  • Quantity too small to interest a supplier
  • Control of lead time, transportation, and warehousing costs
  • Greater assurance of continual supply
  • Provision of a second source
  • Political, social or environmental reasons (union pressure)
  • Emotion (e.g., pride)

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 the item)
  • Small-volume requirements
  • Limited production facilities or insufficient 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

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