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TOPIC

:

By

NITHIN. P. DUGAR

07-BU-034

CONTENT:
1. Meaning of Make or buy decision
2. Decisive Thought On Make or Buy Decision
3. Benefits of Make and Buy Decision
4. Make or Buy Decision Process
5. How to Choose the Decision?
6. Modern Trends.

INTRODUCTION:
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 Issues like government regulation, competing firms, and market trends all have a
strategic impact on the make-or-buy decision. It prescribes that a firm outsource all items that do
not fit one of the following three categories:

(1) the item is critical to the success of the product, including customer perception of
important product attributes; (2) the item requires specialized design and manufacturing skills or
equipment, and the number of capable and reliable suppliers is extremely limited; and (3) the
item fits well within the firm's core competencies, or within those the firm must develop to
fulfill future plans. Items that fit less than one of these three categories are considered strategic
in nature and should be produced internally if at all possible.

The Make Strategy:
Employ the Make Strategy if you assume that business conditions are stable enough to ensure that
your leadership career ladders will be relatively stable over the next few years, and that the
development experiences you are offering to managers will be applicable to tomorrow's business
changes. This decision also assumes that your current internal pool of leadership talent is
sufficiently broad and strong.

The Buy Strategy:
The Buy Strategy is often employed whenever an organization seeks to jump-start its performance,
such as in the case of attempting a quick financial turnaround, or making a leap into a new market.
To be successful, these types of corporate mutations may require the whole-scale importing of
leaders who are either much stronger than current incumbents, or who bring with them very
different backgrounds and skill sets.

DECISIVE THOUGHT ON MAKE OR BUY DECISION FACTORS
MAKE DECISION FACTORS

• 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

BUYING DECISION FACTOR

• 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

ADVANTAGES OF MAKE DECISON
It supports organizational continuity by allowing junior-level managers to learn the
business from more senior-level executives. It involves the nature of managerial on-the-job
learning. At the same time, tacit knowledge has been shown to play a vital role in what has been
termed "practical intelligence," the ability to make effective decisions in real-life situations that
require anticipating emerging problems, working with problems that are "fuzzy" and balancing
trade-offs among alternative solutions.

ADVANTAGES OF BUY DECISON

The strongest advantage associated with this strategy is that it allows you to undertake the
rapid replacement of personnel, particularly when you need to fill senior-level leadership
positions and your internal development efforts have just taken root. One final advantage of the
Buy Strategy is that it can help you build your internal bench strength while simultaneously
hamstringing your competitors.

MAKE OR BUY DECISION PROCESS

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.

DRAWBACKS OF MAKE DECISION

A strategy's weaknesses are often a mirror-reflection of its strengths, and the Make
Strategy is no exception. First, if you are just launching your internal development, assessment
and succession efforts, be willing to accept the fact that that you are in for a multiyear
commitment that will take a few years to begin to show returns. This is particularly likely to be
the case when you are identifying and developing midlevel managers to take on executive
positions in your company.

Your CEO must be willing to keep internal development and selection at the top of the
corporate agenda for several years. When a company turns its development efforts off and on
again to accommodate each fluctuation in its profit picture, the Make Strategy loses much of its
credibility and effectiveness.

Another drawback that you need to consider is that, over time, companies that become
heavily reliant on the Make Strategy can fall into the trap of becoming excessively insular.
When this happens, they tend to gauge the strength of their leadership talent solely by historical
standards.

DRAWBACKS OF BUY DECISION
Unfortunately, the Buy Strategy can prove incredibly costly, since the current market
value for top-notch leaders may be quite high when compared to the compensation currently
being paid to those incumbents who have slowly worked their way up the internal salary
escalator.

The Buy Strategy can also prove to be very disruptive to an organization if it takes the
form of the rapid, large-scale importing of outside talent. If you find yourself in this scenario,
you will need to create a transition plan that can help you keep your organizational units in
motion during the six- to twelve-month period in which acquisition and on-boarding is
underway.

Still another drawback associated with the use of the Buy Strategy is that, when
compared with the Make Strategy, it typically requires organizations to accept a higher level of
risk for their leadership staffing decisions. The reason for this is that rather than promoting
leaders who have been repeatedly tested against tough business challenges, under this strategy
you are hiring managers who are relatively unknown to your organization.

WHICH ONE TO CHOOSE MAKE OR BUY?

No amount of observation of prevailing practice in different industries will reveal
whether high or low vertical integration creates competitive advantage. Neither wills look at
whether successful companies tend to be less or more vertically integrated. In Germany,
successful component manufacturers consistently do more in-house production than less
successful ones, while in machinery manufacturing, some of the successful companies had high
vertical integration and some low.

Clearly, every company must find its own optimum level of Integration. Vertical
integration should be used as a means to reinforce existing effectiveness in technology or
operations. Thus, if a company is technologically or operationally superior to its competitors and
suppliers, a high level of vertical Integration will give it a competitive advantage. If it is weaker,
on the other hand, the same level of integration will be a disadvantage.

Component manufacturers rarely achieve strategic differentiation with a superior product
concept; their strengths are more likely to lie in operational excellence, larger economies of
scale, a superior process, and first-rate logistics. As a result, the best among them tend to have
higher levels of integration than do the less successful.

Machinery companies, on the other hand, are able to achieve adequate differentiation
with a superior system architecture or design, and have no real need for particular operational
strengths. To some extent, they can compensate for operational weaknesses by outsourcing.
What distinguishes excellent machinery manufacturers is that they are a better judge of their
competitive position than poorer performers. They aim for high vertical integration when they
are strong in operations, but outsource other value-added stages when their superiority lies more
in the machine concept or design.

It is open to question how long this latter strategy will remain sustainable. Today many
machines become commodities as their life cycles advance, making differentiation possible only
through low costs derived from operational efficiency. By this point, at the latest, a manufacturer
must be in a position to exploit economies of scale and raise its competitive profile by means of
superior operational management.

MODERN TREND

There is a tendency on the part of many manufacturing companies, especially the
engineering units to prefer to BUY rather than make. They are:

1. The component or part manufacture could be a specialist in that particular product.
He may produce in large number and will be able to make the product at much lower price than
if one had in-house production unit as it would generally be running far below capacity.
2. Being a specialist, he may generally have the tendency to update his technology.
Investments in latest technology would also be possible for him in view of the good returns of
investments.
3. If most of the items are to be made in-house, there will be problems of inadequate
managerial attention. This would affect quality assurance.
4. Ancillary units are set up by the main company, sometimes as joint sector
companies, quite often the main plant.
5. Excellent inventory reduction is possible as an organization can buy its exact
requirements, just in time can be practiced.

-THANK YOU -