PROJECT

Facilitator : Ahmed Aslam, PMP, MPM, ACCA

COURSE OUTLINE
 Week 01 – Introduction
 Week 02 – Procurement in project life cycle
 Week 03 – Assignment, Make or buy analysis
o Week 04 – Buyer & Seller relationships
o Week 05 – Purchasing process
o Week 06 – Quiz, Procurement documents
o Week 07 – Supplier positioning and sourcing strategy
o Week 08 - Mid-term Examination
o Week 09 – Seller pre-qualifications, evaluation & bidding
o Week 10 - Commercial contract management
o Week 11 - Assignment, Bids opening and evaluation
o Week 12 - Conflict & Dispute resolution
o Week 13 - Formal acceptance of deliverables
o Week 14 – Quiz, Procurement involving international suppliers
o Week 15 – Project Presentation
o Week 16 - Final Examination
What is Make or Buy?
The act of choosing between manufacturing a product in-house or purchasing it
from an external supplier.
Reasons to make (instead of buy)

• The quantity is too small or requirements may be unusual

• Preserve confidentiality and avoids dependency

• Lower cost and facilitates fluctuations in demand

• Future shortage in the market or increase in price

• Management strategy like vertical integration and control

Reasons to Buy

• Cheaper to buy than make

• Lack managerial or technical expertise

• Lacks production capacity

• The challenges of maintaining a noncore activity

• Insufficient volume to justify in-house production

• Future technological uncertainty

• The organization desires to stay lean and agile

Make costs

• Delivered purchased material costs

• Direct labor costs

• Incremental inventory carrying costs

• Incremental factory overhead costs

• Incremental managerial costs

• Incremental purchasing costs

• Incremental costs of capital

Buy costs

• Purchase price of the part

• Transportation costs

• Receiving and inspection costs

• Incremental and inspection costs

• Any follow-on costs related to quality or service

Make or Buy Decisions
• Incremental costs also are important in the decision to make a product or
buy it from a supplier.
• The cost to produce an item must include
(1) direct materials
(2) direct labor and
(3) incremental overhead

Exitel makes computer chips used in

one of its products. Unit costs, based on
production of 20,000 chips per year, are:

Unit Costs
Direct Material $ 9.00
Direct La bor 5.00
Variable Overhe ad 1.00
Fixed Overhe ad 13.00
Total $ 28.00
Make or Buy Decisions

An outside supplier has offered to provide the

20,000 chips at a cost of $25 per chip.
Exitel has no alternative use for the facilities.
Should Exitel accept the offer?
Make or Buy Decisions
Differential costs of making (costs avoided if bought from outside supplier)

Unit Cost
Direct Material $ 9.00
Direct Labor 5.00
Variable Overhead 1.00
Total $ 15.00

Exitel should not pay $25 per unit to an outside supplier

to avoid the $15 per unit differential cost of making the
part. Fixed costs are irrelevant to decision.
Make or Buy Analysis
Step 1: Perform the
quantitative analysis by
comparing the costs incurred in
each option.
Step 4: Factor the qualitative
factors into the quantitative
analysis in order to complete it.
Step 5: Come to a final make-
or-buy decision
Step 2: Consider qualitative factors that
can influence the decision to produce
the products.
• Experience of the business' production
department
• The quality of its management.
Step 3: Consider qualitative factors
that can influence the decision to
purchase the products from
outside suppliers.
• Suppliers' trustworthiness,
• The quality of its management,
• The quality of its products.
Insourcing and Outsourcing

• Insourcing - Reversing a previous ‘buy’ decision

• Outsourcing - Reversing a previous ‘make’ decision

Reasons to insource/outsource
• New technology may permit processes previously considered impossible.

• New suppliers may have entered the market or old suppliers may have left.

• New trade-offs between raw material / components

• Change in volumes, prices, capabilities, specifications, suppliers, capacities,

regulations, competitors, technology, and managers
Insourcing

• Deals with past buy decisions that are reversed.

• Obvious reason is when an existing source of supply goes out of business

• Drops a product or service line and no other supplier is available

• A sudden massive increase in price,

• Purchase of a sole source by a competitor,

• Political events and regulatory changes,

• Lack of supply of a key raw material or component required

• Development of a unique process for a product or service

Outsourcing

• Buy something that was being made inhouse previously.

• Focus on value-added activities and core competencies
• Urge to downsize, “right size,”
• The growth in outsourcing in the logistics area is attributed to
• Transportation deregulation,
• Focus on core competencies,
• Reductions in inventories, and
• Enhanced logistics
• “What happens to the employees and space and equipment previously
dedicated to this product or service now outsourced?”
Subcontracting
• Common in military and construction procurement, subcontracts can exist
only when there are prime contractors who bid out part of the work to
other contractors

• The use of a subcontract is appropriate when placing orders for work that
is difficult to define, will take a long period of time, and will be extremely
costly.
• Aerospace companies subcontract many of the larger structural components and
avionics.
• A building contractor might subcontract the electrical or plumbing work.

• Managing the subcontract is a complex activity that requires :

• Knowledge about performance to date
• Ability to anticipate actions needed to ensure the desired end results.