Outsourcing and Other Make-or-Buy Decisions

For example, what if Sunset outsources its airplane maintenance? While this may be a
moneysaving move from a quantitative perspective, the qualitative issues cannot be ignored. Is
the quality of work the same as Sunset’s internal work? What are the risks associated with
outsourcing maintenance if poor-quality work results in an airplane accident? How will
outsourcing maintenance impact other employees of the airline, including ticket agents and
ground service personnel? Issues of motivation and fears of job loss may lead to quality problems,
operational slowdowns, employee strikes, and a loss of outstanding employees to competitors.
The value chain of an organization is simply the set of activities that increase the value of an
organization’s products and services. Vertical integration is accomplished when a company is
involved in multiple steps of the value chain, extending from R&D to Customer Service. In an
extreme example, the same company might own a gold mine, a manufacturing facility to produce
gold jewelry, and a retail jewelry store.
Let’s look at a make-or-buy example. Assume that Birdie Maker wants to purchase 1,000 putters
for its custom golf club sets from Ace Putters. Birdie currently makes the putters (costs shown in
this picture).
Opportunity costs should also be considered in make-or-buy decisions. In our third scenario,
assume that Birdie could rent out the factory space that is now used to manufacture putters for
P500,000. Based on this analysis, the outsourcing would save P100 per unit.