Week 7 Short-term decision making

Santiago Domínguez Castillo

Cost and budgets – BUS235 – UNAD FLORIDA

Professor Alicia Silva

August 2021
Development

A make vs. buy cost analysis involves comparing all of the costs associated with fulfilling a
supply need (making) a good or service in-house against the cost of fulfilling a supply need
(buying) a good or service from an outside supply partner. The common factors that
companies consider in a make versus buy decision include proprietary knowledge, capabilities,
quality, capacity, labor, volume, timing, and cost. Make versus buy analysis should be carefully
analyzed at the strategic and operational level of an organization.

At the strategic level, the decision to make or buy a component directly impacts organizational
profit, and the firm’s reputation in their industry. In a strategic level analysis, an organization’s
leadership should weigh different variables pertaining to the company’s desired business
model, competitive environment, governmental regulations, and market trends. At the
operational level, the decision to make or buy a component directly impacts operational
efficiency, income, and expenses. In an operational level analysis, an organization should
weigh out costs considerations, quality control, lead time, transportation, volume, union
contracts, and assurance of supply. A strategic make or buy decision will utilize the variables
affected at the strategic level and operational level which will lead to a long term sustainable
competitive advantage.

When a product is critical to a company’s performance, the use of in-house capabilities to

make the product is often a desirable choice. Tight control over the manufacturing process of
time sensitive components with frequent design changes are essential to the quality and
consistent availability of the product. When a company does not view a product or
manufacturing process as a strategic advantage to the business, it is often best to buy the
product or manufacturing process from an outside supply partner.

Companies that partner with leading supply partners for non-core goods and services will
attain an assortment of advantages such as: reducing unit costs, gaining flexibility to changes
in demand, eliminating expenses of capital equipment, attaining access to innovative and
alternative process technologies, and de-risking themselves from environmental and
governmental regulations. Outsourcing clearly brings strategic and operational benefits to non-
core business process when the right strategic partner is chosen. We find the most successful
high growth technology companies have developed the ability to strike the optimal balance
between vertical and horizontal process integration which allows them to be world-class in all
aspects of their business operations whether they make or buy their goods or services.
Reference list

• Three pillars of sound decision making:

https://www.strategyand.pwc.com/media/file/Strategyand_Make-or-buy-sound-decision-
making.pdf

• Make or buy:
https://www.cleverism.com/make-or-buy-decision-step-by-step-guide/

• Decision Making using Cost Concepts and CVP Analysis:

http://www.icaiknowledgegateway.org/littledms/folder1/chapter-2-decision-making-
using-cost-concepts-and-cvp-analysis-pm.pdf