encountered BY an Organisation fecision refers tO ti should be purchased from outside pi duct OF serv) ‘every item which is currently purchase a . a ery iter? Manufacture and every item cup! ® jer aays a cared gidate fo" purchase. oe ag it ake or buy decisions are made on ine ae of Price, By The majority of the MARE Ta be evaluated in this ste i : The Muctuating demand for the company’s products. carrie 3. When the organisation carries out value analysis or cost reduction programs. 4. Deteriorating quality and delivery commitment of the supplier if presently & item is bought. 5. The scarcity of funds for investment in additional plant and equipment. 15.10 FACTORS INFLUENCING MAKE OR BUY DECISION 1. Volume of Production: The quantity or volume of pr buy decision fo the greater extent If the volume of production is high, it fav decision and low volume favours buy decisions. 7 ex con ee The cost analysis refers to the determination of costs to makean#= aswellas th cost tobuy i The cost make include—the material cost, direct labour aaa | tooling up costs, depreciation, administrative overheads, interest, insu tpeesand inventory carrying outs of raw materials and work-in-process. The cost! FO} i] is a so includes the appropri allowances, spoilage of work or scrap, and the risk ass" The st i i ae oe Sader an Sem peu include—purchase price of the item or compo a ance a c Bic procurement cost, carrying cost, recelvi®§ - eee alysis ofthese two costs helps take decision whe . Utilisation of Production Ca ¢ 4, Integration of Production § — he : stem: The vertical i i eta iy horizontal integration aa uy dee integration favours “1 wna billy of Manpower: Availabilty of sil — fo In whereas scarce manpower prefers illed and competent manpow® 6, Secrecy or Protection of Patent, Right Tia a sion 7. Fixed Cost: A lower fixed cost favors eee Hon Favs the make de buy decision. he decision to make and higher Industrial Ens problem 388 The make or buy 4 deciding whether @ Pro manufactu! outside suppli ‘manufactured in thy make or buy decisions: oduction affects the males ours the mie Scanned with CamSeannera Ur, \ bility of Competent Suppliers or Vendors. t : i {wail Some) *y iy SSpmty and Reliability of Vendors Sof \ FUNCTIONAL ASPECTS OF MAKE OR BUY DECISION W ic _ uy decision should be viewed with both fong-term and short-term perspectives 5 a ake or ome ofthe effects are tangible and other are intangible. he in in are classified as follows: SN Menara 7 Technological Aspects + Marketing Aspects \ 4, Purchasing Aspects ) «strategic Aspects «Intangible aspects | | 7 Financial Aspects: The make decision always demands an investment in plant, “ 1 Fit and equipment. The investments can be categorised into fixed cost and variable sxhispuy decision is associated with only variable cost. A thorough and comparative | = iocanted eat by expwensing ell factaca nso aionwy termne. Then the decteta ipso ionprogany jetkenbased on which one is more economical, to make or to buy. ict ifpreccy 2 Technological Aspects: The make or buy decision is influenced by “\ (j Theaccess to the latest technology to the organisation. Aipment {é) Feasibility and terms and conditions of technology transfer. {@ Outdating of technology. (e) Product life cycle. Pe ne 3. Marketing Aspects: The satieting aspects have the efuence on make or buy decision. 28 When there isa fierce competition, ® crganisation tries to enhance equality and cut down the costs. make decision assures the uty and reliability of the parts. Total cost to make Make decision Buy decision tide the situation of increasing BEP. 1." share and a good future Volumo—> Se yftential company can have Fig. 15.4 Sitional investment potential beg, “ts CN opt for make decision. When there is a doubt about the market potential, gai, 2"Y should opt for buy decision, The large organisations pay greater attention to “hich favours the make decision to maintain quality and reliability of items. 7chasing aspects: The decision is influenced by. iy Saou of items or components in sufficient quantities. (ig 4)" “livery commitments must be reliably met. fy 5° 2°cePtable quality and price level of the product. 6, -2™Y in transportation from the source to the organisation. ie [ ™petence and reliability of vendors. Scanned with CamSeannerjuction Management 390 A a ‘sion that is to be taken including make 5; Strategic aspects: Any decision TN call objective of the ongayetY & Should be taken with the considera! of the ¢ importance should be given to the ‘economy, secrecy and flexibility in taking = regarding make or buy. ; ; F ‘ ts like environmental facto 6. Intangible aspects: Intangible aspec' factors, lap acceptance, goodwill, support toancillarisationand growth of SSI units, technica, iy to vendors also influence the make or buy decision. ig 15.12 ECONOMIC AND NON-ECONOMIC FACTORS INFLUENCING MAKE oR Buy DECISIONS Decisions regarding whether to make or buy the components involve both econo non-economic factors. Economically, an item or component is a candidate for in ay production, if the company has sufficient capacity and if the components value see enough to cover the variable costs of production and make some contribution tora Maan ove volumes favour buying which incurs very little or no fixed costs Fig shows the relationship between cost factors. + The non-economic factors are: 1. Availability of infrastructure and skilled personnel 2. Desire for alternate sources of supply 3. Employee preferences and stability concerns 4. Need to maintain trade secrets 5. Desire to expand into new product line 6. Forward or backward integration 7, Long lasting and mutually rewarding relationships with venclors Problem 14: Demand for the component is at the rate of 6000 per year and this demi going to continue for next three years. The company has two options. It can get ‘the componet ‘manufactured from outside or it can manufacture in house. It costs the company & 2.8 per it buy the component. The in-house manufacture will incur a fixed cost tothe extent of 1000004 variable cost of & 1.5 per unit. Give the decision rule for make or buy. Solution: Let x represent the number of units. ‘The total cost incurred in buying the component is Total cost (Y) = 28x . Total cost incurred in making the component in-house Total cost (Y) = 10,000 +15 x a At BEP, both alternatives result in equal total cost At BEP, equation (1) = equation (2) 28x = 10,000+15x ‘The decision rules are: 1. If the quantity is 7693, both make and buy are equally economical (re54! costs) 2. Quantity less than 7693, it is economical to buy 3, Quantity more than 7693, itis economical to manufacture isin Scanned with CamSeannerProcess Planning 391 i [ jem 15: The ABC company is investigating the decison whether to make or buy a e maging ei is currently Being purchased al ® 7 ench. The demand estimates are shown ie { bow , a Demand (Units) [_ 20,0 30,000_[__ 40,000 _[__50,000_[_ 60,000 10 30 40 ee | Fehance 0%) ovson to manufacture in-house costs the company ay annual fixed cost of & 80,000 on and conditioning variable costs are estimated at 8 5 per unit. rig road 4 Giee your decision whether to make or buy. At what quantity it is profitable to produce rather ay. Pe ution The expected demand (or volume) is determined treating the percentage | | asa probability. | ee Demand (D) Probability (P)- D.P.(D) 20,000 0.10 2,000 30,000 0.30 9,000 40,000 0.40 16,000 50,000 0.15 7,500 60,000 ~ 0.05 3,000 Total 37,500 {The Expected Cost to Produce TC = Fixed cost + Variable cost x Quantity = 80,000 + 5 x 37,500 = 2,67,500 Expected cost to buy TC = 7 x 37,500 = 2,62,500 The decision is-economical to continue to buy. 9 Break-Even Point Brite mune of production where the total costs to make are equal to the total cos . Total cost to make = Total cost to buy 80,000 + 5x= 7x oe x= 40,000 pa cinomical to produce, if the quantity is > 40,000 units. ‘sey 16: An item which is required by the company can be manufactured on any of the '§ machines and also it can be purchased at a price or & 1.2 per coniponent: Machine | Fixed Cost (®) Variable Cost (8/LInit) M, 9,000 0.75 M, 3,500 0.50 Sy Ms, 92,000 0.05 ‘he best option i option if the requirement is 2,000 units and give the decision rules. Scanned with CamSeannerM, TCyyq = 3,500 + 0.50 x M, TC yyy = 92,000 + 0.05 x The relationship between cost and volume is established. The total alternatives are determined at various quantities (volume). The cost are tabulated below “h Costs for ay he ia Alternative Buy Machine Volume (x) (TCB) TCM, TCM, Loa 10,000 12,000 16,500 40,000 Tag | 20,000 24000 | 24,000 45,000 30m) 50,000 60,000 46,500 60,000 94nn9 | 60,000 72,000 53,000 65,000 a0 | 80,000 96,000 69,000 75,000 5600 | 1,00,000 1,20,000 84,000 85,000 97,000 1,10,000 1,32,000 91,000 90,000 97,000 | 1,20,000 144,000 99,000 95,000 98000 1,30,000 1,56,000 1,06,500 1,00,000 98.500 1,50,000 1,80,000 1,21,000 1,10,000 9950 | Plot the cost Vs quantity on a graph 2,00,000 80,000 ~ 0,000 —7,00,0001,20,000 Cost —_,. Scanned with CamSeanner