MAKI-OR-BLY ICISIONS

TIe muke-or-buy decIsIon Is LIe ucL oI mukIng u sLruLegIc cIoIce beLween producIng un ILem InLernuIIy (In-Iouse) or buyIng IL exLernuIIy
(Irom un ouLsIde suppIIer). TIe buy sIde oI LIe decIsIon uIso Is reIerred Lo us ouLsourcIng. Muke-or-buy decIsIons usuuIIy urIse wIen u
IIrm LIuL Ius deveIoped u producL or purL-or sIgnIIIcunLIy modIIIed u producL or purL-Is IuvIng LroubIe wILI currenL suppIIers, or Ius
dImInIsIIng cupucILy or cIungIng demund.
Muke-or-buy unuIysIs Is conducLed uL LIe sLruLegIc und operuLIonuI IeveI. ObvIousIy, LIe sLruLegIc IeveI Is LIe more Iong-runge oI LIe Lwo.
VurIubIes consIdered uL LIe sLruLegIc IeveI IncIude unuIysIs oI LIe IuLure, us weII us LIe currenL envIronmenL. ssues IIke governmenL
reguIuLIon, compeLIng IIrms, und murkeL Lrends uII Iuve u sLruLegIc ImpucL on LIe muke-or-buy decIsIon. OI course, IIrms sIouId muke
ILems LIuL reInIorce or ure In-IIne wILI LIeIr core compeLencIes. TIese ure ureus In wIIcI LIe IIrm Is sLrongesL und wIIcI gIve LIe IIrm u
compeLILIve udvunLuge.
TIe Increused exIsLence oI IIrms LIuL uLIIIze LIe concepL oI Ieun munuIucLurIng Ius prompLed un Increuse In ouLsourcIng. MunuIucLurers
ure LendIng Lo purcIuse subussembIIes ruLIer LIun pIece purLs, und ure ouLsourcIng ucLIvILIes rungIng Irom IogIsLIcs Lo udmInIsLruLIve
servIces. n LIeIr zoo book World Clcss Suppl Mcncement, uvId BurL, onuId obIer, und SLepIen SLurIIng presenL u ruIe oI
LIumb Ior ouL-sourcIng. L prescrIbes LIuL u IIrm ouLsource uII ILems LIuL do noL IIL one oI LIe IoIIowIng LIree cuLegorIes: (1) LIe ILem Is
crILIcuI Lo LIe success oI LIe producL, IncIudIng cusLomer percepLIon oI ImporLunL producL uLLrIbuLes; (z) LIe ILem requIres specIuIIzed
desIgn und munuIucLurIng skIIIs or equIpmenL, und LIe number oI cupubIe und reIIubIe suppIIers Is exLremeIy IImILed; und () LIe ILem
IILs weII wILIIn LIe IIrm's core compeLencIes, or wILIIn LIose LIe IIrm musL deveIop Lo IuIIIII IuLure pIuns. Lems LIuL IIL under one oI
LIese LIree cuLegorIes ure consIdered sLruLegIc In nuLure und sIouId be produced InLernuIIy II uL uII possIbIe.
Muke-or-buy decIsIons uIso occur uL LIe operuLIonuI IeveI. AnuIysIs In sepuruLe LexLs by BurL, obIer, und SLurIIng, us weII us JoeI WIsner,
G. Keong eong, und KeuI-CIoon Tun, suggesL LIese consIderuLIons LIuL Iuvor mukIng u purL In-Iouse:
O CosL consIderuLIons (Iess expensIve Lo muke LIe purL)
O esIre Lo InLegruLe pIunL operuLIons
O !roducLIve use oI excess pIunL cupucILy Lo IeIp ubsorb IIxed overIeud (usIng exIsLIng IdIe cupucILy)
O eed Lo exerL dIrecL conLroI over producLIon undJor quuIILy
O BeLLer quuIILy conLroI
O esIgn secrecy Is requIred Lo proLecL proprIeLury LecInoIogy
O &nreIIubIe suppIIers
O o compeLenL suppIIers
O esIre Lo muInLuIn u sLubIe workIorce (In perIods oI decIInIng suIes)
O "uunLILy Loo smuII Lo InLeresL u suppIIer
O ConLroI oI Ieud LIme, LrunsporLuLIon, und wureIousIng cosLs
O GreuLer ussurunce oI conLInuuI suppIy
O !rovIsIon oI u second source
O !oIILIcuI, socIuI or envIronmenLuI reusons (unIon pressure)
O moLIon (e.g., prIde)
ucLors LIuL muy InIIuence IIrms Lo buy u purL exLernuIIy IncIude:
O uck oI experLIse
O SuppIIers' reseurcI und specIuIIzed know-Iow exceeds LIuL oI LIe buyer
O cosL consIderuLIons (Iess expensIve Lo buy LIe ILem)
O SmuII-voIume requIremenLs
O ImILed producLIon IucIIILIes or InsuIIIcIenL cupucILy
O esIre Lo muInLuIn u muILIpIe-source poIIcy
O ndIrecL munugerIuI conLroI consIderuLIons
O !rocuremenL und InvenLory consIderuLIons
O Brund preIerence
O Lem noL essenLIuI Lo LIe IIrm's sLruLegy
TIe Lwo mosL ImporLunL IucLors Lo consIder In u muke-or-buy decIsIon ure cosL und LIe uvuIIubIIILy oI producLIon cupucILy. BurL, obIer,
und SLurIIng wurn LIuL "no oLIer IucLor Is subjecL Lo more vurIed InLerpreLuLIon und Lo greuLer mIsundersLundIng" CosL consIderuLIons
sIouId IncIude uII reIevunL cosLs und be Iong-Lerm In nuLure. ObvIousIy, LIe buyIng IIrm wIII compure producLIon und purcIuse cosLs.
BurL, obIer, und SLurIIng provIde LIe mujor eIemenLs IncIuded In LIIs compurIson. IemenLs oI LIe "muke" unuIysIs IncIude:
O ncremenLuI InvenLory-curryIng cosLs
O IrecL Iubor cosLs
O ncremenLuI IucLory overIeud cosLs
O eIIvered purcIused muLerIuI cosLs
O ncremenLuI munugerIuI cosLs
O Any IoIIow-on cosLs sLemmIng Irom quuIILy und reIuLed probIems
O ncremenLuI purcIusIng cosLs
O ncremenLuI cupILuI cosLs
CosL consIderuLIons Ior LIe "buy" unuIysIs IncIude:
O !urcIuse prIce oI LIe purL
O TrunsporLuLIon cosLs
O #eceIvIng und InspecLIon cosLs
O ncremenLuI purcIusIng cosLs
O Any IoIIow-on cosLs reIuLed Lo quuIILy or servIce
One wIII noLe LIuL sIx oI LIe cosLs Lo consIder ure IncremenLuI. By deIInILIon, IncremenLuI cosLs wouId noL be Incurred II LIe purL were
purcIused Irom un ouLsIde source. I u IIrm does noL currenLIy Iuve LIe cupucILy Lo muke LIe purL, IncremenLuI cosLs wIII IncIude vurIubIe
cosLs pIus LIe IuII porLIon oI IIxed overIeud uIIocubIe Lo LIe purL's munuIucLure. I LIe IIrm Ius excess cupucILy LIuL cun be used Lo
produce LIe purL In quesLIon, onIy LIe vurIubIe overIeud cuused by producLIon oI LIe purLs ure consIdered IncremenLuI. TIuL Is, IIxed
cosLs, under condILIons oI suIIIcIenL IdIe cupucILy, ure noL IncremenLuI und sIouId noL be consIdered us purL oI LIe cosL Lo muke LIe purL.
WIIIe cosL Is seIdom LIe onIy crILerIon used In u muke-or-buy decIsIon, sImpIe breuk-even unuIysIs cun be un eIIecLIve wuy Lo quIckIy
surmIse LIe cosL ImpIIcuLIons wILIIn u decIsIon. Suppose LIuL u IIrm cun purcIuse equIpmenL Ior In-Iouse use Ior $zo,ooo und produce
LIe needed purLs Ior $1o eucI. AILernuLIveIy, u suppIIer couId produce und sIIp LIe purL Ior $1 eucI. gnorIng LIe cosL oI negoLIuLIng u
conLrucL wILI LIe suppIIer, LIe sImpIe breuk-even poInL couId eusIIy be compuLed:
$zo,ooo + $1o" = $1"
$zo,ooo = $1" - $1o"
$zo,ooo = $"
o,ooo = "
TIereIore, IL wouId be more cosL eIIecLIve Ior u IIrm Lo buy LIe purL II demund Is Iess LIun o,ooo unILs, und muke LIe purL II demund
exceeds o,ooo unILs. However, II LIe IIrm Iud enougI IdIe cupucILy Lo produce LIe purLs, LIe IIxed cosL oI $zo,ooo wouId noL be
Incurred (meunIng IL Is noL un IncremenLuI cosL), mukIng LIe prospecL oI mukIng LIe purL Loo cosL eIIIcIenL Lo Ignore.
SLunIey GurdIner und JoIn BIucksLone's 1qq1 puper In LIe nternctioncl 1ourncl oj Purchcsin cnd Mctericls McncementpresenLed
LIe conLrIbuLIon-per-consLruInL-mInuLe (C!CM) meLIod oI muke-or-buy unuIysIs, wIIcI mukes LIe decIsIon bused on LIe LIeory oI
consLruInLs. TIey uIso used LIIs upproucI Lo deLermIne LIe muxImum permIssIbIe componenL prIce (M!C!) LIuL u buyer sIouId puy
wIen ouLsourcIng. n zoo Juydeep BuIukrIsInun und CIun Hung CIeng noLed LIuL GurdIner und BIucksLone's meLIod dId noL
guurunLee u besL soIuLIon Ior u compIIcuLed muke-or-buy probIem. TIereIore, LIey oIIer un upduLed, enIunced upproucI usIng
spreudsIeeLs wILI buIIL-In IIner progrummIng (!) cupubIIILy Lo provIde "wIuL II" unuIyses Lo encouruge eIIorLs Lowurd IIndIng un
opLImuI soIuLIon.
Irms Iuve sLurLed Lo reuIIze LIe ImporLunce oI LIe muke-or-buy decIsIon Lo overuII munuIucLurIng sLruLegy und LIe ImpIIcuLIon IL cun
Iuve Ior empIoymenL IeveIs, usseL IeveIs, und core compeLencIes. n response Lo LIIs, some IIrms Iuve udopLed LoLuI cosL oI ownersIIp
(TCO) procedures Ior IncorporuLIng non-prIce consIderuLIons InLo LIe muke-or-buy decIsIon.