Sharing In Growth Teach Point

Make v Buy
Objectives & Principles

Copyright ©  2013-2020 Sharing in Growth

What?

• Make vs Buy (“MvB”) is a process to determine if

a product or service should be produced internally
or procured externally from a supplier;

• It is a two stage approach that involves both

qualitative factors and quantitative analysis;

• It is a business process that Procurement are

involved in both “Make” & “Buy” routes.
Why?

Discuss the benefits of Make versus Buy

Safety: Higher risk processes can be removed and given to specialists providing a safer
environment for staff e.g. chemical processes such as plating

Quality: Improved product quality by focusing on core capabilities and using experts for non-core
products and services

Delivery: Can alleviate poor service of existing supplier by making in-house, or conversely be a
support when bottlenecks exist through Buying

Cost: The outsource of non-core product or services can result in lower costs for the customer
than making in house

People: Provides access to skills not available in-house, enables concentration of core capability
skill set development

Discuss the reasons for implementing a Make versus Buy process

 How?

Strategic Make v Buy (Qualitative)

FEW CAPABLE
SUPPLIERS Is the competency
critical for business
SUPPLY CHAIN CAPABILITY success?

Does a supply chain

exist and is capability
high?

MANY CAPABLE
SUPPLIERS

NON-CORE DIFFERENTIATOR
CORE COMPETENCY
(CORE)
 How?
Qualitative Factors
CORE COMPETENCY
TECHNICAL DIFFERENTIATION
CUSTOMER PERCEPTION
INTELLECTUAL PROPERTY – THREAT
TO EXISTING COMPETENCIES
CRITICALLY TO END PRODUCTS OR
MARKETING EFFORTS
REGULATORY REQUIREMENTS AND
ENTRY BARRIERS
SUPPORTS WIDER BUSINESS
EFFICIENY
SYNERGIES WITH EXISTING
COMPETENCIES
ADDED VALUE PROPORTION
OPPORTUNITY
SUPPLY CHAIN CAPABILITY
NUMBER OF AVAILABLE SOURCES
SUPPLIER TRANSFER COSTS
COST REDUCTION OPPORTUNITY
SUPPLIER PROXIMITY
SUPPLY MARKET RISKS
SUPPLY CHAIN COMPETITIVENESS
No technical differentiation
Customer views competency as very
common
IP requires no protection or has little impact
to future growth
Not critical to end product
No regulations to acquire competence and
little time and investment to acquire
competence
No impact to wider business efficiency
No synergy with existing competencies
Minimal added value proportion <1%
High number of approved sources available
to supply
Very low internal and external costs to
transfer
High opportunity for cost reduction due to
technology access and rapidly reducing cost
base
Supply base is mostly locally located
Risk is low within supply market
Supplier’s cost base is more highly
competitive compared to internally
Some differentiation in some areas of
cost and performance
Customer views that some competitors
have this competency
IP requires some protection or has
some impact to future growth
Somewhat critical impact to end
product performance
Significant regulation and investment
and up to 3 years to acquire competence
Some impact to business efficiency
Some synergy with existing
competencies
Significant added value proportion
>10%
Some sources
Significant internal and external transfer
costs
Some opportunity due to supplier cost
base reducing through efficiency
improvements
Some local and European suppliers
available
Some risk with supply disruption
somewhat likely
Supply base as competitive as internal
costs
High technical differentiation providing high
benefits to performance
Customer reviews those with such competency
as market leaders
IP is highly sensitive and critical to growth
Highly critical to end product performance
High regulatory environment and several years
of investment required to acquire competence
High impact to business efficiency
High synergy with existing competencies
High added value proportion >40%
Very few or no alternative sources of supply
Very high internal and external transfer and
investment costs
Little opportunity for cost reduction due to
static cost base
Supply base are all based in intercontinental
location
High risk and chance of supply disruption
Internally cost advantaged, cost base much
higher in supply base
How?

Tactical / Operational Make v Buy (Quantitative)

FEW CAPABLE
SUPPLIERS

Conduct at individual
SUPPLY CHAIN CAPABILITY

product level

Incorporate into the

quotation and
estimating process

MANY CAPABLE
SUPPLIERS

Can be triggered by a specific event e.g. high risk of supply disruption, or high
internal capacity overload.
How?

Quantitative Factors
OPERATIONAL MvB

STRATEGIC CORE Competency is listed as non-core in MvB Competency is listed as core in MvB
COMPETENCY strategy strategy

BUSINESS CASE No financial business case for producing Cost Neutral No financial business case for procuring
product in-house product

COST REDUCTION High opportunity for cost reduction by Cost Neutral High opportunity for cost reduction by in-
OPPORTUNITY outsourcing house

RISK OF SUPPLY DISRUPTION Low risk of supply disruption Medium risk High risk of supply disruption

AVAILABLE
MANUFACTURING CAPACITY No available manufacturing capacity Available manufacturing capacity Excess internal manufacturing capacity

INFRASTRUCTURE & Available infrastructure and

INDIRECT RESOURCE resource Excess available of infrastructure or resource
No available infrastructure or resource
AVAILABILITY available
available

Through quantitative analysis draw a comparison of the costs and advantages of producing
in-house versus buying through a cost benefit analysis:

Cost to Buy = Volume x Per unit Cost of getting from supplier

Cost to Make = Fixed Costs + (Volume x Per unit cost of making)

How?

Arrive at a final make or buy decision after considering both quantitative and qualitative factors to ensure
profitability is maximised.

TIVE
QUALITA
c or e ’
Strategic ‘ ATIVE
competency
? QUANTIT
osts
k Transfer c
support ris
Customer

costs
‘In-house’
on risk?
Supp ly disrupti

rocure
Costs to p
capacity &
Available
resources
N
BUY DECISIO
MAKE V
Who?

• Strategic MvB should be incorporated into corporate

strategy process led by senior management.

• Operational MvB decisions are typically assigned to

procurement or commercial.

• The decision making process is recommended to be a

cross functional effort.
Summary

Implementation of MvB process will:

• Provide an essential input element of procurement strategy to aid

business growth;

• Define the business focus on ‘core’ competencies to be targeted to

be made in-house, as well as identifying opportunities to procure
non-core business activity;

• Ensure a standard cross functional decision making framework is

used to support operational decisions and promote alignment;

• Use the results of qualitative and quantitative analysis as a guide to

make decisions;

• MvB strategy incorporated into business and procurement strategy

will yield extensive cost benefits, increase business
competitiveness and support business growth.