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    What Guides The Make or Buy Decisions of A Business

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    vsyousoof
    The document discusses factors that guide a business's make-or-buy decisions regarding producing an item internally or outsourcing it. Key considerations include cost, available production capacity, whether the item is critical to the product or requires specialized skills, and if producing it aligns with the company's core competencies. The document provides examples of specific costs to consider in a make vs buy analysis and outlines factors that may influence choosing to make or buy an item. It also includes an example cost analysis case study where producing the item internally is determined to be less expensive than outsourcing.

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    Attribution Non-Commercial (BY-NC)
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    What Guides The Make or Buy Decisions of A Business

    Uploaded by

    vsyousoof
    96 views17 pages
    The document discusses factors that guide a business's make-or-buy decisions regarding producing an item internally or outsourcing it. Key considerations include cost, available production capacity, whether the item is critical to the product or requires specialized skills, and if producing it aligns with the company's core competencies. The document provides examples of specific costs to consider in a make vs buy analysis and outlines factors that may influence choosing to make or buy an item. It also includes an example cost analysis case study where producing the item internally is determined to be less expensive than outsourcing.

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    make buy decision

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    The document discusses factors that guide a business's make-or-buy decisions regarding producing an item internally or outsourcing it. Key considerations include cost, available production capacity, whether the item is critical to the product or requires specialized skills, and if producing it aligns with the company's core competencies. The document provides examples of specific costs to consider in a make vs buy analysis and outlines factors that may influence choosing to make or buy an item. It also includes an example cost analysis case study where producing the item internally is determined to be less expensive than outsourcing.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    96 views17 pages

    What Guides The Make or Buy Decisions of A Business

    Uploaded by

    vsyousoof
    The document discusses factors that guide a business's make-or-buy decisions regarding producing an item internally or outsourcing it. Key considerations include cost, available production capacity, whether the item is critical to the product or requires specialized skills, and if producing it aligns with the company's core competencies. The document provides examples of specific costs to consider in a make vs buy analysis and outlines factors that may influence choosing to make or buy an item. It also includes an example cost analysis case study where producing the item internally is determined to be less expensive than outsourcing.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 17

    WHAT GUIDES THE MAKE

    OR BUY DECISIONS OF A
    BUSINESS
    • The make-or-buy decision is the act
    of making a strategic choice between
    producing an item internally (in-
    house) or buying it externally (from
    an outside supplier). The buy side of
    the decision also is referred to as
    outsourcing.
    Make-or-buy decisions usually arise
    when:
    – a firm that has developed a product or part,
    – or significantly modified a product or part,
    – is having trouble with current suppliers,
    – or has diminishing capacity or changing
    demand.
    • Make-or-buy analysis is conducted at
    the strategic and operational level.
    • Strategic level is the long-range of
    the two.
    • Variables considered at the strategic
    level include analysis of the future, as
    well as the current environment.
    A firm can outsource all items that do
    not fit one of the following three
    categories:
    1. the item is critical to the success of the
    product, including customer perception of
    important product attributes,
    2. the item requires specialized design and
    manufacturing skills or equipment, and the
    number of capable and reliable suppliers is
    extremely limited,
    3. the item fits well within the firm's core
    competencies, or within those the firm must
    develop to fulfill future plans.
    • Items that fit under one of these three
    categories are considered strategic in
    nature and should be produced
    internally if at all possible.
    • Firms should make items that
    reinforce or are in-line with their core
    competencies. These are areas in
    which the firm is strongest and which
    give the firm a competitive
    advantage.
    • Make-or-buy decisions also occur at
    the operational level. The following
    considerations are considered
    favorable for making a part in-house:
    – Cost considerations,
    – Desire to integrate plant operations,
    – Productive use of excess plant capacity to help
    absorb fixed overhead,
    – Need to exert direct control over production
    and/or quality,
    – Better quality control,
    – Design secrecy is required to protect
    proprietary technology,
    – Unreliable suppliers,
    – No competent suppliers,

    – Quantity too small to interest a supplier,


    – Greater assurance of continual supply,
    – Political, social or environmental reasons,

    – Emotion.
    • Factors that may influence firms to buy a
    part externally include:
    – Lack of expertise,
    – Suppliers' research and specialized know-how
    exceeds that of the buyer,
    – cost considerations (less expensive to buy),
    – Small-volume requirements,
    – Limited production capacity,
    – Desire to maintain a multiple-source policy,
    – Indirect managerial control considerations,
    – Procurement and inventory considerations,
    – Brand preference,
    – Item not essential to the firm's strategy.
    • The two most important factors to
    consider in a make-or-buy decision
    are
    – Cost, and
    – The availability of production capacity.

    • Cost considerations should include


    all relevant costs and be long-term in
    nature.
    The buying firm will compare production
    and purchase costs. Elements of the
    "make" analysis include:
    – Incremental inventory-carrying costs
    – Direct labor costs
    – Incremental factory overhead costs
    – Delivered purchased material costs
    – Incremental managerial costs
    – Any follow-on costs stemming from quality and
    related problems
    – Incremental purchasing costs
    – Incremental capital costs
    Cost considerations for the "buy"
    analysis include:
    – Purchase price of the part
    – Transportation costs
    – Receiving and inspection costs
    – Incremental purchasing costs
    – Any follow-on costs related to quality or
    service
    • Essex manufactures part 4A that is
    used in one of its products.
    • The unit product cost of this part is:

    Direct materials $ 9
    Direct labor 5
    Variable overhead 1
    Depreciation of special equip. 3
    Supervisor's salary 2
    General factory overhead 10
    Unit product cost $ 30
    • The special equipment used to
    manufacture part 4A has no resale value.
    • The total amount of general factory
    overhead, which is allocated on the basis
    of direct labor hours, would be unaffected
    by this decision.
    • The $30 unit product cost is based on
    20,000 parts produced each year.
    • An outside supplier has offered to provide
    the 20,000 parts at a cost of $25 per part.
    Should Essex accept the supplier’s
    offer?
    Cost
    Per Unit Cost of 20,000 Units
    Make Buy
    Outside purchase price $ 25 $ 500,000

    Direct materials $ 9 180,000


    Direct labor 5 100,000
    Variable overhead 1 20,000
    Depreciation of equip. 3 -
    Supervisor's salary 2 40,000
    General factory overhead 10 -
    Total cost $ 30 $ 340,000 $ 500,000

    Not The
    The special
    special equipment
    equipment has has no
    no
    Not avoidable.
    avoidable. IfIf the
    the product
    product isis dropped,
    dropped,
    itit will resale
    resale value
    value and
    and is
    is aa sunk
    sunk cost.
    cost.
    will be
    be reallocated
    reallocated toto other
    other products.
    products.
    • Should Essex make or buy part 4A?
    • Answer: Make!
    Thank You

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