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Chapter 5 discusses the critical decision-making process of whether to make or buy goods and services, including the considerations for insourcing and outsourcing. It outlines various reasons for choosing to make or buy, such as capacity utilization, risk reduction, and market conditions. The chapter also presents an outsourcing matrix and decision framework to guide organizations in evaluating their options.

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14 views

Chapter05_Student

Chapter 5 discusses the critical decision-making process of whether to make or buy goods and services, including the considerations for insourcing and outsourcing. It outlines various reasons for choosing to make or buy, such as capacity utilization, risk reduction, and market conditions. The chapter also presents an outsourcing matrix and decision framework to guide organizations in evaluating their options.

Uploaded by

Chung Huỳnh Phát
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Chapter 5

Make or Buy, Insourcing and Outsourcing

©McGraw-Hill Education. All rights reserved.


Key Questions Asked in Chapter 5

• Should we make or buy a good or service?

• If we have been making a good or service should we reverse the decision and outsource?

• If we have been buying, should we reverse the decision and insource?

©McGraw-Hill Education. All rights reserved. 2


Make or Buy; Insourcing and Outsourcing Decisions
What Product / Service to Create
in What Market Segment(s)?

What Do We Make or Buy?

100% 100%
Gray Zone
Make Buy

Stay Change Stay Change Stay Change

Outsource Insource
More More
Make Buy
Gray 100% Insource Outsource Gray 100%
Zone Buy Zone Make

100% Gray 100% Gray


Make Zone Buy Zone

©McGraw-Hill Education. All rights reserved. 3


Reasons to Make Instead of Buy
• To take advantage of unused capacity
• Keep our capacity utilization high and outsource the rest
• Avoid supply dependency
• Reduce risk
• Competitive, political, social or environmental factors
• Distance from the closest available supplier is too great
• Market potential for the product or service is expanding rapidly
• Forecasts of future shortages in the market or rising prices

©McGraw-Hill Education. All rights reserved. 4


Reasons to Make Instead of Buy

• Quantities are too small and/or no supplier is interested


• Quality requirements are too exacting or special processing methods needed
• Greater assurance of supply
• Closer coordination of supply and demand
• Preserve technological secrets
• Lower cost

©McGraw-Hill Education. All rights reserved. 5


Reasons to Buy Instead of Make

• Lack of managerial or technical experience


• Excess production capacity
• Reduce risk
• Customer preference for a particular brand
• Challenges of maintaining technological leadership for noncore activity
• Outsourcing is difficult to reverse
• Cost accuracy

©McGraw-Hill Education. All rights reserved. 6


Reasons to Buy Instead of Make

• Flexibility and desire to stay lean


• Insufficient volume to justify in-house production
• Forecasts show great demand and/or technological uncertainty
• Availability of a highly capable supplier
• Buying may open up markets
• The ability to bring a product or service to market faster
• Superior supply management expertise

©McGraw-Hill Education. All rights reserved. 7


The Outsourcing Matrix Currently Currently
In-House Outsourced

Should Be 1 2
In-House

Should Be
3 4
Outsourced

©McGraw-Hill Education. All rights reserved. 8


Reasons to Insource
• The necessity argument: “We would prefer not to produce this product or service in-house, but we really don’t have
any other options.”

• The opportunity argument: “We would prefer to do this in-house because it would give us a strategic competitive
advantage.”
Reasons to Outsource
• The necessity argument: “We would prefer not to outsource this product or service, but we really don’t have any
other options.”

• The opportunity argument: “We would prefer to outsource this product or service because it would give us a
strategic competitive advantage.”
Yes Keep the function
Is the activity strategic?
The Outsourcing Decision
in-house
No
Is the activity critical to the Yes Keep the function
business but not strategic? in-house
No
Create a RFP.
Gather supplier bids/proposals.
No
Is the supplier’s bid/proposal more Yes Keep the function
desirable than the internal option? in-house
No
Could the internal option achieve Yes Keep the function
similar results? in-house
No
Negotiate a contract to ensure
that expectations are realized

©McGraw-Hill Education. All rights reserved. 11

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