Module 4: Make or Buy Analysis

Introduction
The Make or Buy Analysis is a structured decision-making process that evaluates
whether to perform a task or produce a deliverable internally (Make) or procure it
externally (Buy). This analysis balances cost, resource allocation, time, risks, and
strategic objectives, ensuring that the organization’s decisions align with its operational
capabilities and long-term goals.

Key Decision Variables

The Make or Buy decision hinges on several variables that influence project execution,
costs, and outcomes.
1. Cost Evaluation
• Make Costs:

o Labor (salaries and overtime).

o Materials and equipment.

o Overheads like utilities, maintenance, and management.

o Opportunity costs (use of internal resources for other purposes).

• Buy Costs:
o Vendor pricing.

o Shipping and logistics.

o Quality assurance and inspections.

o Contract management and legal expenses.

Example:
For a company deciding whether to produce custom circuit boards for a new product, it
must compare the cost of setting up an internal production line versus buying from an
established supplier.

2. Resource Considerations
• Internal Capacity:

o Availability of skilled personnel, facilities, and technology.

o Impact on other ongoing projects.

 • External Resources:
o Supplier expertise, technology access, and capacity for timely delivery.

Example:
An IT firm with a shortage of in-house developers might consider outsourcing app
development to ensure timely project completion.

3. Strategic Objectives

Align the decision with long-term goals such as innovation, market competitiveness,
and resource optimization.

• Making can enhance intellectual property (IP) protection and core

competency development.
• Buying can provide flexibility and reduce commitments to long-term
investments.

4. Risk Assessment

Evaluate risks associated with:

• Internal Production:

o Technology obsolescence.

o Skill gaps.

• External Procurement:

o Supplier reliability and financial stability.

o Confidentiality breaches and IP theft.

Example:
A pharmaceutical company deciding whether to outsource drug formulation risks losing
control over proprietary research if external suppliers mishandle IP.

Strategic vs. Tactical Make/Buy Decisions

Tactical Decisions
Tactical decisions are short-term and address immediate needs, focusing on
operational efficiency and problem-solving.

Examples of Tactical Make Decisions:

• Producing spare parts internally during an urgent project to avoid delays.

• Leveraging idle production capacity to handle small-scale requirements.

Examples of Tactical Buy Decisions:
• Hiring a subcontractor to complete a component during a production
bottleneck.
• Outsourcing labor-intensive tasks like data entry to meet tight deadlines.

Strategic Decisions

Strategic decisions focus on long-term goals, aiming to position the organization for
sustainable growth.
Examples of Strategic Make Decisions:

• Developing a proprietary AI system to differentiate the company’s offerings.

• Investing in a new manufacturing plant to support long-term product demand.

Examples of Strategic Buy Decisions:

• Outsourcing non-core activities like payroll management to focus on innovation.

• Partnering with a logistics firm to ensure global distribution capabilities.

Outsourcing
Outsourcing involves delegating functions to external vendors, often under long-term
contracts. It can be a vital strategy for organizations aiming to reduce costs and focus
on core competencies.

When to Use Outsourcing

1. Resource-Intensive Activities:

o Functions requiring significant labor or capital investments.

o Example: Contract manufacturing for consumer electronics.

2. Specialized Expertise:

o Complex legal services or advanced analytics.

o Example: Outsourcing cybersecurity monitoring to experts.

3. Dynamic Work Patterns:

o Functions with fluctuating workloads.

o Example: Seasonal customer service outsourcing.

4. Rapid Technology Changes:

o Tasks requiring frequent updates to infrastructure or skills.

 o Example: Cloud storage solutions managed by external providers.

When Not to Outsource

Avoid outsourcing critical activities, including:

• Strategic planning and innovation.

• Quality control or regulatory compliance.

Example:
A luxury automobile brand should not outsource design quality assurance, as it directly
impacts customer trust and brand value.

Problems with Outsourcing

1. Supplier Dependency:

o Over-reliance on suppliers can reduce organizational flexibility.

2. Quality Variability:

o External vendors may not consistently meet desired standards.

3. Loss of Control:

o Outsourcing strategic tasks may lead to diminished oversight of

business outcomes.

Subcontracting
Subcontracting delegates specific tasks to third-party vendors, typically for short-term
or project-specific needs.

When to Use Subcontracting

1. Temporary Capacity Constraints:

o Supplementing internal capacity during peak workloads.
o Example: Hiring contractors for construction during project surges.

2. Specialized Machinery or Skills:

o Gaining access to rare or expensive resources.

o Example: Subcontracting advanced 3D printing for prototype production.

3. Avoiding Long-Term Commitments:

o For projects with uncertain future demand.

 o Example: Subcontracting assembly tasks during market trials.

When Not to Subcontract

Avoid subcontracting when:

• The task is a core specialization of the company.

• The market lacks reliable or experienced vendors.

• Subcontractor failure could derail the project.

Problems with Subcontracting

1. Quality Concerns:

o Vendors may not adhere to the organization’s standards.

2. Reliability Issues:
o Vendors juggling multiple clients may delay deliveries.

3. Financial Risks:

o Vendor instability can jeopardize project continuity.

Outsourcing vs. Subcontracting

While outsourcing and subcontracting both involve external resources, they differ
significantly:

Aspect Outsourcing Subcontracting

Broad, encompassing entire Narrow, task-specific

Scope
processes. assignments.

Duration Long-term, often strategic. Short-term, project-focused.

Control Vendor-managed. Closer control over deliverables.

Cost
Negotiated over fixed contracts. Flexible, based on project needs.
Structure
Make or Buy Case Study: The Big Ideas Automation
Project
An illustrative exercise showcases decision-making approaches:

1. Group 1 - Buy:

o Outsourcing automation components ensures speed but may risk

dependency.

2. Group 2 - Make:

o Internal production provides control and IP security but requires

investment.

3. Group 3 - Do Nothing:

o Avoiding action minimizes costs but risks missed opportunities.

Practical Insights for Effective Make or Buy

Decisions
1. Conduct Comprehensive Risk Analysis:

o Identify potential risks and develop mitigation plans.

2. Cost-Benefit Analysis:
o Quantify financial impacts using models like Total Cost of Ownership
(TCO).
3. Prioritize Strategic Objectives:

o Evaluate how each decision aligns with organizational goals.

4. Involve Stakeholders:

o Engage procurement, finance, and operations teams early in the

process.

Key Takeaways
• Outsourcing focuses on long-term vendor partnerships, while subcontracting is
task-specific.

• A balanced Make or Buy strategy aligns tactical needs with strategic goals.
• Regularly revisit Make or Buy decisions to adapt to market dynamics and
organizational priorities.