Scribd
Upload
17 views17 pages

Module 4 - Make Buy Analysis

Uploaded by

Nauman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
17 views17 pages

Module 4 - Make Buy Analysis

Uploaded by

Nauman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 17

MAKE / BUY ANALYSIS Dr.

Khalid Ahmad Khan


MODULE 4
MAKE/BUY DEFINITION

“Make-or-Buy decisions compare the cost of


producing a component or providing the service
internally with the cost of purchasing the
component or service from an external supplier”

Tactical – deals with Strategic – affects the


issues of temporary shape & capabilities
imbalances of of the organisation
capacity
BASIC MAKE-BUY ANALYSIS

A comparison of cost of making


ourselves versus buying
• What volume do we expect to require
• What quantities involved interest an
outside supplier
• What will be our peak demand
• What capital investment is required to
make the goods
BASIC MAKE-BUY ANALYSIS

A comparison of cost of making ourselves


versus buying
• How much risk is associated with the choice
• Is the activity/function part of our core competence
• To what extent does the process have an impact on
other products or services
• What is the expected life?
• Are we satisfied that the current supplier is the most
economical source
TACTICAL MAKE/BUY DECISIONS

Reasons: Considerations:
• Deterioration in an existing • Medium term decisions
suppliers performance • Competitive strategy
• Delivery failure or poor service • Capitalizing on market
by existing source opportunities
• Large price increases • New products/services
• Volume changes much larger or • The true cost of alternative
smaller quantity requirements for supplier at present and in future
the item concerned
STRATEGIC MAKE/BUY DECISIONS

Reasons: Considerations:
• Pressure to reduce costs • Long term decision making
• Desire to concentrate internal • Overall purpose and scope
resources on areas of special • Adding value to shareholder
competence investment
• The need for design secrecy • Portfolio issues
• Opportunity to use resources • Corporate strategy
involved in the current activity in
alternative work
OUTSOURCING OR SUB-
CONTRACTING
“ if you want the most beautiful lawn in the
neighbourhood and you hire someone to
take care of every aspect of lawn care,
including cutting the grass, weed control,
watering and fertilising it’s strategic
sourcing. But hiring someone to only cut the
lawn is subcontracting.”
OUTSOURCING

Activity/Functions is
transferred to an external
party on a long-term
basis. Types of
Outsourcing:

Body shop outsourcing – a


means of meeting short Project outsourcing – for Total outsourcing –
term requirement, all parts of a particular supplier given full
shortage of in-house skills project, new IT project, responsibility for selected
to meet temporary training requirement function, catering, security
demand.
WHEN TO USE OUTSOURCING?
Functions most easily outsourced:
 Resource intensive activities – high labour/ capital
costs
 Relatively discrete areas of the organisation,
specialist areas
 Areas characterised by fluctuating work patterns in
loading and throughput
 Subject to dynamic market conditions for which it is
costly to recruit & retain staff
 Subject to rapid changes in technology with high
investment
WHEN NOT TO USE OUTSOURCING
Functions that should not be outsourced
 Management of strategic planning
 Management finances
 Control of suppliers
 Quality & environmental management
 Supervision of regulatory requirements, product
liability, environmental regulations, staff health &
safety, public safety product & services safety
Long term use of Outsource can lead
to:
 Dependence on suppliers
 Reduction in flexibility
 Quality of service issues
 High staff turnover
 Complacency over time
 Lack of commitment to client or
industry
 Lack of control over larger suppliers

PROBLEMS WITH OUTSOURCING


SUB-CONTRACTING

Where the buyer


organisation is the main
contractor, some work
can be sub-contracted.
Type of sub-contracts:

Turnkey components of Supply of services or Specialized works


a larger project materials
WHEN TO USE SUB-CONTRACTING
Typical scenarios when sub-contracting
can be used:
 Over loading of machinery or labour
 Meeting time deadline
 Lack of specialist machinery or knowledge
 Wishing to avoid acquiring long-term capacity
when future demand uncertain
 Cheaper to subcontract than manufacture
internally
WHEN NOT TO USE A SUB-CONTRACTOR
Scenarios when using a sub-contractor is
not advisable:
 When the function is one of the buyer
company’s specialisations
 When the there is little market experience in the
required field
 When sub-contractor failure has a
disproportionate effect on the final product
 When a sub-contractor has the potential to
become a competitor
PROBLEMS IN SUB-CONTRACTOR
Problems when using sub-contractors
 Their quality systems are inadequate
 They don’t follow our standards
 They are not reliable at meeting targets
 They have inadequate financial resources
 They have too many order on their books
 They further subcontract the work (additional
risk)
OUTSOURCING VS. SUB-CONTRACTING

Outsourcing

• Use of resource from external organizations to handle


activities typically performed internally
• Corporate restructuring is involved as organization focuses on
core competencies
• Driven by efficiency considerations

Sub-contracting

• Tactical use of resources from external organizations to


handle activities that are either not handled internally or are
in short supply internally
• Driven by cost and availability considerations
Q&A Dr. Khalid Ahmad Khan
https://Drkhalidkhan.org

You might also like