Make or Buy?
Developed by Mehmet Kalköseler
Contents |
Abstract
There has always been a dilemma for the companies regards to either making the product in-house facility or buying the necessary products from the suppliers. Production costs, extra labor costs, monitoring costs, storage requirement costs, waste product disposal costs should be considered in-house production. On the other hand, product purchase price, sales tax charge, shipping costs, inventory holding costs, ordering costs should be considered while buying the products from the suppliers [1].
The decision is crucial for the companies regards to time and profit. Therefore, all the constraints and requirements should be analyzed step by step, then the decision can be given regards to ease and profit. The decision process can be divided into 4 stages such as planning, evaluation, analyzing, and selecting [2]. After the decision has been made, there are different types of contracts that should be preferred and negotiated with the suppliers.
In this article, I will slightly introduce the importance of the make and buy decisions included with crucial points that need to be considered for the company and then the focus will be explaining the 4 steps regarding to make or buy decisions. Different types of contracts such as fixed-price contracts, cost-reimbursement contracts, and time and material contracts with the suppliers are also going to be examined at the end of the article.
Introduction
Make or buy decisions are crucial for the companies; not only for increasing profit and decreasing the time of the process but also it affects operations within the company. Therefore, there have been lots of research regarding the make or buy decisions through last years. However, there is no true answer that can be implemented for all the decisions or there is no formula to obtain the result of the decision by mathematically. It is managerial level strategical decision to be made which has both cons and pros either choosing in-house production or outsourcing from the suppliers. There are different aspects that should be considered while making the strategical decision such as company might having problems with suppliers, problems with capacity, initial investment priorities or expecting change in demands in the future market. According to Bajec and Jakomin, it is suggested that make or buy decision should be examined in 4 steps which are planning stage, evaluation stage, analyzing stage, and selecting stage [2].
Planning stage [2]
In this stage, the first step is to select the planning team, team leader and outsourcing consultant. The team should be included from mid-level managers to help the senior managers with heavy work they have while there should also be technical knowledgeable employees within the team. It is suggested that the importance of outsourcing might be viable for the company instead of in-house production should be explained detailly to employees to prevent the risks of having negative thoughts from the employees. There is also need for an independent consultant who can have wider opinion and experiences regarding to the similar projects they had before. Therefore, they might be helpful to avoid mistakes and can show their expertise while giving advice for the project.
Evaluation stage [2]
After building the team and the team leader, it is vital to understand the company’s vision and strategies regarding to outsourcing and how will the decision affect the company in long term. After understanding mission and vision, it is suggested that to set the objectives and motives since different decisions can be seem useful without having the proper goals to achieve. “The objectives for outsourcing are often derived directly from the motives for outsourcing that can be grouped into a few summarized categories: concentration on core business, investment reduction, restructuring of the supply chain, cost reduction and service improvements” [2].
Analyzing stage [2]
The purpose of this stage is to make an assessment regarding to cost of the in-house production and outsourcing from the suppliers by considering all the expenses that will be made both in long term and short term such as costs of making in-house production; production costs, extra labor costs, training the employees, salaries, monitoring costs, storage requirement costs, waste product disposal costs, and costs of outsourcing; product purchase price, sales tax charge, shipping costs, inventory holding costs, ordering costs [1]. All the costs should be taken into account especially those are hard to see by forecasting to be able to make a proper cost and benefit analysis. And it is important to examine the current procedure to observe the current flows and future improvements.
Selecting stage [2]
After consideration of the vision and mission of the company and gathering all the data regarding the costs of the in-housing and outsourcing applications with the forecasting the future costs, strategical decision can be made by the managerial level. It can be either in-house production or outsourcing which have different benefits for the companies or some parts of the product can also be bought from the suppliers while others made in-house production. After the make or buy decision has been made, it is time for selecting the right service providers. In order to identify the qualified providers, the company should implement; “open a dialogue with outside organizations the company is already doing business with, use the organization’s professional network, direct research, use consultants” [2].
Decision Phase
If the decision is buying from the outsource suppliers, further research will be needed to choose between the suppliers which is more convenient for the company either profit or process time. There are also some other important parts while choosing suppliers such as quality and reliability, speed and flexibility, strong service and clear communication, and financial security of the supplier [3]. After choosing the right suppliers within the company needs, it is time for the negotiation with the suppliers. Before starting negotiation with the supplier that company has decided, there are some key elements that need to be clarified such as price, delivery schedule and payment terms. After reaching an oral agreement with the suppliers, there are different types of contracts that should be considered according to company needs.
Contracts with Suppliers
Contracts play an important role for both buyers and suppliers to provide legal protection in the transaction. It defines the rights and responsibilities for both buyers and suppliers and set a limitation or give a write to terminate the contract after failing their duties either on payment or delivering the products. There are there most common contracts; Fixed-price contracts, cost-plus contracts, and time and materials contracts Cite error: Closing </ref> missing for <ref> tag
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