Make-or-Buy Decisions
Introduction
Make or Buy decisions has always been an issue that represents a vital dilemma experienced by organizations. The first production programs compel the services and manufacturing companies to re-think their current products and services, technologies, and processes to identify an opportunity that positively impacts their production through strategic make-or-buy decisions.
Make-or-Buy decisions are the act that involves making strategic decisions between manufacturing a product or a service internally or buying it from an external vendor. Decisions on whether to buy or manufacture internally are based on the difference between the cost incurred while buying a product and when producing the product or service internally. The most crucial component of managing cost is determining whether to buy or make components in a product. Before making such decisions, an organization must carry out a correct and complete evaluation of the various elements of cost, so it has to make a sound decision.
Reasons for making
- Cost concerns
A company may decide to carry out their production process if the cost of buying is higher than the cost of manufacturing.
- Organizational Pride
Organizational pride in an organization may lead the organization to manufacture its products. Corporate pride includes cognitive, durable attitude, and employee’s experience based on pride perception.
- Quality Control
Desire to monitor the quality of the product or the unique quality needs may make a firm to make its product.
Reasons for Buying
- Lack of technical experience
Buying is a better alternative when the company has no experienced expertise to carry out the process of production.
- Raw Materials
Raw materials include the physical resources that are used in producing the products. The cost incurred in accessing the raw materials could be high, or the unavailability of raw materials altogether.
- Cost factors
The cost that could be incurred while manufacturing a product could be higher than buying from an external vendor. Costs include purchase costs, packing, and forwarding costs, and capacity costs for setting up the manufacturing costs. It also includes expenses incurred in paying the staff members and other overhead expenses.
The organization should come up with an economic model that would help in making financial decisions about whether to buy or make. One of the advantages of make-or-buy choices is that it provides an opportunity that combines the aspects of outsourcing while making product decisions. Before deciding on whether to make-or-buy, the organization must evaluate the economic benefits for each choice and its capacity to implement any of the alternatives.
References
Sillanpää, I. (2015). Strategic decision-making model for make or buy decisions. International Journal Of Logistics Economics And Globalisation, 6(3), 205. https://doi.org/10.1504/ijleg.2015.073894
Kloppenborg, T., Anantatmula, V., & Wells, K. (2019). Contemporary Project Management (4th ed.). Australia: Cengage Learning.