SCM - Make vs Buy (New Version)

Summary

The 'Make vs. Buy' decision in supply chain management is crucial for companies when determining whether to produce a product in-house or outsource it. Key factors influencing this choice include business strategy, risk management, and economic considerations. Companies should evaluate the importance of the product, assess potential risks like supplier reliability and location, and calculate the full economic impact, considering hidden costs and potential savings. The decision requires a balance between cost reduction, flexibility, and maintaining control over core operations, ultimately ensuring sustainable and efficient supply chain management.

Takeaways

• 😀 The 'make or buy' decision in supply chain management is crucial for companies in determining whether to produce products in-house or outsource to external suppliers.
• 😀 Outsourcing to countries with lower labor costs, such as Eastern Europe and China, can provide cost advantages, but developed countries can mitigate this by leveraging internal resources like HR and IT.
• 😀 The decision to make or buy depends on three key pillars: business strategy, risks, and economic factors.
• 😀 Business strategy is the first pillar, and companies should produce in-house when the product or function is core to their competitive advantage or performance.
• 😀 Outsourcing is beneficial when a product is a commodity or does not contribute significantly to the company's differentiation or competitive position.
• 😀 Risk management is critical in outsourcing decisions, considering factors such as quality, liability, predictability, and the reliability of suppliers.
• 😀 Companies should assess risks related to the supplier’s country, including political stability, safety, lead times, and shipping routes.
• 😀 The third pillar, economic factors, involves evaluating the costs of outsourcing versus internal production, considering expenses like capital, labor, and quality control.
• 😀 Hidden costs of outsourcing can include transportation, administrative bills, and the complexity of managing supplier relationships.
• 😀 Successful outsourcing requires a transparent, balanced relationship with suppliers and clear expectations for cost minimization, productivity gains, and responsiveness to changes.
• 😀 Both parties in an outsourcing arrangement should benefit from productivity progress and cost-sharing, ensuring the long-term success of the partnership.

Q & A

What is the importance of the make-or-buy decision in supply chain management?

The make-or-buy decision is crucial as it determines whether a company should produce a product internally or purchase it from an external supplier. This decision affects cost, quality, flexibility, and the strategic direction of the company.

How do third-party suppliers in countries like Eastern Europe and China impact the decision to outsource?

Third-party suppliers in countries like Eastern Europe and China offer cost advantages that developed nations may not be able to provide, making them attractive options for outsourcing. These countries offer low-cost production benefits that can be essential for companies seeking to reduce expenses.

What role do in-house activities like human resources and IT play in offsetting the costs of outsourcing?

In-house activities such as human resources, information technology, and customer relations can help mitigate the additional expenses of outsourcing by providing added value and potentially improving profitability through effective management and technology utilization.

What are the three pillars that influence the make-or-buy decision?

The three pillars that influence the make-or-buy decision are business strategy, risks, and economic factors. Each pillar impacts the overall feasibility and sustainability of outsourcing or in-house production.

How does business strategy influence the make-or-buy decision?

Business strategy plays a key role in deciding whether to outsource or produce in-house, particularly when the product or service is core to the company’s performance. If it significantly improves the company’s competitive edge, in-house production is preferred.

When is it advisable to select in-house production over outsourcing?

In-house production is advisable when a product is time-sensitive, prone to design changes, or critical to a company’s core operations. Outsourcing could lead to issues such as delays or poor quality control in such cases.

What are some of the major risks involved in outsourcing?

Major risks in outsourcing include issues with quality, reliability, predictability, and the selection of the right supplier. Additionally, political instability and shipment delays can also pose significant risks to outsourcing.

Why is it important to assess the location of an external supplier in outsourcing?

It’s essential to assess the location of an external supplier due to potential risks such as political instability, shipment delays, and the need for backup suppliers. Companies should evaluate safety, lead times, and backup strategies for optimal risk management.

How do economic factors influence the outsourcing decision?

Economic factors include considerations such as capital expenditures, return on invested capital, and savings gained from outsourcing. These factors help determine whether the external costs outweigh the internal costs and if outsourcing will lead to cost savings in the long run.

What is the significance of a fair and balanced pricing mechanism in outsourcing?

A fair and balanced pricing mechanism ensures both the outsourcing company and the supplier benefit from productivity improvements and cost minimization. It promotes a transparent and mutually beneficial relationship, which is crucial for the success of the outsourcing arrangement.