Apr
18
Introduction to make buy decision
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Companies are typically faced with the choice of whether to buy in parts required for the products they sell (either complete or part assembled) or manufacture the items internally (in house) – this ‘choice’ is referred to as a make buy decision. Where the decision has been made to buy in the item, its more commonly called outsourcing,
When are make buy decisions made
Make buy decisions are prompted for a variety of reasons – these commonly include:
• Design changes resulting in increased capability needs
• Cost of manufacture
• Business core competencies / competitive advantage
• Value add activity by 3rd parties
• Problems with the supply chain
• Market trends
• Criticality of the part
• Complexity of the part
• Quality issues
• Capacity issues
• Commodity strategies
Make buy decisions take in a variety of inputs as part of the decision making process – robust data/information and a strategic view should be seen as imperative. Various stakeholders will usually be involved in the decision making process although it is usually a combination of operational and strategic executives that will have the final say (the mix will change on the value and importance of the parts in question).
Where organizations have focused on maximizing their value add to their customer – an increasing number have looked to procure further up the value chain (allowing them to focus on their own core competency) moving from buying individual parts to completed sub-assemblies, these have the advantage of being delivered to the production line for use and streamlining the overall process.
Make buy decisions can become very emotive and undoubtedly there are always pro’s and con’s on both sides in defining and agreeing what an organizations core competence are – this is especially true where labor relations might be included in the variables.
While one of the major decision factors in make buy is cost, it should not be looked at in isolation. In developing a make buy decision the team behind it are commonly producing a business case and as such the long term total acquisition costs should be considered – for example when outsourcing – considering the logistics costs as well as non cost related variables such as the impact on lead time, impact to internal labor rates, competitive advantage, strategic positions are equally important.
More and more firms have become to realize the strategic value of make buy decisions and the impact it can have on the overall business and its key drivers (labour, core competency etc). Formal procedures are essential in delivering accurate decisions and these should be supported by appropriate authority levels (i.e. who can make decisions about what parts). Formal procedures should also include relevant guidance on the periodicity of review.