Make-or-Buy Decisions

Make-or-buy decisions are taken to arrive at a strategic choice between manufacturing an item internally (in-house) or buying it externally (from an external supplier). The buy side of the decision is also known as outsourcing. Make-or-buy decisions of a firm is important when it has developed a product or part – or significantly modified a product or part – but is having problems with the current suppliers, or has decreasing capacity or changing demand.

The major reasons for manufacturing an item in house includes the following −

●      Cost attributes (less expensive to make)

●      Intentions to integrate the operations

●      Productive use of excess plant capacity (using present idle capacity)

●      For direct control over production / quality

●      When design secrecy is applicable to protect proprietary technology

●      Unreliable / incompetent suppliers

●      Very small quantity of production

●      Controlling lead time, transportation, warehousing costs

●      Political, social, or environmental pressure

Buy decisions are applicable under the following conditions −

●      Insufficient local expertise

●      Cost considerations (less expensive)

●      Small-volume requirements

●      Limited production or insufficient capacity

●      Intentions to maintain a multiple-source policy

●      Indirect managerial control factors

●      Procurement and inventory factors

●      Brand preference


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