Should our company manufacture a product or offer a service in-house? Should some or all activities be performed by a third party or external supplier? Is it time to revise our current strategy? This make versus buy decision has taken on unprecedented importance since COVID-19 caused a seismic shift in the supply chain landscape, especially when it involves offshore suppliers.1 Show
In this article we examine the make vs. buy question through a new lens. We set out a four-step framework designed to drive a holistic evaluation of end-to-end profitability of products/customers and underlying drivers (customer, supplier, internal policies) - that helps isolate underperforming parts of the business/operations, thus feeding the make vs. buy process. Building the decision-making frameworkThe following four-part framework is a useful start to approaching the make vs. buy analysis: 1. Establish Operations Strategy Baseline. Start by working backwards by moving from the customer or demand and move through each step to the supply. This process will clarify customer needs (service levels), demand profile (velocity/mix), supply constraints, etc. This baseline view will provide the necessary line of sight into key factors/conditions that influence current costs/performance such as made-in-USA requirements, 24-hour delivery constraints, and directed supply. 2. Review cost and performance. First, understand internal costs and performance drivers. This process includes establishing a baseline of total end-to-end costs/profitability for every product and customer – from acquisition of raw materials to production to delivery. Follow by capturing the drivers such as velocity, mix, customer requirements, and overhead. Then shift to understanding external costs and performance drivers. This includes a review of the supply base costs, pricing drivers, capabilities, performance, portfolio strategy, and footprint. 3. Design and evaluate scenarios. Define and evaluate make vs. buy scenarios and the implementation options. For each scenario assess the potential impacts on:
4. Develop execution plan. Layout an implementation plan that includes critical activities, including deep dives on internal cost and performance, conducting RFIs/RFPs with potential vendors/partners, conducting comprehensive should cost analyses, and finalizing the business case including the capital investment outlay. Exhibit 1 elaborates on this make vs. buy decision framework It’s more than just costIntegrated within this framework are efficiency, risk, and capability factors. In other words, does making versus buying make more sense from an overall business perspective? Companies with a cost only focus tend to benefit in the short term. But this approach almost always leads to higher total costs in the medium and long term as sub-par choices do invariably drive costs elsewhere in the system (e.g., while piece price may be lower however poor supply performance could lead to higher expedited costs/breakdown in manufacturing lines leading to higher overhead). Make vs. buy: Some rules of thumbAs companies increasingly manage global supply chains, the make vs. buy decision become even more complex. It becomes critical to get a better understanding and view of the complete economic picture that factors in end-to-end costs, from supply to delivery, examining every stock keeping unit (SKU), every vendor and every customer. To create this picture, companies need to invest in developing analytical capabilities that combine financial performance, operational attributes, customer requirements and supply chain/manufacturing conditions – to establish one source of truth for the organization - all together helping create an end-to-end profitability view that helps establish correlation between the root-causes and financial performance. This enables a better understanding of cost/performance driver relationship that is central to make vs. buy decision-making. How to guide your decision.Factors tending to favor making a product or service:
Factors tending to favor buying a product or service:
Business as usual won’t doConsidering the increasingly unpredictable conditions organizations are facing globally – COVID-19, politics, cyber breaches and so on – business as usual when it comes to supply chain/operations strategy is no longer feasible. The make vs. buy decision-making framework can help you consider, compare, and implement optimal short-term and long-term operational strategy decisions. This type of thought process must become ingrained into the supply chain DNA of a company. When your organization masters this capability, it will be able to act – and react quickly – when it comes to critical make vs. buy decisions and determining how it impacts the overall health of your business. What is considered in a makeAlso referred to as an outsourcing decision, a make-or-buy decision compares the costs and benefits associated with producing a necessary good or service internally to the costs and benefits involved in hiring an outside supplier for the resources in question.
What factors will you consider at the time of makeFactors Influencing Make or Buy Decision:. Volume of Production: ... . Cost Analysis: ... . Utilization of Production Capacity: ... . Integration of Production System: ... . Availability of Manpower: ... . Secrecy or Protection of Patent Right: ... . Fixed Cost: ... . Availability of competent suppliers or vendors.. What are three factors that can be considered in the makeThis report explores the dynamics of make-or-buy decisions and presents a framework to help companies make the right decisions. The framework is built on three key pillars — business strategy, risks, and economic factors.
What influences the makeThe make-or-buy decision requires thorough analysis from all angles. Quantitative factors to consider may include things such as the availability of production facilities, production capacity, and required resources. They may also include fixed and variable costs that can be determined with certainty or estimated.
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