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EDUCATIONAL STUFFS

An Ocean of Information

April 11, 2021October 13, 2022

SUPPLY CHAIN MANAGEMENT- Make or Buy Decisions

OPERATIONS MANAGEMENT

 

 

MAKE OR BUY DECISION

  • It is the determination whether to produce component internally or to buy it from the outside supplier.
  • The decision is based on the cost.
  • The cost for both the alternatives should be calculated and the alternative with less cost is to be chosen.

 

CRITERIA FOR MAKE:

  • The product can be made cheaper by the firm.
  • The finished product is being manufactured only by limited firms.
  • The part needs extremely close quality control.
  • The part can be manufactured from the existing facilities with experienced operators.
  • The quantities are too small and/or no supplier is interested or available in providing the goods.
  • Quality requirements may be so exacting or so unusual as to require special processing methods that suppliers cannot be expected to provide.
  • There is greater assurance of supply.
  • It is necessary to preserve technological secrets.
  • It helps the organization obtain a lower cost as the purchase option is too expensive.
  • It allows the organization to take advantage of or avoid idle equipment and/or labor.
  • It ensures steady running of the corporation’s own facilities, leaving suppliers to bear the burden of fluctuations in demand.
  • It avoids sole-source dependency.
  • Competitive, political, social or environmental reasons may force an organization to make even when it might have preferred to buy.
  • The distance from the closest available supplier is too great. • A significant customer required it.
  • Future market potential for the product or service is expanding rapidly and forecasts show future shortages in the market or rising prices.

 

 

 

 

CRITERIA FOR BUY:

  • High investments required for making.
  • Does not have facilities for making.
  • Skilled workers not available.
  • Demand is either temporary or seasonal.
  • Patent or legal formalities prevent from making the product.
  •  The organization may lack managerial or technical expertise in the production of the items or services in question.
  • The organization lacks production capacity.
  • Certain suppliers have built such a reputation for themselves that they have been able to build a real preference for their component as part of the finished product.
  • The challenges of maintaining long-term technological and economic viability for a non core activity are too great.
  • A decision to make, once made, is often difficult to reverse.
  • It assures cost accuracy.
  • There are more options in potential sources and substitute items.
  • There may not be sufficient volume to justify in-house production.
  • Future forecasts show great demand or technological uncertainty and the firm is unable or unwilling to undertake the risk of manufacture.
  • A highly capable supplier is available nearby.
  • The organization desires to stay lean.
  • Buying outside may open up markets for the firm’s products or services.
  • It provides the organization with the ability to b ring a product or service to market faster.
  • A significant customer may demand it.
  • It encourages superior supply management expertise.

 

CONSIDERATIONS WHICH FAVOR MAKING:

  • Cost considerations (less expensive to make the part).
  • Desire to integrate plant operations.
  • Productive use of excess plant capacity to help absorb fixed overhead.
  • Need to exert direct control over production and/or quality.
  • Design secrecy required.
  • Unreliable suppliers.
  • Desire to maintain a stable work force (in periods of declining sales).

 

CONSIDERATIONS WHICH FAVOR BUYING:

  • Limited production facilities.
  • Cost considerations (less expensive to buy the part).
  • Small volume requirements.
  • Suppliers’ research and specialized know-how.
  • Desire to maintain a stable work force (in periods of rising sales).
  • Desire to maintain a multiple source policy.
  • Indirect managerial control considerations.
  • Procurement and inventory considerations.

 

 

RELATED VIDEOS:

 

 

 

 

 

 https://www.myaccountingcourse.com/accounting-dictionary/make-or-buy-decision

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