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.

 

 

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