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EDUCATIONAL STUFFS

An Ocean of Information

April 11, 2021February 14, 2025

SUPPLY CHAIN MANAGEMENT- Make or Buy Decisions

OPERATIONS MANAGEMENT

 

 

MAKE OR BUY DECISIONS

  • Make or Buy Decisions 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.

 

 

Make or Buy Decisions Make or Buy Decisions

 

 

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 FOR MAKE OR BUY DECISIONS:

 

 

 

 

 

 

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

 

For More Information- CLICK HERE

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