Make or buy analysis
One of the key factors for operations managers to consider when making the ‘make ourselves or buy-in’ decision is the relative costs of these two options. In quantitative terms, if it can be shown that the long-term costs of outsourcing (buying-in) a component or product are less than the cost of making that component or product then outsourcing might be the better option. However, qualitative factors should also be considered, such as the impact of redundancies on worker morale, social responsibility objectives and quality issues.
If cost to make (CTM) exceeds cost to buy (CTB), then it is more financially advantageous to buy-in or outsource. If CTB exceeds CTM, the opposite is true and the business will benefit financially from making the product in-house. The unit cost from suppliers of a component or service can be obtained from estimates given by potential suppliers.
Using the calculations from section 33.7: obtaining 10 000 keyboards from an outsourcing company would save the computer business $8000 per month. The cost to buy is less than the cost to make – assuming the expenditure on the fixed costs can be stopped immediately when production of the component ceases.
Make-or-buy decisions are not just about numbers, however. Other questions that an operations manager should ask before outsourcing an operation include:
Is this the organisation’s core competency – and would the business be losing key skills by outsourcing?
Could the business risk losing a competitive advantage by disclosing detailed information about production designs and methods to an outsourcing business?
• What will the impact on quality and perceived image be?
• Can the outsourcing business be relied upon to deliver as and when required? This is an especially important consideration if the purchasing business operates JIT.
• What additional risks would the business be taking?
• How irreversible is the decision? Could the business return to making the product if a supplier lets them down completely?
TIP
For make-or-buy decisions remember to consider: Will the
supplier increase prices once the firm has closed down its
own production capability? Will the quality be as good? Is the
supplier reliable?