Make or Buy Decisions: Outsourcing Strategy

This chapter deals with make or buy decisions as strategic decisions that firms have to make periodically for a variety of reasons such as introducing a new product, vendor performance, and changing demand dynamics and the policy of the firm on work force stability. In most cases, manufacturing firms operate at a mix of make or buy and rarely operate at the extreme points in the make or buy continuum. Factors that favor making may be cost advantage, surplus manufacturing capacity, design secrecy required, unreliable vendors, the need to exert direct control on quality and schedules, and the desire to maintain stable work force even in declining sales scenarios. Similarly, the factors that favor buying are superior know-how of a specialist vendor, cost advantage, small-volume requirements, benchmarking control over quality and costs, limited manufacturing capacity available, and desire to maintain stable work force in periods of rising sales and to have multiple sources of supply, just in case. Make or buy decisions are multi-criteria decisions. Cost data to be used for evaluating alternatives must be on the incremental opportunity costing basis. Decision-matrix approach can help in evaluating finite options in multi-criteria framework. The Internet has substantially changed the decisions environment where it is now quickly possible to search newer vendors globally and cost of searching and coordination has reduced but the reach has become wider. It is good to have a policy of reviewing the make or buy decisions periodically after 3–5 years to examine if a change is required over the current practice.