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Make verses buy agenda. Building a supply chain: make or buy ? Traditional make vs. buy SCM make vs. Buy core competencies elements of total costs purchasing’s role for make products The gray zone. Make vs Buy - case.

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Make verses buy agenda

  • Building a supply chain: make or buy ?

    • Traditional make vs. buy

    • SCM make vs. Buy

      • core competencies

      • elements of total costs

      • purchasing’s role for make products

  • The gray zone

Make vs buy case
Make vs Buy - case

  • Based on the give information please decide if you will make this product or buy it. Base your calculations on the total price of the decision for one year.

A key decision: make or buy

  • Who actually produces a part, service, assembly or any other input needed by the supply chain ?

  • How do traditional organizations do this ?

  • Why is this decision different if we take a supply chain view of the world ?

  • Note a terminology problem - make implies that our company physically produces something - make really means we perform a process

Building on the case
Building on the case

  • The case dealt with a make buy decision driven by price

  • As the articles make clear these decisions are often driven by much more than the price

    • Who does something best- quality and cost

      • Masco-Tech (they are in your articles as well) Story

      • Compared to painting things at JD in articles

    • Freeing capacity

    • Reduced investment and managerial span


  • Out of the back room

    • Buying entire processes- which we used to do internally – here we are talking support processes such as HR

    • Why?

  • Foundry Father and the Barons of outsourcing

    • In high tech many companies have moved to focusing on either design or production- few do it all (Intel is a noted exception)

Other issues from articles
Other issues from articles

  • Companies are buying design, production, HR, accounting and just about anything else you can think of.

    • This is totally different from just buying parts from China for a lower price

    • Don’t want to be a low price supplier with no other skills / attributes

      • What are the Indian IT suppliers doing already

What besides price do we need to consider when making this decision
What besides price do we need to consider when making this decision?

1) Is the input critical to the success of the product ?

2) Is the number of available suppliers extremely limited (if they exist at all) ?

3) Does the process make use of one or more of our core competencies ?

  • Generally if the answer to any of these questions is yes we perform the process because it is strategic / critical to the customer

    • Process helps customer differentiate

Core competencies capabilities
Core competencies / capabilities decision?

  • At the firm level determining core competencies is a key strategic task.

    • What is it that our firm does best - preferably better than anyone else.

    • What knowledge, skills and abilities are needed to compete in our market today and in the future ?

  • The supply chain managers role

    • The key contribution that SCM makes is identifying the K,S,A’s that external producers possess. What can our suppliers do better than we can (even if we could do it) ?

Core competencies examples
Core competencies: examples decision?

  • Honda

    • small engines

  • Solectron and Flextronics

  • Porsche – article

    • Why do they “rent” out their engineers?

  • BAE in Wichita-

    • Long structural parts for an airplane

  • OSU

  • Wal-mart

    • materials management

Other strategic issues
Other strategic issues decision?

  • Capacity

    • we may not have the capacity for a strategic item – lots of low volume car production

      • BMW X3 / most convertibles (Boxter / Solara)

  • No suppliers and not our core competency

    • can we afford to develop a competency ?

    • can we afford not to ?

    • can we develop a supplier ?

  • Suppliers becoming competitors

    • the Dodge brothers

    • Japanese electronic sub-contractors

Strategic issues continued
Strategic issues continued decision?

  • Workforce - especially with a union

    • Boeing Engineers last strike

      • outsourcing

      • overtime

  • Knowledge retention

    • Prince makes dies in order to maintain the design knowledge

  • Government

    • are defense contractors too vertically integrated ?

    • local content

  • The hollow corporation

Some recent examples of make buy
Some recent examples of make buy decision?

  • Space shuttle maintenance – not done by NASA

  • Service outsourcing from articles

    • Call centers and programming went first

    • Now design of products and processes now (including Boeing doing some design in Russia)

  • BMW – X3 speed and capacity

  • Airport security- the TSA

    • Brought work back “in house”

  • Dell outsourcing the recycling of computers to prison labor

Total costs of make buy

Price decision?

Time / speed




Future innovation

Delivery reliability


Relationship to other products




changes in structure

increases in

allotments of

Human resources

hire / fire/ re-train


Cathy Lee is exploiting children

Total costs of make buy

Getting specific making

Why we perform a process decision?

costs --->

integrate facility

use excess capacity and absorb overhead *

need to understand strategy


design secrecy

unreliable suppliers

other responses


Costs to make


direct labor

production and QC

inventory costs

overhead **

managerial costs

purchasing costs

costs of capital

opportunity costs

Getting specific: making

A note on overhead
A note on overhead decision?

  • When capacity exists and is idle or underutilized then the make buy calculations change.

    • If in order to make we need to purchase new equipment, expand the plant, or hire new workers - then our overhead costs increase as well.

    • However, if the capacity already exists then the change in overhead is minimal and we must be careful how we calculate.

      • finance and the set burden

      • does this mean 100% utilization ?

      • ABC and other allocations

Getting specific buying

Why we buy decision?

costs --->

supplier capabilities

small volume

we don’t have capacity

especially short term

avoid hiring

atlas tool and die

maintain multiple sources


Costs to buy



incoming inspection ?

purchasing costs

quality, service, delivery, etc.

Getting specific buying

Make buy conclusions

Make decision?

strategic inputs


fixed are higher

variable are generally lower (otherwise why make ?)

Major benefit - control

Drawback - loss of flexibility


what others can make at a lower total cost

what we do not have the capacity or capability to make

Costs: all variable

Major benefit -flexibility

Major drawback


long term hollowing

Make buy conclusions

The supply chain managers job when we make
The supply chain managers job when we make decision?

  • Once we decide to perform a process it is often difficult to stop. Why ?

  • Purchasing (should) play a role in determining if we should continue to perform a process.

    • Masco-tech forging and Masco-tech machining operations - how much is vertical integration worth ?

  • Boundary spanning - there are always new sources of supply - some of whom may change our make buy decisions.

The gray zone
The gray zone decision?

  • Many make buy decisions are not black and white- they have a gray zone in-between pure make and pure buy.

    • Die shops can either machine from a blank (pure make), buy a finished part (pure buy) or machine from a forging (Gray zone).

    • Don’t have to outsource all of HR- might send out payroll and benefits administration (repetitive tasks) and keep recruiting?

Benefits of the gray zone
Benefits of the gray zone decision?

  • Transition:

    • especially for services

      • payroll and taxes - as we learn to do it we can take on more responsibility - also may be linked to growth

    • ramping up capacity (for us or a supplier)

  • Increased options - flexibility

    • in the laundry example we go from 2 options to many (although buying just a dryer may be a bit odd)

Summation decision?

  • A key issue to address is who performs a process.

  • We generally try and perform strategic processes.

  • Make buy is based on lowest total costs and available capacity.

  • Most make buy decisions have a gray zone that can be exploited to increase our options.

  • Even for processes we perform, purchasing has a role to play. And this role is very important.