MAKE OR BUY DECISION 

Introduction:

A common problem usually faced by manufacturing company is whether it should itself make all the components or by some of them from outside sources. in many cases it might just not be possible for a company to make all the components in its own factory. for example  take a car factory. it me not itself make tyres or batteries or cushion seat. Most manufacturers of radio or television set by most of their major components like was transistors picture tube from outside sources. However,  there can be cases where a company has the capacity to make the component. yet a question may arise, whether it would be worthwhile to buy from outside rather than make it. decisions of this type are usually called “ make or buy decisions”.

 Factors involved in making decisions:

There are several implications in make or buy decision, and in fact,  it has many aspects of Management policy involved in it. the Purchase Manager is usually a prominent participant in the decision  and can render export advice on the availability and price of such materials and components outside the  organisation.

 every component can be obtained by a company either by procuring  it from outside or making it within its own factory. which is more economical and practicable? the comparative merits and demerits of each of these two alternative will have to be evaluated. There are several parameters on which such revaluation has to take place like price, quality, reliability, dependability etc.ultimate decision should be based on the best overall interest of the company.

The following broad factors are usually considered in deciding a make or buy issue.

 Making in one's own company:

 1  cost studies conducted by the company may reveal that it is cheaper to make a part or component then to buy it from outside. it should be emphasized here that the cost factors evaluated should be very accurate and not mere estimates.

2. Excess plant capacity is available within the factory to absorb overheads. the issue to be carefully considered is whether the ideal capacity is a purely temporary phenomenon or not.

3.  the item may be a specialized one  and may require extensive investment in facility which may not be available at suppliers end. the supplier may not be keen on spending the money for such facility.

4.  item may have a demand that is both relatively large and stable and the company may consider it profitable purely from the investment angle.

5.  quantity required may be too small to interest a supplier. before deciding to make, it may be considered whether buying a sufficient quantity and carrying an inventory for a longer period of time may be feasible or not. if this can be done, the inventory carrying cost should be compared with the extra cost incurred in producing the components in an economical quantity. if it is unprofitable for a supplier to accept small quantity orders, it may be equally unprofitable for the user to make them.

6.  the item may be very vital to the company's product and may require extremely close quality control which the supplier cannot be relied upon to exercise.in some cases, the item may be unusual or Complex requiring expert supervision in manufacturing in order to ensure quality control.

7.  the item may be closely allied to some other components made by the company. is manufacturing Mein closely feet and shoot the know-how or technology available and the company may poses equipment which can easily make it.  experience may be available within the company and can be profitably utilised to manufacture the item.

8. making a component within our company will facilitate control of parts changes in inventories and deliveries.

9.  the part may be too big and difficult to transport.

10.  the design of the part of its processing is confidential and the company may not wish to  make it outside purely for security reasons.

11.   there may be only a single outside source of supply and that to may not be very reliable. the company may not consider it wouldn't to rely on one single source.

12.  there may be a desire to integrate plant operations.

13.  there might be a desire to maintain a stable workforce during a period when this sales have declined.

14.  tax considerations can often be a major factor. when  materials are purchased, one often pays GST and this can make a considerable difference to the cost of the product.

 Buying from outside sources:

1.  cost studies may show it is cheaper to buy from outside then to make it inside

2.  Space, equipment, time or skills are not available within the company to develop the necessary manufacturing operations.

3.  the company does not have the facilities to make the item or further investment would be necessary. even if the necessary capital is available, there might be more profitable opportunities for investment would be made.  it can also happen that, the volume required maybe so small that the investment might not be justified.

4. the existing facilities are capable of being used more profitably to make other components.

5.  the skills of the company personnel are not adequate to manufacture the component

6.  patent and legal barriers prevent the company from making the component

7.  demand for the component is seasonal or temporary

8.  the need of special techniques or equipments make buying more logical.  the supplier may help to produce a better engineered product. supply is likely to be a specialist in the manufacturing of items that constitutes his regular line. thus, in buying, one obtain the benefits of specialization.

9.  the company thinks it best for its executive to concentrate on their own speciality rather than dissipate their energies elsewhere.

10.  a wide selection is available from a large number of suppliers.

Make or buy decision is not taken only at the time of setting up of factory, but is a matter which desirably should be continuously reviewed. the search a decision has on the profitability of the company. of course it would also be necessary to think of other factors also like, for example, the Industrial Relations in the company. Mod number of workers that are employed the greater the  overhead.  profit is not the sole criterion.

 sometimes a make or buy decision becomes necessary when the current source is no longer able to supply the material in accordance with buyers quality requirements. another reason may be the poor service or delivery failures on the part of the supplier. yet other reasons may be major price increases or increased sales of the item concerned are making it more profitable to make in house.

when the items is being purchased from outside supplier, following points must be considered and checked.

1.  is adequate capacity available within once company on a long-term basis to make this item or will investments of more funds be required? If so, how much and what will be the return on such investment?

2. Is the necessary raw material required for producing this item readily available and economic rates?

3.  if new tools dies Jigs fixtures are required? what would the cost, what is there expected life and when can they be made available?

4.   is the current supplier the most economical source or are there other possible sources which have not been tapped yet?

5.  is the current supply making the product exclusively for the buying company aur is manufacturing the product for others also? ( this can make a considerable difference to cost)

6.  is there a patent involved,  and if so will not royalties have to be paid?

7.  whether the buying company save taxes by making instead of purchasing?

8.  is a supplier progressive, keeping pace with the latest developments? easy making efforts to improve the quality of his product, for example, using value analysis techniques?

9.  what about the quality of the items supplied by the current supplier?  IDhas it ever been  failed?  what about his performance with respect to quantity and delivery promises?

10.  has  supplier been increasing the price of the item? if so, for what reason? will the same reasons cause problems if the company makes them?

When the item is being manufactured within the organisation:

1.   is there a matter of secrecy to be considered?  very often this factor can be exaggerated beyond proportion. Once Upon A Time perhaps no one was making it and the process or design was required to be kept confidential. today perhaps this process is common..

2. if this item is purchased instead of being made would it result in closure of a department and render people surplus?

3.  what will happen to the tooling? can it be sold to the outside sources? will make the item concerned for the company?

4. can the machinery involved in the manufacturing process of this item be utilised adequately and economically for other purpose?

5.  are the quantities in world large enough to interest and outside supplier?

6.  the true cost incurred by an outside supplier compared with the cost of manufacturing in one's own company?

the make or buy decision is by no means simple. it not only involves the tangible factors mentioned above, but may involve an analysis of the present and future market and economic, trends of the advantages of inflexibility in supply source,possible development in Raw materials and processes etc. every decision requires to be reviewed later on in the light of the circumstances then prevailing.