Introduction

The decision as to whether buy or make goods or services particularly for those products that play a critical role in the final product of the good or the service depends on many factors. The decision of whether to buy or to make extends far beyond manufacturing encompassing information technology, human resources, maintenance and other fundamental functions of business. Officers in procurement sector of any organization must play a major role in helping the business units in making such decisions (Busse 2002, pp. 298). As many organizations come under pressure to cut on the expenses and consequently improve their sales, the dilemma has been whether to keep certain functions in-house or to outsource them. In this reference, this paper examines some of the factors that a business should consider in deciding whether to make or buy the product.

Before an organization can give up on in-house activities, there is the need to objectively assess the core competencies of the organization and measure them with reference to the standards that are regarded as world class. Chief Procurement Officers in any organization must oversee and manage third party suppliers so that they can generate a high level of productivity and quality (Busse 2002, pp. 298). More so, these procurement officers must ensure that their businesses are protected from quality, material and delivery failures that may impact negatively upon their businesses. A business aspiring to make profits and maximize benefits must make a sound review of make or buy decision. The decision as to buy or to make is that act of deciding through strategic choice whether to make a product internally or buy it externally from a certain provider who is an outsider to the bossiness (Coase 2000, pp. 15). Making an ideal choice can be a core factor in sustaining the competitiveness of the company. Competitive advantage is one of the most important tasks of a sound management and as such management must strive to maintain it. Several factors affect the decision to buy or make the product. These are as discussed below.

Business Strategy Factors

The business strategy entails the strategic importance of the products or services to the company that is under consideration of being outsourced (Levenstein & Suslow 2006, pp. 46). Additionally, the technology, process and the skills that are required to deliver the service or to make the product must be considered. These factors should be considered not only in the light of the current environment but also in expectations of how that environment may change in the foreseeable future. It is important to select the decision to make when a function or the product is essential to the performance of the company and is considered a key operation. If the product is time sensitive and is prone to changes in design, it would be better that that product be manufactured in-house. Third party manufacturer may end up making a mistake which could cost the company (Fontenay & Liebenau 2006, pp. 140). Conversely, it may be good to outsource if the business is aiming at eliminating labor and capital intensive processes in the balance sheet, reduce costs, gain flexibility and change output with regard to the changing demand, eliminate management of training or paperwork, supervise few workers, leverage on external expertise and gain access to new technologies or processes (Levenstein & Suslow 2006, pp. 46).

Harley-Davidson Inc., a Milwaukee-based company, has shown the importance of business strategy in making a decision as to whether to outsource or to make it. The motorcycle company in America has continued to thrive due to its decision to manufacture its product in-house. Honda, on the other hand, buys its products from anywhere in the world as long as these products are in good condition (Sako 2004, pp. 294).In certain cases, outsourcing is worth considering. If a function or a product is derived from certain factors other than the differentiating and unique capabilities and any possibility of moving management or production to a third party cannot give rise to risk on the management of the company, outsourcing would be the best in that case. Furthermore, when outsourcing is resorted to, management of the company can use knowledge of the supply base in comparing the capabilities of supply chain management and the ability to collaborate (Litvin, Xu & Kang 2004, pp. 188).

Risks Factors

Risks may include such factors such as low quality, predictability, and reliability of the outsourced products when compared with the products that have been made in-house. These risks also include those risks that are inherent in the process of selecting the right outsourcer and in structuring a relationship that is workable (Fontenay & Liebenau 2006, pp. 140). The management of the company must play multiple roles in managing these risks. The chief procurement officers of the company must encourage their organizations to view service providers and supply chain as partners who manages an entire function or delivers the whole product. They must also ensure that risk assessment has been carried with due diligence and care. They must also supervise the signing of the contract so that the organization is being protected from deficiencies of the supplier (Williamson 1985, pp. 88).

To avoid such cases, certain companies have developed measures for evaluation of their suppliers. Nissan, for instance, has developed an Enhancement Plan that places emphasis on diagnosis and evaluation of its suppliers (Sako 2004, pp. 294).The company has a series of measures concerning its suppliers. Such measures include data quality cost and delivery, financial performance, evaluation of systems governing components, factories, and companies. Additionally, Nissan meets with its suppliers at least twice every year as a way of increasing evaluation and diagnosis of its outsourcers. Its personnel Department also has been educating its workers and suppliers as it understands that the existence of 25 suppliers requires much care. It is however not common for a company to hire multiple outsourcers at the same time for the same products or service. General Motors Corporation, however, did this in 2006 to minimize risks. At times this may benefit a company as it increases competition (Sako 2004, pp. 294).

Important to preventing risks is the selection process of the supplier. Selection must be based on a comprehensive understanding of the strategy, cost structure and strategy of the supplier. Choosing the bidder with the lowest quotation is not sufficient. The selection should be based on only that supplier who has a business strategy that is compatible and will ensure cost advantage over time and that competitive prices, in the long run, will be achieved. More so, the financial viability of the supplier must be considered. A business must be concerned as to whether the supplier will be in business for some time and whether the company is too dependent on the contract to survive (Williamson 1985, pp. 88). Understanding those risks that are associated with the location of the supplier is important. It is also wise to assess the political stability of a country in case the supplier is not in the same country the business is as political conflicts may pose risks through interfering with delivery time. Equally important is the ability to evaluate the transport arrangements and lead times so that risks can be eliminated in time.

Economic Factors

There are a number of economic factors that a business must consider in its decision on whether to buy or make a product. These factors include the impact of outsourcing on the assets return, capital expenditures and possible savings that may be achieved through outsourcing. The primary concern of the procurement department in any organization should be to shift the discussion from finished good’s price to the entire cost of providing the service of the good (Helper & Sako 2010, pp. 400). For such to happen, there must be an identification of the cost drivers of the suppliers and then design a mechanism, of pricing that will reflect the current costs and how it will change in the future. This is to make sure that improvements on costs that are ongoing are covered in the agreement between the business and the supplier.

Among those total costs that must be put into consideration include the outlays for the management of supplier. Sometimes if outsourcing partners happen not to have been chosen properly, organizations will attempt to protect themselves from delays or failures by duplicating in-house some of the efforts that had been farmed out (Helper & Sako 1995, pp. 77). This may result in high costs for the same products. It is important that certain costs that tend to be ignored be put into consideration during the writing of the contract. These costs include shipping and handling costs, administrative expenses that cater for quality control and management of the supplier, expanded inventories and lower return on capital that has been invested. It is, therefore, important that any organization pay attention to all costs including those hidden costs before it outsources. Toyota, a manufacturer of vehicles, has put much focus since the 1960s on its suppliers. Unlike Nissan, Toyota has focused on component design and development from its suppliers relying less on suppliers as a way of eliminating costs that may occur by depending on inter-lateral suppliers as Nissan has depended on (Sako 2004, pp. 294).

How to Mitigate Problems in Make-buy Decision

From this case of buy or make the product several threads run through the process on how to solve some of the issues that are experienced in making a perfect decision. Companies must engage in an effective evaluation of the process by examining both sides of outsourcing and making the product in-house as a way of solving this dilemma (Hikino & Chandler 2009, pp. 46). In case a company is outsourcing it must have details of the supplier such as quality data, the financial viability of the company and the cost structure of the supplier. As noted, a low bid may not always mean that the supplier is the best and there is always the need to evaluate all the bidders thoroughly.

In any case, the procurement process must be open to prevent writing the contract with a supplier whose credibility is low (Hikino & Chandler 2009, pp. 46). Where outsourcing is much economical as compared to making the product in-house then, a company may result in it.  A business must also ensure that it can estimate the lead times and the transport problems likely to affect the delivery of the product to avoid cases of disruption to the business. One thing to put in mind is that a business must have resources and skills that are needed in managing the outsourcers so that they make quality products over the contract life. Without these skills and resources outsourcing may prove disappointing (Helper & Sako 1995, pp. 77). On making the products or on offering the services a business must consider other factors such as the ability to design, resources and quality of the service or delivery. Therefore, to solve the problem of deciding on whether to make or buy a product or service depends on an effective evaluation of multiple factors as discussed.

Conclusion

As can be seen from a number of factors that must be taken care of when making a decision as to whether to outsource or make a product, the decision of outsourcing versus in-house must be made with adequate analysis. The management of an organization must ensure that this analysis is not only initiated but must be conducted in a careful manner throughout the entire process. It requires a high level of skills to deal with this decision. Though the decision of whether to outsource or to resort to in-house strategy is strategic and cross-functional, the decision to make outsourcing work lies with the procurement function. Therefore purchasing executives must not be passive in ensuring that their input is articulated clearly.

References

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