Factors deciding Making in Own Organization or Buying Outside | Modern Trend

Various factors contributes to Make or Buy Decisions in an organization. Quantitative factors such as considerations of costs, idle facilities, Qualitative factors such as product quality, patent (legal restrictions), availability of skilled labor, required materials etc contributes to idea of whether making in one’s own organization is economically affordable or to buy in from outside sources. Lets see some of the other factors that affects the Make or Buy Decisions.

Make or Buy

Make or Buy

Factors deciding Making in One’s Own Organization

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

2. If excess plant capacity is available within the factory to absorb overheads, the issue to be carefully considered is whether the idle capacity is a purely a temporary phenomenon or not.

3. The item may be a specialized one and may require extensive investment in facilities which may not be available with the supplier. The supplier may not be keen on spending the money for such facilities, unless, the buyer guarantees him a minimum order and a minimum price, both of which might involve risks from the buyer’s point of view.

4. The 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. The quantity required may be too small to interest a supplier. Before deciding to ‘make’ for this reason, it may be considered whether buying a sufficient quantity and carrying an inventory for a longer period of time may be feasible. If this is done, the inventory carrying costs should be compared with the extra cost incurred in producing the component in uneconomical quantities. 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 extreme close quality control monitoring which the supplier cannot be expected to exercise. In some cases, the item may be unusual or complex requiring expert supervision in manufacturing in order to assure quality control.

7. The item may be closely allied to some other components made by the company. Its manufacture may closely fit and suit the know-how or the technology available and the company may possess the right equipment which can easily manufacture the item. Experience may also be available within the company which can be profitably utilized to manufacture the item.

8. Making a component within a company will facilitate control of part changes, inventories and deliveries.

9. The part may be too big and difficult to transport favouring a make decision.

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

11. There may only be a single outside supply source and it may not be very reliable. For example, the supplier’s organisation may not be financially stable or it may have constant labour problem, and so on. It is not prudent to rely on one such single source.

12. The available suppliers may be totally unreliable in terms of quality, delivery, etc.

13. There might be a desire to integrate plant operations.

14. There might be a desire to maintain a stable work force during slack period, when the sales have declined.

15. Tax considerations can be a major factor. When materials are purchased, one often pays excise duties or sales tax or octroi and these can make a considerable difference to the ultimate cost of a product.

Factors deciding Buying from Outside Sources

It is better for an organization to buy a component if the following factors are found favorable.

1. Cost studies may show that it is cheaper to buy from outside than to make it on one’s own.

2. Space, equipment, time and/or skill, etc., may are not available within the company to develop the necessary manufacturing operations.

3. The existing facilities are capable of being used more profitably to make other components.

4. Patents or legal barriers may prevent the company from making the components.

5. Demand for the component would be only seasonal or temporary.

6. An organization may see it fit to concentrate more on their own specialty areas rather than dissipate their energies elsewhere. A supplier may be a specialist in the manufacture of the component. Hence, it is wise to obtain the benefits of his specialization.

7. A wide selection is available from a large number of suppliers. A 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, the disadvantages of inflexibility in the supply source, possible adverse developments in raw materials and processes, etc. Every decision requires to be reviewed later on in the light of the circumstances then prevailing.

The purchase department has a very vital part to play in this matter. The initiative often rests with them. The purchase department finds out and supplies all the relevant information necessary for taking correct decisions. If the purchase department is alert to the company’s needs and also to the developments in the supply market, then it will be in a position to initiate thinking on the right lines and render good advice to management. The main criterion, as stated earlier, should be on profitability.

Modern Trend in Make or Buy Decision

There is a tendency on the part of many manufacturing companies, especially the engineering units to prefer to buy rather than make. There are several compelling reasons for this:

1. The component or part manufacturer could be a specialist in that particular product. He may produce in large numbers and will be able to make the product at a much lower price than if one had a in-house production unit as it would generally be running far below capacity.

2. Being a specialist, he would generally have the tendency to update his technology. Investment in latest technology would also be possible for him in view of the good returns on investment.

3. If most of the items are to be made in-house, there would be problems of inadequate managerial attention. This would affect quality assurance.

4. Ancillary units are set up by the main company, sometimes as joint sector or partnership companies, quite often near the main plant. A typical example is Maruti Udyog Ltd., at Gurgaon near New Delhi. A large number of ancillaries are have been set up near the main Maruti plant. The same was the case with Bharath Heavy Electricals Ltd. (BHEL) and other public sector undertakings. The concept today is that an ancillary unit is considered as an extension of the one’s factory and the buyer-seller relationship is that of partners or even that of co-producers. The present trend all over now is to buy components from outside, the buying company being more of an assembler.

5. Excellent inventory reduction is possible as an organization can buy its exact requirement, just-in-time can be practiced.