MAKE OR BUY DECISION

INTRODUCTION

The make-or-buy decision is the act of making a strategic choice between producing an
item internally (in-house) or buying it externally (from an outside supplier). The buy side of the
decision also is referred to as outsourcing. Make-or-buy decisions usually arise when a firm that
has developed a product or partor significantly modified a product or partis having trouble
with current suppliers, or has diminishing capacity or changing demand.

Make-or-buy analysis is conducted at the strategic and operational level. Obviously, the
strategic level is the more long-range of the two. Variables considered at the strategic level
include analysis of the future, as well as the current environment. Issues like government
regulation, competing firms, and market trends all have a strategic impact on the make-or-buy
decision. Of course, firms should make items that reinforce or are in-line with their core
competencies. These are areas in which the firm is strongest and which give the firm a
competitive advantage.

A make-or-buy decision is the act of

choosing between manufacturing a product
in-house or purchasing it from an external
supplier. In a make-or-buy decision, the two
most important factors to consider are cost
and availability of production capacity.

An enterprise may decide to

purchase the product rather than producing
it, if is cheaper to buy than make or if it does
not have sufficient production capacity to
produce it in-house. With the phenomenal
surge in global outsourcing over the past
decades, the make-or-buy decision is one
that managers have to grapple with very
frequently.

The increased existence of firms that utilize the concept of lean manufacturing has prompted
an increase in outsourcing. Manufacturers are tending to purchase subassemblies rather than
piece parts, and are outsourcing activities ranging from logistics to administrative services. In
their 2003 book World Class Supply Management, David Burt, Donald Dobler,
and Stephen Starling present a rule of thumb for out-sourcing. It prescribes that a firm outsource
all items that do not fit one of the following three categories:

The item is critical to the success of the product, including customer perception of
important product attributes;
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The item requires specialized design and manufacturing skills or equipment, and the
number of capable and reliable suppliers is extremely limited; and

The item fits well within the firm's core competencies, or within those the firm must
develop to fulfill future plans. Items that fit under one of these three categories are
considered strategic in nature and should be produced internally if at all possible.

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WHAT IS OUT SOURCING

The term outsourcing means to contract out one of more business activities to an external
agency. the term emerged long back in 1960s where it was just a small scale data process and
now has grown to different levels of BPOs and KPOs. US was truck with economic immobility
leading to very high inflation rates and then companies started outsourcing their service jobs to
locations where they could get cheaper labour, in order to regain their profits. Common
processes outsourced by companies are:

Technology operations.
Customer relationship.
Logistics.
Finance / accounting.
Purchasing.
Research and development.
Operations.
Maintenance / repair.
Service management.
Sales / marketing.
Legal processes.
E Commerce.

Outsourcing industry grew rapidly in India because of

Globalization of economy and

Technological advancement.

Outsourcing boomed throughout India in the late 1990s and 2000s after IT has emerged in the
country. Many US companies started outsourcing their IT related tasks (back office jobs) to low
cost locations like India and China (both are leaders on Outsourcing today) to save on the high
labour cost. Hence, it can be seen Internet boom is the main factor responsible for the success of
Outsourcing. India possesses huge pool of talent, cheap labour and time zone advantage and
these are the reasons for many global companies outsourcing their back office operations in
India.

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REASONS FOR OUTSOURCING

Lower operational and labor costs.

To continue focusing on their core business processes while delegating monotonous time
consuming processes to external agencies.
To leverage on the global knowledge base, having access to world class capabilities.
Freeing up internal resources that could be put in to effective use for other purposes.
Wash their hands off functions that are difficult to manage and control.
Reduce risk.
Realize the benefits of re-engineering.
Expand and gain access to new market areas, by taking the point of production or service
delivery closer to their end users.
Foster innovation.
Improve quality.

ADVANTAGE OF OUTSOURCING

Improved efficiency.
Improved operational performances.
Productivity improvements.
Access to expertise and superior competency.
Operational cost control.
Improved accountability.
Shorter project delivery times.
Opportunity to focus on core business concerns.
Enhanced employment opportunities.
Handling of miscellaneous jobs.
Access to newer markets (in case of off shoring)
Expertise of the service provider.

DISADVANTAGES OF OUTSOURCING

Service expectations mismatch.

Lower than anticipated cost savings.
Data theft.
Higher training costs.
Monitoring costs.
Compromising confidentiality.
Loss of control.
Information security.

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Customer dissatisfaction.
Increase in cash outflow.
Time consuming.

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