Make-Or-Buy Decision

Make-Or-Buy Decision also known as "MOB decision") can be explained as a result of decision process or in a border sense - the whole act of making a strategic choice between producing or buying the goods or services. It gives an answer what would be more profitable for the company - making the goods on their own, internally or buying it from the supplier chosen.

David Probert, the author of "Developing a Make Or Buy Strategy for Manufacturing Business", defines it as "the choice of whether to carry out a particular process or activity within you own business or to buy it in from a supplier"). It confirms that make-or-buy decision is relate not only to production but to services also.

Reasons for consideration MOB decision

Among aspects that prompts to consider make-or-buy decision stands out:

• Not satisfying quality of the goods
• Level of costs
• Too little space to expand company activity
• Unstable demand and sales fluctuations
• Disappointing cooperation with suppliers
• Widening the range of products offered

Make-or-buy-decision process

The process of making decision if it is better to manufacture the goods in-house or to buy them can be divided into four stages.

1. Planning stage.
2. Evaluation stage.
3. Analyzing stage.
4. Selecting stage.

Planning stage is an initial part of the process. It requires an action of company's management which is supposed to inform the employees of the initiative of considering making or buy decision. Their responsibilities consisting of organizing the group of people - the project team which will be responsible for analyzing costs, advantages and disadvantages of implementation outsourcing. In this stage senior management needs to announce the initiative, choose the project leader and team members who will have knowledge about different parts of company's activity. What is important, in the make-or-buy decision process an independent advisor should be involved. The person which is not directly connected with the company environment has clear view of what is likely or unlikely to happen after implement outsourcing.

Evaluation stage requires getting knowledge what impact on organization activity outsourcing will have. The company needs to distinguish their core competences which give them competitive advantage on the market.

Analyzing stage is a phase in which costs are analyzed. The analysis concerns both: fixed and variable costs and needs to take into consideration also forecast for the future changes. What is more this stage of make-or-buy decision process analyze the current and foreseen performance of the company. Estimating the costs of activities which are considered to outsource and the cost of providing them by outsourcers gives the answer if the company should or should not outsource them.

The result of previous stage determine existing of the last - selecting stage. It consist of selecting the provider and making final decision if the company would make their own products or buy them from other companies.

Advantages of outsourcing

The main reasons for choosing "buy decision" and outsource the goods are:

• Focusing on core competences instead of dealing with activities which make no profit for the company.
• Possibility of improving offer by choosing the most competent, well qualified supplier.
• Reducing cost by choosing supplier which can offer competitive price. Supplier by using economies of scale can produce the same goods or provide the same service at lower price.
• Possibility of increasing flexibility and react faster to changes in customers behavior or in the market.
• Less risk to take due to transfer it to supplier (outsourcer). Outsourcing also gives the company possibility to implement supplier management system which can improve the quality of cooperation.

Problems with outsourcing implemented and ways to avoid it

Decision of outsourcing some activities to external suppliers can lead to some problems to deal with e.g

1. Loss of leader position in the market because of providing products which are too similar to competitor's ones. The reason of this situation can be using the same proprietary technology by outsourcer for all of customers.
2. Cooperation with only one supplier. The reason of this problem is the lack of supplier which will meet company's requirement or company's own decision not to look for alternative one. Difficulties with negotiating prices or terms of agreement while company have only one supplier seems to be common.

Problems mentioned can be avoid by well-organized decision process which will focus on avoiding outsourcing core competences, choosing more than one supplier the company cooperate with and making sure that the same technology will be used only for company, considering terms, costs and influence in long term time horizon.

Examples of Make-Or-Buy Decision

• Many companies, who manufacture products, face the decision of whether to make their own components or buy them from an outside supplier. This is an example of a make-or-buy decision. The company has to weigh the cost savings of making their own parts against the cost of purchasing them from an outside source.
• Another example of a make-or-buy decision is when a company has to decide between hiring an employee to do a specific task or outsourcing the work to a third-party. In this scenario, the company has to determine which option is more cost effective and if the quality of the work will be better with an in-house employee or with an outside contractor.
• Another example of a make-or-buy decision is when a company has to decide between purchasing an existing product or investing resources in developing their own product. The company has to consider the cost of developing their own product and the potential financial rewards that come with it, versus the cost of purchasing an existing product.

Limitations of Make-Or-Buy Decision

A Make-Or-Buy Decision can have several limitations, such as:

• Cost: The cost of making a product or service in-house may be higher than buying it from an external supplier. In addition, the cost of producing goods or services internally needs to be compared with the cost of buying it from the outside.
• Time: When deciding to produce the goods internally, the company needs to take into account the time it will take to produce the goods or services. This should be compared to the time needed to buy the goods or services externally.
• Quality: Quality of the goods or services produced internally might be lower than the quality of the goods or services bought from an external supplier.
• Expertise: The company must consider the expertise and resources needed to produce the goods or services internally. It should be compared with the expertise and resources available from an external supplier.
• Risk: Producing goods or services internally can be more risky than buying it from an external supplier. The company should consider the risk involved in producing the goods or services internally and weigh it against the risk of buying it from an external supplier.

Other approaches related to Make-Or-Buy Decision

In addition to the Make-Or-Buy Decision, there are several other approaches to consider when making strategic decisions. These include:

• Do-It-Yourself Decision: This decision-making strategy involves producing a product or service internally instead of outsourcing it. This approach can be cost-effective if the company has the necessary resources, time and expertise to complete the task.
• Outsource Decision: This decision-making strategy involves hiring an outside party to produce a product or service. This approach can be more cost-effective if the company has limited resources and expertise to complete the task.
• Joint Venture Decision: This decision-making strategy involves creating a joint venture with another company to produce a product or service. This approach can be more cost-effective if the company has limited resources and expertise to complete the task.
• Licensing Decision: This decision-making strategy involves licensing a product or service to another company for a fee. This approach can be more cost-effective if the company has limited resources and expertise to complete the task.

In summary, there are four main approaches to consider when making strategic decisions, including the Make-Or-Buy Decision, Do-It-Yourself Decision, Outsource Decision, Joint Venture Decision and Licensing Decision. Each approach has its own cost and benefit considerations and should be carefully evaluated before making a final decision.

Footnotes

Make-Or-Buy Decision — recommended articles

Make or buy decision — Open tender — Strategic cost management — Management company — Make-or-buy analysis — Supplier — Relations between supplier and customer — Strategic business unit — Conglomerate diversification

References

1. Bajec P., Jakomin I. (2010)A Make-or-Buy Decision Process for Outsourcing, "Traffic&Transportation", Vol. 22, No. 4.
2. Baugley P., Sarkadi M., Tiwari A. (2013), Analysis Of The "Make Or Buy" Decision Process In A Research And Development Sme, Cranfield University, Cranfield.
3. Probert D. (1997), Developing a make or buy strategy for manufacturing sector, The institution of Electrical Engineers, London.
4. Sillanpää I. (2015), Strategic decision making model for make or buy decisions . "International Journal of Logistics Economics and Globalisation" Vol. 6, No. 3.

Author: Sylwia Zych