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1. MAKE OR BUY,
INSOURCING/OUTSOURCING
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2. Analysing Strategic Outsource
Decisions
 Option to make or buy is first presented at
the beginning of product life cycle during
new product development.
 Vertical integration to make or in source
material can affect cost, flexibility and
responsiveness.
 Lean manufacturing (lean firms
increasingly buy more and make less)
mindset is the current trend.
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3. Analysing Strategic Outsource
Decisions
Deal first with Subsystems of the Products
No Outsource
Is it Strategic ?
Yes Further Analysis Required
Deal Next with components and parts that make up the strategic
Subsystem.
Can the subsystem be No Make In-house
Broken down into
Families of components Are families of NO outsource
And parts? components and
Parts Strategic Yes Make in-house

4. Analysing Strategic Outsource
Decisions
Outsource subsystems and components unless they fall into
following categories.
 a) Item that is critical to success of the product, including
customer perception of important product attributes,
 b) An item that requires specialised design and
manufacturing skills or equipment and the number
of capable and reliable supplier is extremely limited.
 c) Any item that fits well within the core competencies or
within those the firm must develop to fulfill further plans.
Relative costs and volume requirement is also a
consideration despite core competencies.
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5. Reasons for Make Instead of Buy
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• The quantities are too small and/or no supplier is interested or
available in providing the goods.
• Quality requirements may be so exacting or so unusual as to
require special processing methods that suppliers cannot be
expected to provide.
• There is greater assurance of supply.
• It is necessary to preserve technological secrets.
• It helps the organization obtain a lower cost as the purchase
option is too expensive.
• It allows the organization to take advantage of or avoid idle
equipment and/or labour.
• It ensures steady running of the corporation’s own facilities,
leaving suppliers to bear the burden of fluctuations in demand.

6. Reasons for Make Instead of Buy
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• It avoids sole-source dependency.
• Competitive, political, social or environmental reasons may force an
organization to make even when it might have preferred to buy
• The distance from the closest available supplier is too great.
• A significant customer required it.
• Future market potential for the product or service is expanding rapidly
and forecasts show future shortages in the market or rising prices.
• Management takes pride in size.

7. Reasons for Buying Outside
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• The organization may lack managerial or technical expertise in
the production of the items or services in question.
• The organization lacks production capacity.
• Certain suppliers have built such a reputation for themselves
that they have been able to build a real preference for their
component as part of the finished product.
• The challenges of maintaining long-term technological and
economic viability for a noncore activity are too great.
• A decision to make, once made, is often difficult to reverse.
• It assures cost accuracy.
• There are more options in potential sources and substitute
items

8. Reasons for Buying Outside
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• There may not be sufficient volume to justify in-house production.
• Future forecasts show great demand or technological uncertainty an d
the firm is unable or unwilling to undertake the risk of manufacture.
• A highly capable supplier is available nearby.
• The organization desires to stay lean.
• Buying outside may open up markets for the firm’s products or services.
• It provides the organization with the ability to b ring a product or
service to market faster.
• A significant customer may demand it.
• It encourages superior supply management expertise.

9. Considerations Which Favour Making
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• Cost considerations (less expensive to make the part)
• Desire to integrate plant operations.
• Productive use of excess plant capacity to help absorb fixed
overhead.
• Need to exert direct control over production and/or quality.
• Design secrecy required.
• Unreliable suppliers.
• Desire to maintain a stable work force (in periods of declining
sales).

10. Considerations Which Favour Buying
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• Limited production facilities
• Cost considerations (less expensive to buy the part)
• Small volume requirements
• Suppliers’ research and specialized know-how.
• Desire to maintain a stable work force (in periods of rising
sales).
• Desire to maintain a multiple source policy.
• Indirect managerial control considerations.
• Procurement and inventory considerations.

11. Determination of the cost to
Make or Buy
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Cost considerations indicate that a part should be made in-house; in
others, they dictate that it should be purchased externally.
A make-or-buy cost analysis involves a determination of the cost to
make an item – and a comparison of this cost with the cost to buy it.
To Make
• Delivered purchased material costs.
• Direct labour costs.
• Any follow-on costs stemming from quality and related problems.
• Incremental inventory carrying costs.
• Incremental factory overhead costs.
• Incremental managerial costs.
• Incremental purchasing costs.
• Incremental costs of capital.
To Buy
• Purchase price of the part.
• Transportation costs.
• Receiving and inspection costs.
• Incremental and inspection costs.
• Any follow-on costs related to quality or service.

12. INSOURCING
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Insourcing refers to reversing a previous buy decision. An organization chooses to
bring in-house an activity, product, or service previously purchased outside.
Insourcing, the often forgotten twin of outsourcing, deals with past buy decisions
that are reversed. The most obvious reasons are
1. when an existing source of supply goes out of business or drops a product or
service line and no other supplier is available
2. Sudden massive increase in price, the purchase of a sole source by a competitor,
political events and regulatory changes, or a lack of supply of a key raw material
or component required for the manufacture of the purchased product might
force supply to consider insourcing
3. May have developed a unique process for this product or service and as a result
quality, delivery, total cost of ownership, or flexibility would be vastly improved
and provide superior customer service and satisfaction.
Insourcing would greatly enhance competitive ability.
With any insourcing initiatives, there is also a new supply issue in terms of raw
materials, components, equipment, energy, and services required to produce the
particular requirement just insourced.

13. Outsourcing
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Outsourcing reverses a previous make decision. Thus an activity,
product, or service previously done in-house will next be
purchased.
Almost no function is immune to outsourcing. The growth in
outsourcing in the logistics area is attributed to transportation
deregulation, the focus on core competencies, reductions in
inventories, and enhanced logistics management computer
programmes.
The reasons for outsourcing are similar to those advanced for the
buy option in make-or-buy decisions. There is a key difference.
“What happens to the employees and space and equipment
previously dedicated to this product or service now outsourced
?”

14. Outsourcing
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Additional concerns over outsourcing include:-
• Loss of control
• Exposure to supplier risks: financial, weakness, loss
of supplier commitment. Slow implementation,
promised features or services not available,
.responsiveness, poor daily quality.
• Unexpected fees or “extra use” charges
• Difficulty in qualifying economics.
• Conversion costs
• Supply restraints
• Attention required by senior management
• Possibility of being tied to obsolete technology
• Concerns with long-term flexibility and meeting
changing business requirements.

15. OUTSOURCING PURCHASING AND
LOGISTICS
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Purchasing function has also come under scrutiny in some
organisations as a target for outsourcing.
Many tasks associated with the logistics function as well as the
entire function itself have been heavily outsourced.
The outsourcing decision is a function of many factors, and
each organisation must assess these factors based on the goals
and objectives and long-term strategy of the organization.
The more skilled the supply group at exploiting market
opportunities and developing competitive sources, the more
readily the organization should be to buy outside and
outsource.