Make verses buy 1 Make verses buy agenda Building a supply chain: make or buy ? –Traditional make vs. buy –SCM make vs. Buy core competencies elements of total costs purchasing’s role for make products

Make verses buy 2 A key decision: make or buy Who actually produces a part, service, assembly or any other input needed by the supply chain ? How did organizations traditionally do this ? Why is this decision different if we take a supply chain view of the world ? Note a terminology problem - make implies that our company physically produces something - make really means we perform a process

Make verses buy 3 More than $$$$ Traditionally this issue has been addressed from a lowest price perspective As the articles make clear these decisions are often driven by much more than the price –Often driven by a desire to lower total costs –Freeing capacity – UPS and the post office –Reduced investment and managerial span –Leveraging the core competencies of the chain members

Make verses buy 4 Articles Out of the back room –Buying entire processes- which we used to do internally – here we are talking support processes such as HR –Why? The Barons of outsourcing –In high tech many companies have moved to focusing on either design or production- few do it all (Intel is a noted exception)

Make verses buy 5 Other issues from articles Companies are buying design, production, HR, accounting and just about anything else you can think of. –This is totally different from just buying parts from China for a lower price –Generally don’t want to be a low price supplier with no other skills / attributes What are the Indian IT suppliers doing already

Make verses buy 6 What besides price do we need to consider when making this decision? 1) Is the input critical to the success of the product ? 2) Is the number of available suppliers extremely limited (if they exist at all) ? 3) Does the process make use of one or more of our core competencies ? Generally if the answer to any of these questions is yes we perform the process because it is strategic / critical to the customer –The process helps customers differentiate between supply chains

Make verses buy 7 Other strategic issues Capacity –we may not have the capacity for a strategic item – lots of low volume car production BMW X3 / most convertibles (Boxter / Solara) No suppliers and not our core competency –can we afford to develop a competency ? –can we afford not to ? –can we develop a supplier ? Suppliers becoming competitors –“The man with two daggers” –Why is this play likely to infuriate customers?

Make verses buy 8 Strategic issues continued Workforce - especially with a union –Boeing Engineers last strike outsourcing overtime Knowledge retention –Prince makes dies in order to maintain the design knowledge Government –are defense contractors too vertically integrated ? –Green requirements in RFQ’s The hollow corporation

Make verses buy 9 Some recent examples of make buy Space shuttle maintenance – not done by NASA Service outsourcing from articles –Call centers and programming went first –Now design of products and processes now (including Boeing doing some design in Russia) –And some work is coming back BMW – X3 speed and capacity Airport security- the TSA –Brought work back “in house”

Make verses buy 10 Total costs of make buy Price Time / speed Quality Control Service Future innovation Delivery reliability Safety Relationship to other products Capacity Transportation Overhead –changes in structure –increases in –allotments of Human resources –hire / fire/ re-train Others –Cathy Lee is exploiting children

Make verses buy 11 Getting specific: making Why we perform a process –costs ---> –integrate facility –use excess capacity and absorb overhead * need to understand strategy –control –design secrecy –unreliable suppliers other responses –workforce Costs to make –materials –direct labor production and QC –inventory costs –overhead ** –managerial costs –purchasing costs –costs of capital opportunity costs

Make verses buy 12 A note on overhead When capacity exists and is idle or underutilized then the make buy calculations change. –If in order to make we need to purchase new equipment, expand the plant, or hire new workers - then our overhead costs increase as well. –However, if the capacity already exists then the change in overhead is minimal and we must be careful how we calculate. finance and the set burden does this mean 100% utilization ? ABC and other allocations

Make verses buy 13 Getting specific buying Why we buy –costs ---> –supplier capabilities –small volume –we don’t have capacity especially short term –avoid hiring atlas tool and die –maintain multiple sources –flexibility Costs to buy –price –transportation –incoming inspection ? –purchasing costs –quality, service, delivery, etc.

Make verses buy 14 Make buy summary Make –strategic inputs Costs –fixed are higher –variable are generally lower (otherwise why make ?) Major benefit - control Drawback - loss of flexibility Buy –what others can make at a lower total cost –what we do not have the capacity or capability to make Costs: all variable Major benefit -flexibility Major drawback –control –long term hollowing

Make verses buy 15 The supply chain managers job when we make Once we decide to perform a process it is often difficult to stop. Why ? Purchasing (should) play a role in determining if we should continue to perform a process. –Masco-tech forging and Masco-tech machining operations - how much is vertical integration worth ? Boundary spanning - there are always new sources of supply - some of whom may change our make buy decisions.

Make verses buy 16 Summation A key issue to address is who performs a process. We generally try and perform strategic processes. We generally let others do what they do best. –It is not this simple! Make buy is based on lowest total costs and available capacity. Even for processes we perform, purchasing has a role to play. And this role is very important.

Make verses buy 17 Fairtrade Chocolate Case Main question – How will you source and sell Fairtrade chocolate ? Things to think about: –You need to consider the risks and rewards for all potential chain members including the Co-Op, The traditional confectioners, The non-traditional confectioners, and the growers. Don’t forget that marketing / strategy decisions are tightly linked to the sourcing decision. –What are the risks associated with each strategy? –What are the long term implications for the company and the chocolate industry from your choices ?