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 The gray zone

Make verses buy 2 Make vs Buy - case Based on the give information please decide if you will make this product or buy it. Base your calculations on the total price of the decision for one year.

Make verses buy 3 A key decision: make or buy Who actually produces a part, service, assembly or any other input needed by the supply chain ? How do traditional organizations 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 4 Building on the case The case dealt with a make buy decision driven by price As the articles make clear these decisions are often driven by much more than the price –Who does something best- quality and cost Outsourcing HR? How about design? –Freeing capacity – UPS and the post office –Reduced investment and managerial span

Make verses buy 5 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? In high tech many companies have moved to focusing on either design or production- few do it all (Intel is a noted exception) –The man with two daggers

Make verses buy 6 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 –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 7 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 –Process helps customer differentiate

Make verses buy 8 Core competencies / capabilities At the firm level determining core competencies is a key strategic task. –What is it that our firm does best - preferably better than anyone else. –What knowledge, skills and abilities are needed to compete in our market today and in the future ? The supply chain managers role –The key contribution that SCM makes is identifying the K,S,A’s that external producers possess. What can our suppliers do better than we can (even if we could do it) ?

Make verses buy 9 Core competencies: examples Honda –small engines Solectron and Flextronics Porsche –Why do they “rent” out their engineers? BAE in Wichita- –Long structural parts for an airplane OSU Wal-mart –materials management

Make verses buy 10 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 Dodge brothers –The man with 2 daggers

Make verses buy 11 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 ? –local content The hollow corporation

Make verses buy 12 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) BMW – X3 speed and capacity Airport security- the TSA –Brought work back “in house”

Make verses buy 13 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 14 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 15 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 16 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 17 Make buy conclusions 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 18 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 19 The gray zone Many make buy decisions are not black and white- they have a gray zone in-between pure make and pure buy. –Die shops can either machine from a blank (pure make), buy a finished part (pure buy) or machine from a forging (Gray zone). –Don’t have to outsource all of HR- might send out payroll and benefits administration (repetitive tasks) and keep recruiting?

Make verses buy 20 Benefits of the gray zone Transition: –especially for services payroll and taxes - as we learn to do it we can take on more responsibility - also may be linked to growth –ramping up capacity (for us or a supplier) Increased options - flexibility in the laundry example we go from 2 options to many (although buying just a dryer may be a bit odd)

Make verses buy 21 Summation A key issue to address is who performs a process. We generally try and perform strategic processes. Make buy is based on lowest total costs and available capacity. Most make buy decisions have a gray zone that can be exploited to increase our options. Even for processes we perform, purchasing has a role to play. And this role is very important.