1. McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 5 Make or Buy, Insourcing and Outsourcing

2. 5 - 2 Make or Buy and Insourcing and Outsourcing Decisions

3. 5 - 3 Reasons to Make Instead of Buy Quantities are too small and/or no supplier is interested Quality requirements are too exacting or special processing methods needed Greater assurance of supply Closer coordination of supply and demand Preserve technological secrets Lower cost To take advantage of unused capacity Keep our capacity utilization high and outsource the rest Avoid supply dependency Reduce risk Competitive, political, social or environmental factors Distance from the closest available supplier is too great Market potential for the product or service is expanding rapidly Forecasts of future shortages in the market or rising prices

4. 5 - 4 Reasons to Buy Instead of Make Lack of managerial or technical experience Excess production capacity Reduce risk Customer preference for a particular brand Challenges of maintaining technological leadership for noncore activity Outsourcing is difficult to reverse Cost accuracy Flexibility Insufficient volume to justify in-house production Forecasts show great demand and/or technological uncertainty Availability of a highly capable supplier Buying outside may open up markets The ability to bring a product or service to market faster Superior supply management expertise

5. 5 - 5 Risks of Outsourcing Loss of control Higher exit barriers Exposure to supplier risks e.g., financial, commitment to relationship, response time, quality, service Unexpected/unanticipated costs Difficulty quantifying economies Conversion costs Supply restraints Attention required by senior management Possibility of being tied to obsolete technology Concerns with long-term flexibility

6. 5 - 6 The Outsourcing Matrix 12 34 Should Be In-House Should Be Outsourced Currently In-House Currently Outsourced

7. 5 - 7 The Outsourcing Decision Is the activity strategic? Is the activity critical to the business but not strategic? Create a RFP. Gather supplier bids/proposals. Is the supplier’s bid/proposal more desirable than the internal option? Could the internal option achieve similar results? Negotiate a contract to ensure that expectations are realized No Yes No Keep the function in-house Keep the function in-house Keep the function in-house Keep the function in-house Yes No Yes

8. 5 - 8 Purchasing’s Role in Outsourcing Providing a comprehensive, competitive process Identifying opportunities for outsourcing Aiding in selection of sources Identifying potential relationship issues Developing and negotiating the contract Ongoing monitoring and management of the relationship Source: Lisa Ellram and Arnold Maltz, Outsourcing: Implications for Supply Management, Tempe, AZ: Center for Advanced Purchasing Studies, 1997.