1. Outsourcing: To Make OR To Buy
Bab 7
Outsourcing: To Make OR To Buy

2. Key Concepts Outsourcing: A Growth Industry Strategic Issues
Core Competencies
Supplier Dominance
The Creation of Strategic Vulnerabilities
The Dangers of Vertical Integration
Horizontal Integration
New Product Development and Outsourcing
Lean Manufacturing
Tactical Decisions

3. Factors Influencing Make-or-Buy Decisions
Key Concepts
Factors Influencing Make-or-Buy Decisions
Cost Considerations
Time
Capacity
Control of Production or Quality
Business Process Outsourcing
Technology Risk and Maturity
Unreliable Suppliers
Suppliers’ Specialized Knowledge and Research
Small-Volume Requirements
Limited Facilities

4. Key Concepts Factors Continued Netsourcing
Work Force Stability
Multiple-Source Policy
Managerial and Control Considerations
Procurement and Inventory Considerations
Netsourcing
The Volatile Nature of the Make-or-Buy Situation
Dangers of Outsourcing
Administration of Make-or-Buy Activities
Chief Resource Officer
Framework for Outsourcing
Executive Level Involvement

5. Outsourcing and WCSM
Outsourcing has become a way to increase an organization’s flexibility to meet rapidly changing market conditions, focus on core competencies and develop competitive advantage.
As a result, the need for World Class Supply ManagementSM has intensified and positioned supply managers as agents of strategic change critical to supply chain success.

6. Views on Outsourcing
“Today’s manufacturing focus means learning how not to make things - how not to make the parts that divert a company from cultivating its skills - parts its suppliers could make more efficiently.” (Ravi Venkatesan)
“Manufacturing strategy is about creating operating capabilities a company needs for the future.” (R.H. Hayes and G.P. Pisano)

7. Outsourcing: A Growth Industry
Outsourcing is increasing rapidly
Not just materials, many business functions are being outsourced
Outsourcing can enable:
Leveraging of the supplier’s expertise
Increases in innovation
And result in:
lower staffing levels
reduced costs
more flexibility

8. Strategic Issues Core Competencies Supplier Dominance
The Creation of Strategic Vulnerabilities
The Dangers of Vertical Integration

9. Horizontal Integration
Outsourcing all non-critical activities is a trend
The idea is to achieve significant cost leverage
To identify non-critical activities, the firm’s core competencies must be defined
All other activities are candidates for outsourcing

10. From A Strategic Level: What Should Not Be Outsourced
An item that is critical to the success of the product
An item that requires specialized design, manufacturing skills or equipment
An item that fits well within the firm’s core competencies

11. Strategic Analytic Procedure for Subsystems and Components
Based on
Illustration 7-1
Is the
subsystem
strategic? No
Yes
Can the
subsystem be broken
into families? No No
Yes
Are families
strategic?
Outsource No
Yes
Make In-House

12. Make or Buy at Tactical Level
Poor supplier performance
Changing sales demand
Restricted manufacturing capability
Modification of product
Increased manufacturing capability
Improved supplier capability

13. Considerations Which Favor Making
Cost considerations
Desire to integrate plant operations
Use of excess plant capacity
Control over production and/or quality
Design secrecy required
Unreliable suppliers
Desire to maintain a stable work force

14. Considerations Which Favor Buying
Limited production facilities
Cost considerations (less expensive to buy)
Small-volume requirements
Suppliers’ specialized know-how
Stable work force (rising sales)
Multiple-source policy
Indirect managerial control considerations
Procurement and inventory considerations

15. Major Elements Included in a “To Make” Cost Analysis
Delivered purchased material costs
Direct labor 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

16. Major Elements Included in a “To Buy” Cost Analysis
Purchase price of the part
Transportation costs
Receiving and inspection costs
Incremental purchasing costs
Any follow-on costs related to quality or service

17. Cost Considerations The time factor (two views)
Short-term view
Focus on direct measurable costs
Long-term view
Also measure hidden costs (storage, inspection, tooling, quality, etc.)
The capacity factor (2 possibilities)
1. We are at capacity
Fixed costs are an issue
2. We are not at capacity
Fixed costs are not as much an issue

18. Incremental Costs from “Make” Decision When Operating at 80% Capacity
Figure 7-1

19. Netsourcing
Many companies are not readily staffed to keep a company competitive in e-business
As a result, companies are outsourcing infrastructure development and maintenance to “Netsourcers”
Netsourcing has become popular since it allows:
A quick e-business presence
Flexibility to make changes
Sustained performance
Support without the need to train or hire specialized personnel

20. The Volatile Nature of the Make-or-Buy Decision
Beware of rigid formulas and rules of thumb
The make‑or‑buy question is influenced by a multitude of diverse factors constantly changing
Under such conditions, few easy decisions turn out well in both the short and the long run
Moreover, the relevant factors vary immensely from one firm to another
Every company should periodically evaluate the effectiveness of its past decisions to generate information helpful in guiding future decisions

21. Dangers of Outsourcing
Loss of control
Loss of client focus
Loss of clarity
Loss of cost control
Ineffective management
Loss of confidentiality
Double outsourcing

22. Administration of Make-or-Buy Activities
Chief Resource Officer
Manages and initiates outsourcing for direct support to the company’s bottom line
Framework for outsourcing
Information gathering
Strategic roadmap
Decision flowchart
Transition back plan
Review system
Executive level involvement

23. Concluding Remarks
Firms are becoming more aware of the strategic dimension of the make-or-buy decision
As technology has advanced, most manufacturing firms have become much more specialized
Cost of materials has continued to increase in many industries