1. Make or Buy, Insourcing and Outsourcing
Chapter 5
Make or Buy, Insourcing and Outsourcing
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2. Key Questions Asked in Chapter 5
Should we make or buy a good or service?
If we have been making a good or service should we reverse the decision and outsource?
If we have been buying, should we reverse the decision and insource?
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3. Make or Buy; Insourcing and Outsourcing Decisions
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4. 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
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5. 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 and desire to stay lean
Insufficient volume to justify in-house production
Forecasts show great demand and/or technological uncertainty
Availability of a highly capable supplier
Buying may open up markets
The ability to bring a product or service to market faster
Superior supply management expertise
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6. The Outsourcing Matrix
Currently In-House
Currently Outsourced
Should Be In-House 1 2
Should Be Outsourced 3 4
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7. Reasons to Insource
The necessity argument: “We would prefer not to produce this product or service in-house, but we really don’t have any other options.”
The opportunity argument: “We would prefer to do this in-house because it would give us a strategic competitive advantage.”

8. Reasons to Outsource
The necessity argument: “We would prefer not to outsource this product or service, but we really don’t have any other options.”
The opportunity argument: “We would prefer to outsource this product or service because it would give us a strategic competitive advantage.”

9. 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
Keep the function
in-house
Yes
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