Qualitative factors of Make –or-buy decision

- Relevant to paper F5

 

        Make or buy decision is one of the most critical decision an organisation are often facing with in modern business environment. Hence, having a sound understanding of make or buy decision from F5 is crucial. Make-or-Buy decision (also called the outsourcing decision) is a judgment made by management whether to make a component internally or buy it from the market. Make-or-buy decisions usually arise when a firm that has developed a product or part—or significantly modified a product or part—is having trouble with current suppliers, or has diminishing capacity or changing demand.

 

        While making the decision, both qualitative and quantitative factors must be considered.

 

        2. Make-or-buy analysis is conducted at the operational level

 

        At the operational level the factors in favor of making a part in-house.

 

        · Cost considerations (less expensive to make the part)

        · Desire to integrate plant operations

        · Productive use of excess plant capacity to help absorb fixed overhead (using existing idle capacity)

        · Need to exert direct control over production and/or quality

        · Better quality control

        · Design secrecy is required to protect proprietary technology

        · Unreliable suppliers

        · No competent suppliers

        · Desire to maintain a stable workforce (in periods of declining sales)

        · Quantity too small to interest a supplier

        · Control of lead time, transportation, and warehousing costs

        · Greater assurance of continual supply

        · Provision of a second source

        · Political, social or environmental reasons (union pressure)

        · Emotion (e.g., pride)

 

        Factors that may influence firms to buy a part externally include:

        · Lack of expertise

        · Suppliers' research and specialized know-how exceeds that of the buyer

        · cost considerations (less expensive to buy the item)

        · Small-volume requirements

        · Limited production facilities or insufficient capacity

        · Desire to maintain a multiple-source policy

        · Indirect managerial control considerations

        · Procurement and inventory considerations

        · Brand preference

        · Item not essential to the firm's strategy

 

        This article has discussed the qualitative factors at the both strategic and operational level while making the decision of make-or-buy. The quantitative factors will be discussed later.

        Prepared by Golden ACCA R&D Center

        February 2013
 

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