Monday, February 26, 2007

Management Lite & Ezy 26 - Make-or-Buy Decision

A wholesaler or retailer buys everything that it sells; a manufacturing operation hardly ever does. Manufacturers, restaurants and assemblers or products often buy components and subassemblies that go into final products. For example, a computer maker may purchase the processor chips from Intel or AMD, hard disks from Seagate or Western Digital, and DVD drives from Sony or Toshiba.

Since I am a shutterbug, I will give an example in the camera industry. Canon and Nikon are the major producers of digital Single Lens Reflex camera, or DSLR. Three of the most important components of a DSLR are the lens, image sensor and image processor. Canon makes all these three components for its DSLR, but Nikon buys image sensors and image processors from Sony. Nikon sources the components from outside because it is primarily an optics company. Electronics isn’t its core competence.

A variety of considerations in the make-or-buy decision are listed below.

Reasons for Making:

  • Maintain core competence
  • Lower production cost
  • Unsuitable suppliers
  • Assure adequate supply (quantity or delivery)
  • Utilize surplus labor or facilities and make a marginal contribution
  • Obtain desired quality
  • Remove supplier collusion
  • Obtain unique item that would entail a prohibitive commitment for a supplier
  • Protect personnel from a layoff
  • Protect propriety design or quality
  • Increase or maintain size of the company (management preference)

Reasons for buying:
  • Free management to deal with its primary business
  • Lower acquisition cost
  • Preserve supplier commitment
  • Obtain technical or management ability
  • Inadequate capacity
  • Reduce inventory costs
  • Ensure alternative sources
  • Inadequate managerial or technical resources
  • Reciprocity
  • Item is protected by a patent or trade secret

Reference: Heizer & Render, "Operations Management", 8th edition

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