Make or Buy Supply Chain

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MAKE OR BUY SUPPLY CHAIN

Submitted toDr. Masood Sabzwari

Course InstructorSupply Chain Management

Iqra University

Submitted byKamran Ali – 13875

Iqra UniversityApril 21, 2012

Course: Supply Chain Management Instructor: Dr: Masood Sabzwari Topic: Make Or Buy Supply Chain

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LETTER OF AUTHORIZATION

April 21, 2012

Dear Readers

This report on the topic “MAKE OR BUY SUPPLY CHAIN” is written with the authorization of our supply chain management course instructor, Dr. Masood.

This report is related to make or buy supply chain, including cases in of when to outsource & when to make, the repot also covers decision making process, strategic decision making process & etc… the report also covers some common information which gives you & etc… the report also covers some common information which gives you more information about the topic. The report is required to be submitted on April 21, 2012

Sincerely

Kamran AliMBA (Morning)Iqra University


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LETTER OF TRANSMITTAL

April 21, 2012

Dr.MasoodSupply Chain Management FacilitatorIqraUniversityKarachi

Subject: Make Or Buy Supply Chain

Dear Instructor

Here is the final report on the topic “MAKE OR BUY SUPPLY CHAIN” which you had authorized us to write at the beginning of the semester. The report is now ready for your perusal.

This report reveals information on Make or buys supply chain, including cases, strategic decision, outsourcing decision, overall impact & etc… some common information gives you better idea about the report.

Thank you for providing us with such an opportunity. By availing it, were honored with a wonderful learning experience. We have endeavored to be precisely complete on this report, but still if you have any queries, feel free to call us. We would be glad to respond your queries.

Sincerely,

Kamran Ali (13875)MBA (Morning) Iqra University0333-1234567


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TABLE OF CONTENTS

S:No Contents Page No1 Title Page 1

2 Letter Of Authorization 2

3 Letter Of Transmittal 3

4 Table Of Contents 4

5 Executive Summary 5

6 Make Or Buy Supply Chain 6

7 Make Or Buy Decision 7

8 Importance Of Purchase Management 9

9 Selection Of Vender 10

10 The Make Or Buy Frame Work 11

11 Cases Which Helps Make Or Buy 12

12 Strategic Decision On Core Competence 17

13 Make /Buy Evaluation Process 18

14 Outsource Yes/Not 19

15 Appendix (A) References 21

16 Appendix (B) Power Point Presentation Slides 22


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EXECUTIVE SUMMARY

Dr. Masood, our Supply Chain Management course instructor at Iqra University has authorized me to write a report on topic “MAKE OR BUY SUPPLY CHAIN” in the beginning of the semester. The report reveals the cases when we should make & when we should go for outsource. The report also covers the strategic advantages & process. They also revels the outsourcing types. The report also process of outsourcing.

Therefore we explained the alternative of either we should make or buy our product material. The report also reveals how to minimize the cost of product & production. The report is also explained how to make decision in different circumstances.


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1.MAKE OR BUY SUPPLY CHAIN

INTRODUCTION:

The researcher studies this certain topic of make or but supply chain. Now what is mean by make or buy supply chain? A make or buy supply chain is a statement or decision making choice for your production that what you want for your business. Is it is better option to make good or purchase from another manufacturer. It is totally up to organization management what they want. Mostly this decision based on to reduce future uncertainty. What you have to do for future sales & productions we are make research teams, build up R&D departments. Their basic function is to find way to reduce cost of production & transportation. There is another technique to make this decision is forecasting techniques. There are so many ways to log on this decision. Mostly the biggest factor which affects this decision is industrial factor. Its mean this decision is vary industry to industry.

The decision of make or buy supply chain also varies from concept to concept, Like forecasting, transportation, procurement, ware housing, capacity problems named as warehousing, order amount & etc… Here researcher describes important factors according to his limitations.


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2. MAKE-OR-BUY DECISIONS

The make-or-buy decision is the act of making a strategic choice between producing an item internally (in-house) or buying it externally (from an outside supplier). The buy side of the decision also is referred to as outsourcing. 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.

Make-or-buy analysis is conducted at the strategic and operational level. Obviously, the strategic level is the more long-range of the two. Variables considered at the strategic level include analysis of the future, as well as the current environment. Issues like government regulation, competing firms, and market trends all have a strategic impact on the make-or-buy decision. Of course, firms should make items that reinforce or are in-line with their core competencies. These are areas in which the firm is strongest and which give the firm a competitive advantage.

Considerations that favor 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


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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


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3. IMPORTANCE OF PURCHASE MANAGEMENT

Purchase management is considered to be very important function of materials management in a company. Its importance is felt even outside the formal scope of materials management. As the purchase decisions commit a very large portion of financial resource of the company purchase function is said to be highly important. Purchase personnel deal with large number of external agencies while performing their functions. Hence they represent company’s reputation in the outside world. As they negotiate and finalize deals worth lot of money for the company their integrity is of utmost importance for the organization.


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4.SELECTION OF VENDORS

1. The production capabilities of the vendor(a) Capacity to manufacture the required product in desired quantities.(b) Possibility of future expansion in capacity.(c) The understanding or the knowledge of the vendor regarding the buying

company and its need.

2. The financial soundness of the company(a) The vendor company’s capital structure.(b) Whether it belongs to a larger group of companies; whether it is a Private

Limited or a Public Limited company.(c) The profitability record of the company in the past.(d) Expansion plans of the company in the future.

3. Technical capabilities(a) Whether the available machines are capable of the required quality of materials?

What are the future plans of the vendor?(b) Whether there are enough technical skills available with the vendor?(c) Whether there is proper research, design and development facility available with

the vendor?(d) What is the record of the vendor in filling the orders of other buying companies

in the same business?(e) What has been the consistency in the quality produced by the vendor?(f) Whether the vendor has appropriate storage and warehouse facilities to retain

the quality of the product produced?(g) Whether proper quality control procedures are being followed in the vendor

company?

4. Other considerations(a) What are the working conditions in the vendor company?(b) How are the industrial relations in the vendor company?(c) Whether there is any possibility of disruption of the supply of materials in terms

of quantity and/or quality due to human relations problem in the vendor company?


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5.The Make-or-Buy Framework

The framework depicted in Figure 1 provides a graphical representation of why operational make-or-buy decisions are made and shows relevant dimensions to be studied in approaching such decisions. In contrast with existing frameworks, this provides a holistic view of make-or-buy and captures relevant factors in a structured manner. Additionally, it takes a first step towards providing performance measures for the assessment of the business benefits delivered by individual make-or-buy decisions.

The external environment, on which the company has little or no influence, usually activates triggers for the make-or-buy analysis. For instance, increased price competition in the market place usually forces companies to reduce costs. The triggers are the reason(s) for undertaking the make-or-buy review and can be easily identified by asking why the decision is being made. In this example, the cost reduction trigger raises the make-or-buy question. The framework clusters factors relevant to make-or-buy into four areas: technology and manufacturing processes; cost; supply chain management and logistics; and support systems. The performance measures are closely linked to the triggers. They aim at providing some criteria to evaluate the extent to which the targets suggested by the triggers are achieved. For instance, if the trigger is cost reduction, cost saving should be the key performance measure. However, other measures such as flexibility and quality should not be neglected. Finally, the arrows coming out from the performance measures to the external environment show that make-or-buy is not a static issue. The performance measures for these decisions feed back into the external environment and possibly activate other triggers that raise again the make-or-buy question.


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6. CASES WHICH HEPS MAKE OR BUY

6.1 Shortage of Quantity:Sometimes in industry because of fashion or fads there is increase of huge demand to support this fulfilling this extra demand we have to look for outsourcing of material or sometimes finished goods? So number of quantity is very big factor which affect the decision of either we have to make goods or outsource.

6.2 Right Goods:Sometimes in special cases when client is huge company & we deliver bulk of orders to them on regular bases. By chance we are failed to deliver this & they demand same quality of goods on urgent bases so we have to make these goods according to their desired order & sometimes we have to purchase it.

6.3 Right Place:Sometimes we have to purchase some goods from different places to reduce the transportation cost. Most of times the situation considers the requirements that we have to purchase finished goods from market & deliver it to customers at his desired place.

6.4 Right Time:Sometimes accidentals factors cause to waste of working days & company is failed to deliver right good at right time. In that type of situation we have to purchase some extra goods to deliver the party at right time to save the reputation of firms. But sometimes companies announced part time and extra work schedules to make the desired quantity to fulfill their order at right time.

6.5 Right Condition:Sometimes some environmental factors are reason to create problems. Like if we are facing some disastrous situation in our region & we are failed to fulfill our order then we have to purchase goods to meet our orders. Sometime the factor is wheatear is we are producer of seasonal goods then we have to work in extra shifts to meet our demands & requirement.

6.6 Right Cost:Sometimes orders are most costly when we make or purchase. So according to our costing methods we deliver exact quantity.

2.7 ACCORDING TO MANUFECTURING CATEGORIES:

6.7.1 Primary Sector (Extractive Sector):Sometimes when extracting raw material for our goods we have different option to utilize. If we are manufacturer for cars we have two options for tires. Either we have a chance to make tires or outsource from general tires or other companies.


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6.7.2 Secondary Sector (Manufacturing Sector):Sometimes manufacturing cost is to excessively high & better option is to purchase or outsource your raw material for finished goods, & sometimes it is better option not to outsource but make your own good.

6.7.3 Tertiary Sector (Service Sector)

Sometimes product major cost is related to service sector like coal & oil industry where major costing part is related to service industry. In this type of industry you have also option to make your own service industry which facilitate your product or purchase it from others.

6.8 To Create Strategic Advantage:

Sometimes the size of industry or factory is too massive & you have to create some differentials points with compare to your competitor. Now let take an example of FMCG industry where some firms strategic advantage is related to cost, logistic, customer facilitation & etc… now its totality up to you what you want & what is your vision. If you research tells you that in future there is more chance to extension of technology then you were analyze your resources & your competitors also that are they able to furnish their demands or not. If not then you make if yes then you purchase it.

6.9 Productivity Advantage:

Sometimes you want productivity advantage over your competitors. It also same as strategic advantage where you want to make difference between your cost & productivity. You prefer those productivity methods which is more effective & efficient with compare to competitor. If you make & its cost is lower then competitor then you produce your own if not then you purchase it from outside (Outsourcing).

6.10 Cost Advantage:Sometimes you are working for cost. Either if we make it is more beneficial for us or purchasing is more effective.

6.11 Organizational Structure:Sometimes the organizational structure is too much rigid & there is enough chance to make a department therefore at that type of situation you are going to deliver powers to another department which can easily manage that work. Or you will purchase the same requirement with someone else that is specialized in same duty.

6.12 Information Technology:Information technology is the key factor of Supply Chain Management. There are many real world cases in the world where information technology factor affect the cost & firms change their decision. Alkoozy Tea Company in India their product Alkoozy green tea were basically


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based on outsource product but after introducing new technological change in the firm company make there own farm houses & make their product in new way.

6.13 Knowledge Transfer Problem:It is very rare case that sometimes when management change or the new manager appointed he is alien in the new environment. Because the person or management who knows the pit & fall of company is not there so it is better decision to outsource the material or product.

6.14 Problem of Bottleneck:Bottleneck is a kind of situation in production department whom everyone wants to remove. If any company face bottleneck then there are only two options to remove them. Either we need expansion in production or we need outsource. To remove bottleneck we have two options make or buy most of times firms are gone to buy goods but if there is a huge difference in price then they go for make.

6.15 In case of wrong Predication & forecasting:Sometimes when firms are making their short term or strategic goals or decision, they are not 100% perfect sure & reliable. Therefore there is a chance of failure. So if they are failed to got then they have to options, are they outsource or make it rapidly.

6.16 Demand Patterns:Many times demand patterns are reason to redefine your decisions. Because most of times you are prepared for these uncertainties & but you should make decision according to strategic advantages. Like if your demand pattern is transient impulse in that types of situation you need to outsource. If you sudden rise then you need to prepare for yourself for uncertain demand pattern or outsource. In sudden rise this decision is totally based on industry. In sudden fall you need to stop your product at certain level & not to go for outsource.

6.17 Strikes & Lockout:In strike or lockout you have to go for outsource because your labor & other staff are going for work off. So for important clients &a orders you have to go for outsource. It is a special case where you have only one option of outsource. It is not absolute decision which doesn’t change sometimes firms are rejected orders to produce item either it is in work in process or in starting.

6.18 To Reduce Extra Cost:To manufacture a single product in industry you have to bear lots of extra cost in terms of labor & overheads. These are the major expenses which don’t estimate at the time of start calculation. Extra cost consider as storage cost & interest rates & etc… so at that time you have to re-prepare yourself or outsource it from outside.


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6.19 Break-Up with 3pl & 4pl Partners:Everyone knows this statement that the most unpredictable thing is future. You don’t believe any one because what promises & conditions are applied today can’t work tomorrow. So that same statement also valid on 3pl & 4pl partners of your chain. It is also a case if there is going something wrong with your channel partner or they broke up with you then you have only two options with you either buy it or outsource it. If your extra bearing cost is covered from the penalty of cost received from partner it is better option to outsource it from some other place. If you have a capability to produce then you should do it yourself.

6.20 Transportation Cost:Transportation is one of the basic factors of supply chain management. If your transportation cost is consistently increasing then you should find another outsource partner which gives you cheaper cost then first one. It is most difficult part of supply chain. That kind of work needs too much specialization. If you are not specializing on it then you should bear the extra cost. Because it is not good decision to make your transportation department. Sometimes if your product is local then you should distribute it yourself.

6.21 Warehousing Cost:Warehousing is also one of the major factors of supply chain management. It is not enough to manufacture the good but it is also important to finish good & send in to stores & make a better marketing plan whom sales your product in lowest time. So how to place you’re good in warehouse in short space. How much goods must be in pipeline & how must be in warehouse it is very important good. If any problem occurs then you should reconcile your decision & re select either we make it or outsource it.

6.22 Concentrate On Core Competency:Your attitude towards your core competency must be defensive. Because it is one of the factor which create difference between you & industry competitor. So your concentration must be on your core competency. If anything creates problems within that them you should go for outsource. If you have capability to produce it then you should.

6.23 Improved Customer Service:As discuss in outsourcing it is not important they you can do it but it is more important how you do it. If someone does it the same thing in better way with better pricing option then you should be one whom goes it for outsource. By taking that types of decision you can improve you customer service.

6.24 Quick Entry in Markets:Sometimes when you are planning for your product you have enough time to enter in a market. There are so many lairs in product development & introducing so you can’t handle every part very well. So the smart decision is that few parts must be make yourself & remaining will be outsourced.


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6.25 Management change:Due to change of management you can face problem like co-ordination problems. So to reduce problems like this you have to need very smart manager. You must have contingent plan for this. It is totally up to management how they go for, either they go for outsource or make their own product.

6.26 Repair:Every firm whom main business is to make goods & there is chance of damage. So if the product is damage by some obsession then it must need repair. Repair can be many types. If repair is miner then it can be removed within company but it is major it needs to be outsourced. It must be note that by adding repair cost profit will be not affected too much.

6.27 Bullwhip Effect:

In bullwhip effect we are making some extra goods. In real terms the demand doesn’t exists we are making all these as extras. We earn some money from that but it is not in real terms. So we have to make decision about out demand either we should make it or when it came we outsource it on alarming basis’s.


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7. STRATEGIC DISCUSSION ON CORE COMPETENCIESWhat have to do or not in making decision of make or buy supply chain, following diagram is more effective.

What is core competency you don’t need to outsource that thing but the second circle essential but not core is that part of production where you have to make analyze yourself that are you in the better position to make this or not. Because in that type of secession you were having option if you are in position to make it that is not enough but it is possible that your outsource partner is much better. It is possible that he is better in aspect of cost, labor, transportation, & etc… so your decision is very important in second circle. In third circle you should also need to analyze. But at that type your decision your secession is more related to outsource. Outsource something is not important but it is more important than how he did it.


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8. MAKE/BUY EVALUATION PROCESS

1. Preparation:

a. Team creation and appointment of the team leaderb. Identifying the product requirements and analysis

c. Team briefing and aspect/area destitution

2. Data Collection

a. Collecting information on various aspects of make-or-buy decisionb. Workshops on weightings, ratings, and cost for both make-or-buy

3. Data Analysis

1. Analysis of data gathered

4. Feedback

1. Feedback on the decision made

By following the above structured process, the organization can make an informed decision on make-or-buy. Although this is a standard process for making the make-or-buy decision, the organizations can have their own varieties.


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9. OUTSOURCE YES/NOT

If Yes Or If Not:If we are supporting the yes decision then decision must be have element like

A. FlexibilityB. DependencyC. StrategyD. OrganizationE. Product characteristicsF. Financial

If all these elements are in high quantity then we should support yes decision. If these entire element are in low quantity then we should go for make decision.

5.1 Flexibility:Flexibility factor shows that if we not support that decision then it will not cost more to us. Because everyone knows what is our strength today is not tomorrow. It is possible that we will go for better option or not. If yes then we will do it ourselves.

5.2 Dependency:We should be not depending on them but they are working under. If we are in surrender position then we should not go for outsource. If we are in much better position then we should go for.


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5.3 Strategy:Our strategy must be secret and not to be publicized. If our strategy will be go out then we should not go for that. It no then we should do outsource.

5.4 Organization:Our organization must be more powerful then outsourced company. If we are not dominant then we should make it ourselves & make our product. If we are in governing position then we should go for outsource.

5.5 Product Characteristics:Our product characteristic must be in co-ordination. Like we outsourcing one part of our production cycle then second part must be independent & co-ordination between outsourced part & that part which we make ourselves is not too much differed. If there is any dissonance between them we should not support outsource.

5.6 Financial:Financial the outsourced partner will be viable. Mostly its happened that by defaulting outsource partner your business will stop & affected. So your outsource partner will be financially feasible.


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APPENDIX A

WWW.Google.com/images

http://www.enotes.com/make-buy-decisions-reference/make-buy-decisions

http://www.tutorialspoint.com/management_concepts/the_make_or_buy_decision.htm

http://www.google.com.pk/url?sa=t&rct=j&q=make%20or%20buy

%20decision&source=web&cd=3&ved=0CEQQFjAC&url=http%3A%2F

%2Fwww.newagepublishers.com%2Fsamplechapter

%2F001724.pdf&ei=RpORT4yiAZKP4gSD3MSBBA&usg=AFQjCNEF2P40e4wkhUGL0eqwn2wh

TXOdtg

http://www.youtube.com/watch?v=04KKbfLGI7g


http://www.youtube.com/watch?v=04KKbfLGI7g

http://www.google.com.pk/url?sa=t&rct=j&q=make%20or%20buy%20decision&source=web&cd=3&ved=0CEQQFjAC&url=http%3A%2F%2Fwww.newagepublishers.com%2Fsamplechapter%2F001724.pdf&ei=RpORT4yiAZKP4gSD3MSBBA&usg=AFQjCNEF2P40e4wkhUGL0eqwn2whTXOdtg



http://www.tutorialspoint.com/management_concepts/the_make_or_buy_decision.htm

http://www.enotes.com/make-buy-decisions-reference/make-buy-decisions

http://WWW.Google.com/images

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APPENDIX (B)POWER POINT PRESENTATION SLIDES (PPT)


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Make or Buy Supply Chain

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