A company may produce either all parts and components for its final product or purchase some of these parts from outside and combine them in assembly line with parts manufactured by it so as to form its final product.
These are the two sources of procuring materials. The ‘make or buy’ problems normally arise when some new products being developed or substantial modification of the old product is being carried out.
Value analysis may also indicate the need for seriously considering the possibility of internally manufacturing certain parts and components. Erratic vendor behavior and sudden rise in prices are the other reasons necessitating make-or-buy analysis.
However, if producing certain components of the final product internally requires substantial amount of funds to be invested on permanent assets of the company, the make or buy problems deserve top-management’s full attention on capital outlay or when capital outlay is very small, the problems may be left to be decided though on the basis of some objective analysis, by purchasing and other operating departments.
The Factors Affecting Make or Buy Decisions
The factors affecting such decisions are as under :
(a) Technical feasibility of manufacturing : The company’s existing plants and machines, technical know how and the availability of skilled personnel may be the deciding factors in make or buy decisions.
(b) Quality considerations : Where the customers are very sensitive to quality and other manufacturers cannot be relied upon, the company may have to produce rather than buying from outside. It may not be safe to entrust non-patented designs or processes to outsiders.
(c) Quantity required : When quantity required is substantially large it may be economical to produce. When variety of goods in small quantities are required buying from outside may be preferred. When the company lacks resources to manufacture large quantity, it may entrust supply to one or more producers who have specialized in that product.
(d) Cost : The cost of manufacturing and the profit margin on the product influence make or buy decisions in most cases. When the product can be manufactured at a low cost and is selling in the market at a high cost due to lack of competition or inadequate supply the company may consider the economics of making. The opportunity cost should also be considered.
When the economic lot size of manufacture is greater than economic lot size of purchase, the inventory may be heavy and its carrying cost will be additional burden.
(e) Service: The continuity in supply and the service is also an important consideration in making or buying decision.