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Unit 8: Supply Chain Management




          8.2.4  Evaluating the Make or Buy Decision                                            Notes

          In the build-up of a product or service, there are some parts that the organization will create
          internally, some parts it may have no option but to purchase from outside, the other remaining
          parts can be either made internally or purchased from suppliers. To decide whether a service or
          good should be provided from inside the organization or it is to be purchased from suppliers,
          management must ask the following questions:
          1.   Who has the technical capabilities to provide the good or service?
          2.   Who can deliver a quality product?

          3.   Who can make timely deliveries?
          4.   What costs are associated with each alternative?

                             Figure  8.4: Investment for Make  or Buy  Decision



































          A make or buy decision should be viewed as an investment decision. Very often, new equipment
          or balancing equipment is required to manufacture the part in-house. Figure above provides a
          framework of how such costs can be treated. Management should consider internal sources for
          services or goods and evaluate these sources to the external sources with the same after thorough
          analysis. One should be careful that there are no hidden costs when evaluating alternatives.
          Internal sources should perform at the same high level expected from external suppliers.

          The real cost of a purchased product is not the unit price, but the lowest final cost, which is the
          lowest total cost to the buying firm. The lowest total cost includes the purchase price, transportation
          and receiving costs, costs to rework defective products, and costs for special processing that
          would not be necessary if another supplier were used. The lowest-final-cost objective relies on
          the system view of the firm.




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