The make vs buy decision process

The processes of make-to-order and make-to-stock are similar at first sight. The major difference is that in make-to-order, production orders are linked to one or more sales orders whereas in make-to-stock production, orders are the result of production planning, which in its turn is based on a sales prognosis.

The make vs buy decision process

This article will take you through all the basic things you need to know with respect to the vital cost-saving decision known as make-or-buy.

The make-or-buy decision is the action of deciding between manufacturing an item internally or in-house or buying it from an external supplier also known as outsourcing.

Step-by-step guide to Make or Buy Decision

Such decisions are typically taken when a firm that has manufactured a part or product, or else considerably modified it, is having issues with current suppliers, or has reducing The make vs buy decision process or varying demand. Another way to define make-or-buy decision that is closely related to the first definition is this: Some companies manage all of the tasks in the value chain from manufacturing raw materials all through to the ultimate distribution of the completed goods and provision of after-sales services.

Some other companies are happy just to integrate on a smaller scale by buying a lot of the parts and materials that are required for their finished products. When a business is involved in more than one activity in the whole value chain, it is vertically integrated.

This kind of integration is quite common. Vertical integration provides its own set of advantages. An integrated company depends less on its suppliers and so can be certain of a smoother flow of materials and parts for the manufacture than a non-integrated company.

The make vs buy decision process

In addition, some companies believe they can manage quality better by manufacturing their own parts and materials instead of depending on the quality control standards of external suppliers. The benefits of vertical integration are counterbalanced by the benefits of using outside suppliers.

By combining demand from different companie, a supplier can enjoy econoies of scale. These economies of scale can cause better quality and lower expenses than would be possible if the business were to endeavor to manufacture the parts or provide a service by itself.

At the same time, a business should be careful to retain control over those tasks that are necessary for maintaining its competitive position. Hewlett Packard manages the software for laser printers that it manufactures in collaboration with Canon Inc. The rule recommends that companies outsource all goods that do not fall into one of the following three classes: The assessment should include qualitative and quantitative factors.

It should also separate relevant expenses from irrelevant ones and consider only the former. The study should also look at the availability of the product and its quality under each of the two situations.

Introduction to quantitative and qualitative analysis Quantitative aspects can be calculated and compared whereas qualitative aspects call for subjective judgment and, frequently require multiple opinions.

In addition, some of the associated factors can be quantified with sureness while it is necessary to estimate other factors.

The make-or-buy decision calls for a thorough assessment from all angles. Quantitative aspects are essentially the incremental costs stemming from making or purchasing the component.

Factors of this type to look at may incorporate things such as availability of manufacturing facilities, needed resources and manufacturing capacity. This may also incorporate variable and fixed expenses that can be found out either by way of estimation or with certainty.

Similarly, quantitative expenses would incorporate the cost of the good under consideration as the price is determined by suppliers offering the product for sale in the marketplace.

Qualitative factors to look at call for more subjective assessment. Examples of such factors include control over component quality, the reliability and reputation of the suppliers, the possibility of modifying the decision in the future, the long-term viewpoint concerning manufacture or purchase of the product, and the impact of the decision on customers and suppliers.

Introduction to relevant and irrelevant expenses As mentioned earlier, distinguishing between these two kinds of expenses is necessary to come to a make-or-buy decision. Relevant costs for manufacturing the good are all the expenses that could be avoided by not manufacturing the product in addition to the opportunity cost resulting from utilizing production facilities to manufacture the good as against the next best alternative utilization of the manufacturing facilities.

Relevant costs for buying the product are all the expenses relating to purchasing a product from suppliers. Irrelevant costs are the expenses involved irrespective of whether the good is produced internally or bought externally.The make-or-buy decision is the action of deciding between manufacturing an item internally (or in-house) or buying it from an external supplier (also known as outsourcing).

Such decisions are typically taken when a firm that has manufactured. is the place to go to get the answers you need and to ask the questions you want. I loathe the process of having to buy a new car. Dealing with pushy, overbearing car salesmen can be extremely frustrating.

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The make vs buy decision process

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