Make or Buy

Reasons for Making Lower production costs Lower production costs Unsuitable suppliers Unsuitable suppliers Assure adequate supply (quantity or delivery) Assure adequate supply (quantity or delivery) Utilize surplus labor or facilities and make a marginal contribution Utilize surplus labor or facilities and make a marginal contribution Obtain desired quality Obtain desired quality Remove supplier collusion Remove supplier collusion

Reasons for Making (Cont.) Obtain unique item that would entail a prohibitive commitment for a supplier Obtain unique item that would entail a prohibitive commitment for a supplier Maintain organizational talents and protect personnel from a layoff Maintain organizational talents and protect personnel from a layoff Protect proprietary design or quality Protect proprietary design or quality Increase or maintain size of the company Increase or maintain size of the company

Reasons for Buying Lower acquisition costs Lower acquisition costs Preserve supplier commitment Preserve supplier commitment Obtain technical or management ability Obtain technical or management ability Inadequate capacity Inadequate capacity Reduce inventory costs Reduce inventory costs Ensure alternate sources Ensure alternate sources Inadequate managerial or technical resources Inadequate managerial or technical resources

Reasons for Buying (Cont.) Reciprocity Reciprocity Item is protected by a patent or trade secret Item is protected by a patent or trade secret Frees management to deal with its primary business Frees management to deal with its primary business

Cost Considerations To Make To Make To Buy To Buy

Make Costs Delivered purchased material costs Delivered purchased material costs Direct labor costs Direct labor costs Any follow-on costs stemming from quality and related problems Any follow-on costs stemming from quality and related problems Incremental inventory carrying costs Incremental inventory carrying costs Incremental factory overhead costs Incremental factory overhead costs Incremental managerial costs Incremental managerial costs Incremental purchasing costs Incremental purchasing costs Incremental costs of capital Incremental costs of capital

Buy Costs Purchase price of the part (or service) Purchase price of the part (or service) Transportation costs Transportation costs Receiving and inspection costs Receiving and inspection costs Incremental purchasing costs Incremental purchasing costs Any follow-on costs related to quality or service Any follow-on costs related to quality or service

Make or Buy Cost Components