Case Study 2

Reasons to Make Instead of Buy

Quantities are too small and/or no supplier is interested

Quality requirements are too exacting or special processing methods needed

Greater assurance of supply

Closer coordination of supply and demand

Preserve technological secrets

Lower cost

To take advantage of unused capacity

Keep our capacity utilization high and outsource the rest

Avoid supply dependency

Reduce risk

Competitive, political, social or environmental factors

Distance from the closest available supplier is too great

Market potential for the product or service is expanding rapidly

Forecasts of future shortages in the market or rising prices

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Reasons to Make Instead of Buy

Lack of managerial or technical experience

Excess production capacity

Reduce risk

Customer preference for a particular brand

Challenges of maintaining technological leadership for noncore activity

Outsourcing is difficult to reverse

Cost accuracy

Flexibility and desire to stay lean

Insufficient volume to justify in-house production

Forecasts show great demand and/or technological uncertainty

Availability of a highly capable supplier

Buying may open up markets

The ability to bring a product or service to market faster

Superior supply management expertise

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5

Insourcing and Outsourcing

Two ongoing questions for a cross-functional team including supply, operations, accounting and marketing are:

(1) Which products or services are we currently buying that we should be doing in-house?

(2) Which products and services that we are currently doing in-house should we be buying from suppliers?

The Outsourcing Matrix

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1

2

3

4

Should Be In-House

Should Be Outsourced

Currently Outsourced

Currently In-House

Reasons to Insource

The necessity argument: “We would prefer not to produce this product or service in-house, but we really don’t have any other options.”

The opportunity argument: “We would prefer to do this in-house because it would give us a strategic competitive advantage.”

Examples of Necessity Drivers of Insourcing

Anything that threatens assurance of supply

An existing source of supply goes out of business or drops a product or service line and no other supplier is available

No opportunities for supplier development

A sudden massive increase in price

The purchase of a sole source by a competitor

Political events and regulatory changes

Lack of supply of a key raw material or component required for the manufacture of the purchased product

Reasons to Outsource

The necessity argument: “We would prefer not to outsource this product or service, but we really don’t have any other options.”

The opportunity argument: “We would prefer to outsource this product or service because it would give us a strategic competitive advantage.”

Deciding What Might be Outsourced

Determine strategic, critical, non-core activities

An entire function or some elements of an activity may lend themselves to lower cost purchase and management by a third party

Identify a function as a potential outsourcing target, break that function into its components, determine which activities are strategic or critical and should remain in-house, and which can be outsourced

Risks of Outsourcing

Loss of control

Higher exit barriers

Exposure to supplier risks

e.g., financial, commitment to relationship, response time, quality, service

Unexpected/unanticipated costs

Difficulty quantifying economies

Conversion costs

Supply restraints

Attention required by senior management

Possibility of being tied to obsolete technology

Concerns with long-term flexibility

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The Outsourcing Decision

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Is the activity strategic?

Is the activity critical to the

business but not strategic?

Create a RFP.

Gather supplier bids/proposals.

Is the supplier’s bid/proposal more

desirable than the internal option?

Could the internal option achieve

similar results?

Negotiate a contract to ensure

that expectations are realized

No

No

No

No

No

Keep the function

in-house

Keep the function

in-house

Keep the function

in-house

Keep the function

in-house

Yes

Yes

Yes

Yes

Purchasing’s Role in Outsourcing

Provide a comprehensive, competitive process

Identify opportunities for outsourcing

Aid in selection of sources

Identify potential relationship issues

Develop and negotiate contract

Monitor and manage relationship

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