MAKE OR BUY
In-house capabilities can be used to make a product when such an item is important to the performance of the firm, especially when time is sensitive or it’s prone to various changes in terms of design. It is important in such cases to have tight control over logistics and production of the product if the company wants assurance of availability of such a product when and where required and that quality requirements are met. On the other hand, companies may choose to buy that product or put up a manufacturing process for such product normally because the item or the production process is seen as being strategic to the business. In buying, the company’s aim is to eliminate any burden on the balance sheet that is put by the by the manufacturing process, minimize on unit costs, attain flexibility to maximize or minimize output because of demand changes (Weygand, Kieso & Kimmel, 2010).
A company may choose a buy solution and therefore source all aspects of the production process for a particular product, product line and even the business. The decision to buy should be given a lot of weight whereby the company must carry out an evaluation of the core competencies that are measured against the set standards before abandoning the make choice. A consideration to be reviewed is whether the company’s manufacturing capabilities can meet the desired quality standards. Another consideration is the external suppliers –firms that are chosen to for the purpose of outsourcing – who must be evaluated rigorously. Key indicators like business strategies, innovation and design skills, engineering capabilities and policies of the supplier should be examined so that to avoid the mistake of contracting inefficient suppliers (Weygand, Kieso & Kimmel, 2010).
Case study
A company has to make a decision on whether to make software installed through outsourcing o making the software by themselves. The make option would cost the company $25000 while buying would cost $17,000. This means that the difference between the buy and options in terms of cost is $8,000. The make option would attract a monthly fee of $2,500 while the buy option would attract $ 2,700 of the fees, resulting to a difference of $200. The strategies involved in this decision making process involve the cost for buying or making and time to be needed in replacing or making it. As such, the decision to make the software would be buying it if the replacement can be made within 40 months and make the product if the replacement will not be done within a period of 40 months.
Analysis
The make or buy decision depicted above can be explored from a firm’s strategic decision point of view. The cost consideration indicates that economic factors play a vital role in determining what decision to make. Such considerations include the effect of buying on capital expenditures, return on capital invested, return on the software as an asset and the possible savings that would be obtained through the buy decision. Initially, outsourcing was mainly aimed at cost reduction but there is no proof that this process is forward-thinking. Firms that depend on outsourcing majorly as a means of reducing expenses fundamentally base their decision on the cost estimates involved in in-house production against the variable cost related to outsourced manufacturing (DRURY, 2006). In the above case, the firm would consider the cost reduction attained after buying the software as compared to making it eternally. The variable costs such as the monthly fees would be major consideration in making a make or buy decision. In the above case, underestimating the cost that would be associated with damaging of the software in the process of having a supplier to outsource it is a common mistake. A firm that wants to remain on course in terms of the purpose of the software would have to consider that, outsourcing may result to failure in meeting the standards requirement. A failure is an additional cost that should be considered if the firm decides to buy the product. The availability of the manufacturer of the software is another issue that would inform he buy decision (MAHADEVAN, 2010). This involves the availability of an alternative maker of the initially contracted firm fails to deliver the software due to unavoidable circumstances.
Various steps or strategies can be applied in the form of make –or-buy framework bringing about assumptions can be directed into the final decision of on the aforementioned choices. Clearing the roles of the involved stakeholders means that the process of decision making is made to be consistent and clear. In the above case, giving clear responsibilities about who should oversee the evaluation of the decisions would bring about straight forward plans that ensure accountability, responsibilities, consultation and information sharing among the stakeholders. The process of decision making would, therefore, meet the right degree of involvement. The manufacturing strategy would involve the day to day articulation of terms to be observed in the process (Weygand, Kieso & Kimmel, 2010). This includes considering the core operations, the standards to be met in the process, the part of the software that would be given priority in manufacturing and such information would be a guide in the initial assessment of the make –buy question for the software. The other strategy involves identifying the potential manufactures of the software and certifying them. As discussed above, the decision to buy is normally affected by the availability of manufactures with capabilities that can meet the required standards. The certification process aims at recognizing the right supplier or manufacturer, auditing and selecting them based on proven quality, capacity and cost and this makes the buy decision to be the appropriate decision. In the above case, the firm would have to choose a supplier who would meet the cost requirement, and with the capability to direct the focus of the project towards other work items in the firm (Weygand, Kieso & Kimmel, 2010).
Cost consideration is a strategy that determines the make or buys decision in a big a way. A complete comparison will spell out competitiveness in terms of cost between the external and internal alternatives of supply (DRURY, 2006). If a simple comparison is made between internal cost of production and the quoted price by the manufacturing, a wrong decision on whether to buy or make may be made. The above firm would thus consider other factors such as fixed cost instead of just dwelling on the variable costs involved. Reassessing the manufacturing strategy would provide the company with a solid foundation for addressing the question of make-or-buy (MAHADEVAN, 2010). The decision process about the software would also require a change resulting from the threshold set up in the company on regulations, requirement of the process, cost of buying and service levels expected. If a decision is made about the software and later found to be the wrong one, it would call for a decision-revision so that the product is made in-house so that to ensure the requirements are met. Risk transfer can be a basis for a company to transfer risks that may arise from failure of the software to operate as intended. Such risks determine the make vs. buy alternatives and extent to which a careful analysis would carry out. In the above case, the firm would chose buying over make decision as a way of avoiding bearing the risk of an internally made software failing. It is strategy that involves being cautious with the decision made especially where internal capability cannot be trusted to assure the required standards (MAHADEVAN, 2010).
In conclusion, making a make-buy decision that will deliver on the firm’s requirement in terms of quality, time frame and cost will only be achieved if the business strategy adopted will align with overall organizational strategy. Such strategies would involve identify the capacity of the firm to develop software in-house and whether required standards can be achieved. The buy decision relates to identifying the right supplier or manufacturer, testing and certifying them to assess their capacity to deliver the needed quality of the software .though the make vs. buy decision may lack a clear answer , a strategy that is well defined can lead to making the appropriate decision.
References
WEYGANDT, J. J., KIESO, D. E., & KIMMEL, P. D. (2010). Managerial accounting: tools for business decision making. Hoboken, NJ, Wiley. 303
MAHADEVAN, B. (2010). Operations management: theory and practice. Upper Saddle River, Pearson. 346-347
DRURY, C. (2006). Management accounting for business. London, Thomson Learning. 90-92
