make or buy decision

Topics: Decision making, Decision theory, Strategic management Pages: 11 (2924 words) Published: May 5, 2014

The debate to buy or make has taken many dimensions, with wit economists, citizens, politicians, and businesses pulling the debate to suit their intentions. When the public is dependent on the rational consumption process amid constraints, the politician is obligated to safeguard the interests of their representatives. In the same breath, the concerns of economists and academicians are overinforming on the implications of each action and businesses have a moral responsibility to remain afloat. The decision to buy or make to some extent is obvious as no company would survive by making all what it uses in its operations and complete buying of the company’s products may make the company lose identity. To some extent, this is true but on the flipside, the decision to buy or make can be a tough managerial dilemma. The buy or make decision is centered on issues that may be situational or strategic. Issues that influence this decision are competitive advantage, flexibility in the face of technological changes, and potential coordination inefficiencies. Small firms may not have choices when called upon to produce through a manufacturing plant whose laying down would require a substantial capital. It is common knowledge that firms remain afloat by engaging continuously in decisions that ensure profitability and outsourcing has over the years given small firms competitive advantages in the manufacturing sector. Established firms have internalized and perfected their production schedules and regimes and efficiency of their production schedules gives them the competitive advantage.

How to Make Choices
Making this choice as Fine and Whitney (2002. p.25) posit is based on the restrictions unique to every firm. The product itself determines how the firm goes round it to make it happen; it is an undertaking that relates to the skill set required to make the product, manufacturing issues, and designing issues. To make it happen, each firm relies on its unique characteristics that determine its competitiveness. The engineering process and management commitment toward a product ought to be harmonized for the prosperity of the company. Because of this, a company must understand its core competencies, the product development process, the engineering process and systems, its architecture, supply chain modalities and other relevant characteristics (Fine and Whitney 2002 p.1).

Taking the example of an automobile industry, varying degrees of outsourcing is apparent. The two big players in US markets GM and Chrysler are the ideal examples of this diversity. GM buys over 70% of its products whereas Chrysler buys only 30% (Fine and Whitney 2002, p.3). This disparity, to some extent, could be attributable to strategic, but also due to GM’s contractual obligations to UAW and the fast-growing corporate changes (Fine and Whitney 1996, p.5).

While cost may look like it is the underlying factor, but as Harvard research group posits if this decision to buy or to make is given a one dimension of cost it may be a bad idea as strategic business concerns for example supply chain and keeping up with customer demands could overshadow the gains in cost cutting if they are not favorable (HRG, 2005: 3).

To-buy decision, according to Chan et al. (2006, p.98) can prove costly due to the high turnover of experts in the field and costs related to training and retraining of these experts to remain relevant to the rapidly changing IT sector. Cost-cutting alone would not be reflective of strategic decision as Leiblein et al. (2002)posit that companies that have some capital intensive production phases may adopt buying option on grounds that changes to the production needs may require further capital outlay and this would threaten the firm’s profitability (817). On this basis, firms are seen to have more flexible production capacities that customer reviews can incorporate in phases and not necessarily...
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