Make - or - Buy Approach for Manufacturing Firms

Essay by harsha83 September 2004

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Make - or - Buy Approach for Manufacturing Firms

A manufacturer company usually has the option of either buying semi-finished goods for the production of their goods or making product itself. Such decisions are usually made by a company's top management as part of the overall planning for company operations. Firstly, before proceeding, let's define what make-or-buy approach is. According to Krajewski and Ritzman (1996), the decision whether to implement backward integration is often referred to as the make-or-buy decision. In other words, "choosing the products and services that can be advantageously obtained externally as opposed to produced internally", (Heizer and Render, 2001). In this case, cost is a frequent determining factor. Such decisions concern materials, components, assemblies and services. They take place during long, medium and short range planning. Here, the company's managers compare the above related costs from buying parts or materials from external suppliers with the estimated cost of making the goods on their own.

The manager's should consider the numbers of units needed, if the company uses only a few units of a particular item and special equipment is needed to produce it, the company will probably look for a supplier. The company can also gain competitive advantage of buying approach if several companies purchase the item from the same particular supplier which may increase the demand and decrease the supplier's cost price. All costs involved in making approach are to be considered before decision of making-or-buying. Such costs include training employees and buying and maintaining equipments. Also, in some cases, materials pr parts may not even be available for purchase and must be made by the company itself. Many companies also have secret product designs that give them competitive advantage and also in order to avoid the risk of their secrets leakage, these companies do...