Make or Buy?

If you are struggling about which material to buy and which material to make by yourself. the following information would be helpful for you and brings you the direction to think through.

Someone may argue that, if we can make it cheaper then we made it by ourselves. yeah, true that's one of the factors need to be considered. Well, you may ask what would be other factors? how should I make my decisions? Let's see.

To strategic level, outsourcing is driven by competitive needs which may be a lower operations cost and focus on the company's long term profitability. in the meanwhile, the risk of the supply chain would also be taken into consideration. Recently I've reviewed one chapter from Designing and Managing the Supply Chian, it summaries five criteria need to be carefully think about before your decision.

1. The importance of the outsourced componet/service to customers. If the target component is critial part which will infulence the customer's decision to buy an item or not, it would be very risky if outsourced.

2. Speed of innovation. If the technology on that component changes rapidly, it may caused significant investment to the company to built up the capabilities. However, if it is the key component which represent the company's competitive advantage, it may need to carefully think about the consquence and risk of outsourcing.

3. Competitive position. This is about the cost. If one company can perform a better cost on a component, to make by itself makes more sense. if the component is not the critical component, and there're suppliers can do better with a lower cost, i can't find an excuse to do by myself.

4. Number of capable suppliers. If you are familar with Porter's five force model of competition. You will recall that one of the force is the supplier's bargaining ability. The competition is high when there're many suppliers and supplier have a low negotiating power. it would go to the other way if there's limited supplier.

5. Architecture. The design of the product is another factor. This is a about the standardization rate of the product or modular rate. The higher the modular rate, the less risk if outsourcing which would influence both function of the product and the cost of poor quality of the product.

This is actually something new to me, and I thought it's very usefuling and interesting. Share so write down and hope it works for you as well. If you have different thought you are very welcome to point it out. :)