When Is The Best Time To Do Make vs. Buy?

I was recently speaking with a client about Make vs. Buy. We were discussing when the appropriate time was for doing that kind of analysis. The natural assumption is that world class organizations are doing that kind of analysis whenever a new product program or a major new contract is being worked on. It should be part of every analysis to provide continuous feedback to the Manufacturing organization and the business’s executives. Make vs. Buy analysis will tell you how competitive your operation is and whether you should continue to invest in those operations, and if appropriate, bring operations in-house or farm them out to supply chain partners. We recently completed a study of competitiveness looking at 89 countries and all 50 states. Click here to see our latest study on Mexico vs. China. The results indicate that manufacturing in the US and Mexico has become much more competitive when you look at the supply chain life cycle cost of a product. This has occurred in just a few short years, and, when taking into consideration the expected labor and material inflation rates outside of the US, the story becomes more compelling. Now is a great time to re-look at your supply chain options. A thorough Make vs. Buy analysis requires analysis into these areas:

• Purchase Price
• Product life cycle: New, developing or mature
• Cost of internal operations: variable and overhead
• Cost of Capital
• Impact on IP
• Regulatory issues with moving jobs from one location to another
• Capital required and expected ROI and NPV
• Total change in supply chain costs including logistics, duties, tariffs, quality oversight, etc.
• Impact of outsourced operations on customers
• Changes in working capital requirements for equipment and inventory, etc.
• Assessments of response time and order fulfillment
• Competitors sourcing strategy review
• Quality and cost reduction programs

Doing a good job on this is tough and requires a lot of work, but the competitive intelligence and insight into the operations you gain is invaluable. A good Make vs.Buy analysis will also consider soft side issues as well as shown in the presentation above. Most businesses have spent much time and money on developing their manufacturing and processing skills. They may use in-country presence as a selling point to their customers. It may even be a strategic advantage. Outsourcing manufacturing, closing down a factory, laying off people and working with another company (maybe in a foreign country) requires that the company carefully consider the impact of losing that manufacturing skill and technology sharing when intellectual property is involved. Existing organization structures need to be revisited when outsourcing operations because it requires a much more focused supply chain group with a different set of skills. Most companies who have never outsourced to a foreign manufacturer don’t understand the requirements for doing so. So, a good analysis will also consider:

• The ability to build a more competitive and sustainable supply chain
• More focus on product management and product development
• Technological advantages that potential suppliers offer
• What the competitors in the market place doing
• Business process changes required to support complete outsourcing
• The amount of capital freed up for other corporate, market or operational activities

Many companies view outsourcing as a way to focus more of their capital on new products, market development, etc. Any time a company can focus more capital on growth, it should. Outsourcing is a possible solution that enables the company to move more money into these business development activities. The outsourcing effort, if done properly will provide two benefits:

• Alleviate the need to invest heavily into new equipment and new processes allowing more money for business/product development
• Lower the cost of the product (if sourced properly), increasing profitability or providing the opportunity to more easily compete on price

The issues that need to be considered for in-sourcing are exactly the same with the exception that in-sourcing will likely be a capital consumer. Make vs. Buy needs to be done carefully and strategically. When the right time strikes, manufacturers should move quickly to take advantage of the opportunity to better understand how productive and competitive its supply chain approach really is. Manufacturers should consider finding an expert to help them do the proper planning and analysis and to develop a Total Cost of Ownership model for the decision making process. They need to find someone who has specific expertise in outsourcing and in-sourcing and the project management skills to help plan it. They also need to understand the supply chain life cycle cost and how to financially model it. If done well, it can yield amazing results for the company on both the top and bottom line and a significant amount of business intelligence.

Learn more about Group50’s capabilities at manufacturing & distribution consultancy services. If you want to find out more about our recent competitive study, or, want to develop a make vs. buy model for your business, you can make a request here, call us at +1 (626) 644-9746 or email us at info@group50.com.

About the author: Jim Gitney is the CEO of Group50 Consulting and specializes in the development and implementation of manufacturing and supply chain strategies. Jim and the Group50 team are all former executives with well known manufacturing and distribution companies who understand what it takes to put together and manage a successful outsourcing or in-sourcing plans. 

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