Question

A firm must decide whether to make a component part in-house or to contract it out to an independent supplier. Manufacturing the part requires a nonrecoverable investment in specialized assets. The most efficient suppliers are located in countries with currencies that many foreign exchange analysts expect to appreciate substantially over the next decade. What are the pros and cons of (a) manufacturing the component in-house and (b) outsourcing manufacturing to an independent supplier? Which option would you recommend and why? Justify your answer with suitable examples.

Answer 1

                                    The given case talks about a situation wherein the firm has to decide whether it would be beneficial for the firm to manufacture a component in-house or outsource the same to an independent supplier. In order to arrive at a conclusion on the same, the various outputs and effects based on the benefits and demerits of both the situations have to be considered. They are discussed below

a) In-house manufacturing

                                    In-house manufacturing refers to the process of manufacturing that is being done within the company rather than depending on the external manufacturer for the same. The following are the advantages of in-house manufacturing

· Here, the communication would become simpler and easier as it has to be done within the firm only

· It would impart more flexibility of supply as the company itself could take last minute changes without the need for consulting an external agency in case of any exigencies

· It could bring in more quality outcomes as the company would have more focus on its outputs rather than an external agency who would have various such projects to manage at the same time

· The management costs would be lower

· There would be more control over the production of the firm

· It helps in saving more money logistically and helps in maintaining better public relations

                                               The following are the major disadvantages of an in-house manufacturing process

· It could cause much labor costs

· There could be inventory complications as the firm could not be able to have a control over its inventory at certain stages

· It would require a human resource assistance and thus could cause changes in administrative roles which could cause increased variable costs for the firm

b) Outsource manufacturing

                                    Outsourcing means that the production or other processes involved in the production of a firm is being handed over to an external independent supplier who would then help in the working of the firm. The following are the advantages of an outsourcing manufacturing

· It could cause lower labor costs

· It could result in better innovative practices for production or any related processes as the outsourced agency could have many such links which could be brought together

· Outsourcing is one of the better ways to cause a sudden surge in the demand if the firm has a lack of any tool in manufacturing or marketing which could be made up by the external independent outsourced agency

· Outsourcing saves money on production costs and hence would result in improved efficiency for the firms

                                                The following are the various disadvantages of depending on an external agency who is independent for a firm

· Outsourcing would have detrimental impacts on delivery time and thus there could be a lag in the delivery time which could affect the marketing of the firm

· There could be huge variances in the quality of the produce as the outsourced agency would have a lot of customers to deal at a single time

· There could be communication issues as it would take a lot of strain and time to communicate with an external agency

· There could be lack of control over manufacturing as the communication is not strong

                                                 The above are the various advantages and disadvantages that are associated with both outsourcing and in-house manufacturing techniques. The in-house manufacturing is the most preferred one as it would bring in more benefits to the firm rather than depending on an external agency for each purpose. But in case of low capital and other circumstances, the firm could be forced to depend on an external agency for the same.