Question

b) Use the relevant production and outsourcing costs identified in part (a) to analyse a possible cost saving of this make-or-buy decision by contrasting the internal production cost with external purchase cost, and make a suggestion. (Hint: irrelevant cost(s) should be excluded.)

Answer 1

Answer

A The make-or-buy decision is the act of making a strategic choice between producing an item internally (in-house) or buying it externally (from an outside supplier). The buy side of the decision also is referred to as outsourcing. Make-or-buy decisions usually arise when a firm that has developed a product or part—or significantly modified a product or part—is having trouble with current suppliers, or has diminishing capacitylso referred to as an outsourcing decision, A make-or-buy decision compares the costs and benefits associated with producing a necessary good or .bad service internally to the costs and benefits involved in hiring an outside supplier for the resources in question. To compare costs accurately, a company must consider all aspects regarding the acquisition and storage of the items versus creating the items in-house.

• A make-or-buy decision is an act of choosing between manufacturing a product in-house or purchasing it from an external supplier.
• Make-or-buy decisions, like outsourcing decisions, speak to a comparison of the costs and advantages of producing in-house versus buying it elsewhere.

Regarding in-house production, a business must include expenses related to the purchase and maintenance of any production equipment and the cost of production materials. Make costs can include the additional labor required to produce the items, storage requirements within the facility, storage costs overall, and the proper disposal of any remnants or byproducts from the production process.

Buy costs related to purchasing the products from an outside source must include the price of the good itself, any shipping or importing fees, and applicable sales tax charges. Additionally, the company must factor in the expenses relating to the storage of the incoming product and labor costs associated with receiving the products into inventory.

Make-or-buy decisions also occur at the operational level. Analysis in separate texts by Burt, Dobler, and Starling, as well as Joel Wisner, G. Keong Leong, and Keah-Choon Tan, suggest these considerations that favor making a part in-house:

• Cost considerations (less expensive to make the part)
• Desire to integrate plant operations
• Productive use of excess plant capacity to help absorb fixed overhead (using existing idle capacity)
• Need to exert direct control over production and/or quality
• Better quality control
• Design secrecy is required to protect proprietary technology
• Unreliable suppliers
• No competent suppliers
• Desire to maintain a stable workforce (in periods of declining sales)
• Quantity too small to interest a supplier
• Control of lead time, transportation, and warehousing costs
• Greater assurance of continual supply
• Provision of a second source
• Political, social or environmental reasons (union pressure)
• Emotion (e.g., pride)

In a make-or-buy decision, the most important factors to consider are part of quantitative analysis, such as the associated costs of production and whether the business can produce at required levels.