Make verses buy agenda

1
Make verses buy agenda

• Building a supply chain make or buy ?
• Traditional make vs. buy
• SCM make vs. Buy
• core competencies
• elements of total costs
• purchasings role for make products
• The gray zone

2
Make vs Buy - case

• Based on the give information please decide if
  you will make this product or buy it. Base your
  calculations on the total price of the decision
  for one year.

3
A key decision make or buy

• Who actually produces a part, service, assembly
  or any other input needed by the supply chain ?
• How do traditional organizations do this ?
• Why is this decision different if we take a
  supply chain view of the world ?
• Note a terminology problem - make implies that
  our company physically produces something - make
  really means we perform a process

4
Building on the case

• The case dealt with a make buy decision driven by
  price
• As the articles make clear these decisions are
  often driven by much more than the price
• Who does something best- quality and cost
• Masco-Tech (they are in your articles as well)
  Story
• Compared to painting things at JD in articles
• Freeing capacity
• Reduced investment and managerial span

5
Articles

• Out of the back room
• Buying entire processes- which we used to do
  internally here we are talking support
  processes such as HR
• Why?
• Foundry Father and the Barons of outsourcing
• In high tech many companies have moved to
  focusing on either design or production- few do
  it all (Intel is a noted exception)

6
Other issues from articles

• Companies are buying design, production, HR,
  accounting and just about anything else you can
  think of.
• This is totally different from just buying parts
  from China for a lower price
• Dont want to be a low price supplier with no
  other skills / attributes
• What are the Indian IT suppliers doing already

7
What besides price do we need to consider when
making this decision?

• 1) Is the input critical to the success of the
  product ?
• 2) Is the number of available suppliers extremely
  limited (if they exist at all) ?
• 3) Does the process make use of one or more of
  our core competencies ?
• Generally if the answer to any of these questions
  is yes we perform the process because it is
  strategic / critical to the customer
• Process helps customer differentiate

8
Core competencies / capabilities

• At the firm level determining core competencies
  is a key strategic task.
• What is it that our firm does best - preferably
  better than anyone else.
• What knowledge, skills and abilities are needed
  to compete in our market today and in the future
  ?
• The supply chain managers role
• The key contribution that SCM makes is
  identifying the K,S,As that external producers
  possess. What can our suppliers do better than we
  can (even if we could do it) ?

9
Core competencies examples

• Honda
• small engines
• Solectron and Flextronics
• Porsche article
• Why do they rent out their engineers?
• BAE in Wichita-
• Long structural parts for an airplane
• OSU
• Wal-mart
• materials management

10
Other strategic issues

• Capacity
• we may not have the capacity for a strategic item
  lots of low volume car production
• BMW X3 / most convertibles (Boxter / Solara)
• No suppliers and not our core competency
• can we afford to develop a competency ?
• can we afford not to ?
• can we develop a supplier ?
• Suppliers becoming competitors
• the Dodge brothers
• Japanese electronic sub-contractors

11
Strategic issues continued

• Workforce - especially with a union
• Boeing Engineers last strike
• outsourcing
• overtime
• Knowledge retention
• Prince makes dies in order to maintain the design
  knowledge
• Government
• are defense contractors too vertically integrated
  ?
• local content
• The hollow corporation

12
Some recent examples of make buy

• Space shuttle maintenance not done by NASA
• Service outsourcing from articles
• Call centers and programming went first
• Now design of products and processes now
  (including Boeing doing some design in Russia)
• BMW X3 speed and capacity
• Airport security- the TSA
• Brought work back in house
• Dell outsourcing the recycling of computers to
  prison labor

13
Total costs of make buy

• Price
• Time / speed
• Quality
• Control
• Service
• Future innovation
• Delivery reliability
• Safety
• Relationship to other products

• Capacity
• Transportation
• Overhead
• changes in structure
• increases in
• allotments of
• Human resources
• hire / fire/ re-train
• Others
• Cathy Lee is exploiting children

14
Getting specific making

• Why we perform a process
• costs ---gt
• integrate facility
• use excess capacity and absorb overhead
• need to understand strategy
• control
• design secrecy
• unreliable suppliers
• other responses
• workforce

• Costs to make
• materials
• direct labor
• production and QC
• inventory costs
• overhead
• managerial costs
• purchasing costs
• costs of capital
• opportunity costs

15
A note on overhead

• When capacity exists and is idle or underutilized
  then the make buy calculations change.
• If in order to make we need to purchase new
  equipment, expand the plant, or hire new workers
  - then our overhead costs increase as well.
• However, if the capacity already exists then the
  change in overhead is minimal and we must be
  careful how we calculate.
• finance and the set burden
• does this mean 100 utilization ?
• ABC and other allocations

16
Getting specific buying

• Why we buy
• costs ---gt
• supplier capabilities
• small volume
• we dont have capacity
• especially short term
• avoid hiring
• atlas tool and die
• maintain multiple sources
• flexibility

• Costs to buy
• price
• transportation
• incoming inspection ?
• purchasing costs
• quality, service, delivery, etc.

17
Make buy conclusions

• Make
• strategic inputs
• Costs
• fixed are higher
• variable are generally lower (otherwise why make
  ?)
• Major benefit - control
• Drawback - loss of flexibility

• Buy
• what others can make at a lower total cost
• what we do not have the capacity or capability to
  make
• Costs all variable
• Major benefit -flexibility
• Major drawback
• control
• long term hollowing

18
The supply chain managers job when we make

• Once we decide to perform a process it is often
  difficult to stop. Why ?
• Purchasing (should) play a role in determining if
  we should continue to perform a process.
• Masco-tech forging and Masco-tech machining
  operations - how much is vertical integration
  worth ?
• Boundary spanning - there are always new sources
  of supply - some of whom may change our make buy
  decisions.

19
The gray zone

• Many make buy decisions are not black and white-
  they have a gray zone in-between pure make and
  pure buy.
• Die shops can either machine from a blank (pure
  make), buy a finished part (pure buy) or machine
  from a forging (Gray zone).
• Dont have to outsource all of HR- might send out
  payroll and benefits administration (repetitive
  tasks) and keep recruiting?

20
Benefits of the gray zone

• Transition
• especially for services
• payroll and taxes - as we learn to do it we can
  take on more responsibility - also may be linked
  to growth
• ramping up capacity (for us or a supplier)
• Increased options - flexibility
• in the laundry example we go from 2 options to
  many (although buying just a dryer may be a bit
  odd)

21
Summation

• A key issue to address is who performs a process.
• We generally try and perform strategic processes.
• Make buy is based on lowest total costs and
  available capacity.
• Most make buy decisions have a gray zone that can
  be exploited to increase our options.
• Even for processes we perform, purchasing has a
  role to play. And this role is very important.