make-or-buy decision

make-or-buy decision

the strategic choice confronting the firm as to whether it purchases its raw materials and components requirements from outside suppliers or produces them for itself as part of a vertically-integrated operation (see VERTICAL INTEGRATION). The main factors influencing this decision are the relative costs and risks involved. The main advantage of outside suppliers who specialize in the production of an input and produce for a large number of customers (not just one as in the case of self supply), is that they are able to benefit from the lower costs associated with economies of large-scale operations (see ECONOMIES OF SCALE). Thus, it may be cheaper to a user to buy in the input rather than to produce it internally; the more so if the firm has access to a number of supply sources (both domestic and international) and can take full advantage of price competition between them. Set against this are the risks in certain cases of over-dependency on particular suppliers, leading to possible problems of overcharging and disruptions to the firm's production schedules arising from supply shortages, failure to meet delivery times, and inputs lacking the desired degree of quality or precision. See SOURCING, OUTSOURCING, INTERNATIONALIZATION, PURCHASING.
References in periodicals archive ?
The thrust of this research is on a make-or-buy decision method that combines traditional cost accounting and the effects of capacity limitations.
While these and other strategic issues, such as uncertainty in technology and volume, and competition among suppliers are important in the make-or-buy decision (Walker and Weber 1987), financial implications are also important (Burt et al.
Thus, little research has focused on the integration of operational and managerial accounting issues in the make-or-buy decision. As indicated in Blackstone and Gardiner (1991), it is important to take an integrated approach to make-or-buy.
The Theory of Constraints (TOC) was used by Blackstone and Gardiner (1991) to analyze the make-or-buy decision. The TOC advocates managing by focusing on the removal of the constraints in a system in an effort to enhance profitability.
Gardiner and Blackstone (1991) discussed the influence of shop-floor capacity on the make-or-buy decision. If the component being considered for in-house production has to share a resource with existing products and this resource is being fully utilized at present, then the only way to produce this new component is by taking capacity on that resource away from existing products, which could adversely impact profitability.
So the CPCM is a better criterion than standard costing in determining the make-or-buy decision. However, the CPCM method also has some shortcomings.
THE MAKE-OR-BUY DECISION WITH MULTIPLE PRODUCTS AND BOTTLENECKS
To determine the make-or-buy decision based on the TOC, the CPCM numbers for resource B (the constraint) in Figure 3 are examined.
If Q were the only product, the make-or-buy decision would be for Q(c) only based on the trade-off at resource B.
Their research therefore makes an important contribution in understanding the make-or-buy decision. However, their procedure may not result in good decisions in the more complex make-or-buy situation.
"The Theory of Constraints and the Make-or-Buy Decision," International Journal of Purchasing and Materials Management, (27:3), 1991, pp.
Today, CEOs have the option of making outsourcing decisions, make-or-buy decisions, about highly sensitive activities, which have themselves become strategically distinct businesses developed by global companies.