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Make verses buy agenda

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Title: Day 4 Agenda Author: Michael Wasserman Last modified by: pagellm Created Date: 8/16/1997 9:33:12 AM Document presentation format: On-screen Show – PowerPoint PPT presentation

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Title: 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.
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