Make-or-Buy Decision: Benefits of Manufacturing or Outsourcing

The purpose of this report is to analyze the benefits of either manufacturing or buying a part of a company implement or product by taking into account the cost of either making or buying such part or whole of that implement. This report therefore uses calculation to arrive at such decision by drawing comparison between the cost of making or manufacturing it, the efficiency of such in terms of man-hours needed, total units produced and time taken to produce such units.

RUNNNING HEAD: MAKE-OR-BUY DECISIONS 1
UNIVERSITY NAME
STUDENT NAME
STUDENT ID
COURSE
DATE.

MAKE-OR-BUY DECISION 2
EXECUTIVE SUMMARY.
The purpose of this report is to analyze the benefits of either manufacturing or buying a part of a
company implement or product by taking into account the cost of either making or buying such
part or whole of that implement. This report therefore uses calculation to arrive at such decision
by drawing comparison between the cost of making or manufacturing it, the efficiency of such in
terms of man-hours needed, total units produced and time taken to produce such units.
This report also gives some reasons when a company decides to make or buy a particular item
considering the advantages such as improved quality, reduction in cost and and need for secrecy
disadvantages such as limited skills and knowledge..

MAKE-OR-BUY DECISION 3
Table of Contents
INTRODUCTION...........................................................................................................................4
DISCUSSIONS................................................................................................................................5
FACTORS THAT INFLUENCES A FIRM TO OUTSOURCE A PRODUCT OR PART...........5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

MAKE-OR-BUY DECISION 4
INTRODUCTION
The make or buy decision involves a process of creating a planned preference on whether to produce an
item within or sourcing it from suppliers. Outsourcing Is also referred to as buying side. These decisions
always occurs the time a company that creates an item or claims any modification of the item
experiences problem with its suppliers or changing demand(Nunez,2009).
The most critical issues to be regarded in a Make or Buy decision involves cost(Bajec &
Jakomin,2010)and accessibility of production volume .Therefore ,decision whether to buy-or-make
depends on the analysis of relevant costs varying between Make-or-buy alternatives. Calculation of
analysis costs is shown below.
Considering all the relevant costs, it will be cost effective for the firm to make the product in-
house because the cost of making the 8000 units is $120,000 compared to outsourcing at
Purchase price $ 16 $128,000
Direct Materials $ 5 $ 40,000
Direct Labor 4 32,000
Variable overhead 4 32,000
Fixed overhead that
Can be avoided by Not
Making 2* 16,000
Total Relevant Costs $ 15 $ 16 $ 120,000 $ 128,000
Difference in Favor of Making $ 1 $ 8,000
Make
8000 Units
MakeBuy Buy
Single Unit

MAKE-OR-BUY DECISION 5
$128,000 and additional $ 32 ,000 Fixed overhead Cost which is irrecoverable. The Company
would save $ 40,000 for the production of 8000 units.
DISCUSSIONS
Make-or-buy decisions can be ananalyzed and conducted in two levels that is strategic and
operational levels. Variables considered in strategic level include analysis of environment and
the future. Issues like government regulation, market trends and competition have impact on
strategic analysis. Therefore, firms should process or make items that are in-line with their major
competencies. This gives the company a competitive advantage. Manufacturers and product
developers tend to buy subassemblies rather than piece parts if the item does not fit into one of
the categories below (Arya, Mittendorf & Yoon, 2013).
1) Is crucial to the success of a commodity together with customer understanding of
essential product qualities.
2) Is within the foundation of the firm’s competencies or fits to those items or products that
the firm must make in order to realize it’s laid down future objectives.
3) Requires technical skills to design and manufacture and the reliable suppliers is limited
Items that fit one of the above categories are considered strategic and therefore should be
manufactured internally if it is possible.
In operation level, Make-or-buy decisions also have impact.
The following factors contribute to the firm producing or making a part internally.
1) Cost of production.
2) Better quality control.
3) Limited competent suppliers.
4) Secrecy in order to protect patent.
5) Supplier not interested due to too small quantity to be supplied.
6) The need to bring together plant operations.
7) Environmental, social or political reasons.
8) Ability to regulate transport, lead time and warehousing costs.
(Daneshgar, Low, & Worasinchai, 2013).

MAKE-OR-BUY DECISION 6
FACTORS THAT INFLUENCES A FIRM TO OUTSOURCE A PRODUCT OR PART.
1) Limited skilled man power
2) Brand preference
3) Production cost.
4) Volume required
5) Inventory and tendering considerations
6) Supplier’s know-how is advanced than that of the buyer.
CONCLUSION.
In conclusion, make or buy decisions of a company depends on various factors such as need to
keep secrecy regarding the production of a particular commodities, need for improved quality of
the product and the need for harmonization of various plant operation units.in arriving at make or
buy decisions therefore, a company must critically evaluate the cost saving in both cases and
examine the production efficiency of the part in question. For our case above, it will be of benefit
for this company to make the product in-house as this will lead to a cost saving of $8000 and a
fixed cost of $32000 (irrecoverable) which will finally results in saving of $40000 in the
production of 8000 units.

MAKE-OR-BUY DECISION 7
REFERENCES.
Arya, A., Mittendorf, B., & Yoon, D. H. (2013). Revisiting the make-or-buy decision:
Conveying information by outsourcing to rivals. The Accounting Review, 89(1), 61-78.
Bajec, P., & Jakomin, I. (2010). A make-or-buy decision process for outsourcing. PROMET-
Traffic&Transportation, 22(4), 285-291.
Daneshgar, F., Low, G. C., & Worasinchai, L. (2013). An investigation of ‘build vs.
buy’decision for software acquisition by small to medium enterprises. Information and
software technology, 55(10), 1741-1750.
Nunez, I. (2009). Outsourcing occupational safety and health: an analysis of the make or buy
decision. Human resource management, 48(6), 941-958.