PROCUREMENT OPTIONS

Make or Buy Decision in Information Systems

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 partor significantly modified a product or partis having trouble with current suppliers or has diminishing capacity or changing demand. Make-or-buy analysis is conducted at the strategic and operational level. !bviously the strategic level is the more long-range of the two. "ariables considered at the strategic level include analysis of the future as well as the current environment. #ssues like government regulation competing firms and market trends all have a strategic impact on the make-or-buy decision. !f course firms should make items that reinforce or are in-line with their core competencies. These are areas in which the firm is strongest and which give the firm a competitive advantage. The increased existence of firms that utili$e the concept of lean manufacturing has prompted an increase in outsourcing. Manufacturers are tending to purchase subassemblies rather than piece parts and are outsourcing activities ranging from logistics to administrative services. #n their %&&' book World Class Supply Management, (avid )urt (onald (obler and *tephen *tarling present a rule of thumb for out-sourcing. #t prescribes that a firm outsource all items that do not fit one of the following three categories+ (,) the item is critical to the success of the product including customer perception of important product attributes- (%) the item re.uires speciali$ed design and manufacturing skills or e.uipment and the number of capable and reliable suppliers is extremely limited- and (') the item fits well within the firm/s core competencies or within those the firm must develop to fulfill future plans. #tems that fit under one of these three categories are considered strategic in nature and should be produced internally if at all possible. Make-or-buy decisions also occur at the operational level. 0nalysis in separate texts by )urt (obler and *tarling as well as 1oel 2isner 3. 4eong 5eong and 4eah-6hoon Tan suggest these considerations that favor making a part in-house+

6ost considerations (less expensive to make the part) (esire to integrate plant operations 7roductive use of excess plant capacity to help absorb fixed overhead (using existing idle capacity) 8eed to exert direct control over production and9or .uality )etter .uality control (esign secrecy is re.uired to protect proprietary technology :nreliable suppliers

8o competent suppliers (esire to maintain a stable workforce (in periods of declining sales) ;uantity too small to interest a supplier 6ontrol of lead time transportation and warehousing costs 3reater assurance of continual supply 7rovision of a second source 7olitical social or environmental reasons (union pressure) <motion (e.g. pride)

=actors that may influence firms to buy a part externally include+

5ack of expertise *uppliers/ research and speciali$ed know-how exceeds that of the buyer cost considerations (less expensive to buy the item) *mall-volume re.uirements 5imited production facilities or insufficient capacity (esire to maintain a multiple-source policy #ndirect managerial control considerations 7rocurement and inventory considerations )rand preference #tem not essential to the firm/s strategy

The two most important factors to consider in a make-or-buy decision are cost and the availability of production capacity. )urt (obler and *tarling warn that >no other factor is sub?ect to more varied interpretation and to greater misunderstanding> 6ost considerations should include all relevant costs and be long-term in nature. !bviously the buying firm will compare production and purchase costs. )urt (obler and *tarling provide the ma?or elements included in this comparison. <lements of the >make> analysis include+

#ncremental inventory-carrying costs (irect labor costs #ncremental factory overhead costs (elivered purchased material costs #ncremental managerial costs 0ny follow-on costs stemming from .uality and related problems #ncremental purchasing costs #ncremental capital costs

6ost considerations for the >buy> analysis include+

7urchase price of the part Transportation costs @eceiving and inspection costs #ncremental purchasing costs 0ny follow-on costs related to .uality or service

!ne will note that six of the costs to consider are incremental. )y definition incremental costs would not be incurred if the part were purchased from an outside source. #f a firm does not currently have the capacity to make the part incremental costs will include variable costs plus the full portion of fixed overhead allocable to the part/s manufacture. #f the firm has excess capacity that can be used to produce the part in .uestion only the variable overhead caused by production of the parts are considered incremental. That is fixed costs under conditions of sufficient idle capacity are not incremental and should not be considered as part of the cost to make the part. 2hile cost is seldom the only criterion used in a make-or-buy decision simple break-even analysis can be an effective way to .uickly surmise the cost implications within a decision. =irms have started to reali$e the importance of the make-or-buy decision to overall manufacturing strategy and the implication it can have for employment levels asset levels and core competencies. #n response to this some firms have adopted total cost of ownership (T6!) procedures for incorporating non-price considerations into the make-or-buy decision.

Outsourcing as an Option
strategy for obtaining the economic benefits of #T and controlling its costs by obtaining #T services from outside vendors rather than from internal #* units within the organi$ation. !ffshore outsourcing of software development 0*7s and :tility 6omputing. 0pplication service provider (0*7) manages and distributes software-based services and solutions from a central off-site data center via the #nternet.

Management service provider (M*7) is a vendor that remotely manages and monitors enterprise applications. #nformation Technology has many advantages and disadvantages. #T !utsourcing is ?ust similar to any other type of overseas development services. 8ow a day !ffshore *oftware (evelopment is expanding all over the world. 7reviously outsourcing decision was as simple as checking the budget experience of the service provider and present in-house ability. #ndia is the hottest spot of the #T outsourcing. The reasons are that #ndia has supportive government policy advanced Technology reliable communication facilities huge skilled men power with proficiency in <nglish language. Thus there are lots of advantages of #T outsourcing. 5et us have a look at some of them+ ! Cost"Effecti#eness$ There is no doubt about this advantage of outsourcing to #ndia. !utsourcing your #T re.uirements save you as much as '&A of company/s expenditure and that says for itself. !ne can always resort to !ffshore *oftware (evelopment to implement huge pro?ects which may not be affordable to a company in the western world. !ffshoring not only takes care of the development costs but also slashes hiring costs training costs and cost of infrastructure to a great extent.

%! &ua'itati#e Ser#ices$ *ervice providers provide .ualitative services not at high cost but competitive rates. 0sia is known for its service and this attribute clubbed with .ualitative manpower makes 0sia especially #ndia an ideal outsourcing destination. (! Ski''e) Manpo*er$ #ndia has a large pool of technically skilled and <nglish proficient population thus making it favourable for making it an outsourcing partner. +! ,ocus$ !utsourcing enables a company to focus on its core competencies while it offloads its non-core activities to other service providers. -! E.pertise in IT Outsourcing$ <xpertise comes only at that time when customer deals with highly skilled and capable service provider. <verybody wants to become an expert service provider. This business playing progressively ma?or role to become an expert businessman. 8ow look at the (isadvantages of #T !utsourcing+ ! /oss of Contro'$ )ecause of some misunderstanding you will lose control on all over pro?ect in that case you have to clear all things. That means transparency must have to in the business of !ffshore *oftware !utsourcing. %! Communication C0a''enges 1 Different Stan)ar)s$ *ometimes in the business of #T !utsourcing communication problems are usually comes. =or the better communication service provider have to use email and instant messaging program because it/s online communication. *ometimes telephone communication is the bad thing for this business. (! Time 2one" a )ou3'e"e)ge) S*or)$ Time $one would be creating disadvantages of #T outsourcing. )ecause vendors and customers are in the different countries so in that case they have to understand the difference between time for online meetings and re.uirement between the customers and vendors. +! Cu'tura' Differences$ )ecause of the two different countries language and cultural problems might be create disadvantage of !ffshore *oftware !utsourcing. -! Ser#ice Pro#i)er *ants to )i#ersify an) take more pro4ects$ To diversify the business of #T !utsourcing service providers/ wants to take more pro?ects and in that case sometimes they can not give better preference for all pro?ects. 5! Customer is No#ice$ Many a times customer is novice and in the effort to satisfy him the pro?ect may go haywire.