You have a process for justifying make versus buy decisions
 
Taking the correct make buy decision is crucial for your company because it determines which product technologies, manufacturing activities and business processes will be retained in-house. However, it is strategically important to protect your proprietary product and manufacturing knowledge needed to maintain your competitive advantage
Key Issues
·         Outsourcing is usually driven by a need to reduce costs by decreasing the number of people working for your company, or by saving investment costs on new product development, capital equipment, facilities etc
·         Cost reductions can be achieved in several alternative ways e.g.:
o      Partnerships with specialist suppliers
o      Purchasing new technology for manufacture
o      Buying in non-strategic or low-value items
o      Sourcing additional capacity from other companies
o      Reducing your overheads by purchasing selected items from specialists
o      Buying services from third party suppliers
·         The make versus buy decision for outsourcing significant items /services must be taken by senior managers based on strategic and financial considerations
·         When senior managers take the make versus buy decision, they should consider the following:
o      First, using the contribution method; establishing a product line’s direct costs and calculating its contribution. If positive, and capacity is available, it is likely to be more efficient to manufacture in-house
o      This does not apply if a product line and its related overheads can all be removed and the contribution is negative.  In this instance all the costs associated with purchasing an item, including business overheads, should be compared with an accurate activity-based manufacturing cost model
o      Establishing how core business processes can be simplified
o      Determining how to reduce those overheads associated with in-house manufacture that will remain within the business
o      Considering what to do with the available additional resources
o      Evaluating whether significant parts of the factory are left without work
·         If you do decide to outsource, remember that:
o      Once companies decide to outsource product technology, manufacturing capability or services they usually stop investing in knowledge retention
o      Business overheads are usually recovered based on the work performed in-house.  If you outsource, less work is done and the overhead burden can become unsustainable
o      Fixed overheads within the business can be difficult to partially reduce
Factors for Success      
Factors to  Avoid
1.     You make decisions based on contribution methods to avoid the errors introduced by including overhead allocations
1.     Letting purchasing department decide what to outsource, based solely on price
Who does this apply to?
Senior management teams
Realisable Benefits
A cost effective business with the knowledge needed for a sustainable future

Guides:

Factors affecting financial performanceFactors affecting financial performance

Factors affecting financial performance

Cash flowCash flow

Cash flow

Determining the cost of productionDetermining the cost of production

Determining the cost of production

Justifying the make versus buy decisionJustifying the make versus buy decision

Justifying the make versus buy decision

Justifying capital expenditure decisionsJustifying capital expenditure decisions

Justifying capital expenditure decisions

Managing debtorsManaging debtors

Managing debtors

Managing creditorsManaging creditors

Managing creditors

BudgetingBudgeting

Budgeting

Providing management informationProviding management information

Providing management information