Procurement: Make or Buy?
Whether we are talking about purchasing for project management or operations management, most major purchasing decisions are made only after the completion of a “make-or-buy” analysis. Essentially, is the business able to cost effectively complete the work in-house (make), or would it be more cost effective to outsource the work (buy)?
When a manufacturer assembles parts to produce a finished product, mangers must first decide whether to make or buy those individual components. Consider a motorcycle. The manufacturer can either make or buy the wheels, seats, gas tanks, etc. used in the finished bike.
When you’re first trying to understand the concept of a Make-or-Buy Analysis, it helps to think of a DIY project you’ve undertaken. I can use the example of an oil change. An oil change for an SUV can cost in excess of $40. On the surface it may seem like the price is not worth it. After all, how much does a few quarts of oil cost, right?
Now let’s really think about everything that needs to happen to successfully change the oil in an SUV. Do you have the know-how to accomplish the job? Do you have the tools needed? Are you willing and able to get under the vehicle? Do you have a means of disposing of the old oil? How much value do you place on your time?
That last question might be one of the most important of all. Chances are good you would say an hour’s worth of your free time is worth at least $40. Since this would likely take an hour plus the expense of oil, tools and disposal, is it really worth doing it yourself?
Create an Excel spreadsheet to conduct a make or buy analysis of the following:
You manage a large multi-national business that manufactures/builds commercial airliners. In an effort to reduce costs, you are considering outsourcing some of the parts used to build the planes. You start with the parts that are used most often. We will call these “A” parts.
The estimated costs of producing 8,000 “A” parts in house are:
Applied Variable Factory
Applied Fixed Factory
You can buy this part from a supplier overseas for only $41.49 each. You have never worked with this supplier before, but the price difference appears as if it could save your organization some money.
If you purchased from the supplier, 50% in fixed factory overhead would be saved. (NOTE: Keep in mind that Fixed overhead is overhead you must pay even if the factory is not producing anything!)
Using Excel, perform the calculations necessary to determine if you should make or buy.
Upload your Excel spreadsheet AND in the comments section of the D2L assignment screen, explain what you think you should do based on ALL information available. Is it worth outsourcing this part?
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