Transcript week 4 make verses buy 2006.ppt

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
• purchasing’s role for make products
Make verses buy
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A key decision: make or buy
• Who actually produces a part, service, assembly or
any other input needed by the supply chain ?
• How did organizations traditionally 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
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More than $$$$
• Traditionally this issue has been addressed from a
lowest price perspective
• As the articles make clear these decisions are often
driven by much more than the price
– Often driven by a desire to lower total costs
– Freeing capacity – UPS and the post office
– Reduced investment and managerial span
– Leveraging the core competencies of the chain
members
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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?
• 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)
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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
– Generally don’t want to be a low price supplier
with no other skills / attributes
• What are the Indian IT suppliers doing already
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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
– The process helps customers differentiate
between supply chains
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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 man with two daggers”
– Why is this play likely to infuriate customers?
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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 ?
– Green requirements in RFQ’s
• The hollow corporation
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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)
– And some work is coming back
• BMW – X3 speed and capacity
• Airport security- the TSA
– Brought work back “in house”
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Total costs of make buy
•
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•
•
•
•
•
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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
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Getting specific: making
• Why we perform a process
– costs --->
– integrate facility
– use excess capacity and
absorb overhead *
• need to understand
strategy
– control
– design secrecy
– unreliable suppliers
• other responses
• Costs to make
– materials
– direct labor
• production and QC
–
–
–
–
–
inventory costs
overhead **
managerial costs
purchasing costs
costs of capital
• opportunity costs
– workforce
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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
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Getting specific buying
• Why we buy
– costs --->
– supplier capabilities
– small volume
– we don’t have capacity
• especially short term
– avoid hiring
• Costs to buy
– price
– transportation
– incoming inspection ?
– purchasing costs
– quality, service,
delivery, etc.
• atlas tool and die
– maintain multiple
sources
– flexibility
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Make buy summary
• 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
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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.
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Summation
• A key issue to address is who performs a process.
• We generally try and perform strategic processes.
• We generally let others do what they do best.
– It is not this simple!
• Make buy is based on lowest total costs and
available capacity.
• Even for processes we perform, purchasing has a
role to play. And this role is very important.
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Fairtrade Chocolate Case
• Main question – How will you source and sell Fairtrade
chocolate ?
• Things to think about:
– You need to consider the risks and rewards for all
potential chain members including the Co-Op, The
traditional confectioners, The non-traditional
confectioners, and the growers.
• Don’t forget that marketing / strategy decisions are tightly
linked to the sourcing decision.
– What are the risks associated with each strategy?
– What are the long term implications for the company
and the chocolate industry from your choices ?
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