Make or Buy
Make or Buy is a key process for any business in the phase of product development. It will take into consideration In-house capacity, Cost optimization, Go to market strategy.
To comprehend the concept of make or buy, let’s examine the history of supply chain management, which encompasses three major phases commonly referred to as SCM generations. In first-generation SCM, there is no concept of outsourcing or buying anything from other vendors. Take the example of Ford Motors in the year 1940. At that time, Ford Motors manufactured one type of car in one color only, which was black. Ford Motors does all the manufacturing of components in-house. The second-generation concept of outsourcing was introduced by Toyota Motors. Toyota expanded its business across the world in the early90s, at the same time, other global players were facing the problem of capacity. Toyota solved this problem by outsourcing component manufacturing to vendors, or what Toyota called business partners. Toyota controls the design and final assembly of cars, and vendors control the manufacturing process of components. In the third generation, complete outsourcing of product manufacturing started. We have a lot of examples, like Zara and Nike. They only designed the product and did marketing for it.
Let’s move to the make-or-buy framework: You already know about different generations of the supply chain. In the first generation, Ford Motors manufactured all components of cars in-house, and in the second generation, Toyota started outsourcing components manufacturing to vendors.
At that moment, a make-or-buy framework was needed. To take calls, ask which thing is produced in the house or which is produced outside.
Make: When a firm takes the call to produce in-house, we know what to make.
Buy: when a firm takes a call to our source, know us.
Why Make or Buy is a strategic choice?
Make or buy defines the aspect of the business of the firm. Let’s define it: Toyota Motors is the leading car manufacturer in the world. How did Toyota become that bigger than the others? Answer: Toyota is the creator of concepts like lean manufacturing, just-in-time, value stream mapping, and continuous improvement (Kaizen). Of course, apart from all these, they started outsourcing components, and they care only about the design and assembly of cars. That is why they can manufacture cars in different models.
Zara is a fashion design and marketing company. Can you believe this? Yes, Zara, because they outsource manufacturing; they only do the design and market it to customers.
The process begins with the product design phase, where the specifications and design of the product are finalized. Decision Point: Make or Buy: A crucial decision is made whether to manufacture the product in-house (“Make”) or outsource the manufacturing to external vendors (“Buy”). Make Path: In-House Manufacturing: If the decision is to make the product, it is manufactured internally within the company’s facilities. Buy Path: Manufacturing Outsourced to Vendors: If the decision is to buy, the manufacturing process is outsourced to external vendors. Distribution: Once the product is manufactured, it moves to the distribution stage. Retailer: The product is then distributed to retailers. Customer: Finally, the product reaches the end customer.
A flowchart provides a comprehensive overview of the factors influencing the “make and buy” decision process, which is essential for businesses evaluating whether to produce a product in-house or outsource its production. Key considerations include cost, capacity, quality control, time to market, and innovation. Cost considerations encompass both direct and indirect costs, along with potential economies of scale. Capacity and resource evaluation involves assessing production capacity and resource availability.
Quality control focuses on maintaining standards and effective quality management systems. Time to market addresses lead times and the company’s ability to respond swiftly to market changes. Lastly, innovation and technology considerations involve access to cutting-edge technology and the company’s innovation capabilities. By systematically analyzing these factors, businesses can make informed, strategic decisions that align with their operational strengths and market demands.
Conclusion
In the fast-paced world of business, every decision counts, especially when it comes to whether to “make” or “buy.” This article delves into this crucial strategic choice, exploring how companies like Toyota and Zara have mastered the balance between in-house production and outsourcing. By understanding the evolution of supply chain management and the key factors involved in this decision, you’ll gain valuable insights to help your business thrive in today’s competitive market. Whether you’re looking to optimize costs, enhance quality, or accelerate time to market, this framework will guide you toward making the right choices for your business.
Let’s connect on LinkedIn:
Feel free to connect with me on LinkedIn to discuss more about Business strategies and share insights on business growth.
