The Do-It-Yourself Guide

July 11, 2008
Is it always cheaper to farm it out, or should some things stay in-house? Here are six ways to help crack the "make or buy" mystery.

In a down economy, companies must pursue any and all opportunities to drive savings and efficiencies across their operations in order to stay competitive. This often involves examining manufacturing plans for both existing and new products to determine the most cost-effective alternatives.

But, arriving at the right answer isn't always easy. According to spend management solutions provider Ariba Inc., manufacturers need to do more than simply calculate costs based on face-value prices when evaluating whether to make or buy a critical product or component. The company offers these six tips to help you make decisions that will yield the best results for your operation:

  1. Focus on core competencies. If it isn't key to your product or part of your core capabilities, you probably shouldn't be making it. Outsourcing non-core production will not only reduce your operating costs, but allow you to focus on what you do best and improve your ability to respond to changes in your business and customer needs.
  2. Make sure internal costing is accurate. To assess the economic feasibility of making a product, you have to compare apples to apples. Most companies are fairly adept at getting uniform quotations from suppliers so they can select the most competitive option. But when it comes to comparing supplier costs to internal manufacturing costs, many companies struggle. To make a fair comparison to supplier costs, understand your internal manufacturing cost structure -- labor, materials, buying new tools, maintaining existing tools, and costs associated with maintaining additional inventory to protect your customers.
  3. Keep abreast of commodity prices and markets abroad. You can't effectively evaluate whether to insource or outsource production without also considering economic and political trends that may impact your decision. Raw material price fluctuations across regions along with currency fluctuations will directly impact your costs. Consider too that the best offshore outsourcing occurs when manufacturers uncover new, low-cost sources of supply in emerging regions before the rest of the market and take steps to lock-in capacity with the best sources.
  4. Don't sacrifice quality and control for savings. The decision to make or buy should balance the total cost of materials with your overall proficiency in a given area. But when it comes to key inputs, you need to give more credence to producing them in house. Even if the cost of production is slightly greater, your product could suffer having a lesser-skilled partner develop it. In addition, producing strategic items internally can help protect unique process technology or intellectual property related to design that might provide competitive advantage in the market.
  5. Consider customer needs. In evaluating whether to make or buy, keep in mind the impact that your decision may have on your customers. Will outsourcing enable you to maintain your quality standards and deliver products on time? While it may be cheaper at first glance, unhappy end users will cost you more in the long run.
  6. Engage in "forward sourcing." Procurement often serves as an order-taker for engineering, with the latter simply providing a list of items to buy after product design is already complete. Buyers can be invaluable to the design process and should insert themselves early. They can propose options for product inputs that engineering hadn't considered, due to their close relationships with suppliers. Procurement and engineering can then jointly analyze the prices of all possible materials by asking the right questions, which can lead to optimal decisions that balance both cost and quality.

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