Chapter 5

Make or Buy, Insourcing

and Outsourcing
Purchasing & Supply Management
Johnson
Leenders
Flynn
14th Edition
 Learning Objectives and
Outcome

• Make or Buy
• Subcontracting
• In sourcing and Outsourcing
• Outsourcing Purchasing and Logistics
• Purchasing Role in Insourcing and Outsourcing
 Make or Buy

• Buy decision: for any brand new product or service, the

decision to acquire from an outside supplier.

• Make decision: for any brand new product or service, the

decision to manufacture or provide with in-house resources.
Make or Buy and Insourcing and
Outsourcing Decisions
What Product / Service to Create
in What Market Segment(s)?

What Do We Make or Buy?

100% 100%
Gray Zone
Make Buy

Stay Change Stay Change Stay Change

Outsource Insource
More More
Make Buy
Gray 100% Insource Outsource Gray 100%
Zone Buy Zone Make

100% Gray 100% Gray

Make Zone Buy Zone
 Reasons to Make Instead of Buy
1. Quantities are too small and/or no supplier is interested
2. Quality requirements are too exacting or special processing methods needed that supplier cannot
expected to provide.
3. Greater assurance of supply or a closer coordination of supply with the demand.
4. Preserve technological secrets
5. To obtain a lower cost
6. To take advantage of unused capacity/avoid having idle equipment
7. Keep our capacity utilization high and outsource the rest
8. Avoid single-source dependency
9. Reduce extended supply chain risk
10. Competitive, political, social or environmental factors
11. Distance from the closest available supplier is too great
12. Market potential for the product or service is expanding rapidly
13. Forecasts of future shortages in the market or rising prices
 Reasons to Buy Outside
1. Lack of managerial or technical experience.
2. Excess production capacity.
3. Reduce risk.
4. Challenges of maintaining technological leadership for noncore activity.
5. Cost accuracy.
6. A decision to make, once made, is often difficult to reverse thus, buying outside is seen
as providing greater flexibility.
7. Insufficient volume to justify in-house production.
8. Forecasts show great demand and/or technological uncertainty.
9. Availability of a highly capable supplier.
10. Buying outside may open up markets.
11. The ability to bring a product or service to market faster.
12. The organization desires to stay lean..
 Subcontracting
• Subcontract: Common in military and construction procurement, when
a prime contractor bids out part of the work to other contractors.

The use of subcontract is appropriate when:

• 1- Placing orders for work that is difficult to define.
• 2- Will take a long period of time.
• 3-It will be extremely costly.
• For example, aerospace companies subcontract many of the larger
structural components and avionics.
 Insourcing And Outsourcing

Insourcing and Outsourcing : occurs when

the decisions are made to reverse past make
or buy decisions.
 Insourcing

Insourcing: reversing a previous buy decision. An organization chooses to

bring in-house an activity, product or service previously purchased outside.

“We would prefer not to produce this product or service in-house, but we
really don’t have any other options.”
OR
“We would prefer to do this in-house because it would give us a strategic
competitive advantage.”
 Outsourcing

•Outsourcing : reversing a previous make decision; an activity, product or service

previously done in-house will next be purchased.

•An entire function may be outsourced ,or some elements of an activity may be
outsourced and some kept in-house.
 Risks of Outsourcing
1. Loss of control in your supply chain

2. Exposure to supplier risks

e.g., financial strength, lose of supplier commitment, response time, poor daily
quality, promised features or services not available.

3. Unexpected fees or “extra use” charges.

4. Difficulty quantifying economies; conversion costs.

5. Supply availability restraints.

6. More attention required by senior management.

7. Possibility of being tied to obsolete technology.

8. Concerns with long-term flexibility and meeting changes with business requirements.
The Outsourcing Matrix
The Outsourcing Decision
Yes Keep the function
Is the activity strategic?
in-house
No
Is the activity critical to the Yes Keep the function
business but not strategic? in-house
No
Create a RFP.
Gather supplier bids/proposals.
No
Is the supplier’s bid/proposal more No Keep the function
desirable than the internal option? in-house
Yes
Could the internal option achieve Yes Keep the function
similar results? in-house
No
Negotiate a contract to ensure
that expectations are realized
Outsourcing Purchasing and Logistics
Many tasks associated with logistics function as well as the entire function itself
have been heavily outsourced.
Examples:
– Ownership and management of an in-house fleet of vehicles may be subject to the decision to
outsource or maintain in-house.
– In organization where the sales force is large, the car for sales representatives may be seen as an
extension of sales force, and part of the company ability to outperform the competition in personal
sales.
Many of the function of fleet may be outsourced rather than owning the vehicles, maintenance,
resale of vehicles.

The outsourcing decision is function of many factors, and each organization must
asses these factors based on the goals and objectives and long-term strategy of
the organization.
 Purchasing’s Role in Insourcing and
Outsourcing
Supply managers should be heavily involved to add in the following ways:
• Providing a comprehensive, competitive process.
• Identifying opportunities for insourcing or outsourcing.
• Aiding in selection of sources.
• Identifying potential relationship issues.
• Developing and negotiating the contract.
• Ongoing monitoring and management of the relationship.
 Case Study 5-3
Alicia Wong
Assignment Question (Group work)

If you were in the position of Alicia Wong:

1. What would be your analysis of the feasibility of making mustard in-
house?

2. What information, if any, is still missing at this point and how would you
go about collecting it? How might this information affect the proposal?

3. What major topic areas would you address in your proposal to the CEO
and what would be your main arguments?