Make or Buy Decision

Make or Buy have increased progressively over the years. For example, the Fashion Industry (Nike) (all manufacturing outsourced), and Electronics  Industry-Cisco (major suppliers across the world), Apple (over 70% of components outsourced). Brands such as Hewlett-Packard and PalmOne collaborate with Asian suppliers on the design of their PDAs.

Make reduces transaction costs. The make-strategy is governed by internal contracts relying on intra-organizational incentives. A transaction causes costs of contracting, hiring, negotiating, and monitoring.

Make strategy include psychological contract (PC) which is an unwritten act of expectations between employees and managers. It involves respect, recognition, updated communications,  opportunities-to-grow, and an opportunity for the employee to utilize personal talents and creativity. It is mutual expectations based on employees’ sense of fairness and trust and their belief that the employer is honoring the ‘deal’ between them. A  positive PC increases employee commitment and satisfaction with a  positive impact on business performance.

Make Strategy provides functional flexibility by making optimal use of the employee’s capacity to perform different tasks. It facilitates companies to deal with fluctuating high and low supply and demand. It makes use of employee’s capacity to perform different tasks when needed, through job rotation, widening the scope of the job, and job enrichment. Make  Strategy plays an important role in the skill formation of the firm. It assists in developing and retaining specific skills and knowledge.  Following Lepak and Snell (1999), skills are firm-specific, contribute to core business activity, and are of high value, there is an emphasis on long-term employment and developing skills and trust relations between managers and workers. Employees with the right skills give firms a  competitive edge, increased innovation, new technology, and access to new markets. Critical knowledge that is closely linked and reinforcing is kept in-house in Make Strategy. Specialized designs, products, and manufacturing skills or equipment that are vital to the success of the firm are kept in-house. Make Strategy supports organizational continuity by allowing on-the-job learning. It produces leaders who are more knowledgeable about the details of the business.

Buy strategy or outsourcing is an act of moving some of a firm’s internal activities and decision responsibilities to outside providers. The Buy strategic option has enabled firms to secure advantages such as economies of scale and scope, cost reduction, quality, service, and delivery improvement, organizational focus, product flexibility enhancement and develop change provided by external suppliers, as well as gain new knowledge or realized the need for additional product development resources to speed up the time taken to deliver to the market.

The relatively high cost of labor, shortage of skilled labor, and rising legislative and regulatory demands are the factors leading to outsourcing. It gives Numerical flexibility to the firm by adjusting the size of the workforce at extremely low rates. It provides access to skilled labour. This increases productivity and cost. The company saves on recruitment, training, and other HR costs. An outsourcing company can bring better management skills.

Outsourcing allows operations that have seasonal or cyclical demands to bring in additional resources when you need them and release them when you are done. Outsourcing vendors may rotate their staff.

In rapid growth periods, by outsourcing the companies can focus on their core business while their operations are managed by specialized third-party companies. By employing skilled labor at a lower cost, there is an increase in productivity. This results in better customer satisfaction and increased profitability. This allows the buyer to differentiate from its competitors. Buy  Strategy reduces the cost by reducing the overheads. Economies of scale save money when unit costs go down as volumes increase. Aggregation of multiple orders reduces costs, both in purchasing and in manufacturing. Capital investment is transferred to suppliers and hence it is reduced. A supplier’s higher investment is shared between customers. Risk pooling is an important advantage of Buy Strategy. Demand uncertainty is transferred to the suppliers. Buy Strategy is critical to hi-tech industries where technology changes frequently and fashion industries where products have a short life cycle.

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