Understanding the Critical Assessments Involved in a Manufacturing Make-or-Buy Decision

Understanding the Critical Assessments Involved in a Manufacturing Make-or-Buy Decision

By Discovery Lean Six Sigma

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http://flevy.com/blog/wp-content/uploads/2019/03/pexels-photo-236748.jpeg 500w" sizes="(max-width: 300px) 100vw, 300px">Make or buy?  This is one of the most first questions asked when formulating a Manufacturing Strategy.  In fact, internal manufacturing of a product versus procurement from external supplier sources is a difficult decision requiring careful and thorough assessment of multiple elements.

When evaluating the make-or-buy question in Manufacturing, there are 6 broad assessments to conduct.  These are:

  1. Manufacturing Strategy Compatibility
  2. Total Delivered Costs
  3. Capacity
  4. Intellectual Property Exposure Risk
  5. Business Case
  6. Contract Manufacturers Availability

Let’s take a look at these first 3 assessments in further detail.

Manufacturing Strategy Compatibility

The crux of this assessment is the question: does the product fit within our Manufacturing Strategy?

Most companies decide to manufacture a product in-house merely because of their existing capacity.  However, this decision should be ideally based on an assessment of the facilities, technologies, processes, and materials needed for in-house manufacturing.

These Logical Manufacturing Units (LMUs) and inputs should be validated against predefined standards.  If there is a compatibility issue the product should be bought externally.  In case the LMUs and inputs match the predefined standards, more thorough analyses at the micro level should be carried out to determine the viability of internal manufacturing.

Total Delivered Costs

The crux of this second assessment lies in addressing the core question:  how do internal costs compare with third-party alternatives?

The second analysis evaluates the internal versus external option on the basis of costs.  The Cost Analysis confirms the practicality of the manufacturing strategy.  If the cost analysis reveals that a product cannot be made in-house economically, the manufacturing strategy is inconsistent and should be revisited.

Capacity

This assessment entails comparison of the capacity required to manufacture a new product based on demand projections with the internal available capacity.  A deficiency in capacity should not automatically trigger a buy decision, but it could result in new products replacing the existing ones that are poorly compatible with the manufacturing strategy.

A stamp maker in Singapore Kiasu Print regularly needs conduct this assessment of manufacturing capacity.  This company has been operating in the printing industry for 10 years with a value proposition centered around affordability and customizability.  They develop products on demand to customer’s exact specifications (e.g. jasa bikin logo).

By conducting all 6 assessments, a company like Kiasu Print can render a structured and unbiased decision for the make-or-buy question.

However, please note that not all 6 assessments are required for all companies to make informed make-or-buy decisions.  Each case should be evaluated against its product nuances, company maturity, and Manufacturing Strategy.

For organizations that have a structured make-or-buy Manufacturing decision process in place, they typically have clearly defined roles and responsibilities for key stakeholders.   In fact, the first step leading companies take is to identify key stakeholders in their decision making process.

Many organizations also utilize well-defined RACI (responsible, accountable, consulted, informed) plans to explain the level of involvement and roles for the stakeholders.  In any large corporate decision, it is very important for all the stakeholders to understand the responsibilities and accountabilities of each person. While smaller teams can have more informal rules to keep track of responsibilities, in bigger teams with cross-department and inter-organizational collaboration, it is essential to create a more formal process to track responsibilities. The RACI tool is a very useful technique which can help to reduce confusion and leads project to faster completion.




Original: http://flevy.com/blog/understanding-the-critical-assessments-involved-a-manufacturing-make-or-buy-decision/
By: Shane Avron
Posted: March 11, 2019, 7:41 pm

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