OK, that was a poor paraphrasing of Hamlet; but the question is one that every manager or business owner faces regularly in the business world. Should I buy this component/assembly, or make it myself?
There was a period in the first half of the 20th century when companies leaned strongly toward making their components. There were so many new manufactured devices, from radios, airplanes, and automobiles to new chemicals that a company with a new product had difficulty finding vendors to make the new components. When Henry Ford started mass producing his cars, he began to buyout and manage his suppliers, or simply start up a company to supply the parts he needed for the final assembly. Other companies in the startup mode were doing the same thing. The reasoning behind this vertical integration of companies was that there was no one available to make the parts in the quantity or quality required by the main company. In these situations it was easier, and cheaper, to control the supply of parts by owning the source of supply. Many major industries were following this philosophy to make their products in a timely manner and reaping good profits.
Then, after World War II a slow reversal took place. Companies began to subcontract or source out components to smaller companies. As more companies in the same industry were competing for parts, smaller suppliers learned how to make these parts in a more economical fashion. Because they were dedicated to a smaller number of end products, these smaller suppliers could reduce their costs and suddenly the customer companies began to realize they couldn’t make some parts as cheaply as these smaller suppliers. It was the obvious choice to outsource some in-house production to the cheaper supplier. The question of component quality and production reaction time became less of a problem as both the customer and the supplier began to exchange information. Lean manufacturing techniques and Just in Time techniques were key tools to cement the relationship between the customer and supplier.
This pattern of outsourcing was accelerated with the Japanese model of a large factory surrounded by dedicated vendors who shipped parts and assemblies daily to the main plant.
Now we are seeing a subtle reversal of this outsourcing in many industries, as they return to making, rather than buying, components. Each shift in the make or buy question has been justified by cost reductions. What is the reason for this reversal of philosophy back to making components? In what industries is Make or Buy best suited to a serious review?
In today’s manufacturing world many companies are making a product with radical new designs, or requiring new manufacturing equipment or methods. These companies are facing the old challenge of finding a vendor who can make the proper part. Design changes come so fast the suppliers cannot keep up with the changes. It becomes easier for the customer to make the part himself than to train the supplier to make the part. Or, the equipment and design changes are too expensive for a small supplier.
Thus, it becomes economical for the main plant to make its own components. Suppliers just can’t react fast enough to design changes or machinery upgrades. In these new industries speed of introduction of new products is critical because delays can mean major loss of market share.
If you consider yourself to be in a new industry, or have new, frequent product designs that require a rapid change-over of machinery, then the question of Make or Buy is worth a review. When calculating the cost of the Make or Buy decision, you have to include all costs. Besides labor, material and overhead, you may have to introduce the speed of reaction time, cost of quality, design capability, transportation costs and inventory costs into the equation. As a corollary to the Make or Buy decision is whether you want to finance your supplier’s upgrades to help him cope with your demands. This question will lead to negotiations on price and confidentiality with the supplier.
The business world is in a constant state of change. Good Luck in this most basic of manufacturing decisions!
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