Make/buy decision

The market for PVC based compounds continues to expand as a primary substitute for natural materials the most prolific being building products, automobiles and furniture. Examples include vinyl siding, vinyl windows, fencing, decking, soffits, trim, furniture and automotive trim. There are major companies prepared to supply the pre-mixed compound usually delivered in Gaylord boxes, bulk truck or bulk rail car. At some volume in a producer s process the make/buy decision is imminent. An attempt is made identify and familiarise processors with the factors and costs for the make/buy decision. 

Cost Allocation Knowing what your costs are is especially importemt if you have a make-buy decision or are bidding on new contracts. If a component is used on more than one product (standardization), it can progress much faster on the curve since its stiles come from multiple sources. Manufacturing progress also means that standard costs quickly become obsolete. 

Note that in the solution, the cost per unit to subcontract product B is 20 (i.e., 93 — 73), while the cost of outsourcing product A is 15 per unit. Why is it optimal for the company to outsource product B instead of product A It is clear that product B uses more bottleneck resources, i.e., the capacity of machine X, than product A. In other words, the make-buy decision now requires identifying the internal bottleneck resource and then finding the best way to minimize cost using the internal resource. The linear programming tool enables this bottleneck resource to be identified and generates the optimal make-buy decision. 

The specific purchasing decisions include the make-buy decision for components and products, global location of sources for manufacturing and distribution facilities, and coordination with suppliers to maximize mutual benefit. 

In addition to the available budget in my opinion, the following points play a central role in making buying decisions ... 

The table has been constructed by first disaggregating the key business activities that the strategy function normally has to discharge within any company, as described in chapter 1, and then linking these seven business activities with the particular types of tools and techniques found to be in use. These key business activities were defined as market and environmental analysis, product and competence development, resource allocation, performance measurement, financial management, the make/buy decision and the use of IT and Internet solutions. 

Strategic procurement - central leadership provided by a cross-functional team with involvement in design specifications, and input into make-buy decisions... 

To assist companies in the make-buy decision it is normally necessary for companies to have a framework by which they can understand the opportunity costs and risks of insourcing or outsourcing activities. A formalised process will normally assess the current internal costs of ownership against the external costs of ownership. More advanced models may well try to understand deskilling, the loss of critical assets and post-contractual lock-in and moral hazard over time if activities are outsourced. 

This form of analysis (Figure 8.11) recognises that make-buy decisions should be taken in view of potential future vulnerability ... 

In making buy decisions, you know which overhead activities - such as supply of materials, transport, time at partner company, return transport, etc. - generate which additional costs. Even a standard purchased part generates more than the minimum purchase price and transport costs before it is available from your warehouse (Fig. 35). 

A study determined that customers typically do not make buying decisions on their own but take the advice of relatives, friends, and particularly the sales force who exercise a strong influence in approximately half the sales decisions irrespective of product price. The first step is to determine key parameters of interest for a particular product. Consider, for example, audio equipment. From a table (similar to Table 3), selected are the top three or four attributes (e.g., price, cost of ownership, reliability, quality) mentioned most frequently. These selections represent the best candidates to link with environmental attributes to enhance the marketing value of an audio product. Similarly, the environmental factors were ranked by customers as listed in Table 4. Based on the results, it was concluded that energy consumption, hazardous substances, materials application, and recyclability were the most important environmental aspects to couple with other product attributes to help differentiate them from competitor products and increase their marketability [llj. 

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