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Make or buy? The multi-million-pound question for manufacturing

26/05/21 Gerda Ivanauskaite Consultant, Electronics & Technology

The decision to make or purchase extends beyond manufacturing environments and can encompass IT services, human resources, and a variety of business functions. These strategic decisions to “make or buy” should be based on three principals – business strategy, risks, and economic factors. For example, all the components of the Apple iPhone are made by external suppliers and the final assembly by one or two companies other than Apple. Toyota, the largest automotive manufacturer, purchases many components and individual parts from various suppliers and then assembles the finished vehicle. Many companies outsource some of their manufacturing if not all, but why and what decisions drive “make or buy”?

50 years ago, manufacturing companies were often large but local, horizontally integrated, and focused on volume and efficiency. And it worked well – until the advent of globalisation and growing consumer demand for customisation of both processes and parts.

Some companies rose to the challenge with innovation and were rewarded with growth and success. Others stuck to their “volume and efficiency” business models until they were forced to change or close.

Manufacturing today is a place of complex ecosystems and vertical integration, with “make or buy” decisions historically being driven by the availability of lower-cost third party suppliers often in China, Eastern Europe, etc. This has seen some changes as agility becomes a more important matter and businesses are often small but global.

This 180-degree change has had a dramatic effect on supply chains, which may now be solution-focused rather than product-focused. Suppliers act as partners, in strategic rather than transactional relationships, and share in manufacturers’ fortunes, good or bad.

This makes outsourcing and the “make or buy” question of tremendous strategic importance. Chief Purchasing Officers, Purchasing Managers and Directors are far more like to be leading detailed analysis to evaluate the cost, risk, and benefits of any outsourcing. Some of the common drivers of these decisions are:

  • Absence/Shortage of competent suppliers
  • Business interruption/risk planning
  • Lead-time reduction
  • Quality concerns
  • Logistics and carbon footprint reduction
  • New skills or capabilities
  • Reshoring/on-sourcing
  • Tacit knowledge, intellectual property, and patents
  • The need for additional capacity
  • Total cost reduction
  • Cost-benefit from economies of scale
  • Emotional reasons

But each company’s situation is unique, so the decision-making process will be different in each case. The strategic importance of a given process, the effectiveness and suitability of a supplier, the supply chain network capability and overall risk management must be considered to protect against quality, delivery, IP, and other material failures.

Ultimately, the same general conclusion will be reached: businesses should invest significantly in processes and areas of competence that are central to the business, those where the risk is too high to rely on outsourcing.

All models will point in the same general direction…organisations should invest, indeed invest significantly, in areas of competencies/processes, where capabilities have synergies across the business and the ‘need’ to be at the centre of the business, where risks are too high to consider outsourcing. Where the supplier’s processes and competences are superior, have lower costs, or better quality the opposite holds true.

If a company is weighing up the decision to outsource, that leaves two questions.

  • At what level do they outsource – total assembly and finished product, sub-assembly, and/or component level?
  • How do they identify the right outsourcing partner?

Risk is key to answering the question of level. It may be better to start with the lowest risk and adopt an outsourced supplier just at the component level, then start moving them up to sub-assembly and total assembly over time as trust is built.

Choosing the right supplier means assessing their size and capacity, level of expertise, cost consideration, capital requirements, financial standing, investment track record, location, ownership, culture, supply chain capabilities, innovation, and design and engineering capabilities.

Time spent in the rigorous selection of a new strategic supplier is always time well spent and should be so much more than the quality team going in and performing an audit. The costs of getting it wrong can be ‘eye-watering’ and, in some circumstances, could stop a business ’stone dead’.

A successful outsourcing relationship often includes sharing of savings from productivity improvements, so that both parties are incentivised in collaboration and a common goal.

Reshoring manufacturing is a constant debate in the UK and COVID-19 has changed the way many businesses purchase, manufacture and sell with politicians and senior leaders calling for a reshoring effort.

With the ‘war for talent’ in the UK being compounded by Brexit, this has driven some strategic thinking to consider an increase in outsourcing. However, the desire to outsource abroad simply to benefit from low-paid labour is waning, with more companies seeing the benefit of working together and creating agile supply chains centred on the UK. In the long term, this can only benefit UK manufacturing.

The increase in global shortages, improved delivery schedules, the development in best practices for new product introduction (npi) and supply flexibility will continue to drive the strategic discussions of “make or buy”.

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