Make or Buy

Topics: Government, Outsourcing, Innovation Pages: 8 (2829 words) Published: March 31, 2013
Outsourcing, Make or buy (Outsourcing in personal computing industry Dell, Acer, HP) What can outsouce? What can produce? Why are they doing it? Outsourcing is a task or the process that the employee within the business could able to perform it however, the organization itself is contracted to third party to perform that function internally or certain period of time without purchasing it as a service. For example, Dell has been outsourced some of the production units to China and India to cut cost and satisfy the customers need as well as to accommodate lower cost. Some organizations do outsourcing just because they are hard pressed for time, or because they believe outsourcing can save them money. Careful planning and assessment of one’s requirements are needed for any organization before it goes for outsourcing. Make or buy is a decision that evaluate the costs and benefits of manufacturing a product or services against purchasing it. If the purchase price is higher the cost the firm to make it, or if the firm has excess capacity that could be used for that product, or the manufacturer's suppliers are unreliable, then the manufacturer may choose to make the product. This assumes the firm has the skills and necessary equipment, access to raw materials, and the ability to meet its own product standards.

A firm can manufacture a product by itself. It may also receive an offer from an outside supplier to supply that product. Such problem of make or buy can be found in companies which manufactures the goods assembling various sort of components parts like Television, Motor car, Watch, Computer etc. The decision to make or buy may be motivated by cost leadership and/or differentiation strategies. Making instead of buying or buying instead of making may be one way of reducing the cost of producing the main product.

Alternatively, choosing to make or buy may be a way of increasing the quality of the component and thus increasing the overall quality of product. Cost analysis for make or buy is necessary. The decision in such case will be made by comparing the price being paid to outsides and all additional costs that will have to incurred for manufacturing the product and assess the best used of the available facilities.

Advantages of outsourcing
Companies decides to outsource for a number of reasons. All of which are based on realizing gains in business profitability and efficiency. The benefits of outsourcing include the following: Cost savings. Many businesses embrace outsourcing as a way to realize cost savings or better cost control over the outsourced function. Companies usually outsource to a vendor that specializes in a given function and performs that function more efficiently than the company does. For example, 25% of the hardware bearing Dell's name is outsourced for manufacturing. Going to a level of 50% or more of existing and new products would certainly help Dell's reduce cost as per Dell's CFO statement of "one new computer or server at a time" in which many of the its production units would be thrown to a manufacturing partner for production. Economies of scale due to pooling: This can be seen when fixed costs are high and pooling across organizations result in lower per unit cost for all. For example: Dell has built the Premier Page, a vertical portal for businesses to interact with Dell. It has all the information that a customer would want in an interaction with Dell. This bring economies of scale to Dell customers, driving their costs of acquisition and support down. Moreover, Dell has been pooling these customers order together and ordered from the customer's nearest factory location or outsourced location. In that way, Dell can reduced cost by accepting orders from the internet to pool order for both customers and supplier. Saving Agency and Influence Cost; As market firms are subject to market discipline, whereas in house units may be able to hide their inefficiencies behind over...
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