As Western companies are being put under increasing pressure to cut expenses and improve return on assets, the dilemma of whether to keep key functions in-house or outsource them has taken center stage.
Manufacturing units are being identified with Make-or-Buy Decisions as third-party suppliers in Eastern Europe, China, and other low-cost regions hold out a promise of significant advantage that companies in developed countries can’t offer.
The Make-or-Buy Decision extends beyond manufacturing. It encompasses human resources, information technology, maintenance, and other fundamental business functions. Chief Procurement Officers are now expected to play a key role in helping business units make decisions given the skills and objective perspective the teams bring to the effort.
A Make-or-Buy Decision is the act of making a strategic choice between outsourcing and in-house. It usually arises when a company with a new product has problems with suppliers, has a diminishing capacity, or faced with changing demands. A Make-or-Buy analysis is often done at the strategic and operational level.
Oftentimes, our company needs to ask the right questions to achieve the highest possible level of quality and productivity in overseeing and managing third-party suppliers. We need to ask what resources are required and how long it would take to reach noticeably improved performance. Are technology innovation and alignment necessary to have a competitive edge? This and many more should be asked to direct our company to make the right decision. It is essential that our company must recognize the importance of the Make-or-Buy Decision to overall business strategy and its implications.
In the use of the Key Pillars to Make-or-Buy Decision Making Analysis, a Decision Criteria is used to guide companies to go through an accurate process of assessment. The use of decision criteria allows companies to come up with a more informed and sound decision when it comes to Strategy, Risks, and Economics.
The Chief Procurement Officer plays a key role in helping business units make Make-or-Buy Decisions, as they are an integral part of any Procurement Strategy. The CPO can lead business units in conducting a detailed analysis that thoroughly evaluates the costs, benefits, risks, and rewards of outsourcing and the implications of keeping the activity in-house. Likewise, the CPO can assess core competence and measure them against world-class standards.
We need to reiterate and re-emphasize again that the decision of in-house versus outsource should not be made without careful analysis. The analysis should be initiated and conducted diligently and objectively.
This is made possible when the Chief Procurement Officer ensures that all the right trade-offs have been evaluated and all possibilities considered. Through the CPO, the organization can be challenged to make a more objective and informed Make-or-Buy Decisions.
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