Chapter 5
Make or Buy, Insourcing and Outsourcing
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Key Questions Asked in Chapter 5
• Should we make or buy a good or service?
• If we have been making a good or service should we reverse the decision and outsource?
• If we have been buying, should we reverse the decision and insource?
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Make or Buy; Insourcing and Outsourcing Decisions
What Product / Service to Create
in What Market Segment(s)?
What Do We Make or Buy?
100% 100%
Gray Zone
Make Buy
Stay Change Stay Change Stay Change
Outsource Insource
More More
Make Buy
Gray 100% Insource Outsource Gray 100%
Zone Buy Zone Make
100% Gray 100% Gray
Make Zone Buy Zone
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Reasons to Make Instead of Buy
• To take advantage of unused capacity
• Keep our capacity utilization high and outsource the rest
• Avoid supply dependency
• Reduce risk
• Competitive, political, social or environmental factors
• Distance from the closest available supplier is too great
• Market potential for the product or service is expanding rapidly
• Forecasts of future shortages in the market or rising prices
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Reasons to Make Instead of Buy
• Quantities are too small and/or no supplier is interested
• Quality requirements are too exacting or special processing methods needed
• Greater assurance of supply
• Closer coordination of supply and demand
• Preserve technological secrets
• Lower cost
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Reasons to Buy Instead of Make
• Lack of managerial or technical experience
• Excess production capacity
• Reduce risk
• Customer preference for a particular brand
• Challenges of maintaining technological leadership for noncore activity
• Outsourcing is difficult to reverse
• Cost accuracy
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Reasons to Buy Instead of Make
• Flexibility and desire to stay lean
• Insufficient volume to justify in-house production
• Forecasts show great demand and/or technological uncertainty
• Availability of a highly capable supplier
• Buying may open up markets
• The ability to bring a product or service to market faster
• Superior supply management expertise
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The Outsourcing Matrix Currently Currently
In-House Outsourced
Should Be 1 2
In-House
Should Be
3 4
Outsourced
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Reasons to Insource
• The necessity argument: “We would prefer not to produce this product or service in-house, but we really don’t have
any other options.”
• The opportunity argument: “We would prefer to do this in-house because it would give us a strategic competitive
advantage.”
Reasons to Outsource
• The necessity argument: “We would prefer not to outsource this product or service, but we really don’t have any
other options.”
• The opportunity argument: “We would prefer to outsource this product or service because it would give us a
strategic competitive advantage.”
Yes Keep the function
Is the activity strategic?
The Outsourcing Decision
in-house
No
Is the activity critical to the Yes Keep the function
business but not strategic? in-house
No
Create a RFP.
Gather supplier bids/proposals.
No
Is the supplier’s bid/proposal more Yes Keep the function
desirable than the internal option? in-house
No
Could the internal option achieve Yes Keep the function
similar results? in-house
No
Negotiate a contract to ensure
that expectations are realized
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