Make or Buy Analysis

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\Sam Johnson is the owner of a medium-size electronics company, Integrated Electronics Manufacturing (IEM), which produces high-grade electronic modules used by several major electronics manufacturers to produce a variety of military and commercial telecommunications devices such as aircraft radios, navigational equipment, land-based satellite receivers, and other items. IEM has 60 employees. Normally, IEM purchases electronic parts such as resistors, capacitors, circuit boards and enclosures from several different suppliers and assembles the modules in its own facility. Some of the parts, like circuit boards and enclosures, are built to IEM engineer’s specifications while others are “off the shelf”.

The engineers have come up with a new module that contains several innovations that they believe will significantly contribute to the advancement of the state-of-the-art in avionics equipment and will generate significant revenue for IEM. However, because the engineers are so paranoid of industrial espionage, they want to build the circuit boards in house to keep the proprietary circuitry safe (they never thought about what happens if a competitor gets their hands on a module after it’s sold and “reverse engineers” it).

Sam makes the following agreement with his engineers (he’s a good guy and wants to keep them happy):

“You perform a make-buy analysis for the circuit boards and, if the cost of in-house production is at least 5% less than cost of procuring them from one of our proven suppliers, we’ll produce them in-house.”

The engineers prepare a specification that, while not revealing the specific circuits that are part of the proprietary technology, contains sufficient detail for a circuit board manufacturer to prepare a bid. Working with the contracts administrator, they release a request for quote to three known circuit board fabricators. When the quotes are received, all three are found to be acceptable, so the lowest price is used for the make...
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