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P. Bajec, I. Jakomin: A Make-or-Buy Decision Process for Outsourcing

PATRICIJA BAJEC, M.Sc. E-mail: patricija.bajec@fpp.uni-lj.si IGOR JAKOMIN, Ph.D. E-mail: igor.jakomin@fpp.edu University of Ljubljana, Faculty of Maritime Studies and Transportation Pot pomorščakov 4, SI-6320 Portorož, Republic of Slovenia

Distribution Logistics Review Accepted: Mar. 25, 2008 Approved: July 5, 2010

A MAKE-OR-BUY DECISION PROCESS FOR OUTSOURCING
ABSTRACT
Should firms perform logistics services on their own or should they buy them from a logistics provider? Today’s global competition forces companies to re-evaluate their existing processes, technologies and services in order to focuse on strategic activities. Outsourcing is now increasingly used as a competitive weapon in today’s economy. External parties can often do job quicker, cheaper and better. This has resulted in an increasing awareness of the importance of the make-or-buy decision, the dilemma organisations face when deciding between keeping logistics services in house or purchasing them from an outside logistics provider. This article provides a make-or-buy decision process methodology that any manager can implement – whatever the size or industrial type of the organization. The make-orbuy methodology is one of the most critical strategic decisions within logistics outsourcing and should be taken in a structured and consistent manner. A practical guide to this decision is a step-by-step guide to addressing make-or-buy decision in a consistent and structured manner. The highlevel steps are as follows: – evaluate whether outsourcing is right for your company; – determine exactly what functions to outsource and the performance expectations; – use a well-defined professional selection process to evaluate and select which provider(s) are right for the job.

KEY WORDS
logistics, logistics outsourcing, make-or-buy decision, outsourcing methodology

companies decide to outsource some or all of their logistics functions in order to reduce costs, make more effective use of the working capital and focus their energies creating differentiation and promoting revenue growth. In some cases, companies claim they can respond faster and more effectively to change when using a logistics service provider (LSP). Indeed, there are significant benefits to outsourcing logistics. To maximize these benefits a review of make-or-buy decision must be implemented. The make-or-buy decision is the act of making a strategic choice between producing a product internally (in-house) or buying it externally (from an outside provider). Making the right choice can be the key factor in sustaining a company competitive advantage and is one of the most important tasks of a successful management. Although the strategic implications of the makeor-buy decision have been discussed for many years these decisions are often made purely on the basis of costs. This paper aims to address this gap by developing a decision-making process that can provide managers with a way of managing the make-or-buy decisions more effectively. The key objectives that arise from the defined purpose are first to describe the set of factors which affect the make-or-buy process, second, to understand better the challenges and barriers that companies face when deciding whether or not to outsource a component or process and third, to suggest some tools and methods for addressing the make-or-buy decision process.

1. INTRODUCTION
The beginning of the 21st century is proving to be an interesting time for the logistics industry. There has been a great deal of transformation in logistics outsourcing caused by the continued drive of manufacturers and retailers to cut costs and by a continued focus on core competencies. Logistics and supply chain management have often been among the first functions to be outsourced. This has moved beyond the warehousing and trucking functions and spread to ancillary services. Usually, Promet –...
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