Outsourcing, Make or Buy Decisions

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Outsourcing, Make or Buy Decisions

By | May 2011
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MAKE OR BUY? – THE CHOICES
When firms face a “make-or-buy” decision, it means that they have to choose whether to insource a particular production process or service or to outsource it to a third party. The word “insourcing” stems from the union of the words “inside resource using” and indicates the “use of internal labor, personnel and resources to supply the operational needs of the enterprise” . A firm can decide either to insource –i.e. to produce in-house- a production process or a service from the beginning or to take in-house a previously external or outsourced production process or service. For example, in 2009 Volkswagen AG decided to focus more on and to increase by yearly 10% its own production of automobile components. In order to realize this, Volkswagen AG decided to insource human capital in the engineering, production, prototyping and toolmaking fields. A further example is represented by “the insourcing of the funds administration business of Credit Suisse in Germany” by the german subsidiary of the french bank “Société Générale”. The latter “will provide a broad range of administrative and technological solutions to Credit Suisse (Deutschland) AG, including front office services (ASP), funds administration and reporting services” . Instead, the word “outsourcing” stems from the union of the words “outside resource using” and indicates the “delegation of one or more processes to an external service provider” . Firms usually outsource the production of services or goods when the production processes are neither too technical nor standardized. However, they should never outsource activities related to their core competences as by doing so they would lose their (sustainable) competitive advantage in the market. A special case is the “intern outsourcing”, where the third party to which a process is transferred is the holding company. Some examples of outsourcing companies are Chrysler, Ford and Boeing: the first one has outsourced half of its...
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