What Factors Must a Firm Consider While Addressing the Make or Buy Decision?

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Q: 3 (A) What factors must a firm consider while addressing the make or buy decision?


International Operations management and corporate strategy:

Operations management of an International business needs to be integrated with the firm’s corporate strategy. The central role of operations management is to create the potential for achieving superior value for the firm. If operations management takes Rs. 100 worth of inputs and brings out product worth Rs. 150, it has crated considerable value for the firm. However, if it requires Rs. 140 worth of inputs to obtain the same output, value creation does take place, but is very little. Therefore, the way in which the firm structures and manages its operations management function both influences and is influenced by strategies.

In fact, the corporate strategy of the firm should set the tone and tenor for planning and implementation of activities relating to operations management. For example, if a firm is pursuing a differentiation strategy, the operations management function must be able to create goods or services that are distinct from those of competitors. This effort may require a greater investment in high quality resources and equipment with cost being a secondary consideration. For a firm following a cost leadership strategy, the operations management function must be able to reduce the costs of creating goods or services to the absolute minimum so that the firm can lower its prices while still earning a reasonable level of profit. Here, major consideration shall be cost and price, quality being relegated to the background.

Therefore, the firm’s corporate strategy decides strategies relating to its operations management. Specifically, corporate strategies decide where to source, where to locate operations, logistic management, and other related activities.

Strategic issues:-

In operations management, an MNC needs to make decisions on several strategic issues, more important of them being:

• International sourcing and vertical integration
• Standardization of production facilities
• International facilities location
• Contract manufacturing
• Strategic role of foreign plants
• Supply chain management 
• Managing service operations
• International quality standards 
• Internationalization of R&D
• Managing technology transfers

Sourcing and vertical integration:

Sourcing, also called producing. Refers to a series and processes of a firm uses to acquire the different components it needs to produce its own goods and services.

The famous make or buy decision becomes relevant in this context. An International firm can make, in house, all its needed parts or may decide to outsource them from suppliers who can provide them more efficiently, regardless of where they are geographically located. Make or buy decisions are important factors in operations strategies. In the automobile industry, for example, the typical car contains more than 10,000 components, so automobile firms frequently face make or buy decisions. Ford of Europe, for example, produces only about 45 percent of the value of the Fiesta in its own plants. The remaining 55 percent mainly comprising components come from independent suppliers.

Make or buy decisions pose many problems for purely business but even more problems for multinational business. These decisions in the International arena are complicated by volatility of countries’ political economies, exchange rate movements, changes in relative factor costs, and the like.

Through deciding on make or buy in practice is highly difficult, theoretically, the issue involves consideration of the pros and cons of the few choices to manufacture in-house or outsourcing the needed components.

The arguments to make and or to buy: If the International business decides to make all the components in-house, it is having vertical integration. Vertical integration means owning or controlling all the supply sources or the...
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