Procurement Management Make-or-Buy Analysis

Topics: Project management, Cost-benefit analysis, Procurement Pages: 8 (2887 words) Published: March 17, 2011
Assignment 1: Make-or-Buy Decision Analysis
Jacqueline M. Oxendine
PMAN 641 – Project Procurement Management
Professor Randall Napier
University of Maryland University College
February 13, 2011

Table of Contents
Methods of Make-or-Buy Decision Analysis3
Hurdles to Overcome in the Make-or-Buy Decision-Making Process9

Assignment #1: Make-or-Buy Decision Analysis
All projects involve the need to determine whether the project work will be done in-house, external to the organization (outsourced), or a combination of the two. This is called “make-or-buy analysis” and is an essential part of project planning, as well as a tool/technique integral to procurement planning (Project Management Institute, 2008). A “make-or-buy” decision must be made for all major segments of projects work before the project plan can be completed (these can be refined later in more depth in the initial stages of the project). This paper examines various decision analysis methods that can be used to determine whether to make or buy an item, whether it is a tangible good or service. Factors that can impact the ability to make a timely and accurate decision will also be analyzed. Methods of Analysis Used in Make-or-Buy Decision Analysis

Prior to doing any analyses, all of the choices or alternatives for that segment of project work should be determined, that is, the organization should lay out the (a) various ways the work could be “made” internally, (b) options (sources and methods) for external procurement, or (c) hybrids of the two. There are several broad categories of analysis that should be performed in order to arrive at a make-or-buy decision. Cost Analysis

There are a number of different types of cost analysis an organization may wish to employ to contribute to the make-or-buy decision. The type of analysis used will depend on the buyer and/or sellers objectives and concerns. In addition, there are also some types of cost analysis and methodologies that are common to specific industries, but not in others. Here are a few common types of cost analysis: Cost-benefit analysis (CBA). Analyze each make-or-buy alternative to determine best “bang for the buck” by monetizing the benefits of each alternative and comparing it to the cost of each alternative (Cost-benefit analysis, 2011; Office of Management and Budget [OMB], 1992). Cost-effectiveness analysis (CEA). Which alternative has the lowest cost for a given set of benefits and specific outcome? This can be used if it is not possible or desirable to associate a cost to a specific benefit (Office of Management and Budget [OMB], 1992; Cost-effectiveness analysis, 2011), such as increasing internal employee morale or strengthening a company core competency. Note that the benefit must still be quantifiable as some sort of measurable number, e.g. “50% of the employees in this division say they are ‘very satisfied with their jobs’ now, but after this project is performed by the division, we project that 75% will say they are ‘very satisfied with their jobs’.” Cost-efficiency analysis. Which alternative can achieve the best set of results, benefits and/or outputs with the lowest input of resources? Is it more cost efficient to use internal resources or to outsource? Resources may include people, facilities, funding, or any input required in the production of the good or service, and are most frequently translated into financial costs of each resource as part of the analysis. Economic impact analysis (EIA). EIA examples the financial impact of the project on the economy in surrounding area where the work will be done. This is “usually measured in terms of changes in economic growth (output or value added) and associated changes in jobs (employment) and income (wages)” (Economic impact analysis, 2011). This type of analysis may be used by companies that are concerned about “giving back to the community” (or...

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Cost-effectiveness analysis
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Fleming, Q
HUBZone program faces economic uncertainties. (2011, January 31). Retrieved February 13, 2011, from Georgia Tech Procurement Assistance Center:
HUBZone Program Overview
Inman, R. A. (n.d.). Make-or-buy analysis. Retrieved February 12, 2011, from Encyclopedia of Management:
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Project Management Institute. (2008). A Guide to the Project Management Body of Knowledge (4th ed.). Newtwon Square, PA: Project Management Institute, Inc.
Understanding the HUBZone Program. (n.d.). Retrieved February 13, 2011, from U.S. Small Business Administration:
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