Question2) Write an essay outlining the dilemma surrounding whether a company should “make-or-buy” component parts that go into its products?
A make-or-buy decision pertains to whether a business should make or buy the component parts that go into its final product.
The Advantages of Make: The arguments that support making component parts in-house (i.e. vertical integration) include: lower costs, facilitating specialized investments, proprietary product technology protection, and improved scheduling. In terms of lower costs, it may pay a firm to manufacture its own component parts, if no cheaper source (assuming quality remains consistent) is available. In terms of facilitating specialized investments, when a firm needs a component part that is highly customized and specialized, it is often best for the firm to manufacturer the part itself. Having a supplier manufacture the part would be awkward, because the supplier would rely strictly on one buyer to purchase the part and the buyer would typically have only the one supplier to furnish the part. In terms of protecting proprietary product technology, the more involvement that a firm has with suppliers, the more likely it is that proprietary information will be lost. As a result, a firm that has highly sensitive proprietary technology may be ahead to produce its own component products. Finally, improved scheduling can result from producing in-house rather than relying upon suppliers.
The Advantages of Buy: The advantages of buying component parts from independent suppliers is that it gives the firm greater flexibility, it can help drive down the firm’s cost structure, and it may help the firm to capture orders from international customers. In regard to flexibility, by outsourcing the manufacture of its component parts, a firm can switch suppliers as circumstances dictate. This could provide a firm a substantial advantage in a rapidly changing environment. In terms of costs, using suppliers to manufacture component parts allows a firm to narrow its scope, and the resulting administrative overhead costs may be smaller. Finally, an advantage of buying rather than making component parts is that the relationships that are established through buying parts may lead to sales of the firm’s final product.