Production units are identified mostly with their decision to make or buy. In other words, do they wish to produce the desired product on their own or do they want to purchase it from the foreign market?
This decision is critical because of the third-party suppliers, especially in countries like Eastern Europe, China, and other low-cost parts of the world, hold out the promise of essential beneficiaries, which the developed nations fail to offer.
However, the developed countries can easily overcome the expenses cost in the imported material through activities like human resources, information technology, maintenance and customer relations.
If properly utilised and taken care of, these activities may yield profit rather than lead the nation to suffer more loss. All the expense of outsourcing can be regained through these activities and thus they should not be neglected when the options are considered.
The Make Vs Buy decision of a nation depends on three pillars. These pillars are:
• Business strategy
• Economic factors
The first pillar in the Make Vs Buy decision is the business strategy adopted by a nation. Business strategy strategically engages the importance of the company whose product or service is being considered for outsourcing, in addition to the process, technologies or skills needed to design the product or deliver that particular service.
These factors should be carefully considered, not just on the basis of the current competitive environment but also by anticipating the changing competitive environment in future.
So, as a rule, it’s advisable to select the in-house skills and abilities when a product or a function plays a very important role in improving the company’s performance or is considered a core operation.
Perhaps, if we consider a time-sensitive product or a product, which is prone to consequent design changes, third-party producing would likely be a mistake. In simple words, companies must opt for outsourcing in the following scenarios:
• Remove the processes, which are intensive on the balance sheet, e.g., capital or labour.
• Minimise the costs.
• Achieve flexibility for adjusting output in comeback to changing demand.
• Phase out management of paperwork, documents or training.
• Monitor fewer workers.
• Have access to a new process or network tools and technologies.
• Leverage external expertise.
In fact, if a product relies on proprietary technology or intellectual property or if a product or an operation is critical for the company’s performance, it is recommended to select in-house skills & abilities rather than outsourcing.
Obviously, outsourcing is worth considering under some situations. If a product or function has essentially become a commodity or is derived from factors other than unique or differentiating capabilities and as such, moving production or management to a third party does not give rise to a significant risk to the company’s strategy, outsourcing would be the perfect solution.