The third pillar in the Make Vs Buy strategy is the economic factors residing in the country that needs to decide if to buy a product or make it on its own. The various economic factors comprise the effect of outsourcing on capital expenditures, return on invested capital and return on assets, along with the probable savings gained by outsourcing.
To study the importance of pricing mechanisms, let’s consider those companies that base their decision on if they need to outsource solely on approximate calculations of the in-house as compared to the external costs related to the outsourced function, for example, the cost of each item produced or the price of running an HR department or an IT network instead on the total costs. The net prices that need to be taken care of comprise the layouts for handling the outsource supplier, exclusively as the outsourced process changes. These changes prove to be very essential.
For example, customising some software on a third-party information technology network can compute a large surcharge to the outsourcing deal. Tackling the customization in-house, i.e., within the home country, where the IT department can work closely, their work can be easily monitored and more productively with end-users to satisfy their demands can be obtained, tend to be less costly.
Along with this, the home country needs to choose the outsourcing partners very cautiously. In case the outsourcing partners are not selected properly, the companies often attempt to protect themselves from failures or delays by replicating in-house some of the effort that was originally farmed out. This leads to multiple prices for the same project and potential costs are mostly neglected when the outsourcing deal is made.
The costs that are often neglected in outsourcing manufacturing operations are as follows:
• Transportation and handling charges.
• Expanded, extended inventories.
• Administrative bills like the supplier management and quality control rates.
• Casted complexity and its effect on lean flows.
• Minimal return on invested capital.
• Production dependability and quality control.
Taking all these costs into consideration, depending on a one-time quote to measure the competitiveness of an external producer is mostly not enough. Enterprises can be saved from this mistake by factoring into the outsourcing equation the economic effects of comparative wage prices, labour productivity, tools and staff utilisation, the biases of both the labour base and functional processes, the potential for process and product innovation and relative purchasing power.
Finally, we can say that for a successful outsourcing relationship, the basic factors include the sharing of savings from productivity progress, so that both sides have an inducement to merge.
After establishing a sober formal relationship, it is very essential to search for the right balance between fully transparent supplier functions and micromanagement or the perception of it. After the outsourcing decisions are made and suppliers have been chosen, it is crucial to be on the same front on a fair and balanced pricing mechanism, productivity progress and cost minimization expectations and the necessary scale of responsiveness to design, service or delivery changes.