Make versus Buy

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From the course by Rutgers the State University of New Jersey

Supply Chain Management Strategy

111 ratings

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Rutgers the State University of New Jersey

Supply Chain Management Strategy

111 ratings

Course 5 of 5 in the Specialization Supply Chain Management

Have you ever wondered what it takes to manage a successful supply chain? It all comes down to the right strategy. Supply Chain Management Strategy is the indispensable direction for managing a successful supply chain. This course is the capstone of the Supply Chain Management specialization. While, it is strongly recommended that you take all courses in this specialization, you do not have to if you believe you already have those skills. You will use the tools acquired in the previous four courses to create a supply chain management strategy in a real-life case scenario. At the completion of this course you will have shown mastery of the tools and techniques to successfully manage a complex network of companies that we call the supply chain.

From the lesson

Sourcing at MTC

In this module, you are going to examine the sourcing challenges that MTC faces. In addition to examining the current state of the company's procurement activities, you will make recommendations to improve the company's relationships with its suppliers as well as their ability to take advantage of closer relationships with its customers. After completing this module, you will have demonstrated the ability to recognize a company's sourcing challenges and make appropriate recommendations to overcome those issues.

Procurement6:22

Supply Management6:21

Strategic Sourcing4:10

Make versus Buy6:33

Meet the Instructors

Rudolf Leuschner, Ph.D.
Assistant Professor
Department of Supply Chain Management

Make versus Buy, every year I wrestle with the same age-old question.

Do I bake a birthday cake for my daughter's birthday, or

do I just go out and buy one?

This is a difficult question to answer because I would like to make her

something so it feels like, I really gave her something from the heart,

and then just go out and buy one, but I can't really bake that well.

And the birthday cakes we usually get her are amazing and they taste great.

So I end up always buying one for her, but

it's still a very difficult question for me.

Now companies have to face the same decisions, do they make everything that

goes into their product or do they find a vendor that supplies them with that.

It is an important decision from many aspects.

One, what are the boundaries of our company?

Where do our company operations start and where do they finish?

The other one is, what do customers value?

And third what are we good at?

So this decision needs to be made very carefully and very deliberately.

It's not something you just decide on a whim.

You have to have proper analysis in place.

To help you whether to make or

buy, I'm offering you a couple of questions that you should ask yourself.

In coming up with the right answer.

The first one is what business are we in?

What is our company about?

And what is core to our company?

Everything that is core should stay in house,

everything that we determine is not a core area should be outsourced.

The second question is, are we good at making this one item?

And if we're not good at it, we should not make it because

we can buy it from somebody who is much better than we are.

For example,

a lot of companies decide they are not very good at handling their own logistics.

So, they decide to pay another company to handle their logistics.

Third, do we have a competitive advantage?

If we decide something is core to our business, but we're worse

than our competitors, then it's the wrong thing to have as a core item.

So we don't necessarily want to spend resources doing that.

And lastly, If we decide to put in resources in to making a certain item,

what happens to those resources?

They're gone, but we could have used them better elsewhere.

So we need to be very conscience of what resources we spend in making items,

or choosing to not expend those resources and buying the item.

Harley Davidson continues to thrive,

partly because their label is made in the USA.

Consumers like that, so

the company continues to produce in house, in the United States.

And that is what their consumers are looking to buy

in terms of the motorcycles.

Now when it comes to the accessories,

which is another big part of Harley Davidson's business.

They outsource those things to contract manufacturers.

All the jackets, these t-shirts, the hats.

People love them and they don't care if they're produced elsewhere,

as long as the motorcycles are made in the USA, they're happy.

So here's an example of a company that shows

certain areas of their business to be core and kept in-house.

And even in the country where it was started rather than outsource,

but other pieces can be outsourced.

Apple relys heavily on contract manufacturers to build

all of their products from iPhone to iMac, to Macbook.

Nevertheless, consumers are very loyal to the company

even though they know somebody else actually builds the product.

But it doesn't matter to them because they're a well designed product.

Consumers love using them and they continue to go back and buy more products.

So in Apple's example, they found their core business in marketing,

research and development, and providing an environment for

all of these little devices to work together very well.

It's a big task, but it does not include manufacturing products

which other companies can do better than Apple would.

Now you can also outsource the wrong parts of your company.

For example, the German beer maker Lowenbrau,

chose to have a licensing deal with Miller Brewing Company in the United States.

One of the big brewers here in the USA to produce

Lowenbrau beer, but they produced it in the United States.

So it was domestic production for the domestic market.

And it really failed because consumers when they bought Lowenbrau,

they wanted real German beer.

Not just a German recipe made in the US, and

therefore the Lowenbrau brand in the United States took a big hit and

it really deteriorated the company much more.

Then it would have if they continued to ship German beer to the United States,

which, initially, they thought was not very profitable.

Now, I personally prefer Augustiner, which is the real Munich beer,

probably considered the top beer brewed in Munich.

And it's in Bavaria which is overall known as the best German beer.

I might be a little bit biased, and the taste and

the quality of this beer is better than any other beer that I've ever tasted.

So if you want a real German beer, this is what I would recommend.

Now back to make versus buy.

In many cases, companies can also choose both making and buying.

You may choose to make a part of your product and if you

need additional production, you will find a contract manufacturer to do it for you.

So you can have the best of both worlds.

Nevertheless, make versus buy is an important decision for any company.

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