Make-or-buy decisions are concerned with whether PRODUCTs or components should be made in-house or purchased from external sources. These decisions are a simple economic decision based on COSTS. However, in many instances make-or-buy decisions are more strategic and can affect a company’s competitive position. To determine whether a product should be purchased or produced, managers consider
• the role of the process technology in providing a competitive advantage for the firm
• the maturity of the process technology
• competitors’ technology position
OUTSOURCING of process technology can often lead to the creation of suppliers who have the ability to become competitors in the marketplace. Thus, a supplier may internalize enough of the process technology to start doing RESEARCH AND DEVELOPMENT on the process. With the improved technology, the supplier may then use the technology to supply current competitors; and, finally, if the technology is a core part of the business, these suppliers can emerge as competitors. A classic example of this strategy can be seen in computer vendors from Taiwan. Initially these vendors were utilized as low-cost suppliers of components and circuit boards. They then expanded to producing computers, which were sold under different labels. Eventually these companies began marketing computers under their own brand names. The maturity of the process technology also plays a key role in the make-or-buy decision. Even if the technology is new in the industry, there might be other industries where the technology is routinely used. For example, when firereinforced composites were being developed, the weaving process required was new to this industry but fairly well advanced in the textile industry. If the technology is mature, there is not much to be gained from research and development, since competitors can simply acquire the technology from other sources. Finally, it is important to gauge the ability of competitors to develop/acquire and assimilate the new technology. Such assessments are typically done using BENCHMARKING studies, by reverse-engineering a competitor’s product, and by searching through literature to identify use of the technology by other companies. If proprietary technology is involved or if the technology represents a core competency of the firm, special thought should be given to the outsourcing decision. Once assessment is made of the key decision variables, the make-or-buy decision falls into one of the following categories: make, marginal make, develop internal capability, buy, marginal buy, and develop suppliers.