Further, DOD may not always appropriately consider the arsenals as a source of manufacture, because it has not developed clear, step-by-step implementing guidance on conducting make-or-buy analyses to determine whether to purchase items from an arsenal or the private sector, which potentially limits the arsenals' ability to generate revenue.
DOD is not strategically positioned to sustain the manufacturing arsenals' critical capabilities, as it has not identified fundamental elements for implementing its strategic plan or identified these capabilities. Such capabilities help ensure that DOD can respond to emergencies and obtain products and services it could not otherwise acquire from private industry in an economical manner.
DOD has a strategic plan that includes goals and objectives related to sustaining the arsenals' critical capabilities; however, it has not identified fundamental elements, such as milestones and resources, needed to implement the plan.
As a result, DOD lacks information that would be useful in determining progress in achieving the plan's stated goals and objectives for the arsenals. This kind of integration is quite common. Vertical integration provides its own set of advantages. An integrated company depends less on its suppliers and so can be certain of a smoother flow of materials and parts for the manufacture than a non-integrated company.
In addition, some companies believe they can manage quality better by manufacturing their own parts and materials instead of depending on the quality control standards of external suppliers.
The benefits of vertical integration are counterbalanced by the benefits of using outside suppliers. By combining demand from different companie, a supplier can enjoy econoies of scale.
These economies of scale can cause better quality and lower expenses than would be possible if the business were to endeavor to manufacture the parts or provide a service by itself.
At the same time, a business should be careful to retain control over those tasks that are necessary for maintaining its competitive position. Case in point: Hewlett Packard manages the software for laser printers that it manufactures in collaboration with Canon Inc.
To come to a make-or-buy decision, it is essential to thoroughly analyze, all of the expenses associated with product development in addition to expenses associated with buying the product. The assessment should include qualitative and quantitative factors.
It should also separate relevant expenses from irrelevant ones and consider only the former. The study should also look at the availability of the product and its quality under each of the two situations. Quantitative aspects can be calculated and compared whereas qualitative aspects call for subjective judgment and, frequently require multiple opinions.
In addition, some of the associated factors can be quantified with sureness while it is necessary to estimate other factors. The make-or-buy decision calls for a thorough assessment from all angles. Quantitative aspects are essentially the incremental costs stemming from making or purchasing the component.
Factors of this type to look at may incorporate things such as availability of manufacturing facilities, needed resources and manufacturing capacity. This may also incorporate variable and fixed expenses that can be found out either by way of estimation or with certainty. Similarly, quantitative expenses would incorporate the cost of the good under consideration as the price is determined by suppliers offering the product for sale in the marketplace. Qualitative factors to look at call for more subjective assessment.
Examples of such factors include control over component quality, the reliability and reputation of the suppliers, the possibility of modifying the decision in the future, the long-term viewpoint concerning manufacture or purchase of the product, and the impact of the decision on customers and suppliers. As mentioned earlier, distinguishing between these two kinds of expenses is necessary to come to a make-or-buy decision. Relevant costs for manufacturing the good are all the expenses that could be avoided by not manufacturing the product in addition to the opportunity cost resulting from utilizing production facilities to manufacture the good as against the next best alternative utilization of the manufacturing facilities.
Relevant costs for buying the product are all the expenses relating to purchasing a product from suppliers. Irrelevant costs are the expenses involved irrespective of whether the good is produced internally or bought externally.
Though the cost is rarely the sole criterion utilized to come to a make-or-buy decision, easy break-even analysis can be a useful way to quickly guess the expense implications within a decision. Businesses should first carry out an assessment of quantitative aspects before considering qualitative aspects to finalize their make or buy decisions. Carry out the quantitative analysis by comparing the expenses incurred in each option. The expense of purchasing products is the price paid to suppliers to purchase them.
On the contrary, the cost of manufacture includes both variable and fixed expenses. For example, a business requires 10 units of its item in 10 consecutive periods. Think about all the qualitative factors that may have a bearing on the decision to manufacture the products. An example for this is that it may be possible that the business has zero experience in manufacturing a specific good and its previous experience in manufacturing other goods cannot be applied.
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List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses. Business Business Essentials. Business Essentials Guide to Mergers and Acquisitions. What Is a Make-or-Buy Decision? Key Takeaways A make-or-buy decision is an act of choosing between manufacturing a product in-house or purchasing it from an external supplier. Make-or-buy decisions, like outsourcing decisions, speak to a comparison of the costs and advantages of producing in-house versus buying it elsewhere.
There are many factors at play that may tilt a company from making an item in-house or outsourcing it, such as labor costs, lack of expertise, storage costs, supplier contracts, and lack of sufficient volume.
Companies use quantitative analysis to determine whether making or buying is the most cost-efficient method. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Terms What Is Inventory? Inventory is the term for merchandise or raw materials that a company has on hand.
What You Need to Know About In-House Activities In-house refers to conducting an activity or operation within a company, instead of relying on outsourcing. Optimization Definition Optimization in investing is the process of adjusting a trading system to make it more effective.
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