Part 160: Make-or-Buy Decisions

//Part 160: Make-or-Buy Decisions
Part 160: Make-or-Buy Decisions2022-08-21T03:59:54+00:00

Part 160: Make-or-Buy Decisions
(OUTPUT Project Procurement Management: Plan Procurement Management)

  • The Make-or-Buy decision applies to products and services
  • For any project component or material, we can choose to Make It, Buy It, Both, or Neither
  • This is known as a “Make-or-Buy” decision.  For any given product or service required by the project, we might have the ability to make it, buy it, both, or neither (in which case the project will fail).
  • This also applies to human resources; we can hire the required resources directly (make them), or subcontract them (buy them)
  • There are advantages and disadvantages for Making and Buying products.  We should consider all the factors when deciding
    • How much will it cost to make vs buy in the required quantity?
      • In order to Make It, we must design the component, acquire the necessary equipment, acquire the necessary raw materials, acquire trained technicians, and then manufacture the component.
      • For a small quantity of components, a third-party supplier (Buy It) will be cheaper.  Our overhead in manufacturing the component will be high.
      • The supplier may have a large minimum order quantity.  If we require a small quantity, it may be cheaper to Make It.
      • For a larger quantity of components, manufacturing it ourselves (Make It) will be cheaper.  Our overhead will be low.  The third-party supplier will sell us the components at a profit.
      • For example, we need gears.  Gears cost $2 each.  It will cost us $1000 to buy gear making equipment.  Then we can make the gears for $1 each.
      • If we only need 10 gears, we should buy them.  The cost is $20 to buy 10 gears, and $1010 to make them ($1000 for the equipment, and $10 for the gears).
      • If we need 2000 gears, we should make them.  The cost is $4000 to buy them, and $3000 to make them ($1000 for the equipment, and $2000 for the gears).
    • How long will it take to acquire the component?
      • It will take a long time to design the component, and acquire the equipment, raw materials and training, and make the component ourselves.  If a third-party supplier (Buy It) has the completed components sitting on a shelf, ready for sale, then it will be faster to Buy It.
      • A third-party supplier (Buy It) may have a long lead time.  For example, they may ship the component by sea, which takes one month.  If we already have the equipment, design, and training, we can manufacture the product on demand, in a matter of hours or days.
      • For example, we need gears.  Our supplier ships gears in two business days.  Setting up the equipment will take two weeks.  If we need the gears right away, we should buy them.
      • What if our supplier takes a month to ship gears?  Then setting up the manufacturing equipment is faster.
    • Other considerations
      • The third-party supplier may have a patent on the design of the component.  In that case, we may have to purchase the component from the supplier regardless of the cost and/or schedule.  If we try to manufacture the component ourselves, we could be sued for patent infringement.
      • Providing sensitive information and/or trade secrets to a third party could put us at a competitive disadvantage
      • If our product is sensitive, the government may not allow us to purchase some components from a foreign company
      • Long-term financial situation of the supplier.  If we rely on the supplier for components, and the supplier goes out of business, we will have to find a new supplier or shut down our project.  We should make sure that the supplier is financially sound or considering Making the components ourselves.  If the supplier is critical and small, we could consider buying the supplier’s company and/or patents.
      • We may have a contractual obligation to purchase an item from a specific supplier.  This obligation could be part of the project’s contract or our organization may have a larger deal with a preferred supplier.  For example, our company agreed to purchase batteries from Energiser.  We wouldn’t be able to buy batteries from Duracell for our specific project.
  • There are advantages and disadvantages for Making and Buying people.  We should consider all the factors when deciding
    • How much will it cost to make vs buy the person?  How soon do we need the work done?  How long will the job take?
      • The cost of advertising the job, interviewing candidates, hiring a candidate, and providing training is high.  The cost could be tens of thousands of dollars.
      • For a small task that may take days or weeks to complete, it is cheaper to subcontract the work.  Especially when it requires a skilled trade (plumber, electrician, etc.), or a professional (engineer, database architect, etc.).  Many companies advertise their services.  Other types of labor can be obtained from staffing agencies.
      • For a longer task that may take months or years to complete, it may be cheaper to hire the person directly.
      • When work is subcontracted, the risk of not completing the work on time, properly, or on budget, can be passed to the subcontractor.  When hiring staff directly, the risk is borne by us.
      • The job market may be difficult.  It may be difficult to find qualified employees.
      • Hiring a person takes time.  If the work must be completed urgently, we can subcontract it.
      • For large projects with fluctuating labor requirements, we can use a combination.  Hire the minimum number of people required and subcontract the rest.  It is easier to fire/lay off a subcontractor.
    • Other considerations
      • The person we need has very special expertise.  Like a world-renowned architect or designer.  He may be unwilling to work as an employee.
      • Visas and work permits.  If the work is being performed in a foreign country, we may have to hire local people.  The government may not allow us to hire people who don’t have the required work permits.
  • Remember also
    • We can do “both”.  We can hire employees to work on the project, and contractors to supplement them when the workload increases.  We can purchase components and manufacture them if we require larger quantities.
    • We can do neither.  If we can’t find the labor we need, or can’t find it at the right price, the project might not be feasible.  If we can’t purchase the components at the right price, or can’t manufacture them, the project might not be feasible.