To maximize flexibility and value creation, leading manufacturers use a five-step scenario-based approach to assess a broad array of sourcing decisions simultaneously. This holistic approach enables manufacturers to develop a comprehensive set of guidelines for make-or-buy decisions company-wide.
The first step in creating the fact base for make-or-buy decisions is to identify the products, parts, or processes that will be included in the analysis. For each, companies need to forecast demand and capacity utilization. They also need to understand all of the associated direct and indirect costs.
Next, assess the strategic value of owning and operating each product or part’s manufacturing processes and controlling the related technology and intellectual property. What is (or should be) the company’s relative cost position for each? Strategic value can be based on flexibility, structural advantages, innovation potential, interdependencies, customer expectations, and supplier availability.
Combining the results of the strategic value and relative cost position assessments in a four-field matrix allows manufacturers to identify those parts, products, or processes that should be prioritized for in-house production rather than outsourcing. From there, companies can explore different scenarios to see whether outsourcing would be beneficial.
Identifying the best scenario to pursue involves considering both financial and nonfinancial criteria, including cost-savings potential, investment requirements, implementation expenses, machine utilization, workforce development, and space requirements.
If a chosen scenario leads to outsourcing, the company needs to select suppliers with the required production technologies and available capacity. In some cases, this can be done in a few months; in others, it can take several years. The process requires close collaboration and innovative ideas, such as a possible joint venture in which the manufacturer and another party coinvest in production equipment.