ABC Limited

Make Vs. Buy Case

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Table of Contents

Executive Summary.........................................................................................................................3
Background......................................................................................................................................3
Case Evaluation...............................................................................................................................4
Proposed Solution............................................................................................................................6
Other Factors Influencing the Decision.......................................................................................6
Competitive Advantage...............................................................................................................6
Human Resource (Issues & Challenges).....................................................................................6
Location & Capacity Requirement..............................................................................................6
Financial Analysis.......................................................................................................................7
Supply Chain Concept (including inventory)..............................................................................7
Forecasting...................................................................................................................................7
Quality Management...................................................................................................................7
Conclusion.......................................................................................................................................7
Implementation................................................................................................................................7

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Executive Summary

ABC Limited wants to expand its business and product line. It is a manufacturing company

which is considering whether it should opt to continue to manufacture its valves or it should go

for outsourcing. Since the expansion option is quite lucrative and auspicious for company to

deliver promising results, it is considering availing this opportunity, but it is not sure which

option is more suitable as it has been facing so many problems in manufacturing the current

volume of production. The following analysis provides a comprehensive analysis of why ABC

Ltd, should go for Buying decision rather than manufacturing in house.

Background

ABC Ltd. deals with the production of valves. It has been about three years that ABC limited are

in business. Although their sales volume has significantly increased from 10,000 valves a month

initially to 50,000 valves a month now, yet still they only manufacture only one type of valves.

Till now, they have procured the raw material needed for the manufacturing and did all the

production for themselves.

Now they have made their name in the market and expanding the business by introducing variety

in their existing product line of valves for which they would need a total area of 50,000 square

foot to continue to do all the manufacturing activities in house. The land price has been doubled

since their establishment in the market and is hardly available.

Other than this, the company is facing many other problems regarding the current production.

Though Mr. Mohan, the chief officer of production, has been quite successful and achieving

increased level, yet quality complaints he has been receiving in the last two years have averaged

to be 0.5 % from 0.2 %. In addition to this, the staff members are highly dissatisfied because of

low salary package and continuous increase in over work. Moreover, due to lack of required

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labor force, no strict action can be taken for the workers who spend lot of time on tea and lunch

breaks and employees deliberately spend time in talking and gossiping to increase their overtime

which has surged the overtime cost by three times.

As such, the expansion plan of management needs more workers. In this regard, Mr. Mohan

suggests management not to go for expansion and instead, improve and consolidate the current

set up. Receive request of Mr. Mohan, Mr. Kumar, Operations Director, called a meeting with all

head of departments to discuss the situation in which marketing and finance managers was very

optimistic regarding company’s growth. The marketing manager emphasized that company

should exploit this opportunity of established brand image and economic growth. The finance

manager emphasized that this would lead the company to achieve economies of scale production

and more profitability. Mr. Mohan, however, presented the problem of lack of labor force,

quality, production control, and productivity on which outsourcing alternative was presented by

marketing manager.

Upon learning this, Mr. Mohan, is uncertain that the outsourced agency will keep their profits

and charge high and may have problems pertaining to the delivery. Purchase manager mentioned

since suppliers would also want to increase their business with us, they would not cause delays

as this may lead them to losses. Upon the suggestion of finance manager, Mr. Kumar suggested

Mr. Mohan to perform the cost analysis for production. All the departments mutually collected

the data and performed forecasts for production and sales which was presented in the report.

Case Evaluation

The analysis of all the data and information collected is presented here in the tables given

subsequently.

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Proposed Solution

From the costs analysis of both these cases shown in above tables, it is quite obvious that buying

decision or outsourcing is the optimal choice for the company because of its lower costs. Even if

the costs associated with this case would have been equal to the making case, still the option of

purchasing the product from the outsource are would have been more optimistic. In addition to

this, if the cost of procurement has been higher in comparison to the manufacturing case, even

then buying from outside would be a better option because of the current problems being faced

by the company in manufacturing as well as because of the greater flexibility and lesser risk

probability it offers.

Other Factors Influencing the Decision

Competitive Advantage – The company has a key competitive advantage by utilizing the option

of expansion as indicated by the marketing manager and since company is only producing only

one type of valves till now, it will increase its customer base and market share in comparison to

its competitors.

Human Resource (Issues & Challenges) – The currently available labor force is not adequate for

the current operations and activities of manufacturing and thus, they will not be able to deal with

additional work in case of manufacturing in house. This prefers buying decision. Furthermore,

the expertise and efficiency of the manpower available has been decreased and average

complaints percentage has increased from 0.2 % to 0.5 %. Moreover, the workers have been

habitual of spending a lot of idle time while chit chatting with each other in lunch and tea break

and not utilizing their time effectively.

Location & Capacity Requirement – The land available is not adequate for expanding

manufacturing operations and thus, the company needs to buy another piece of land which is not

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readily available in the market. The land, if any, found is available at the double rate in

comparison to the land purchased initially at the time of inception of business. Thus, it again

recommends going for buying decision.

Financial Analysis – Since overtime costs has also increased by 3 times, buying is more suitable

choice. Manufacturing in house will also lead to increase in taxes. Since land and plant is to be

purchased and set up, it will increase its fixed costs which does not favor make decision.

Supply Chain Concept (including inventory) – With outsourcing option, secrecy and protection

of patent right can be secured. Low volume of production and horizontal integration also favors

purchase decision. Inventory handling, storage, and cost will also be reduced with the buying

option.

Forecasting – The forecasts of the expansion of the product line also suggests opting

outsourcing.

Quality Management – The current quality of manufacturing is already decreased because of

inefficiency of labor force so; outsourcing is the optimal choice.

Conclusion

Along with the economic benefit, all the factors analyzed above recommend that ABC Limited

should consider the option of outsourcing and buying the ready-made valves rather than

manufacturing them in house because making them in house will not just be costly but also will

not be an optimal choice for the company in almost all the aspects.

Implementation

ABC limited should look for a potential supplier who can fulfil their order requirements in terms

of quality, productivity, and timely delivery while keeping their financial costs as low as

possible. The firm should approach the outsourcing agent discuss all the terms and engage in a

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legal contract to carry out the business activities and operations smoothly and decide for the

penalties in case of breach of contract, late delivery, compromised quality, or any other

noncompliance from either of the parties engaged in the contract.

This will also address the concerns of Mr. Mohan regarding the outsourcing of readymade valves

from the market.