The guarantee of supply is an important service consideration. Generally it can be said that supply is more assured when a company makes an item than when it buys it. Assured supply to the assembly line is often a reason for making rather than buying. Such decisions are valid for large industrial concerns where uninterrupted supply is necessary to prevent a breakdown in the supply line.
Making rather than buying items may enable a firm to give more assured and regular employment to its employees.
Unfair practices of the suppliers may force a company to make rather than buy. The existence of a monopolistic condition provides a strong stimulus to make rather than to buy. Sometimes a company is compelled to devise a substitute for a patented item so as to protect against a “legal monopoly”.
One more factor merits consideration. A company may stop purchasing one items and start making it. But the company purchases several other items from other suppliers. The other suppliers may develop an apprehension that even the other items will finally be made by the company. The suppliers are not sure of a constant business relationship and so there is a risk that the quality of service and the assurance of supply may be affected.
One more consideration is about the effect of the make or buy decision on the buyer’s flexibility. While purchasing negotiations with various suppliers are possible and the suppliers can be selected as the occasion demands to get the right quality, the right quantity, the right quantity at the right time and for the right price. Once a company starts making an item this flexibility is lost. It becomes difficult to adjust quantity, quality, or price (cost)
While deciding to make an item, attention should be paid to the availability of technical know-how. Even if technical know how is available, its cost may be considered.
Taxation policy of the Government should be considered while deciding to make he item. The contingency of war is another consideration bearing on the make or buy decision.
In general, a new company that is still growing will tend to buy more items than a company that has reached maturity.
With the desire to make the company growth oriented, the management may decide to make items it formerly bought. Industrial relations are reflected in make or buy decision. Trade unions often attempt to include in their contract clauses that prohibit management from buying or sub-contracting items that can be manufactured in its own plants.
Subcontracting involves hiring another firm to perform some of the manufacturing process or to give sub-assembles that will be incorporated into the end product. Subcontracting in other words, is one method of buying instead of making and hence many of the factors discussed above, influence the subcontracting decision. The term of subcontracting has come to be particularly associated with contractual arrangements between industrial concerns and governmental agencies.
Subcontracting has several advantages. It is the fastest method of increasing output. The buyer uses manpower where it is located instead of shifting that manpower into his own plant. It enables him to use technical and management skills, already existing as a functioning unit instead of developing new units. It may avoid the need for new plants and equipment on the part of the buyer, since he in effect borrows existing facilities.
Subcontracting checks over expansion of production facilities: Such over-expansion can create serious capacity if the demand is temporary.
Subcontracting will generally save the buyer from incurring investment costs in specialized machinery and tooling which may not be usable for his regular production requirements. However, since the subcontractor does incur such costs, his operating costs still reflect them, and to some extent, the savings may be more nominal than real. It is called the comparative cost factor to be considered prior to making the subcontracting decision. Another factor to be considered is the availability of the market.
Lastly, there is a factor of relative cost between doing one job in the plant and subcontracting for it. Some practical questions should be answered. To what extent the subcontractor permits his facilities to be committed to the buyer? To what extent should a buyer assist a subcontractor in procuring materials, supplies and tools? To what extent should technical assistance be extended? To what extent a subcontractor is financed? It is important to raise these questions and to answer them in the light of the particular situation and sound business principles.