Enhancing Resilience through Make and Buy Decisions
- Marc Rieke
- Feb 25, 2024
- 10 min read
In the complex and ever-evolving landscape of global manufacturing, companies are continually faced with decisions that can significantly impact their operations, competitiveness, and ability to withstand disruptions. Among these critical decisions, the strategies surrounding dual sourcing and whether to make or buy components or products stand as common approaches.
However, in our consulting experience at Production Footprint Strategy Consultants, we've observed that the nuanced option of leveraging both —making and buying— of certain components to enhance resilience and flexibility in production is often overlooked. This oversight can prevent companies from achieving greater operational stability and adaptability in the face of supply chain uncertainties.
The essence of resilience in manufacturing lies not just in the capacity to endure disruptions but in the agility to respond and adapt swiftly to changing market dynamics and unforeseen challenges. From a procurement perspective, dual sourcing strategies have a long and successful history especially for high-volume and / or especially crucial components. However, also in production planning, we encourage manufacturing companies to analyze advantages of outsourcing at least parts of the production with the focus on improving resilience and flexibility.
Yet, the question arises: How can companies effectively approach and analyze these make and buy decisions?
This blog post aims to shed light on precisely that—identifying the key factors to analyze and consider when seeking to improve resilience through thoughtful make and buy decisions. By delving into this under-explored strategic business decision, we aspire to provide valuable insights that can guide manufacturing firms towards more robust and flexible operations, ensuring they are better prepared to navigate the uncertainties of today's global supply chains.
Table of content
How Make and Buy Decisions increase Resilience
In the quest for operational resilience, manufacturing companies continually grapple with the challenge of how to configure their production strategies to withstand disruptions. One important lever in this dilemma is the capacity flexibility and reaction speed afforded by a make and buy approach.
Consider a scenario where a company adopts a production strategy for a certain component comprising 70% in-house manufacturing and 30% outsourcing, with the flexibility to adjust the outsourced volume up to 50% as needed. This configuration offers substantial flexibility, enabling the company to respond adeptly to various disruptions. For instance, should the in-house production face setbacks such as labor strikes or unexpected machinery breakdowns, the ability to increase the outsourced portion to 50% acts as a critical lever to maintain production continuity. This flexibility drastically reduces the risk of being required to halt the production in the entire value chain, safeguarding the company against significant operational and financial impacts.
The value of this make and buy strategy extends beyond just addressing short-term disruptions like strikes or equipment failures. It is particularly potent in mitigating the consequences of long-term crises, such as when a manufacturing facility becomes inoperable for extended periods, for example after a natural disaster. In such dire situations, the repercussions can threaten the very survival of a company. The strategic foresight to distribute production between in-house and external sources can thus be a linchpin for enduring and emerging resilient even from such catastrophic events.
Moreover, resilience, in this context, transcends the mere ability to meet production volumes. It encompasses a broader spectrum of benefits that include hedging against currency fluctuations—if the outsourced volume is produced in a country with a different currency, navigating energy price volatility, or adapting to evolving regulatory landscapes. This multifaceted resilience is crucial for companies operating in the global market, where external factors such as economic policies, geopolitical tensions, and environmental regulations can have significant implications on operations.
In essence, the make and buy decision is a strategic tool that imbues manufacturing operations with the flexibility to adjust capacity swiftly and the resilience to navigate a myriad of operational and external challenges. By thoughtfully balancing in-house production with outsourced manufacturing, companies can not only mitigate risks associated with any single point of failure but also capitalize on opportunities to optimize costs, enhance quality, and ensure uninterrupted supply to their customers. This approach, therefore, represents a cornerstone strategy for building a robust and agile manufacturing operation capable of thriving amidst the uncertainties of the modern business landscape.
Identifying Components suitable for Make and Buy Strategies
In the realm of manufacturing, the adoption of make and buy strategies is not universally advantageous across all components. This chapter aims to delineate an initial decision-making framework to ascertain which components merit a deeper analysis for potential make and buy strategies, particularly to bolster resilience and flexibility within the production landscape.
Make and buy strategies should be selectively applied to components, where they can genuinely contribute to an organization's operational resilience and flexibility. The following characteristics highlight components that are especially qualified for such strategic consideration:
Inherent Production Risks
Components that entail certain levels of risk in their production or supply chain are prime candidates for make and buy strategies. This risk could stem from for example supply chain vulnerabilities, energy-intensive production processes, logistics challenges including lengthy and geopolitically sensitive routes, dependency on singular machinery for production, or facilities situated in disaster-prone areas. Identifying components with these risk factors can highlight opportunities to mitigate potential disruptions through strategic outsourcing.
Independence from the Core Value Chain
Components best suited for make and buy strategies are those whose production can be somewhat autonomous from the rest of the value chain. Outsourcing minor, inconsequential process steps is unlikely to markedly enhance resilience. Instead, focus should be on complete components, for example those which are currently manufactured in distinct facilities before being assembled in a main plant. Commodity components, which are readily available and do not face supply constraints or require extensive qualification lead times, typically do not benefit from outsourcing in the context of increasing resilience.
Non-proprietary Production Processes
The production process for the component in question should not constitute the company's proprietary technology. Outsourcing components that are central to a company's competitive advantage in production processes could lead to a loss of this advantage and necessitate extensive training for the supplier, complicating the outsourcing process. For these components, a split of production volumes to several inhouse facilities might be more suitable to create the required degree of resilience.
Complex Production Requirements
While components that are difficult to produce might seem less suitable for partial outsourcing due to the challenges in achieving operational excellence and maintaining quality standards at multiple locations, they should not be automatically discounted. For instance, if a component's production involves the use of only one particularly error-prone casting machine, outsourcing a portion of this production could still be beneficial. This approach necessitates a double-qualification of production but can lead to increased resilience by distributing the risk of production failures.
This decision-making framework is designed to help manufacturers identify components for which make and buy strategies could meaningfully enhance operational resilience and flexibility. By focusing on components that meet these criteria, companies can strategically allocate their resources to areas where they will have the most significant impact on reducing vulnerabilities and improving adaptability in their production processes.
How to analyze Make and Buy Strategies
In this chapter, we delve into the analytical framework necessary for evaluating make and buy strategies, which share foundational steps with dual-sourcing strategy assessments. We will explore the core topics and considerations that are crucial in determining the viability and strategic value of implementing a make and buy approach.
Make and buy analyses should focus on quantifying and comparing positive value (e.g. flexibility / resilience) with associated costs and negative effects (e.g. economies of scale effects, supplier margin & risk, additional logistics costs). In the following, we want to delve deeper into each part of the equation:
Positive value
a) Flexibility and Resilience
Analyzing the benefits of a make and buy strategy in terms of flexibility and resilience involves a comparative risk assessment between an all in-house production model and a model that integrates partial outsourcing. The effectiveness of this strategy is contingent upon the specificities of the company's existing production framework and the demands of the market it serves. For instance, a manufacturing operation reliant on a single facility in a geopolitically or environmentally precarious location stands to gain considerable resilience by diversifying production through an external supplier situated closer to key supply chain junctures. This diversification can significantly mitigate risks associated with natural disasters, political instability, and logistical challenges, thereby enhancing operational flexibility. The necessity for such flexibility varies across industries; markets like automotive manufacturing, which operates on just-in-time (JIT) principles, demand higher agility compared to sectors where project timelines allow for more extended planning and lead times.
b) NWC impact
Outsourcing parts of the production volume can have a positive impact on a company's net working capital (NWC) by partly transferring the ownership for work-in-progress (WIP) inventory to the supplier. This shift means that the company's cash is not tied up in WIP inventory, thereby improving liquidity, as cash outflows occur only upon receipt of the completed components from the supplier. Additionally, payment terms may introduce further delays before cash outflow, enhancing the company's cash flow management.
Negative effects
a) Lost economies of scale
Adopting a make and buy strategy can lead to diminished economies of scale within your own production, as outsourcing portions of the volume inherently reduces the aggregate quantity produced in-house. The impact of this reduction, however, is closely tied to the specific nature of the product and the production technology used in its production. A meticulous analysis of how economies of scale are affected across varying volumes can pinpoint the optimal balance between outsourced and in-house production.
Illustration on examplary Economies of Scale effect curve per volume
This equilibrium aims to maximize in-house economies of scale up to a point where the benefits of additional volume begin to diminish. Notably, for components produced in lower volumes or with processes that rely heavily on manual labor rather than automation, the negative impact on economies of scale may be less pronounced, offering more flexibility in determining the volume split.
b) Supplier margin & cost
Incorporating a supplier into the production process introduces an additional layer of cost due to the supplier's margin, as they aim to profit from their contribution to manufacturing. This outsourcing transfers the value-add margin that could have been retained in-house to the supplier, potentially elevating the overall cost per unit. Moreover, selecting a supplier in a different region can further complicate cost structures, as variations in e.g. labor and energy costs between the supplier's location and the in-house production site may significantly affect the price per piece, adding another layer of financial consideration to the make and buy decision process.
c) Supplier risk
Introducing an additional supplier to handle a portion of the production volume can effectively mitigate and diversify overall supply chain risks and enhancing resilience. However, each new supplier also introduces its own set of minor risks that must be carefully considered. These include potential uncertainties around the supplier's production capabilities and the consistency of quality levels they can maintain. Ensuring that these risks are identified and managed is crucial to maintaining the integrity and reliability of the supply chain while leveraging the benefits of a make and buy strategy.
d) Logistics costs
Outsourcing parts of the production volume can introduce additional logistics costs, as the coordination and transportation of components between multiple locations add complexity and expense. However, especially when choosing a supplier which is closer to the supply target location compared to the in-house production facility, such scenarios can generate not only more resilience from supply chain disruptions, but also lower logistics costs.
We have seen this for example with a tier1 automotive supplier client, who adding a Central European supplier for parts of a component's volume otherwise produced in an in-house location in Asia. In such scenarios, the strategic positioning of the supplier can lead to reduced transportation costs, improved delivery and lead times and more resilience, turning a potential negative into a strategic advantage.
Integrating Make and Buy Decisions into Planning Cycles: Roles and Responsibilities
The strategic importance of make and buy decisions necessitates their careful integration into a company's planning cycles, particularly as these decisions can significantly enhance the flexibility and resilience of the supply chain. Traditional procurement practices are well-versed in evaluating dual sourcing strategies, but these typically only apply to components that are fully outsourced. A critical gap emerges when considering the partial outsourcing of production volumes for specific components, which often remains unexplored in standard planning processes.
Bridging the Gap Between Operations and Supply Chain Management
The responsibility for evaluating make and buy decisions should ideally be a collaborative effort that requires expertise from Operations, Supply Chain Management and Procurement. This cross-functional approach ensures that all potential impacts of make and buy decisions are thoroughly considered, from production capabilities and constraints to supply chain risks and opportunities.
S&OP as the ideal platform for make and buy decisions
Sales and Operations Planning (S&OP) processes offer a strategic platform for incorporating make and buy decisions into regular planning and decision-making cycles. S&OP, by its nature, facilitates cross-functional collaboration and alignment across key business functions, including production, procurement, and SCM. Within the S&OP framework, make and buy strategies should be a topic of regular discussion and evaluation, particularly during the supply planning phase. This integrated approach allows for a holistic view of how such strategies can serve the organization's broader goals of resilience and adaptability.
Production: Insights from the production team are crucial for understanding the practical implications of splitting production volumes between in-house and outsourced facilities, including the potential impacts on quality, lead times, and operational efficiency.
Procurement: Procurement can provide a strategic perspective on supplier capabilities, risks, and the potential for cost efficiencies or escalations associated with partial outsourcing.
Supply Chain Management: SCM plays a critical role in evaluating the broader implications of make and buy decisions on supply chain resilience, including risk mitigation, inventory strategies, and the ability to respond to market or supply disruptions.
Implementing Make and Buy Decisions
To effectively implement make and buy decisions within the S&OP process, companies should establish clear guidelines and criteria for evaluating potential components for partial outsourcing. This includes regular reviews of supply chain vulnerabilities, production capacity constraints, and market demand fluctuations. Additionally, fostering strong communication and collaboration channels between OPs, SCM, and procurement is essential to ensure that all relevant data and insights are considered in the decision-making process.
Conclusion
In conclusion, make and buy strategies play a pivotal role in enhancing the resilience and flexibility of manufacturing operations. Their successful implementation requires a deep dive into analytical assessments, where risks are meticulously weighed against potential improvements. This entails identifying the most suitable components for the strategy, determining the optimal balance between in-house and outsourced production volumes, and quantitatively evaluating different scenarios. The complexity and critical nature of these decisions demand a high level of expertise and experience.
At Production Footprint Strategy Consultants, we specialize in navigating these intricate processes. With our extensive experience in make and/or buy strategies, we are well-equipped to guide companies through the nuances of the supply strategies, ensuring they achieve the optimal mix of resilience, flexibility and efficiency in their operations.