Procurement: Make or Buy

Initially, when looking at any topic or field the fundamental question pops up: Build it yourself or buy it from a supplier in a market. This question is the only real strategic question when it comes to procurement. Other aspects, such as procurement strategy, have a much to do with strategy as a bunch of oranges. However, the decision taken is never final and should be reconsidered over time.

When making this decision, you have to consider three major aspects to procurement:

  • Need of the business / business strategy
  • Risks (internal and external)
  • Economic factors / business mechanics

When going through the aspects, always look at them from the end customers’ perspective. Is it relevant for her, is it visible, what would it mean on the long run?

Of course there are some situations where you ought to make it but do not have the capabilities – in these cases: Buy it but build up your own capabilities internally.

Need of the business / business strategy

There are few reasons that point towards a buy scenario such as:

  • Process/product is unattractive for owns business (due to strategic fit, regulation, high investment etc…)
  • Process/product is a commodity and can be interchangeably purchased for a market price
  • Process/product is not critical for your own service provision (–> why purchase at all?)
  • Suppliers are innovating far faster than you ever could
  • Suppliers are interested to build long lasting partnerships

On the other hand, there are some factors that initiate in-house solutions:

  • Process/product is core to your own process, to differentiate among competitors or will be in the future
  • Knowhow from the process/product has synergies or other benefits across your own organization
  • Suppliers are in innovation inertia due to their market position and innovation is unlikely to happen
  • Only competitors (current and future) are potential suppliers
  • You intend to procure and build up a disruptive technology
  • There is a non-natural supplier monopoly

Need for risk analysis

Do not make your decision singularly risk driven! It is important to analyze the risk aspects but they offer more of a guideline and should not be taken by the book.

Make it yourself if:

  • ..there are few or no alternative suppliers (avoid lock-in!)
  • ..the supplier market is very risky and unpredictive
  • ..the quality of the supply varies and has a direct impact to the satisfaction of your customer
  • ..there is sensitive IPRs involved

Outsource it if:

  • ..there is no holduprisks (e.g. long term contracts, long term business relationship)
  • ..there are no/low switching costs (e.g. using dockers in Software)
  • ..there is little impact if the supply market becomes instable
  • ..there is no sensitive IPR involved

Need for economic factors

When talking about economic factors, the business mechanic becomes the driving force. Without this, any attempt or optimal procurement activity will be eventually in vain.

Make it yourself if:

  • ..you have lower internal costs and the capacity to make it yourself
  • ..it can reduce your own marginal production costs
  • ..if the investment needs yield good returns aligned with your organization’s objectives
  • ..it helps to improe your overall business mechanic

Outsource it if:

  • ..suppliers have better quality or lower costs
  • ..you have not sufficient capabilities inhouse and time-to-market is essential
  • ..major new investments are necessary that do not fit the company’s strategy

Tools to use for make or buy decisions

While there are many guidelines how to decide to make or buy from large governmental and non governmental organizations (e.g. this PWC document

Key take-aways

  • Use a tool with a timeline or a technology lifecycle perspective to make your make-or-buy decision (e.g. Wardley-Map)
  • If the power of the suppliers is strong and interests might not be aligned, make it.
  • If there is a functioning market trending towards commodity, buy it.
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