11.02 – Make it-or-Buy it?
When running a business that involves manufacturing or assembling products, deciding whether to produce items in-house or purchase them from external sources is crucial. This decision impacts cost, control, and overall business strategy.
Making It Yourself - Pros And Cons
Deciding to manufacture your products or key components in-house has several advantages and disadvantages. Here are some key points to consider:
Pros
- Control: You have complete control over the production process, quality, and timelines.
- Flexibility: You can adjust production levels to meet demand, make product modifications, and develop new prototypes in-house.
- Customization: Meeting specific customer requirements is easier when you manage production directly.
Cons
- High Initial Costs: Starting in-house production requires significant upfront investment in equipment, facilities, and labor.
- Focus Diversion: Managing production processes can divert your attention from market activities and strategic growth.
- Competitive Advantage: Established manufacturers often have cost and efficiency advantages due to experience and economies of scale.
Outsourcing - A Low Investment Option
Outsourcing involves contracting out production or services to external vendors. This approach can be beneficial, especially for start-ups or businesses looking to scale without significant upfront investments.
Advantages of Outsourcing
- Cost Savings: Outsourcing can reduce costs related to equipment, facilities, and labor.
- Flexibility: You can easily scale production up or down based on demand without worrying about maintaining excess capacity.
- Focus on Core Competencies: By outsourcing non-core functions, you can concentrate on areas where your business excels
Case Study - Moonpig
Moonpig, an online greeting cards business, effectively used outsourcing to manage fluctuating demand. During peak times, the company utilized external resources, allowing it to handle increased orders without overextending its internal capabilities. This strategy contributed to Moonpig’s success, leading to its significant market share and eventual public listing.
Setting Boundaries for Outsourcing
To make the most of outsourcing, identify your business’s core competencies and focus on those, outsourcing non-essential functions. Here’s how to approach it:
- Define Core and Non-Core Activities: Determine which activities are central to your business and should be kept in-house.
- Quality Control: Establish clear quality standards for outsourced products or services. Utilize recognized standards such as the BS EN ISO 9000 series to ensure consistency and reliability.
- Evaluate Vendors: Carefully select outsourcing partners based on their ability to meet your quality and performance requirements.
Considerations for Outsourcing:
- Customer Relations and Cash Flow: Initially, keep critical functions like customer relations and cash-flow management in-house until you have full control over these areas.
- Temporary Outsourcing: Some tasks can be outsourced initially and brought in-house later as your business grows and gains expertise.
By carefully weighing the pros and cons of in-house production versus outsourcing and setting clear boundaries and standards, you can make informed decisions that support your business goals and growth.
