Purchasing

Purchasing and supply management exam

Make or Buy case

1. Options to find the best sustainable solution for ABC:

- Make Kettoxyn

 ABC can start own production of this material as it already has its own plant for production materials (for example, Cydodur, Slytherid).

 ABC can acquire OPG (its previous supplier) which has difficulties now. OPG sites are integrated with ABC production sites but its plants in bad shape and are required investments.

- Buy Kettoxyn from new supplier (Barner, for example)

- Update production processes and use cheaper raw materials

Make or buy solution is strategic choice between producing an item internally or buying it externally. It is strategic because right choice allows company to achieve competitive advantage. This choice is depended on cost, risk and growth issues of alternatives so the company needs to minimize costs and risks and force growth in result of this decision.

2. List of criteria for different alternative evaluation:

- Cost

o necessity of expertise

o initial investment

o transportation

o production costs, economy of scale

- Risk

o delays of supply (reliability)

o switch to alternative material (due to updated process)

o lack of flexibility

o quality problems

o political, social, environmental

- Growth

o possibility of increasing volumes (capacity)

o innovations

o differentiation from competitors

- Type of product: strategic, bottle-neck, leverage, non-critical

Advantages and disadvantages of alternatives

Advantages Disadvantages

Make - Independence from suppliers brings decrease of risks

- No need of transportation costs (in case of plants is close to each other)

- Developing innovations can bring cost reduction and competitive advantage

- Opportunity to control quality - Initially company need a lot of time and investments as well as expertise to start production

- Company production costs can be higher than supplier one because of lack of economy of scale

- Switch to...