Advantages And Disadvantages Of Make Or Buy Decision Making

In this contemporary society, most industries, especially, small industries are facing the choice. To outsource the inputs or to manufacture in-house. This is a key techniques for management practice called make-or-buy decision. Due to the global outsourcing, make-or-buy decision making has become popular and frequent.

Make-or-buy decision is a valid concept in the management practice. Normally, organizations do not need to buy the inputs from other industries when the inputs can be manufactured in less cost. On the contrary, it is also the same. As a consequence, in the decision-making process, to buy the components from other industries or to make them in-house is always the core strategy which should be considered in many factors.

“Make”

It is incurred by some factors which we cannot foreseen today. “Two assumptions are axiomatic of ICT. The first closely follows transaction cost theory (TCT) in that many important investments are observable ex post by economic agents close to a trade, but they are not verifiable in a court of law. In the jargon, they are not contractible. In particular, a contract cannot condition prices (or anything else) on ex post investments. The second is that parties to a contract cannot prevent themselves from renegotiating the terms if it is mutually beneficial to do so (Hart & Moore, 1988).” (Bruce R. Lyons, Feb

He concluded that there must be costs to using the market that can be eliminated by using the firm, these costs have come to be known as transaction costs. It can be divided into 4 categories, search and information costs, policing and enforcement costs, bargaining costs and holdup problem. For example, when a wood-toy industry decide to buy steel components in certain shape or with special requirements. The search costs occurs when finding the industry which can manufacture this kind of component. The bargaining costs occurs when negotiating a price with the manufacturer. The policing and enforcement costs occurs when ensuring that the seller delivers the car in the promised condition. Moreover, the holdup problem occurs when this certain shape steel component can only be manufactured by this industry, based on this situation, the supplier may increase the price in future. Therefore, “tailor-made” inputs are better to be manufactured by the big firms