Page 192 - Operations Strategy

do oR Buy? THE vERTiCAl inTEgRATion dECision 167
Whilst efficiency maximisation should be a central feature of any ‘do/buy’ analysis, it
is a profoundly strategic decision and its results will affect the operations performance
objectives in a number of complicated ways (see Table 5.1).
The outsourcing debate is just part of a far larger issue that will shape the fundamen-
tal nature of any business. Namely, what should the scope of the business be? In other
words, what should it do itself and what should it buy in? This is often referred to as the
‘do or buy decision’ when individual components or activities are being considered,
or ‘vertical integration’ when it is the ownership of whole operations that is being

Table 5.1 How in-house and outsourced supply may affect an operation’s performance objectives
Performance objective ‘Do it yourself’ in-house supply ‘Buy it in’ outsourced supply
Quality The origins of any quality problems are Supplier may have specialised knowledge
usually easier to trace in-house and and more experience, also may be
improvement can be more immediate, motivated through market pressures, but
but can be some risk of complacency. communication of quality problems more
difficult.
Speed Can mean closer synchronisation of Speed of response can be built into the
schedules, which speeds up the supply contract where commercial
throughput of materials and information, pressures will encourage good
but if the operation also has external performance, but there may be significant
customers, internal customers may receive transport/delivery delays.
low priority.
Dependability Easier communications internally can help Late delivery penalties in the supply
dependable delivery, which also may contract can encourage good delivery
help when internal customers need to be performance, but distance and
informed of potential delays; but, as with organisational barriers may inhibit
speed, if the operation also has external communication.
customers, internal customers may receive
low priority.
Flexibility Closeness to the real needs of a business Outsource suppliers are likely to be larger
can alert the in-house operation that and have wider capabilities than in-house
some kind of change is required in its suppliers; this gives them more ability
operations, but the ability to respond to respond to changes, but they can
may be limited by the scale and scope of only respond when asked to do so by
internal operations. the customer and they may have to
balance the conflicting needs of different
customers.
Cost In-house operations give the potential Probably the main reason why outsourcing
for sharing some costs, such as research is so popular. Outsourced companies
and development or logistics; more can achieve economies of scale and
significantly, in-house operations do they are motivated to reduce their own
not have to make the margin required costs because it directly impacts on their
by outside suppliers so the business can profits, but extra costs of communication
capture the profits that would otherwise and coordination with an external
be given to the supplier. Relatively low supplier need to be taken into account.
volumes may mean that it is difficult to
gain economies of scale or the benefits of
process innovation.

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