Make-Or-Buy Decision Essay ⋆ Business Essay Examples ⋆ EssayEmpire

The term make-or-buy decision represents the decision of firms to organize their goods and services internally or externally. This decision is so central to the functioning of businesses that it has attracted scholars from multiple disciplines such as supply chains, vertical integration, technology, flexibility, allocation of resources, large versus small organization, and core competencies, among others. Further, factors that have been documented as being central to the make-or-buy decision include total acquisition cost, complexity of the product, technological factors, costs, and skills. Others have discussed factors that include environment characteristics, lifetime costs, and opportunity costs. Although these factors are important, what is missing is the role of market orientation and production costs in the make-or-buy decision-making process.

Given that market orientation leads to superior performance, and that production costs depend on the costs of transportation, which in turn depend on the cost of fuel, it is imperative that managers understand the circumstances under which a making or buying decision is most desirable.

The Make-Or-Buy Model

Market orientation refers to the extent to which a firm is able to meet customers’ needs. John Narver and Stanley Slater (1990) view market orientation as a combination of three behavioral components—customer orientation, competitor orientation, and interfunctional coordination—whereas Ajay Kohli and Bernard Jaworski’s (1990) view of market orientation relates to information generation, dissemination, and responsiveness relating to customers. Clearly, the fundamental benefit of being market oriented is the creation of superior customer value and continuous superior performance for the business. Empirical research supports this assertion. However, market orientation is the function of costs; e.g., if a product is expensive, customers may be unwilling to buy, and thus a lack of market orientation on the part of firms.

Further, the significant increase in the geographical scale of production and distribution has necessitated that firms compare production costs. For the purpose of this study, production costs is defined as the total costs incurred by a firm through the purchase of input goods, its transportation to a plant, and its production. Prior research addresses the elements of time in transportation, such as order time, timing, punctuality, and frequency, and evaluates the differences between adjacent trading partners, nearby trading partners, and distant trading partners. However, there is little reference to the heart of the transportation costs, such as the cost of fuel. Clearly, an alternative to geographical proximity is that suppliers that are located far from plants should coordinate their transportation systems, leading to considerable reduction in transportation time and costs. Or, firms should make the product in-house, leading to savings in transportation time and costs.

Research indicates that a “make” decision is desirable when strong competition exists between firms and their vulnerable core competencies. By contrast, a “buy” decision allows firms to respond flexibly to changes that can occur in technology, demand, and costs, and hence avoid inefficiencies. This makes the argument for the need for inclusion of market orientation and costs in the make-or-buy decision-making model in order to create superior value for customers and superior performance for businesses.

The model suggests that although a firm’s decision to make gives rise to market orientation, its initial cost of production increases up to a point, beyond which the production cost decreases, and thus enables a firm to be more cost competitive and market oriented. By contrast, a firm’s decision to buy has a constant cost. While one scenario may suggest that the production cost exceeds the benefit being market orientation, another scenario suggests that the benefit of market orientation outweighs the cost of production. A third scenario indicates that buying is more desirable than making because buying is always cheaper than making. Clearly, the first scenario is desirable for managers engaged in service industries, whereas the second scenario is applicable to manufacturing. The third scenario is advisable for managers who need to maintain a stable market orientation and thus keep production cost low; however, firms that are equipped to handle only stable markets will not be effective because real markets are often complex and unpredictable.

Although the model depicts how costs can be minimized, sometimes volatile changes in the price of fuel should be factored into the production costs. Indeed, rising fuel costs have been identified as an emergency that affects all supply managers. In sum, the implication for managers is that they should recognize the need for preserving market orientation by keeping costs low through the make-or-buy decision.

Bibliography:

Balram Avittathur and Paul Swamidass, “Matching Plant Flexibility and Supplier Flexibility: Lessons From Small Suppliers of U.S. Manufacturing Plants in India,” Journal of Operations Management (v.25/3, 2007);
Bernard Jaworski and Ajay Kohli, “Market Orientation: Antecedents and Consequences,” Journal of Marketing (v.57/July, 1993);
Ajay Kohli and Bernard Jaworski, “Market Orientation: The Construct, Research Propositions, and Managerial Implications,” Journal of Marketing (v.54, 1990);
Socrates Moschuris “Triggering Mechanisms in Make-orBuy Decisions: An Empirical Analysis,” The Journal of Supply Chain Management (v.43/1, 2007);
John Narver and Stanley Slater, “The Effects of a Market Orientation on Business Profitability,” Journal of Marketing (v.54/4, 1990);
Nada Sanders, “Pattern of Information Technology Use: The Impact on Buyer-Supplier Coordination and Performance,” Journal of Operations Management (v.26/3, 2008);
Stanley Slater and John Narver, “Does Competitive Environment Moderate the Market Orientation-Performance Relationship?” Journal of Marketing (v.58/1, 1994).

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