Procurement plays a critical role in the make or buy decision process, which involves deciding whether to produce a product or service in-house or to outsource it to a third-party supplier. Procurement professionals can support this process by providing valuable insights and data to help decision-makers make informed choices that generate value for the organization. In this blog post, we will explore how procurement can support and generate value in the make/buy decision process.

A Category Manager in procurement plays a critical role in the make or buy decision as, one of the key responsibilities is to constantly seek opportunities for cost reduction and efficiency improvements within a given category. This often involves challenging existing ‘make’ decisions, where certain activities are carried out in-house, and exploring the potential of transferring these activities to external parties. This strategy, when executed effectively, can lead to significant cost savings and other benefits. Here’s an elaboration on how a Category Manager might approach this:

Core / Non-Core evaluation

The core/non-core evaluation is a fundamental aspect of developing a category strategy and holds a critical role in the make or buy decision making in procurement. This evaluation helps in determining whether specific goods or services should be produced internally (make) or outsourced (buy). Understanding what constitutes ‘core’ and ‘non-core’ activities is crucial for businesses to focus their resources effectively and gain a competitive advantage. Here’s a detailed look at how this evaluation works:

Core Activities

Core activities are those that are central to a company’s business and strategic objectives. They are often activities that provide a competitive advantage, are closely aligned with the company’s key competencies, or are critical to the product or service’s quality and performance. In the context of category strategy:

• Competitive Advantage: Core activities typically contribute directly to a company’s unique value proposition or competitive edge in the market.
• Alignment with Business Strategy: These activities are in line with the company’s long-term strategic goals and mission.
• Expertise and Quality Control: Core activities often require specialized knowledge or skills that the company possesses, ensuring high standards of quality and performance.

Non-Core Activities

Non-core activities, on the other hand, are those that do not directly contribute to a company’s competitive advantage. These are usually standard processes or services that can be outsourced without significantly impacting the business’s core operations.

• Standardization and Cost-Effectiveness: Non-core activities are often standard across the industry and can be more cost-effectively managed by external suppliers who have specialized expertise and economies of scale.
• Low Strategic Importance: These activities do not play a critical role in the company’s strategic direction or core competencies.
• Resource Allocation: Outsourcing non-core activities can free up valuable resources, allowing the company to focus on its core competencies.

Steps in Make or Buy analysis which involves a buyer.

Conduct Market Research

Procurement professionals can conduct market research to identify potential suppliers and compare their prices and capabilities to those of in-house production. This research can help decision-makers to determine whether outsourcing is a viable option and to identify potential cost savings.

• Identifying Potential Suppliers: The first step in market research is to identify potential suppliers. This involves gathering information about various manufacturers or service providers who can meet the company’s requirements. The goal here is to create a comprehensive list of potential suppliers, considering factors such as geographical location, production capacity, and industry reputation.
• Comparing Prices and Capabilities: Once potential suppliers are identified, the next step is to compare their prices and capabilities with those of in-house production. This comparison is not just about the cost but also includes assessing the quality of goods or services, technological capabilities, production scalability, and reliability. Detailed cost analysis should consider both direct and indirect costs associated with both in-house production and outsourcing.

Evaluate Total Cost of Ownership (TCO)

Identifying Potential Cost Savings: A key aspect of market research is to identify potential cost savings that outsourcing might offer. This includes not only the savings in production costs but also reductions in logistics, inventory holding costs, and labor costs. It’s important to conduct a thorough Total Cost of Ownership (TCO) analysis to get a clear picture of potential savings. Procurement can calculate the total cost of ownership of both in-house production and outsourcing options, including costs such as raw materials, labor, equipment, and maintenance. By evaluating TCO, decision-makers can make more informed choices about the most cost-effective option.

Analyze Capacity and Capability

Assessing Outsourcing Viability: Market research helps in evaluating the viability of outsourcing. This involves analyzing the market to understand the current trends, supplier dynamics, and the competitive landscape. By understanding these factors, procurement professionals can assess whether outsourcing will provide a strategic advantage to the company.

Procurement can evaluate the capacity and capability of in-house production and potential suppliers. This analysis can help decision-makers to determine whether in-house production can meet demand, and whether potential suppliers have the capacity and capability to meet production requirements.

Consider Risk Management

Procurement can assess the risks associated with both in-house production and outsourcing, including supply chain disruptions, quality issues, and reputational risks. This analysis can help decision-makers to make informed choices that minimize risk to the organization.

Negotiate Contracts

Procurement can negotiate contracts with suppliers to ensure that the organization gets the best value for its money. This includes negotiating pricing, delivery terms, and quality requirements.

Conclusion: Critical role in the make or buy decision

In this critical areas procurement Critical role in the make or buy decision process and generate value for the organization. By providing data-driven insights and analysis, procurement can help decision-makers make informed choices that minimize risk, maximize efficiency, and generate cost savings.

Learn more about the Category manager and the Tactical buyer role by scrolling among the courses at Next step.

About Learn How to Source

Learn How to Source (LHTS) is an online platform based in Sweden, offering a range of procurement courses accessible globally. It serves as a community where procurement experts share their knowledge through online courses, designed for various experience levels from introductory to expert. Courses are concise, about 30 minutes each, and cover different aspects of procurement, tailored for different buyer roles. The courses focus on practical knowledge, presented by seasoned professionals, and include quizzes and certificates. They can be accessed from any device, emphasizing microlearning for flexibility and efficiency.

Note: Illustration to the blogpost “Critical role in the make or buy decision” is created by Chat-GPT on January 21, 2024.

Utbildning Inköp provides information in Swedish about LHTS’ courses.