An illustration of the framework using a set of case studies

This section shows how this framework and its content are aligning with the considerations of the discussed in-firm case study. The triggers, the external elements which activate the triggers, the areas and factors and the final outcomes of the case study are discussed in this section.

3.4.1.1 First MoB case study

Firm and environment

The first make-or-buy (MoB) case study was related to the manufacturing of electronic isolators involving PCB (printed circuit board) assembly and painting and the respective functional and in-circuit tests. The R&D and the manufacturing of those products were performed in the firm. The high number of quality issues in the production line and the high failure rate of the manufactured isolators made upper management aware of this issue, which led to force quality improvements and pressure to reduce rework costs.

Triggers

From the analysis of the case, it was clear that the main trigger for the make-or-buy review was the need for quality improvement and the reduction of rework costs. When the manufacturing process was examined, three needs were identified: investment in high-tech machinery, process standardisation and training of the people involved. The high number of variants and their complexity hindered the process and required further resources which were not available at the firm. As a result of this, a multidisciplinary team was set up to conduct the make-or-buy analysis.

Considerations for the make-or-buy decision

Strategic value. These parts provide a clear competitive advantage and have a relatively high

strategic value for the firm because of their technical differentiation against competitors. This was a relevant factor, together with the need for a profitability increase, a multiple sourcing strategy and demand flexibility.

Resource position. The firm’s low resource position required additional investment in high-

tech assets and internal resources, but other important considerations were the availability of contract manufacturers in the market offering advanced technology and expertise in similar industrial processes. Hence, given the small volume of parts manufactured per year, the high

investment required would not be recovered by the firm. Special certifications and compliance with technical requirements would require a support system and team for potential future external providers if it were decided to outsource the manufacturing process.

Performance. The internal process performance was low and partly not measured because of

the process was not mature. The definition of key performance indicators (KPIs) to monitor the process was essential to evaluate the outcome decision. Contract cost reduction indicators, delivery and quality performance figures, asset utilisation and variant reduction were taken into account. The firm could take advantage of the economy of scale by reducing its manufacturing costs.

Potential for opportunism. Information asymmetry was a clear problem which was not totally

identified during the make-or-buy decision-making process because of the firm failed to clearly and comprehensively document all specifications for external providers. The risk for an increase in quality defects, purchasing costs, delivery delays and a complex relationship with external providers were also factored in. Additionally, monitoring and auditing activities would be required in order to support the external provider until the process had been matured at its site.

Final outcome

In this case study, the final decision was to switch from manufacturing the part in-house to source the activity out split for two external providers. The volume of the activity was equally outsourced by approximately 50% of the revenue between both external providers. The firm got a better negotiation position with them because of the possibility to assign each stage of the process to one or other external provider. Fact that was feared by the external providers. Lessons learned

According to interviewees, the make-or-buy decision process could be improved if all drawings, test specifications, control plans and FMEAs (Failure modes and effects analysis) were previously available and clearly documented. Specifications were only written in the German language, which created some misunderstandings for one external provider located abroad. Many test criteria were not clearly documented, leading to misunderstandings between the parties. A change process for outsourced products was not implemented, which gave rise to many unexpected costs as a result of the high number of product change requests. Interestingly, asymmetry and poor information issues could be avoided. It’s observed that firms performed weakly on the control of the outsourced activities (Dekkers, 2011).

3.4.1.2 Second MoB case study

Firm and environment

The second MoB case study was related to the manufacturing of a plastic part, involving injection moulding, ultrasonic welding and testing processes. It was the first time this part was being manufactured in the firm. The injection moulding process could be performed there, but the firm faced two major obstacles: the lack of capacity and the required investment in an ultrasonic welding machine. From the beginning, having a qualified external provider from the firm’s pool in charge of all processes was the option preferred by line managers. R&D employees, on the other hand, were mostly in favour of in-house control of the process.

Triggers

From the analysis of the case it became evident that there were two main triggers for the make-or-buy review. First, the introduction of the new product questioned the best performance and best cost reduction possibilities comparing the internal manufacturing costs with those involved in purchasing the part from an external provider. Second, the firm’s moulding production facilities were already at full capacity and no more resources were available, which led the firm to consider a make-or-buy decision for the complete pack of processes and services.

Considerations for the make-or-buy decisions

Strategic value. The strategic value of the part is medium, as its functionality can pose a threat

to core activities. A single source strategy was favoured in order to reduce double tool investment costs. Profitability and sales growth were also important considerations.

Resource position. The lack of capacity for moulding production and the firm’s intention to

avoid more investments and increase internal resources influenced the decision to outsource this process to an existing and known external provider. The provider, located abroad, manufactured other injection moulding parts for the firm. This new part required ultrasonic welding, which was a process the provider had never undertaken; the provider, however, agreed to perform it and acquire the welding machine and the skills needed.

Performance. Performance was high, as the cost reduction involved in outsourcing the part

was expected to be higher than that for in-house manufacturing. In order to avoid delivery delays and quickly meet an increased demand, both firms signed a frame contract to reserve finished stocks in the provider’s warehouse with the possibility to receive new parts in one

working day. The manufacturing process at the provider’s site was set up and the ultrasonic welding process had to be monitored until it reached a mature phase. Delivery, asset utilisation and quality performance figures were taken into account.

Potential for opportunism. During the assessment, an increase in quality defects had not been

anticipated, despite the fact that the provider’s expertise in the welding process was still limited. A second source strategy was not considered, which could lead to a production shutdown at the firm in the event of non-delivery by the provider and the derived extra costs to the firm. The risk for an increase in contract costs was also taken into account. The provider was until then classified as an A-provider, which is the best rating in the ABC external provider assessment category established at the firm. Additionally, monitoring and auditing costs would be required in order to support the external provider until the process had been matured and stabilised at its plant.

Final outcome

In this case study, the whole manufacturing process was outsourced to one existing provider. During the assessment, the skills and abilities of the provider performing the ultrasonic welding process were overestimated and many defective parts were delivered as a result. Lessons learned

According to interviewees, the provider did not properly understand the functionality of the part. Hence, the language barriers and the long distance to the provider’s plant, which hindered the support and monitoring of the activity, had a significant impact on performance in this case study. The risk to core activities was not thoroughly considered during the assessment phase. Other providers were neither consulted nor taken into account. Finally, the manufacturing process was insourced as the firm understood the importance of having the process under its own control.

3.4.1.3 Third MoB case study

Firm and environment

The third MoB case study was related to the manufacturing and development of new electronic amperemeters from the concept phase, led by the R&D department, including manufacturing, testing and certification procedures. The firm had worked with external providers in the past to manufacture other electronic devices. As the results had been positive,

a team was formed to study the viability of the new project in cooperation with one of the providers from the firm’s pool.

Triggers

The main trigger for the make-or-buy review was the introduction of the new product with the best performance. The shortage of resources and skills at the firm and the pressure to reduce time to market led the company to assess the feasibility of developing this new product family in cooperation with a long-term provider. This provider was specialised in similar products, but applied to other industrial fields.

Considerations for the make-or-buy decisions

Strategic value. This family of parts will be strategic for the firm to expand its product offer

for the coming years. The products will allow the firm to gain a competitive advantage, especially in terms of technical differentiation from competitors. Profitability performance, capacity for sales growth, trade implications and single source criteria were important considerations.

Resource position. The resource position of the firm regarding this product family is low.

Hence, it was preferred to look for cooperation to take advantage of the provider’s expertise and develop a high-technology product. Other positive factors included the better position of the contract manufacturer’s capability and the special and positive cooperation with the provider in the past. Interestingly, the firm shared opportunities and risks with the provider in this special way of cooperation. The manufacturing activities would be outsourced as the manufacturing facilities and assets were already available at the external provider’s plant, where the firm could also take advantage of the economy of scale.

Performance. Contractual cost reduction, asset utilisation and overall equipment effectiveness

were important considerations. Delivery and quality performance indicators were set up and could be monitored throughout the product’s lifecycle.

Potential for opportunism. The potential for opportunism was low based on the positive

results in the past. However, as a safeguarding mechanism, the firm signed contractual agreements, like an R&D cooperation contract, a quality assurance agreement and a purchase contract. Additional monitoring mechanisms were already planned, such as a regular audit plan at the provider’s site and regular meetings and conference calls with the provider. Possible delivery delays, cost increases and skills appropriation were taken into account.

Final outcome

In the end, hybrid sourcing was adopted for the R&D activities and the manufacturing processes were outsourced. The single source strategy would allow the external provider to achieve a better negotiation position in the future and the firm would become highly dependent on the provider’s services. However, the firm’s strategy is built on a long-term relationship with the provider, based on mutual trust and open bidirectional communication. Additional variants may be developed in the future.

Lessons learned

According to interviewees, the make-or-buy decision was correct. However, the decision- making process could have been better documented and the option to hire expert R&D employees to keep the know-how in-house for the future was not considered. No additional studies were conducted to analyze the results of the assessment with a different outcome.

3.5 Discussion

Why is a make-or-buy decision a dilemma for firms? The difficult choice of whether to keep key functions, manufacturing or R&D activities in-house or outsource them has taken centre stage in firms. Firms can reach their own strategy and goals by saving costs and increasing profits through resolving make-or-buy decisions in a proper manner. Is it merely a decision how to source processes or components (parts, materials)? It’s not only a merely decision, it’s an established process within the firm. This paper contributes to spread out the academic understanding and practitioners’ knowledge by means of a framework and its operationalization. Particular attention is paid to the assessment and implementation of the framework via the developed tool enabling practitioners and academics to visualise the possible outcomes of make-or-buy assessments. The main figures of the twenty-four MoB decisions were documented and described using the framework. Only one of them was described in detail because of the paper’s size limitations. Besides the traditional pure sourcing strategy, other options are considered: plural sourcing strategies, hybrid sourcing and the formation of alliances. Hybrid sourcing is preferred when a great degree of cooperation and coordination between firms and external providers exists. External factors derived from the power and politics theories (Pfeffer, 1981 and 1982) can influence these approaches.

In plural sourcing, the combination of complementarities and constraints determines the optimal mix of internal and external sourcing. In addition to this, when the effects of the combination of both forces are equal to the effects of transactional hazards, plural sourcing is suggested. Even one of the most significant conclusion for practitioners concerns the need to design a structured make-or-buy decision process was already studied particularly in change management by Boer and During (2001), this study validates the importance of involving a multidisciplinary team and a project leader in charge of carrying out the make-or-buy assessment, allocating timescales and responsibilities. Also, the fit between the required characteristics of both the people conducting the process their perception of the product’s requirements, the make-or-buy process, and the way these perceptions are effected in the organization of the process are confirmed. The empirical results support the findings from Medina-Serrano, González-Ramírez and Gascó- Gascó (2018) concerning the relevance to evaluate the will to collaborate and joint problem solving in order to improve the partnership on outsourcing transactions.

The MoB decisions analyzed within this case study suggest that the framework is comprehensive and includes the key considerations highlighted in the interviews, offering insights about possible outcomes. As observed in the case study, while the relevance of business strategy is greater than or equal to that of economic factors, the risks involved in product supply chains are quite relevant. What are the main reasons for outsourcing? The outsourced area was a major problem for the firm in the past, partly because of the small volume of parts needed. The wish to sustain a multiple source policy, reduce costs, improve flexibility, exploits management’s expertise of contractors, avoid investment and outsource non-core activities to focus on core activities are some of the reasons for outsourcing provided in the case study. What costs are more relevant for the “buy” analysis? Increased purchasing expenses, the purchase price of the part, transportation expenses, any service or quality- related follow-up costs, complaint costs, receiving and inspection expenses, future pricing proposed by the provider, costs that the firm would keep incurring in the future, ongoing costs, one-time costs and auditing costs were considered. What financial factors are relevant in an organisation during the “make” decision process? Raw material costs, invested capital, labour costs, overhead costs and poor information were taken into consideration.

3.6 Conclusion

The research presented in this paper has significant theoretical and practical implications in the supply chain area in general and procurement management in particular, extending past versions of multi-criteria decision-making. Although past literature reviews provide valuable results, they were based upon the assessment of make-or-buy decisions failing to consider plural sourcing, hybrid sourcing or forming alliances. This paper aims to contribute to the study of the make-or-buy literature in supply chain management through the graphical representation of why and how make-or-buy decisions are made. Interestingly, the paper presents relevant dimensions and factors to be studied and evaluates possible outcomes when approaching make-or-buy decisions. The proposed framework is verified and validated by the internal released and implementation in the aforementioned firm based in Germany. Interestingly, this framework seems to extend, update and validate the proposed framework from Cánez, Platts and Probert’s (2000). In contrast to their approach, this framework can be applied by practitioners and academics through its implementation into the pairwise and decision matrix tools. The results support the Shishank and Dekkers’ (2013) statement that a structured and standardize process is required in order to avoid resolving make-or-buy decisions under the conditions of inaccurate and incomplete information.

Due to the contradictory prescriptions of the McIvor (2009) and Brewer, Ashenbaum and Carter (2013) frameworks, the presented framework not only includes relevant factors to be considered, but also provides a structure to investigate these factors and design a practical decision matrix with a pairwise comparison to put the framework into practice. This is supported by the make-or-buy decision-making processes reviewed in the in-firm case study. Additionally, it takes into account the need to determine the weighting of decision makers, as seen in the case study, and comprehensively and understandably document the completed make-or-buy decision-making process through the project sheet and the project report. Further testing of the tool involving the parameters defined in the designed framework is addressed during its implementation. The integration of the framework within the proposed tool provides decision makers, practitioners and academics with a practical solution to make decisions in a structured and consistent manner. As observed in the case study, a better understanding of the lessons learned and improvement potentials should be considered for every future MoB decision. Hence, practitioners can learn from past failures by adapting