Insight

Make vs. buy: A new mind-set to embed in your supply chain DNA

A four-part decision-making framework for evaluating your supply chain and maximizing profitability

Brian Higgins

Brian Higgins

Principal, Advisory/Customer and Operations, KPMG US

+1 312-665-8363

Deepak Avari

Deepak Avari

Director Advisory, Supply Chain & Operations, KPMG LLP

+1 404-285-9553

Should our company manufacture a product or offer a service in-house? Should some or all activities be performed by a third party or external supplier? Is it time to revise our current strategy? This make versus buy decision has taken on unprecedented importance since COVID-19 caused a seismic shift in the supply chain landscape, especially when it involves offshore suppliers.1

In this article we examine the make vs. buy question through a new lens. We set out a four-step framework designed to drive a holistic evaluation of end-to-end profitability of products/customers and underlying drivers (customer, supplier, internal policies) - that helps isolate underperforming parts of the business/operations, thus feeding the make vs. buy process.

Building the decision-making framework

The following four-part framework is a useful start to approaching the make vs. buy analysis:

1. Establish Operations Strategy Baseline. Start by working backwards by moving from the customer or demand and move through each step to the supply. This process will clarify customer needs (service levels), demand profile (velocity/mix), supply constraints, etc. This baseline view will provide the necessary line of sight into key factors/conditions that influence current costs/performance such as made-in-USA requirements, 24-hour delivery constraints, and directed supply.

2. Review cost and performance. First, understand internal costs and performance drivers. This process includes establishing a baseline of total end-to-end costs/profitability for every product and customer – from acquisition of raw materials to production to delivery. Follow by capturing the drivers such as velocity, mix, customer requirements, and overhead. Then shift to understanding external costs and performance drivers. This includes a review of the supply base costs, pricing drivers, capabilities, performance, portfolio strategy, and footprint.

3. Design and evaluate scenarios. Define and evaluate make vs. buy scenarios­ and the implementation options. For each scenario assess the potential impacts on:

  • Operating expenses and revenue streams
  • Asset utilization
  • Internal operating model
  • Capital investment
  • Strategic risks (location, geopolitical etc.)
  • Tax, trade, and customs 
The global COVID-19 pandemic has exposed fault lines that were already in place for some time.
- Brian Higgins, U.S. Practice Lead, KPMG Supply Chain & Operations

4. Develop execution plan. Layout an implementation plan that includes critical activities, including deep dives on internal cost and performance, conducting RFIs/RFPs with potential vendors/partners, conducting comprehensive should cost analyses, and finalizing the business case including the capital investment outlay.

Exhibit 1 elaborates on this make vs. buy decision framework 

Make vs. Buy approach

Key Questions to address

Establish operations strategy baseline

Review cost and performance

Design and evaluate scenarios

Develop execution plan

Demand

  • What are current customer requirements?
  • What is current and future demand profile? 

Supply

  • What processes and products are outsourced today?
  • What is the total landed cost profile today? 

Within 4 walls

  • What is current manufacturing strategy?
  • How can today’s assets be leveraged?

Internal costs/ performance

  • How much does it cost to manufacture in-house today?
  • What should it cost to manufacture in-house?
  • Which capabilities are over or under performing?

Internal costs/ performance

  • What is the buy price today?
  • What does the capability profile look like?
  • How do peers and competitors partner with suppliers?

Scenario design

  • What scenario themes should be considered?
  • What factors are most critical to defining each scenario? 

Scenario evaluation

  • What is the total operating cost associated with each scenario?
  • How do other macro level factors look like for each scenario?
  • What investments are required?

Execution options

  • Which execution options should be considered?
  • What are the pros and cons for each option?

Execution plan

  • What near-term activities must be considered?
  • How should these activities be sequenced?


It’s more than just cost

Integrated within this framework are efficiency, risk, and capability factors. In other words, does making versus buying make more sense from an overall business perspective?

Companies with a cost only focus tend to benefit in the short term. But this approach almost always leads to higher total costs in the medium and long term as sub-par choices do invariably drive costs elsewhere in the system (e.g., while piece price may be lower however poor supply performance could lead to higher expedited costs/breakdown in manufacturing lines leading to higher overhead).

It all starts with understanding the portfolio/customer-level economic contribution and looking at end-to-end profitability versus a siloed view of functional costs.
- Deepak Avari, KPMG U.S.

Make vs. buy: Some rules of thumb

As companies increasingly manage global supply chains, the make vs. buy decision become even more complex. It becomes critical to get a better understanding and view of the complete economic picture that factors in end-to-end costs, from supply to delivery, examining every stock keeping unit (SKU), every vendor and every customer.

To create this picture, companies need to invest in developing analytical capabilities that combine financial performance, operational attributes, customer requirements and supply chain/manufacturing conditions – to establish one source of truth for the organization - all together helping create an end-to-end profitability view that helps establish correlation between the root-causes and financial performance. This enables a better understanding of cost/performance driver relationship that is central to make vs. buy decision-making.

How to guide your decision.

Factors tending to favor making a product or service:

  • Reliance on proprietary technology or intellectual property
  • Requires direct control over manufacturing and/or quality
  • Considered a core operation or otherwise vital to your company’s success or competitive position
  • Production is reliable volume/demand that enables profitable production because of scale
  • Frequent design changes that must be implemented on a timely basis
  • Involving a third-party supplier presents potential risks, including issues of quality, reliability, and/or political, environmental, or social repercussions.

Factors tending to favor buying a product or service:

  • Product is critical to your key customers but has an unsteady or erratic demand pattern
  • Unique specifications make it difficult to produce it at a profitable scale
  • Need to quickly scale up production capacity to meet an immediate market need
  • Need for a flexible portfolio to change product specifications or product lines while minimizing capital investment
  • Not unique, differentiated, or critical to your organization’s success, and has little or no impact on customer satisfaction or perception.
  • Ready supply of reliable third parties that could meet the need

Business as usual won’t do

Considering the increasingly unpredictable conditions organizations are facing globally – COVID-19, politics, cyber breaches and so on – business as usual when it comes to supply chain/operations strategy is no longer feasible. The make vs. buy decision-making framework can help you consider, compare, and implement optimal short-term and long-term operational strategy decisions.

This type of thought process must become ingrained into the supply chain DNA of a company. When your organization masters this capability, it will be able to act – and react quickly – when it comes to critical make vs. buy decisions and determining how it impacts the overall health of your business.

Footnotes

  1. Wall Street Journal, Consumer demand snaps back. Factories can’t keep up. (February 22, 2021)