Make vs. Buy Optimization for Industrial Manufacturing & Distribution Businesses

Abstract

In organizations producing products ranging from complex assemblies to individual components for customers, strategic decisions whether to make or buy the components required for the final product can have significant implications on the organization’s income statement, balance sheet, and value proposition in the market. Existing literature describes broad frameworks for evaluating these make vs. buy decisions, but a gap exists in how these decisions should be treated in organizations that are vertically integrated across manufacturing and distribution, especially with a commoditized product. Here we show the development of a broad strategic sourcing framework and detailed item-level analytical tool to aid in these make vs. buy decisions for manufacturer-distributors in commoditized markets. We show that the novel combination of internal capability and capacity data, external supplier segmentation, and a total cost of ownership approach to the financial impacts of a supplier choice can significantly aid in the identification and prioritization of strategic sourcing opportunities. We expect these new methods and tools to have a significant positive impact on the profitability of the partner organization, reduce the total level of inventory required in their network, and improve their value proposition to customers in the market.