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Procurement Management Make-or-Buy Analysis

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All projects involve the need to determine whether the project work will be done in-house, external to the organization (outsourced), or a combination of the two.

This is called “make-or-buy analysis” and is an essential part of project planning, as well as a tool/technique integral to procurement planning (Project Management Institute, 2008). A “make-or-buy” decision must be made for all major segments of projects work before the project plan can be completed (these can be refined later in more depth in the initial stages of the project).

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This paper examines various decision analysis methods that can be used to determine whether to make or buy an item, whether it is a tangible good or service. Factors that can impact the ability to make a timely and accurate decision will also be analyzed. Methods of Analysis Used in Make-or-Buy Decision Analysis Prior to doing any analyses, all of the choices or alternatives for that segment of project work should be determined, that is, the organization should lay out the (a) various ways the work could be “made” internally, (b) options (sources and methods) for external procurement, or (c) hybrids of the two.

There are several broad categories of analysis that should be performed in order to arrive at a make-or-buy decision. Cost Analysis There are a number of different types of cost analysis an organization may wish to employ to contribute to the make-or-buy decision. The type of analysis used will depend on the buyer and/or sellers objectives and concerns. In addition, there are also some types of cost analysis and methodologies that are common to specific industries, but not in others. Here are a few common types of cost analysis: Cost-benefit analysis (CBA).

Analyze each make-or-buy alternative to determine best “bang for the buck” by monetizing the benefits of each alternative and comparing it to the cost of each alternative (Cost-benefit analysis, 2011; Office of Management and Budget [OMB], 1992). Cost-effectiveness analysis (CEA). Which alternative has the lowest cost for a given set of benefits and specific outcome? This can be used if it is not possible or desirable to associate a cost to a specific benefit (Office of Management and Budget [OMB], 1992; Cost-effectiveness analysis, 2011), such as increasing internal employee morale or strengthening a company core competency.

Note that the benefit must still be quantifiable as some sort of measurable number, e. g. “50% of the employees in this division say they are ‘very satisfied with their jobs’ now, but after this project is performed by the division, we project that 75% will say they are ‘very satisfied with their jobs’. ” Cost-efficiency analysis. Which alternative can achieve the best set of results, benefits and/or outputs with the lowest input of resources? Is it more cost efficient to use internal resources or to outsource?

Resources may include people, facilities, funding, or any input required in the production of the good or service, and are most frequently translated into financial costs of each resource as part of the analysis. Economic impact analysis (EIA). EIA examples the financial impact of the project on the economy in surrounding area where the work will be done. This is “usually measured in terms of changes in economic growth (output or value added) and associated changes in jobs (employment) and income (wages)” (Economic impact analysis, 2011).

This type of analysis may be used by companies that are concerned about “giving back to the community” (or those that want to demonstrate that they’re concerned about the surrounding community), as well as Federal, state, and local governments. One example of how EIA can affect a make-or-buy decision: As part of the many make-or-buy analyses done for the Secure Border Initiative (SBI) Tactical Infrastructure Program, it was determined that some of the Border Fence construction contracts would be awarded to HUBZone-certified small businesses to help economically strengthen areas of the U. S. that have a history of being economically depressed. (This also was to help fulfill goals in Federal legislation, but [HUBZone program faces economic uncertainties, 2011]. ) Technical Analysis Technical analysis covers both the scope of the project (what is to be done) as well as the techniques, tools, and methodologies required (how it is to be done). Technical analysis may cover the following areas. High-level scope definition. What does the scope of the project encompass? All project planning must begin with scope definition.

According to Fleming (2003, p. 26), scope definition should include the identification of all make-or-buy choices that need to be made. Alternatives analysis. Are there multiple ways to achieve this scope? If so, what are the pros and cons for each alternative? Engineering analysis. What skills, techniques, tools and/or methodologies are required to execute this scope? Resource Analysis Resource analysis to support a make-or-buy decision may seek to answer the following questions. Does the organization have: * people with the required skill sets? proprietary and non-proprietary processes and methodologies needed to execute the project? * the facilities required to execute the project? * the IT infrastructure (hardware and networks) and applications required for the project? * partners with the necessary resources? (this option would then require a procurement) Schedule Analysis Schedule analysis as part of a make-or-buy analysis can take many forms, much of it qualitative in nature.

This type of analysis may performed to arrive at the answers to the following questions. Is there a hard deadline (either negotiated or prescribed) for the completion of this project? If yes: * Will internal resources become available in time to meet this deadline? * Do the standard organizational procurement processes allow us to meet this deadline? * If the organization’s internal standard procurement process would take too long, is it possible to get an exception in order to use an abbreviate procurement process? * If a Federal project, do any special circumstances apply for which the Federal Acquisition Regulations (FAR), or other applicable legislation, allow for an abbreviated procurement? Are there any financial incentives for finishing the project ahead of schedule? * Is schedule compression possible with any of the alternatives? * Is it possible to crash the schedule? That is, can the application of additional internal or external resources allow the project to be finished sooner? * Is it possible to fast-track any critical-path activities? That is, can any of the activities be done in parallel that were originally planned to be done in sequence (Mulcahy, 2009)? Strategic Analysis

How does the segment of project work fits into the organization’s strategic goals and objectives? Aspects for analysis may include the following areas. Core competencies. Does the piece of work fall within the organization’s core competencies? If so, will it strengthen the organization in this area? Does it need to be strengthened in this competency? If the work does not fall within their core competencies, is the organization seeking to expand its core competencies in the domain that characterizes this piece of project work?

Customer and industry perception. Will doing this piece of project work in-house enhance our reputation in the industry and to our clients? Will it increase our client “stickiness” (repeat purchases)? Will it help establish our organization as an expert in a desired domain? Other considerations. Will the project work help the organization reach an established strategic goal? Will doing this type of work in-house attract a higher caliber of employee? Will doing this piece of work in-house increase employee morale? Will it decrease employee morale? If the answer is “yes”, strongly consider outsourcing! ) Would outsourcing or doing the work internally increase customer satisfaction more? In addition, “the future, as well as the current environment…. [and] issues like government regulations, competing firms, and market trends” (Inman) are also important considerations.

Changes in regulations, such as those mentioned in Footnote 3. , can alter the playing field and increase or decrease the desirability to pursue in-house execution of certain projects or project work. As a summary, the ollowing quote from Inman (borrowing the concept from Burt, Dobler , and Starling, 2003) provides a good heuristic for make-or-buy decisions: A firm [should] outsource all items that do not fit one of the following three categories: (1) the item is critical to the success of the product, including customer perception of important product attributes; (2) the item requires specialized design and manufacturing skills or equipment, and the number of capable and reliable suppliers is extremely limited; and (3) the item fits well within the firm’s core competencies, or with those the firm must develop to fulfill future plans.

Items that fit under one of these three categories are consider strategic in nature and should be produced internally if at all possible. Hurdles to Overcome in the Make-or-Buy Decision-Making Process The make-or-buy analysis is one of the most crucial elements of project planning. In fact, the organization must have at least the preliminary make-or-buy decisions in hand before they can even begin to plan a detailed scope or schedule for the project.

Yet despite its importance to project planning, and therefore successful project execution, there can still be delays in the analysis or decisions-making, as well as challenges arriving at decision with which there is a high-degree of confidence in its accuracy. This section examples some of those issues and problems. Timeliness.

There are a number of factors that can make it difficult to come to a make-or-buy decision in a timely manner, such as: * Uncertainty as to whether the necessary good or service can be procured in time to meet the requirements of the project schedule; * Difficulty determining whether the work of the internally available labor is off sufficient quality to meet the projects requirements; * Uncertainty whether the internal resources with the required skill sets will be freed from other project commitments at all or in time to meet the project schedule (for example, if the company is waiting for the outcome of a contract award or extension for another project); * Shortages of contract specialists leading to the inability to obtain and understand the procurement options in a timely manner;

* Delays in upper management approving the final make or buy decision(s). (This could be from many reasons, such as management unavailability because f other higher priorities, lack of information that management needs to make a decision, misunderstanding of the time-sensitivity of the decision, etc. ) Decision Accuracy Decision accuracy can be negatively impact by many factors, two of the most frequent being flawed cost analysis and/or mistaken assumptions. Flawed cost analysis. Just as there are many types and methodologies for performing cost analyses, there are also a number of ways of getting it wrong. For example, if a cost analysis is based too much on historic cost data without any or enough adjustments for future changes in cost drivers, the resulting analysis will be flawed (White, Case, & Pratt, 2010).

One case where the correct analysis of future cost drivers resulted in a very smart buy decision was the decision to have the SBI prime contractor procure most of the required steel for the second and third phases of the Border Fence project in bulk, prior to the commencement of the majority of the commercial construction, instead of purchasing only enough for each fence segment immediately before it was constructed, as would be typical. (The first phase of the project was primarily constructed by “in-house” Federal labor provided by the U. S. military and using surplus or recycled materials – the result of previous make-or-buy decisions. ) During the cost analysis for that particular make-or-buy decision, it was determined that (1) the Federal government did not have enough steel to construct phases two and three of the Border Fence project; and (2) the large requirement for steel for this project, in addition to other supply economics and U. S. trade dynamics, might result in a significant increase in the price of steel.

Had this cost analysis been flawed and the decision not made to set up an advanced, special bulk procurement, the resulting cost for steel for the project would most likely have been exponentially higher. Sensitivity analysis. What if the assumptions used in the make-or-buy analysis were wrong? How much do the assumptions used need to change (or how far off do they need to be) before it changes the outcome of the make-or-buy analysis? Sensitivity analysis can help to answer these questions (Sensitivity analysis, 2009). For instance, mistaken assumptions about the (1) internal resource availability, (2) length of time need to plan and/or execute a procurement, or (3) amount of funding and the funding profile (nature of the funding, timing of its release, etc. can drastically affect the resulting make-or-buy decision. Doing sensitive analysis can provide for better forecasting and mitigation of the risks inherent to the make-or-buy decision-making process. Conclusion There are many types of analysis that can be done to support a make-or-buy decision, as well as many potential pitfalls. It behooves the project manager to ensure that they have ample time for planning and analysis, in addition to a skillful team of project analysts, engineers, and procurement specialists to help them accurately analyze the necessary factors for their particular project and arrive at the best make-or-buy decision possible.

Cite this Procurement Management Make-or-Buy Analysis

Procurement Management Make-or-Buy Analysis. (2017, Mar 18). Retrieved from https://graduateway.com/procurement-management-make-or-buy-analysis/

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