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Make Versus Buy: Facts of The Case

ABC Ltd is a manufacturing company considering whether to continue in-house valve production or outsource as production has increased. Three scenarios are analyzed: 1) 100% in-house production, 2) 20% in-house assembly with outsourced components, and 3) 30% in-house production with 70% outsourced. Total costs over 5 years show 100% in-house production is most cost effective. The recommendation is to address workforce concerns while maintaining quality through outsourcer evaluations and cross-departmental collaboration.

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JAYA KIRTANA.S
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27 views2 pages

Make Versus Buy: Facts of The Case

ABC Ltd is a manufacturing company considering whether to continue in-house valve production or outsource as production has increased. Three scenarios are analyzed: 1) 100% in-house production, 2) 20% in-house assembly with outsourced components, and 3) 30% in-house production with 70% outsourced. Total costs over 5 years show 100% in-house production is most cost effective. The recommendation is to address workforce concerns while maintaining quality through outsourcer evaluations and cross-departmental collaboration.

Uploaded by

JAYA KIRTANA.S
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Make Versus Buy

Facts of the Case :

 ABC Ltd. is a manufacturing company producing valves for the past 3


years, initially producing 10,000 valves/month, now at 50,000
valves/month.
 Looking to expand and produce various valve types.
 Existing plant area: 50,000 sq. ft., expansion needs additional 50,000 sq.
ft.
 Quality complaints increased from 0.2% to 0.5% in the current
year.Worker dissatisfaction regarding workload, salary levels, and breaks.
 The objective is to determine whether ABC Ltd. should continue in-house
manufacturing or consider outsourcing, considering the provided costs,
sales forecast, and various operational challenges faced by the company.

Assumptions of the Case :

 Labour cost increase by 10% annually and material cost increase by 10%
yearly are based on a consistent and linear growth pattern.
 Inventory costs are solely related to storing the basic material cost and are
calculated at a consistent rate of 5% per year.
 The machine's usable life of 5 years is assumed to remain constant
without unexpected breakdowns.

Analysis:

SITUATION A: To produce and manufacture completely

Particulars Year 1 Year 2 Year 3 Year 4 Year 5


Supervisor’s Salary 60,000 66,000 72,600 79,860 87,846
Direct Wages 12,00,000 18,00,000 25,20,000 35,64,000 43,60,000
Material Cost 42,00,000 77,00,000 1,18,58,000 1,67,67,000 2,04,90,000
Power & Fuel Cost 6,00,000 11,00,000 16,94,000 23,94,000 29,30,000
Indirect Labour Cost 6,00,000 9,00,000 12,60,000 17,82,000 21,80,000
New Machine Cost 9,99,000 10,00,000 10,01,000 9,99,000 10,00,000
Total Cost 76,59,000 1,25,66,000 1,84,05,600 2,55,85,860 3,10,47,846

Total Cost for 5 Years = 9,52,64,306


SITUATION B: To completely outsource components and only assemble
valves requiring 20% manufacturing capacity

Particulars Year 1 Year 2 Year 3 Year 4 Year 5


Component Cost 60,00,000 1,10,00,000 1,69,40,000 2,39,58,000 2,92,80,000
Transportation Cost 6,00,000 11,00,000 16,80,000 23,40,000 28,00,000
Inventory Cost 2,10,000 3,85,000 5,88,000 8,28,000 10,20,000
20% of in-house 22,39,200 29,60,000 38,24,800 50,76,000 60,32,000
manufacturing
capacity
Total 90,49,200 1,54,45,000 2,30,32,800 3,22,02,000 3,91,32,000
Total Cost for 5 Years = 11,88,61,000

SITUATION C: To manufacture 2 grades of valves, one completely


produced in house (30% capacity) and 70% outsourced and assembled

Particulars Year 1 Year 2 Year 3 Year 4 Year 5


In-House 22,97,700 37,69,800 55,21,680 76,75,758 93,14,354
Manufacturing Cost
Outsourcing Cost 47,67,000 87,39,500 1,34,45,600 1,89,88,200 2,31,70,000
Total Cost 70,64,700 1,25,09,300 1,89,67,280 2,66,63,958 3,24,84,354
Total Cost for 5 Years = 9,76,89,592

Inference :

 Comparing and analysing with the total cost for 5 years of the above three
situations Situation A (i.e In-House Manufacturing) will be cost-
effective and best option for ABC Ltd.
 As indirect labour cost is 50% of direct labour, it’s going to exist in all
the 3 cases, resulting in 100% in-house.

Recommendations :

 Evaluate the ability of outsourced suppliers to maintain quality standards.


 Review workforce capabilities and availability. Address concerns about
workload, overtime, and dissatisfaction among workers.
 Encourage collaboration between departments to find a solution that
balances production costs, quality, and overall business goals.
 Implement a mechanism for continuous evaluation of the chosen strategy.
 Regularly review performance metrics, cost-effectiveness, and quality
standards to make informed adjustments.

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