MAKE OR BUY DECISION

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 Objectives
• To explore the benefits, problems and a
process for outsourcing
• To determine the need to subcontract
supplies

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 Definitions
• “Make-or-Buy decisions compare the cost of
producing a component or providing the service
internally with the cost of purchasing the component
or service from an external supplier”

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 Outsourcing
• Outsourcing:-
• “Outsourcing is a strategic decision to give a task or
activity to an independent contractor who
determines how best to do the task or activity”.

• (it is a) management strategy by which an

organisation outsources major non-core functions to
specialised, efficient service providers”

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 Subcontracting
Outsourcing is a strategic long term decision,
Subcontracting is a tactical, short term approach.
• “Outsourcing is nothing but delegating a particular
business activity/function to another
individual/entity. Sub-contracting is sharing a part of
the business activity with another. ”

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 Tactical Make-Buy Decisions
• Some common reasons for make-buy decisions at
this level follow:-
• Delivery failure or poor service by existing source
• To allow the client organization to focus on its core
business
• To access skills and technologies
• To provide flexibility
• Pressure to reduce costs

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 Operational Make-Buy Decisions
• - a simple and probably logical rule of thumb
when considering whether to make-or-buy is
to carryout a comparison of cost of making
ourselves with buying in.

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 Outsourcing vs Insourcing
• Out - Sourcing is when a company "A" makes
an agreement with a company "B" about
giving them some part of the work to do. 
For example BMW outsourced with with "Boss
Sound System" in a way that BOSS does all the
music for the BMW cars. 

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 Insourcing:-
• “In-Sourcing is so similar to Out-sourcing, with the difference
that it is under clients' sight. “
• for example TOSHIBA insourced with UPS (unit parcel service)
in a way that UPS now is in control of the supply chain for
toshiba. if your laptop at home needs repair, UPS will pick it
up and fix it at the TOSHIBA/UPS REPAIR CENTER and deliver
it back to you. 
Therefore the difference: BOSS was in charge of doing sound
systems in BMW (Clients didn't see any of that work) 
Whereas UPS s in charge of delivering products for TOSHIBA
(Clients were almost managers in that work)

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 Why Outsourcing?
• Resource intensive activities – high labour/ capital costs.

• Subject to specialist areas

• Subject to dynamic market conditions for which it is costly to

recruit & retain staff

• Subject to rapid changes in technology with high investment

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 Examples of outsourced services
• Car park management • Library
• Cleaning • Medical/ Welfare
• Catering • Pest control
• Building maintenance • Ground maintenance
• Security • Computers &
• Transport management information technology
• Waste disposal

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 Types of Outsourcing
• Body shop outsourcing – a means of meeting short
term requirement, shortage of in house skills to
meet temporary demand.

• Project management outsourcing – for all parts of a

particular project, new IT project, training
requirement

• Total outsourcing – supplier given full responsibility

for selected function, catering, security

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 Some benefits of Outsourcing
• Gain access to world • Free management time
class capabilities • Reduce staff costs
• Improve organisational • Increased flexibility
focus • Cost certainty
• Make capital funds • Improved service levels
available
• Reduced capital
requirement
• Reduced risk

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 Some problems with outsourcing
• Long term commitment • Quality of service
• Communication with • High staff turnover
suppliers • Poor project
• Dependence on management
suppliers • Lack of control over
• Additional training larger suppliers
• Reduction in flexibility
• Coordinating different
suppliers

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 Measuring outsourcing performance
• Typically consider measuring:-
• Response time
• Performance reports
• Satisfactory performance statement
• Penalties for non performance

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 Project Procurement Management
Processes
• “Project Procurement Management includes the processes
necessary to purchase or acquire products, services, or results
needed from outside the project team. The organization can be
either the buyer or seller of the products, services, or results of a
project”.
• Procurement planning: determining what to procure and when
• Solicitation planning: documenting product requirements and
identifying potential sources
• Solicitation: obtaining quotations, bids, offers, or proposals as
appropriate
• Source selection: choosing from among potential vendors
• Contract administration: managing the relationship with the
vendor
• Contract close-out: completion and settlement of the contract

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Figure 2-1. Project Procurement
Management Processes and Key
Outputs

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 Procurement Planning Tools and
Techniques

• Make-or-buy analysis: determining whether a

particular product or service should be made or
performed inside the organization or purchased
from someone else. Often involves financial analysis
• Experts, both internal and external, can provide
valuable inputs in procurement decisions

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 Make-or Buy Example
• Assume you can lease an item you need for a
project for $150/day. To purchase the item,
the investment cost is $1,000, and the daily
cost would be another $50/day.
• How long will it take for the lease cost to be the
same as the purchase cost?
• If you need the item for 12 days, should you
lease it or purchase it?
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 Make-or Buy Solution
 Set up an equation so the “make” is equal to the “buy”
 In this example, use the following equation. Let d be the
number of days to use the item.
$150d = $1,000 + $50d
 Solve for d as follows:
 Subtract $50d from the right side of the equation to get
$100d = $1,000
 Divide both sides of the equation by $100
d = 10 days
 The lease cost is the same as the purchase cost at 10 days
 If you need the item for 12 days, it would be more economical
to purchase it
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 Types of Contracts

• Fixed-price : involve a fixed total price for a well-

defined product or service  to be provided
• Cost-reimbursable: involve payment to the seller for
direct and indirect costs
• Time and material contracts: Mixture of both fixed-
price and cost-reimbursable, often used by
consultants
• Unit price contracts: require the buyer to pay the
seller a predetermined amount per unit of service

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 Statement of Work (SOW)

• A statement of work is a description of the

work required for the procurement( is the
acquisition of goods or services)
• Many contracts, or mutually binding
agreements, include SOWs
• A good SOW gives bidders a better
understanding of the buyer’s expectations

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 Figure 12-3. Statement of Work (SOW) Template
I. Scope of Work: Describe the work to be done to detail. Specify the hardware and
software involved and the exact nature of the work.
II. Location of Work: Describe where the work must be performed. Specify the
location of hardware and software and where the people must perform the work
III. Period of Performance: Specify when the work is expected to start and end,
working hours, number of hours that can be billed per week, where the work must
be performed, and related schedule information.
IV. Deliverables Schedule: List specific deliverables, describe them in detail, and
specify when they are due.
V. Applicable Standards: Specify any company or industry-specific standards that
are relevant to performing the work.
VI. Acceptance Criteria: Describe how the buyer organization will determine if the
work is acceptable.
VII. Special Requirements: Specify any special requirements such as hardware or
software certifications, minimum degree or experience level of personnel, travel
requirements, and so on.
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 Solicitation Planning

• Solicitation planning involves preparing

several documents:
– Request for Proposals(RFP): used to solicit
(obtain)proposals from prospective sellers
– Requests for Quotation(RFQ): is a document
that an organization submits to one or more
potential suppliers eliciting quotations for a
product or service.  used to solicit quotations
for well-defined procurements

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 Figure 12-4. Outline for a Request
for Proposal (RFP)
I. Purpose of RFP
II. Organization’s Background
III. Basic Requirements
IV. Hardware and Software Environment
V. Description of RFP Process
VI. Statement of Work and Schedule Information
VII. Possible Appendices
A. Current System Overview
B. System Requirements
C. Volume and Size Data
D. Required Contents of Vendor’s Response to RFP
E. Sample Contract 25
 Solicitation

• Solicitation involves obtaining proposals or

bids from prospective sellers
• Organizations can advertise to procure goods
and services in several ways
– approaching the preferred vendor
– approaching several potential vendors
– advertising to anyone interested
• A bidders’ conference can help clarify the
buyer’s expectations
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 Source Selection

• Source selection involves

– evaluating bidders’ proposals
– choosing the best one
– negotiating the contract
– awarding the contract
• It is helpful to prepare formal evaluation
procedures for selecting vendors
• Buyers often create a “short list”
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 Contract Administration

• Contract administration ensures that the

seller’s performance meets contractual
requirements
• Contracts are legal relationships, so it is
important that legal and contracting
professionals be involved in writing and
administering contracts
• Many project managers ignore contractual
issues, which can result in serious problems
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 Contract Close-out
• Contract close-out includes
– product verification to determine if all work was
completed correctly and satisfactorily
– administrative activities to update records to reflect
final results
– archiving information for future use
• Procurement audits identify lessons learned in
the procurement process

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