Reasons for making
An organisation also makes its own materials, components, services and/or equipment in-house for many reasons:
1. Protect proprietary technology
A major reason for the make option is to protect proprietary technology. A firm may have developed an equipment, product or process that needs to be protected for the sake of competitive advantage. Firms may choose not to reveal the technology by asking suppliers to make it, even if it is patented. An advantage of not revealing the technology is to be able to surprise competitors and bring new products to market ahead of competition, allowing the firm to charge a price premium. For example, Intel is not likely to ask suppliers to manufacture their CPU.
2. Non-competent supplier
If the suppliers do not have the technology or capability to produce the required components or services, the firm may have no choice but to make an item or provide a service in-house, at least for the short term. The firm may use supplier development strategies to work with a new or existing supplier to produce the component or service in the future as a long-term strategy, a topic we shall come back to in Unit 1 of the course BLC 307/05 Inventory Management.
3. Better quality control
If the firm is capable, the make option allows for the most direct control over the design, process, labour and other inputs to ensure that high-quality components or services are built or provided. The firm may be so experienced and efficient in manufacturing the component that suppliers are unable to meet its exact specifications and requirements. On the other hand, suppliers may have better technology and processes to produce better-quality components. Thus, the sourcing option ensuring a higher quality level is a debatable question and must be investigated thoroughly.
4. Using existing idle capacity
A short-term solution for a firm with excess idle capacity is to use the excess capacity to make/do some of its components/services. This strategy is valuable for firms that produce or provide seasonal products/services. It avoids laying-off skilled workers and, when business picks up, the capacity is readily available to meet demand.
5. Lower cost
If technology, capacity, and managerial and labour skills are available, the make option may be more economical if large quantities of the component are needed on a continuing basis. Although the make option has a higher fixed cost due to capital investment, it has a lower variable cost because it precludes suppliers’ profits. However, this is not a strategic option in the long term, if the activities are not core-competencies of the firm.