Thought Process about Make or Buy Decisions

Thought Process about Make or Buy Decisions Make or Buy Decisions & Why I am Interested in them I am interested in make or buy decisions because it has been a topic that I have studied in multiple places (classes, certifications, etc.), but one that I have not actually seen in practice.

Thought Process about Make or Buy Decisions
Thought Process about Make or Buy Decisions

Initially learning about make or buy decisions in an introductory cost accounting class set the stage for what appeared to be a simple topic, but one that is certainly an iceberg. I dove more deeply into the evaluation of make or buy decisions as I was preparing to the sit for the CMA exams, and I began considering the additional implications the topic holds. I was primarily interested in conducting more research on the topic and ultimately learning how what I studied in the theoretical world actually applies to real business decisions.

Explanation of Make or Buy Decisions

Make or buy decisions, as the term implies, are an evaluation that business leaders take on how to source certain products or services for production. Most commonly used in manufacturing environments, leaders need to decide if investing capital to create products or generate services “in-house” is more advantageous than searching for, negotiating with, and maintaining supplier relationships. Several advantages and disadvantages are present for both and like many decisions that need to be made in business, both qualitative and quantitative factors need to be considered. For example, it may be cheaper for the business to source a product from a supplier, but if this particular supplier is single-source (only supplier in the market that produces the product), significant risk is being undertaken by relying on them to provide this product. Below, I will discuss an article by Parmigiani (2007) that challenges the typical make or buy decision framework and considers concurrent sourcing.

Thought Process about Make or Buy Decisions Major Article Summary

Parmigiani (2007) begins his article with a brief summary of the current thoughts and research to date on the make or buy topic. He explained the process as dichotomous, typically thought to result in wholly made or brought products, and none concurrently produced.  This view is the one which I studied both in my college coursework and in preparation for the Certified Management Accountant exams. Current literature is primarily aimed at first eliminating options by evaluating the qualitative factors of the make or buy decision. Using the example which was provided above, if the product in question is only offered by one supplier, heavy reliance must be placed on their ability to continue as a going concern and meet time and quality control restrictions. If sourcing options (internal or external) are not objectively eliminated during the qualitative review process, business leaders then conduct a quantitative analysis on the costs associated with each course of action. Generally, whichever course is more cost advantageous, of course, adjusted for qualitative factors originally considered, is the one selected. In any case, make or buy decisions generally result in one outcome; the product is either sourced externally from a supplier, or produced internally by the company. Parmigiani (2007), alternatively, explains the benefits of concurrent sourcing. Concurrent sourcing results in the business simultaneously creating the product in house and purchasing the product externally. At first glance, this decision appears financially burdensome as both processes will need to be undergone. While concurrent sourcing requires more capital than completely purchasing or producing the product will, it offers several benefits. Continuing on with the single source example, the company could take the necessary steps to research and develop the product, purchase the equipment needed to produce it and begin purchasing the product from the supplier. This stage of concurrent sourcing would result in the highest cost to the company, but would effectively protect the company from the supplier going bankrupt, failing to meet quality assurance standards, etc. Obviously concurrent sourcing is not feasible or advantageous in every scenario, but it is an option that should be considered by those undergoing the make or buy decision process.

Thought Process about Make or Buy Decisions Discussion

The major article summary provided above further expounds upon the definition discussed in the introductory paragraphs by challenging current thought processes around make or buy decisions. The course textbook, written by Satterlee (2018), describes make or buy decisions as I had in the explanation paragraph which results in a company either choosing to purchase or produce the good or service in question. Obviously, the complexity of these decisions is amplified when considering conducting business internationally and sourcing products in unfamiliar territory, but the essential processes remain the same. The ultimate decision whether to make or buy subcomponent goods, materials, or services depends on both qualitative factors such as lead times and product quality, as well as quantitative factors such as overall cost to buy vs. cost of research, development, and maintain inventory. Further articles, which will be explained in more detail below, consider additional implications surrounding the make or buy decision process and continue to explore ways in which the benefits can be maximized.

Mols (2010) references Parmigiani’s work, which was discussed above, and adds further economic explanations for concurrent sourcing. He conducts a review of the literature on concurrent sourcing and provides an opinion on why business leaders should consider using it with more frequency. Leiblein, Reuer, & Dalsace (2002) discuss the organization governance aspect of make or buy decisions and set the stage for how important of a topic it actually is. Especially as economies of scale increase and operations bleed into more and more foreign nations, higher levels of management and even the board of directors need to be involved in these decisions. Kistruck, Morris, Webb & Stevens (2015) provide specific examples of factors that contribute to the make or buy decision process and explain additional angles that should be evaluated such as customer heterogeneity. Finally Sappington (2005) submits a contradicting opinion on the irrelevance of input prices on make or buy decisions which indirectly supports the model of concurrent sourcing that Parmigiani (2007) discussed in his article. All of these articles continue to expound on the make or buy decision process and should researched further if one is seeking to gather a wholistic understanding of the topic.

Thought Process about Make or Buy Decisions References

Leiblein, M. J., Reuer, J. J., & Dalsace, F. (2002). Do make or buy decisions matter? the influence of organizational governance on technological performance. Strategic Management Journal, 23(9), 817-833. doi:10.1002/smj.259

Kistruck, G. M., Morris, S. S., Webb, J. W., & Stevens, C. E. (2015). The importance of client heterogeneity in predicting make-or-buy decisions. Journal of Operations Management, 33-34, 97-110. doi:10.1016/j.jom.2014.11.001


Parmigiani, A. (2007). Why do firms both make and buy? an investigation of concurrent sourcing. Strategic Management Journal, 28(3), 285-311. doi:10.1002/smj.580

Mols, N. P. (2010). Economic explanations for concurrent sourcing. Journal of Purchasing and Supply Management, 16(1), 61-69. doi:10.1016/j.pursup.2009.09.001

Sappington, D. E. M. (2005). On the irrelevance of input prices for make-or-buy decisions. The American Economic Review, 95(5), 1631-1638. doi:10.1257/000282805775014344

Satterlee, B. (2018). Cross border commerce (3rd ed.). Raleigh, NC: Synergistics International Inc. ISBN: 9781934748176.


DB essay 3: Strategic Alliance

A vast amount of business around the world utilize strategic alliances to gain access to the global market. This term was chosen for this week’s discussion board because the company I work for has formed a strategic alliance with numerous other companies and I would like to gain a more in-depth understanding of why companies utilize this strategy. I work for Delta Airlines and I have seen the benefits that strategic alliances have given the company in the international market space.

Thought Process about Make or Buy Decisions Explanation of Key Term

According to Satterlee (2018), a strategic alliance is a voluntary agreement between companies involving exchange sharing, co-development of products, technologies, or services (p.205). A successful strategic alliance builds on the strengths of each company. In a strategic alliance, the companies involved will combine their respective resources, capabilities, and core competencies to generate mutual interests in designing, manufacturing, or distributing of goods or services. Strategic alliances allow the companies involved to pursue opportunities at a faster rate than if it were to be pursued alone. An alliance provides access to additional knowledge and resources owned by the other company, which may ease the learning curve for the new pursuit and relieve setup time and costs. Delta Airlines has formed a strategic alliance with other airlines which provides Delta’s customers access to destinations not flown by Delta. This increases the company’s international footprint and provides a mutual benefit for all the airlines involved.

Thought Process about Make or Buy Decisions Major Article Summary

According to Islam, Hossain, & Mia (2018), you must adapt and innovate more today than you ever have in the past (p.2). The two options that were outlined in the article was changed internally or change your external relationships. Of the two, it was stated that internal change is usually more difficult. Presently, companies are forming more and more alliances to gain capabilities through an exchange of resources both tangible and intangible. As a result of these alliances, companies are progressing rapidly in developing new and improved products or services (Islam, Hossain, & Mia, 2018). The article addresses the positive relationship that a strategic alliance has on innovation and product development. Strategic alliances are not only benefiting the economic objectives of a company, but also the environmental objectives as well. This strategy provides more flexibility than joint ventures because the involved companies do not need to merge any assets or funds. Instead, the companies remain autonomous, which can help ease the functioning of the agreement when the two company’s business practices are highly varied.

When considering innovation, there are four main approaches that a company can take which are recruiting superior human capital, internal R&D spending, strategic alliances, and acquisitions. According to Islam, Hossain, & Mia (2018), strategic alliances are always the better option because it is faster, cheaper, and carries less risk (p.11). The other three option is generally more expensive. Nowadays, consumers are placing a lot of demand on companies for newer products and services and this increase in demand in part due to the advancements in technology. Strategic alliance allows companies to respond to this increase in demand in a much cheaper way. Furthermore, a strategic alliance requires a high level of trust between the parties involved, especially when the sharing of proprietary information is involved.

Thought Process about Make or Buy Decisions Discussion

Cited Work Relationship to Major Summary and Assigned Readings

In this article, Jinyeong (2018) stated that trust is recognized not only as a precondition for excellent performance and competitive advantage, but also as one of the most important success factors and the source of further national competitiveness (p.3). The need for trust is even greater in strategic alliances with the sharing of sensitive and critical information. Trust in a strategic alliance is essential for several reasons. Trust helps to facilitate the flow of information, it activates investment, it serves to inhibit opportunistic behavior, and it reduces transaction costs for monitoring and adjusting the others (Jinyeong, 2018). This article correlates with the major article summary because in the major article summary, trust was identified as a necessary component of a strategic alliance. This article further expounds on the importance of trust in such a relationship. Trust is a critical success factor when forming a strategic alliance, it is essential for successful performance (Jinyeong, 2018).

Cited Work Relationship to the Other 4 Articles

As stated by Klossek, Meyer, and Nippa (2015), strategic alliances are an attractive mode of organizing complex business activities as they provide a high degree of flexibility while limiting resource commitments (p.4). Due to the limited resources required, economies of scale can be achieved as well as increasing cost efficiency. Companies are motivated to form strategic alliances for numerous reasons. Organizational learning and the development of valuable organizational competencies are two of the motivators. When forming a strategic alliance, firms may seek to acquire critical knowledge from other partners to develop new ideas and ways of doing business that can lead to competitive advantage (Lin & Darnall, 2015). According to Hretcanu and Hretcanu (2015), strategic alliances are now considered to be one of the most powerful mechanisms for combining competition and cooperation and for industrial restructuring at the global level (p.9)

Thought Process about Make or Buy Decisions References

Hretcanu, C.-I., & Hretcanu, C.-E. (2015). Strategic alliances between firms — a model of

competitive strategy in food industry. Food & Environment Safety, 14(2), 223–232. Retrieved from http://ezproxy.liberty. edu/ login?url=http://search

Islam, M., Hossain, A. T., & Mia, L. (2018). Role of strategic alliance and innovation on

organizational sustainability. Benchmarking: An International Journal, 25(5), 1581–1596.

Jinyeong Kim. (2018). Research on trust in strategic alliances. Journal of Marketing

Thought, 4(4), 40–45.

Klossek, A., Meyer, K. E., & Nippa, M. (2015). Why do strategic alliances persist? A behavioral decision model. Managerial & Decision Economics, 36(7), 470–486.

Lin, H., & Darnall, N. (2015). Strategic alliance formation and structural configuration. Journal

of Business Ethics, 127(3), 549–564.

Satterlee, B. (2018). Cross Boarder Commerce. Raleigh: Synergistics International Inc.

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