National Institute of Technology 2009-1st Sem M.B.A International Business IV Sem - - Question Paper

The famous make or buy decision becomes relevant in this situation. An International firm can make, in house, all its needed parts or may decide to outsource them from suppliers who can give them more efficiently, regardless of where they are geographically located. Make or buy decisions are important factors in operations strategies. In the automobile industry, for example, the typical car contains more than 10,000 components, so automobile firms frequently face make or buy decisions. Ford of Europe, for example, produces only about 45 percent of the value of the Fiesta in its own plants. The remaining 55 percent mainly comprising components come from independent suppliers.

Make or buy decisions pose many issues for purely business but even more issues for multinational business. These decisions in the International arena are complicated by volatility of countries’ political economies, exchange rate movements, modifications in relative factor costs, and the like.

Through deciding on make or buy in practice is highly difficult, theoretically, the problem involves consideration of the pros and cons of the few options to manufacture in-house or outsourcing the needed components.

The arguments to make and or to buy: If the International business decides to make all the components in-house, it is having vertical integration. Vertical integration means owning or controlling all the supply sources or the channels through which the firm’s products or services are distributed. The former is called backward integration, while the latter is called forward integration.

The arguments that support vertical integration and the risks associated with outsourcing. The risks of outsourcing are incidentally the supportive arguments for any decisions to make.

Reasons for Outsourcing:

1. Strategic flexibility-switching orders ranging from suppliers as circumstances dictate
2. Cost reduction
3. Focus on core competencies
4. Minimize inventory, materials handling, and other non-value-added costs.
5. Reduce development and production cycle times
6. Improve efficiency
7. Possibility of obtaining orders from the country where suppliers are located.

Risks of Outsourcing

1. Loss of control
2. Conversion costs
3. Possibility of being tied to obsolete technology
4. Exposure to supplier risks; financial strength, loss of commitment to outsourcing, slow implementation, promised features not available, lack of responsiveness poor quality
5. Loss of protection over proprietary technology

Earning:   Approval pending.