Maker or Buy

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In the case of a “make or buy” decision making, the company decides whether the product should be produced within the company or whether this product should be ordered from an supplier. It is important to take into account both quantitative and qualitative factors. In this example, we focus on the quantitative factors of production costs and purchasing prices. The decision-maker must also assess other factors, such as reliability of supplies, product quality, capacity utilisation and other resources before taking a decision. These factors can be included in the decision intuitively, systematically with a pre-set method and criteria, or incorporated into a quantitative model so that each factor is also evaluated as a cost.

Challenge

The decision is usually not black or white. Business dynamics and adapting to market conditions often require a combination of own production and outsourcing, depending on market or other circumstances. The decision-maker than needs best information to balance between both strategies in a certain point in time.

Let’s look at an example of how to use TIBCO Spotfire® solutions for the quantitative part of the analysis. By visualizing, we can display the data in a very simple way though we make an actionable and important decision. Nevertheless, a relatively complex calculation from a number of data sources is in the background. These are:

  • Production orders
  • Bill of materials and procedures
  • Sales orders
  • Invoices
  • Material movements
  • Actual operating times
  • Purchase orders
  • Associated master data

Finally it is necessary to establish appropriate relations between tables. The problem with these is that these relations are many-to-many (more sales orders are related to different invoices, same is true for relations between sales and production orders). However, where there is a will, we can find the way to solve the challange.

How TIBCO Spotfire®was used

In the picture below, we have the analysis with the main data that is important in »make-or-buy«  decision”. On the top left-hand visualization we have shown data for standard costs and standard times. The standard cost in the case of the “buy” scenario is the cost of goods with dependent costs. In the “make” scenario, this cost is divided into the set up cost, production cost and cos tof material. We add the desired margin / contribution to these cost and we get the final price.

Blue lines represent sales prices. This means that from visualization we directly see which sales price does not cover the cost or at least the desired markup. The latter can be changed with the parameter. Set up cost that depends on the batch size can be tricky. This can be entered as a parameter, using the actual series data (visualization below to the left). The batch size can vary greatly from those assumed, so the cost of preparing the piece is often underestimated or overstated.

The visualization at the top right shows the same cost structure, but in this case, using actual production times. So, simultaneously with the “make-or-buy” analysis, we also check whether the product is produced according to expecte times and cost or not. This can completely change the decision.

At the bottom of the picture, the sales prices are shown per customer (names are hidden). In this way we can also act on the sales side by abandoning unprofitable contracts, correct prices or take other actions.

(click to enlarge)MakeOrBuyEN

 

How do we use analysis in daily decision making

We use more data on such visualizations, since we want to analyze data by production orders also. Analysis of actual times and costs can hide large differences in the average values by orders. The average cost of the product may be relatively high due to an exceptional situation that has increased the production time in only one batch. It makes sense to exclude this order by simply unmarking it in TIBCO Spotfire®. Even at looking only standard costs, there are situations where the production process has changed, and thus also changed the standard costs. Here it makes sense to consider the last valid production process that defines the standard cost in the future. Similarly, the same applies to all purchasing orders and prices.

With this analysis in the TIBCO Spotfire® tool, we greatly reduce the time of analyzing data, taking action and making the right decisions. Companies sould be armed with such information in any time to be able to react in a given and unpredictable situation.