MAKE OR BUY DECISION AN IMPORTANT PURCHASING TOOL AND A COST CONTROL TECHNIQUE IN AN ORGANIZATION

MAKE OR BUY DECISION AN IMPORTANT PURCHASING TOOL AND A COST CONTROL TECHNIQUE IN AN ORGANIZATION

CHAPTER ONE

INTRODUCTION

1.1   BACKGROUND TO THE STUDY 

Purchasing should be accounted for as a significant function, which needs to be considered as a part of the corporate planning process to ensure that supply conditions are reflected in it (McIvor et al., 1997). Strategic approaches for a particular function, for example sourcing, need to be linked to other functional strategies, linked to strategies for particular business units and linked at the corporate level where there are perceived synergistic benefits. The make or buy issue has been under discussion since the industrial revolution. Yet, its strategic role has not been admitted until now, at the same time as the strategic role of sourcing has started to have been appreciated.

Probably the known and the most classical theoretical approach to a make or buy decision-making is transaction cost theory made by Williamson (1985). According to transaction cost economics, a company will make the outsourcing decision on the basis of reducing production and transaction costs. Production costs refer to the direct costs involved in creating the product or service and include labour and infrastructure costs. Transaction costs include the costs of selecting suppliers, negotiating prices, writing contracts, monitoring performance, as well as the potential for opportunism from suppliers. The main factors for bringing transaction costs out at markets are: bounded rationality, opportunism, small numbers of bargain and information impactedeness. (Williamson, 1985, 1981, 1991).

1.2   STATEMENT OF THE PROBLEM

This research will help to understand how outsourcing and subcontracting can affect to company’s business, operations and profitability. This research creates a tool for make or buy decision-making which can be used as a help to evaluate the reasonableness of outsourcing analytically. For the meantime this kind of tool has not been created and there is no systematically way to make these decisions.

1.3   OBJECTIVE OF THE STUDY

The aim of this study is to analyse factors that are related to make or buy decisions as important purchasing tool and a cost control technique in an organisation. Specific objectives include:

a.    To evaluate a tool for make or buy decision-making.

b.   To evaluate the effects of the MOB to competitive performance.

c.    To determine how to make MOB decisions systematically

1.4   RESEARCH QUESTIONS

a. What are the effects of the MOB to competitive performance?

b. How to make MOB decisions systematically?

1.5   SIGNIFICANCE OF THE STUDY

This study will be of immense benefit to other researchers who intend to know more on this study and can also be used by non-researchers to build more on their research work. This study contributes to knowledge and could serve as a guide for other study.

1.6   SCOPE OF THE STUDY

This study is on make or buy decision an important purchasing tool and a cost control technique in an organization.

1.7  LIMITATIONS OF THE STUDY 

The demanding schedule of respondents at work made it very difficult getting the respondents to participate in the survey. As a result, retrieving copies of questionnaire in timely fashion was very challenging. Also, the researcher is a student and therefore has limited time as well as resources in covering extensive literature available in conducting this research. Information provided by the researcher may not hold true for all businesses or organizations but is restricted to the selected organization used as a study in this research especially in the locality where this study is being conducted. Finally, the researcher is restricted only to the evidence provided by the participants in the research and therefore cannot determine the reliability and accuracy of the information provided.

Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8   OPERATIONAL DEFINITION OF TERMS

Make or Buy Decision: A make-or-buy decision is an act of choosing between manufacturing a product in-house or purchasing it from an external supplier. Make-or-buy decisions, like outsourcing decisions, speak to a comparison of the costs and advantages of producing in-house versus buying it elsewhere. 

Cost Control: Cost control is the practice of identifying and reducing business expenses to increase profits, and it starts with the budgeting process. ... As an example, a company can obtain bids from different vendors that provide the same product or service, which can lower costs.