Case Study: Sports Co. Ltd

Make or Buy Decisions

Mike Simpson, Andrea Genovese

• Publisher: Kogan Page
• Year: 2016
• ISBN:
  9780749477868
• Edition: 1
• Topic: Business
• Subtopic: Operations
• Index: Business

This case study looks at strategic approaches to purchasing. It covers vendor rating, development and consideration of costs.Buying-in a product is often called outsourcing or subcontracting and very often these terms are used interchangeably when in actual fact they are quite different. Purchasing concerns the acquisition of resources for the organisation so that it can continue to make the products and services the organisation provides to its customers. Essentially, the company purchases materials, a component or item from a supplier.Strategic approaches to purchasing include vendor rating and development and consideration of costs, quality, delivery, flexibility, technical knowledge and reliability of suppliers. However, an initial consideration is to look at the costs of purchasing an item versus the costs of making the same item within the company. This problem is called the 'Make or Buy Decision' which this case investigates.Aimed at students on operations management and procurement courses, this case study shows the reader how to analyse the costs of purchasing an item versus the costs of making the same item within the company. Through worked examples and presentations of difficult concepts such as the Derivation of the Break-even Quantity, Mike Simpson and Andrea Genovese guide the reader through the highly technical approach to such complex purchasing decisions. This case study introduces the reader to essential concepts such as outsourcing and purchasing and also provides them with essential definitions. The authors also guide readers through critical calculations.

CASE STUDY

OPERATIONS MANAGEMENT

Sports Co Ltd

Make or buy decisions

Mike Simpson and Andrea Genovese

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AUTHOR BIOGRAPHIES

dr mike simpson and dr andrea genovese

andrea genovese is a Lecturer in Logistics and Supply Chain Management at The University of Sheffield Management School.

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Introduction and useful definitions

Outsourcing: Contracting with another company to do work that was once done by the organization itself. It is the process of having suppliers provide goods and services that were previously provided internally.

Purchasing: The activity of acquiring services and goods for the organization. It includes all the activities necessary for fulfilling the organization’s long and short-term needs.

Subcontracting: Buying parts or subassemblies from outside suppliers whenever a company’s capacity is insufficient to meet its needs from internal production.

Buying in a product is often called outsourcing or subcontracting and very often these terms are used interchangeably when in actual fact they are quite different as we can see from the standard definitions above. Purchasing concerns the acquisition of resources for the organization so that it can continue to make the products and services the organization provides to its customers. Essentially, the company purchases materials, a component or item from a supplier.

Usually a company that makes a part or component or item typically incurs fixed costs associated with purchasing equipment or setting up a production facility as well as fixed costs for salaries, rent, rates and so forth. Fixed costs do not vary with volume or number of units made. Fixed costs can often include costs of building or buying or leasing equipment and administrative costs. Variable costs are usually direct labour, materials, assemblies, sub-assemblies, maintenance and consumables, and anything that varies with the number of items produced. Variable costs can be eliminated to a large extent if the product or item is produced by an external supplier. Although it should be noted that the external supplier may well have a different cost base associated with producing any item or product. The economic idea of comparative advantage comes into play where a supplier in another country may have a...