|
Supplying Principles and Practices > USPS Supplying Practices Process Step 1: Identify Needs > Conduct Make vs. Buy Decision Analysis
Conduct Make vs. Buy Decision Analysis
Once the Postal Service has produced an internal cost estimate and
suppliers have shared their cost estimates in response to the request for
information (RFI), the Postal Service is able to determine whether to make or
buy the given requirement. This decision is reached by conducting a Make
vs. Buy Decision Analysis. In some cases, specifically those involving
contracting out services currently performed by Postal Service bargaining unit
employees, the make vs. buy decision is made following the receipt and
review of proposals. Such make vs. buy decisions require coordination
between the Client, Legal Counsel, Labor Relations, Supply Management
(SM), and potentially the Strategic Initiatives Action Group (SIAG).
A make vs. buy decision analysis should cover both strategic and operating
considerations. The strategic aspect is centered on protecting the Postal
Service's competitive advantage, while the operating aspect is concerned
with tactical and cost-related issues. If the strategic decision conflicts with the
tactical decision, the former takes precedence over the latter.
A product or service meeting the following conditions is considered strategic:
• It is critical to customer satisfaction.
• It requires specialized design and manufacturing skills or
equipment, and the number of capable and reliable suppliers is
extremely limited.
• It falls under existing Postal Service core competencies or within
those that must be developed to fulfill future plans.
Products/services that do not meet these conditions are considered
nonstrategic and should always be outsourced unless compelling tactical
reasons indicate that outsourcing would compromise best value to the Postal
Service.
A strategic product/service requires further analysis before one can decide
whether to make or buy from a strategic standpoint. Specifically, if the
strategic product/service can be broken down into families of components
and parts that are also strategic, it should be made in-house. On the contrary,
if it is not divisible or its components or parts are not strategic, it should be
outsourced.
Figure 1.10
Analyzing Strategic Make vs. Buy Decisions
* Note: In some cases, it is not possible to make an item in-house in the short term. This may be the result of budget
constraints, capability problems, capacity limitations, etc. In these cases, the item must be outsourced.
The following considerations can help the Purchase/SCM Team consider
relevant tactical factors affecting the make vs. buy decision:
Considerations that favor a "make decision" include:
• Cost considerations (less expensive to make)
• Desire to integrate plant operations
• Productive use of excess plant capacity to help absorb fixed
overhead
• Need to exert direct control over production and ensure supply
continuity
• Need to exert direct control over quality
• Design secrecy required
• Unreliable suppliers
• Desire to maintain a stable workforce (in periods of declining
sales)
Considerations that favor a "buy decision" include:
• Limited production facilities
• Limited internal labor/resources
• Cost concerns (less expensive to buy)
• Small volume requirements
• Suppliers' research and specialized know-how
• Desire to maintain a stable workforce (in periods of rising sales)
• Desire to maintain a multiple-source policy
• Indirect managerial control considerations
• Purchasing and inventory considerations
Cost is a crucial tactical consideration. An estimate of the cost for the
requirement must be developed based on a detailed analysis of the costs
expected to be generated by performing the work in-house or through a
supplier. The following costs should be major elements in a make vs. buy
cost estimate.
To Make:
• Delivered purchased material costs
• Direct labor costs
• Any follow-on costs stemming from quality and related problems
• Incremental inventory carrying costs
• Incremental factory overhead costs
• Incremental managerial costs
• Incremental purchasing costs
• Incremental costs of capital
• Environmental costs
• Disposal costs
To Buy:
• Purchase price of the part
• Transportation costs
• Receiving and inspection costs
• Incremental purchasing costs
• Any follow-on costs related to quality or service
Whether the decision is to make or buy, all investment projects must be
justified either as an economic opportunity or as a means of sustaining
existing Postal Service operations into the future by correcting or eliminating
a problem. The Decision Analysis Report (DAR) is a document prepared by
the requiring organization to recommend an investment for approval, and it is
used for decisions regarding high-dollar-value projects. For sample DARs
and specific DAR requirements, including dollar-value thresholds for
investments requiring Headquarters approvals and DARs, refer to Handbook
F-66, General Investment Policies and Procedures.
The Justification of Expenditure (JOE) is a one-page document used to
request approval for small field projects that do not require a more formal
DAR. Although not required, Headquarters organizational units may use
JOEs to justify small investment expenditures within their approval authority.
For a more detailed discussion of JOEs, including samples in the
recommended format, refer to Handbook F-66C, Field Investment Policies
and Procedures.
All investment projects that require Headquarters review and approval must
follow the instructions detailed in Handbook F-66, including validation, before
being forwarded to the appropriate official for final approval. Capital items
that are centrally purchased by Headquarters, but are locally funded (such as
administrative or non-mail-hauling vehicles), must be justified by the
responsible Headquarters organization. This also applies to other nationally
mandated programs.
A quadrant approach classifies all Postal Service purchases into four
categories, depending on their impact on the Postal Service's core
competencies (noncore versus core) and complexities (standard versus
custom). Attributes of certain quadrants may cause a propensity for
outsourcing over making in-house or vice versa.
Figure 1.11
Four Quadrants
 
Products and services in this quadrant require customized attention, but do
not provide direct value to the end Client. A potential opportunity exists to
take advantage of suppliers' specialized knowledge and research.
Products and services in this quadrant are highly unique and specialized.
External suppliers may face challenges in meeting quality specifications on a
consistent basis; making the item in-house would seem to assure quality and
lower risk. However, strategic concerns and resource limitations may justify
buying from established and innovative suppliers. Further cost/benefit
analysis is recommended to finalize the make vs. buy decision for products
and services of Quadrant II.
Products and services in Quadrant III are fairly standardized and available
from a wide pool of suppliers. Suppliers may have a more effective and
reliable process for producing the requirement than the Postal Service.
Products and services in this quadrant are central to Postal Service
operations and fairly uniform in their makeup. They often have significant
impact on reducing cycle time, a key strategy for gaining competitive
advantage. The impact on cycle time and business continuity is an important
consideration of the make vs. buy decision. Further cost/benefit analysis is
recommended to finalize the make vs. buy decision for products and services
of Quadrant IV.
|
