Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 1

Trends in Make-or-Buy Strategies

Toyota Motor Company is able to maintain a small number of suppliers by using two key strategies. First, it develops a hierarchy of suppliers; Toyota deals directly with approximately 200, which are called the top-tier suppliers. These 200 suppliers in turn deal with second-tier suppliers who provide products and services to those at the top tier. These second-tier suppliers in turn deal with third-tier suppliers. In this way, Toyota delegates the responsibility for managing the supply function in a way that motivates suppliers at each tier to work effectively with those above and below it in the supply chain. Second, Toyota distinguishes two types of suppliers, general and specialty. Toyota has relatively simple relationships with those in the general category of suppliers but develops close financial and technological ties with the specialty suppliers. The objective is to recognize the strategic importance of the specialty suppliers and to develop strong relationships with them to ensure success.

In a recent change the airline carriers are beginning to manufacture replacement parts for their fleets, rather than purchase the replacement parts from the manufacturers. For example, Continental Airlines can manufacture a flight deck door for a Boeing 767 for $150 in contrast to the purchase price from Boeing of $960. Similarly, American Airlines manufactures air filters for its Boeing 777 fleet for $33, in contrast to the Boeing price of $132. For the air carriers, it is definitely cheaper to make than to buy.

Other trends include a move by some firms to return some manufacturing back to domestic factories, as the cost of shipping product from China and other countries has increased dramatically with the increase in fuel prices; the cost of shipping a 40-foot, 5,000-pound container from China to the west coast has increased from $2,000 in 2000 to $5,000 in 2008.

In another reversal of outsourcing, the financial services industry, suffering through historic losses in 2008, has cut back in 2008 by one-half the amount of 2007 outsourcing in which computer services, customer services, and other banking activities are “off-shored.”

Source: “Machete Time,” BusinessWeek, April 9, 2001, pp. 42–43; Melanie Trottman, “To Cut Costs: Airlines Make More of Their Own Parts; Jettisoning a $719 Toilet Seat,” The Wall Street Journal, Tuesday May 3, 2005, p. B1; Timothy Aeppel, “Stung by Soaring Transport Costs, Factories Bring Jobs Home Again,” The Wall Street Journal, June 13, 2008, p. 1. “In a Pinch,” The Economist, October 11, 2008, p. 86.

Step 1 of 2

Make-or-buy strategy is the strategy of the firms which helps management decide that whether they should make the parts used in production in-house or they should go for buying the part form outside supplier. They decide it with respect to costing, quality. Resource management, opportunity cost, etc.