Strategic aspects of the make or buy decision-

Vertical integration provides certain advantages. An integrated company is less dependent on its suppliers and may be able to ensure a smoother flow of parts and materials for production then a non-integrated company.

For example, a strike against a major parts supplier can interrupt the operation of a non integrated company for many months; whereas an integrated company that is producing its own parts might be able to continue operations. Also some company feels that they can control quality better by producing their

own parts and materials.

And some company feels that buying is better than produce. So they buy the products.

Definition of make or buy decision:

A decision concerning whether an item should be produce internally or perchance from an outsider supplier.

Sell or process further decision:

A decision as to weather a joint product be sold at the split of point or sold after further process.

Constraint:

A limitation under which a company must operate, such as limited available machine time or raw material, that’s restricts the company’s ability to satisfy demand.

Utilization of constrained resource:

Managers are routinely faced with the problem of deciding how constrained resources are going to be utilized. A medicine company, for example, has a limited amount of floor space and therefore cannot stock every product that may be available. A manufacturer has a limited number of machine and limited number of direct labor hours at its disposal.

When a limited resources of some type restricts the company’s ability to satisfy demand. The company is said to have a constraint. Since the company cannot fully satisfy demand. The manager must decide how the constrained resource should be used. Fixed cost are usually unaffected by such choices, so the course of action that will maximize the company’s total contribution margin should ordinarily be selected.

RELAXING (EVALUATE) THE CONSTRAINT:

An action this increases the amount of constraint resource. This action can be happened in many types of operation.

SPECIAL ORDER:

A one-time order that is not considered part of the company’s normal ongoing business.

SPLIT OF POINT:

That point in the manufacturing process where some or the entire joint products can be recognized as individual products.