CIPS L4m6 Supplier Relationships · Free Practice Question Medium
Question 9
Friends Company needs a specific type of valves for its product. It buys the valves from a supplier for $5 each. The procurement team checks the market and finds no cheaper alternatives. The company has enough capacity to make the valves in-house. What factors should the company consider before in-sourcing the valve production? Select TWO that apply.
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A
Type of tendering process
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B
Negotiation strategies
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C
Cost effectiveness
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D
Supplier selection criteria
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E
Ability to meet performance standards
Reveal correct answers
Correct answers: C, E
Explanation
The scenario deals with make and buy decision. The make-or-buy decision is the act of making a strategic choice between producing an item internally (in-house) or buying it externally (from an outside supplier). The buy side of the decision also is referred to as outsourcing. Make-or-buy decisions usually arise when a firm that has developed a product or part—or significantly modified a product or part—is having trouble with current suppliers, or has diminishing capacity or changing demand.
Make-or-buy analysis is conducted at the strategic and operational level. Obviously, the strategic level is the more long-range of the two. Variables considered at the strategic level include analysis of the future, as well as the current environment. Issues like government regulation, competing firms, and market trends all have a strategic impact on the make-or-buy decision. Of course, firms should make items that reinforce or are in-line with their core competencies. These are areas in which the firm is strongest and which give the firm a competitive advantage.
The two most important factors to consider in a make-or-buy decision are cost and the availability of production capacity. Burt, Dobler, and Starling warn that "no other factor is subject to more varied interpretation and to greater misunderstanding" Cost considerations should include all relevant costs and be long-term in nature. Obviously, the buying firm will compare production and purchase costs. Burt, Dobler, and Starling provide the major elements included in this comparison. Elements of the "make" analysis include:
- Incremental inventory-carrying costs
- Direct labor costs
- Incremental factory overhead costs
- Delivered purchased material costs
- Incremental managerial costs
- Any follow-on costs stemming from quality and related problems
- Incremental purchasing costs
- Incremental capital costs
Reference:
- CIPS L4M6 study guide page 2-3 / The new syllabus 2024
LO 1, AC 1.1
Discussion
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