“We paid what?!?! For that?!?!” I suspect that line has been screamed by management since the dawn of business. And once the boss calmed down and was faced with tightening the business’ belt/tunic/animal skin, his next question was probably…”Can’t we make it ourselves cheaper?”

Make vs Buy is a question being asked by manufacturers everywhere in these tough economic conditions, which pair soaring commodity prices and weak sales. Industry Week recently interviewed Senior Category Manager Pat Furey on the variables manufacturers should consider when determining whether producing in-house or buying your inputs makes the most fiscal sense.

What advice did Pat give?

• Stick to what you do best - By focusing on core competencies and leaving the other inputs to third parties (who are doing what they do best), you’ll reduce operating expenses and have a more nimble reaction time when market conditions change.
• Do the math - According to Pat, companies often have a harder time estimating internal production costs than comparing quotes from vendors. Know and model your internal cost drivers properly to avoid surprises down the road.
• Read the news - Commodity markets, currency fluctuations and political conditions must weigh into your decision. So stay on top of the key categories and work to identify opportunities ahead of the curve.
• Don’t sacrifice quality and control for savings - Even if you could outsource a component and save money, it may not be worth while if that item is mission critical or contains strategic IP. Minimizing the risk by producing in-house can be worth the added expense.
• Consider your customers - Will sending production to a vendor sacrifice either quality or timeliness? If your customers aren’t happy, any savings are for naught.
• Engage engineering earlier - If procurement works with engineering to identify options, efficiencies and vendors early on, their input can help put all possibilities for production on the table.

Justin Fogarty is Managing Editor of Supply Excellence. Feedback and questions about the site may be directed to Justin at jfogarty[at]ariba.com.