We already discussed how to define business need and develop specification in the previous post. If you didn’t read that part, you can go to that post following the link above.
Those who already have gone through that post, try to recall your memory what you have learnt on defining business need.
The most important thing is that, since this module is the constructive response exam, you have to write down the answer in the descriptive manner. In this case you must provide some real life example in order to get a good exam score.
However, now let’s start the present topics of the post. That is how to carry out market analysis and make or buy decision. This is the second stage of CIPS procurement cycle as you already know.
You need to memorize those stage one after another sequentially. Because, it has got a chronological order. If one step is skipped, the cycle would not be complete.
Okay, let’s get started on the topic – how to carry out market analysis and make or buy decision.
Market analysis and make or buy decision
Once the customers need is defined and understood, the procurement professional will start to research the best means to meet that need.
The buying organization will to assess their internal capabilities, to see whether the need can be fulfilled internally.
If not, buyers need to review the market in order to make an informed decision on where to source, if there is an option to buy.
If the need can be fulfilled internally, buyer should still explore the external market to verify if delivering the requirement in house is the most effective method of satisfying the need.
Reviewing the market and the availability of goods or services required, involves the following things to consider-
1) The Economic Situation:
Depending on the need, the best option may be to source from an overseas supplier. If the economy of supplier’s country is weaker, there is a high chance that buying from abroad may provide better value.
2) Currency fluctuations:
When buying from overseas the exchange rate should be considered. Making a calculated decision about when to commit to buy can add value.
3) Supply and demand issue:
This relate closely to price within the market. If the supply is surplus to demand, the price will be more favorable. On the other hand, if demand exceeds the supply, the price becomes higher.
So, in between making or buying, which option will be the most cost-effective solution?
The answer or the decision will relate to another issue for a buying organization. That is the amount of control the buyer wants to have and the amount of risk associated with the particular need.
The following figure shows the make or buy decision. Where the need is critical to the customer or to the customer’s organization, the case to make or supply the need in-house become crucial.
Because, in-house manufacture provides a high level of control and a lower level of risk than when buying the product needed.
On the other hand, if the need is not critical to the success of the customer or their organization, then it is better to buy the needed product.
Buying in goods or outsourcing services reduces the level of control the buying organization has and therefore increases the risk.
Example: Suppose an organization sells heavy-duty padlocks to an established customer base. The organization has manufacturing capabilities, a warehouse facility, and skilled workers with years of experiences making padlocks.
Now, explain, which of the goods or services listed below should be make or carried out in-house, and which should be bought or outsourced, giving reasons for your decisions.
- Best-selling padlock, sold to several core customers
- Worst-selling padlock, sold to spot customers
- Cleaning contract
- Recruitment of temporary staff.