Summary
Highlights
Companies must decide whether to perform a service or produce a good in-house ('Make') or outsource it to an external company ('Buy'). This decision is crucial for product offerings.
Important goals include technical factors like having the right material, in the right quality, at the right place, at the right time (the '4 R's of procurement'). Economically, the goal is to minimize procurement costs while meeting technical objectives.
Outsourcing (Fremdbezug) involves only variable costs, which increase with quantity. In contrast, in-house production (Eigenfertigung) incurs both variable and fixed costs, such as machinery investments.
The SimpleCompany AG faces a 'Make or Buy' decision for its new SimplePhone. In-house production involves €25 million in fixed costs plus €225 per unit. Outsourcing to ChinaCompany AG costs €265 per unit with no fixed costs, due to cheaper labor but added transport and profit margins. The estimated market demand is 750,000 units annually.
By plotting cost functions, the break-even point is found at 625,000 units. Below this quantity, outsourcing is cheaper; above it, in-house production is more cost-effective. Since demand is 750,000 units, the SimpleCompany AG should opt for in-house production ('Make').
Beyond costs, other factors influence the decision. In-house production offers control over the manufacturing process and allows for internal knowledge accumulation. Outsourcing provides strategic flexibility due to fewer fixed costs and access to supplier expertise. The video concludes with a relatable everyday example.