Triggering mechanisms in make-or-buy decisions: an empirical analysis.BACKGROUND
Decisions regarding outsourcing significant functions are among the most strategic that can be made by an organization. They address the basic organizational choice of the functions for which internal expertise is developed and nurtured and those for which such expertise is purchased. Thus, the make-or-buy decisions are often major determinants of profitability and can be significant to the financial health of the company (Yoon and Naadimuthu 1994). They can impact corporate strategy, as well as a company's cost structure and competitiveness, flexibility, customer service and the core competencies of the organization (Ford, Cotton, Farmer, Gross and Wilkinson 1993; Manders and Brenner 1995; McIvor and Humphreys 2000; Tayles and Drury 2001; Baily, Farmer, Jessop and Jones 2005).
Despite the importance of make-or-buy decisions, most contributions to this literature have been theoretical in nature; relatively little research has been undertaken to provide a thorough understanding of the make-or-buy process (Laios and Moschuris 1999; Canez, Platts and Probert 2000; Platts, Probert and Canez 2002).
The current research addresses make-or-buy processes in enterprises operating in Greece. The Greek business environment has undergone considerable changes during the past decade. More specifically, until the 1990s, enterprises had a high proportion of manufacturing in-house. Currently, firms outsource many of their activities to subcontractors in Greece as well as in other countries in the Balkans in order to save money. Given the enhanced presence of outsourcing and its direct relationship to the make-or-buy process, it is important to extend research in the direction of uncovering the reasons encouraging enterprises operating in Greece to initiate make-or-buy processes for items/services.
This study makes a twofold contribution. The first is to develop a more precise assessment of the importance of each trigger that initiates a make-or-buy investigation for an item/service in enterprises operating in Greece. The second contribution is to shed light on the relationship between the importance of each trigger and variations with organizational characteristics (environmental uncertainty, operations technology) as well as with characteristics of the item/service under make-or-buy investigation (type, method of acquisition). The conceptual model specifying the relationships among organizational characteristics, item/service characteristics and make-or-buy triggers is shown in Figure 1.
In the following section, the relevant literature is reviewed. The hypotheses and the research method are then described. The results of this study are then reported and discussed in the context of the existing knowledge in the field. Finally, managerial implications of the findings are presented, and directions for future research are identified along with the limitations of the study.
Organizational decisions on "what to make" and "what to buy" should cultivate and exploit the firm's core competencies. Hamel Ham´el
v. t. 1. Same as Hamble. and Prahalad (1994) postulated pos·tu·late
tr.v. pos·tu·lat·ed, pos·tu·lat·ing, pos·tu·lates
1. To make claim for; demand.
2. To assume or assert the truth, reality, or necessity of, especially as a basis of an argument.
3. that companies measuring competitiveness in terms of price only are inviting the erosion of their core competencies. They define core competence Core competence
Primary area of expertise. Narrowly defined fields or tasks at which a company or business excels. Primary areas of specialty. as the combination of individual technologies and production skills, which underlie a company's myriad product lines. A core activity is central to the company serving successfully the needs of potential customers in each market. The activity is perceived by customers as adding value to the enterprise and, therefore, constituting a major determinant of competitive advantage.
Quinn and Hilmer (1994) argued that firms should focus on core competencies and outsource those that are noncore. The advantages of this approach are said to be fourfold fourfold
1. having four times as many or as much
2. composed of four parts
by four times as many or as much
Adj. 1. : internal resources are maximized as they are concentrated on what the firm does best; core competencies become well developed and provide barriers against competitors; suppliers' investments are exploited; and cycle times are reduced. To achieve these benefits, managers should analytically select and develop core competencies that provide the firms' uniqueness, competitive edge and basis of value creation. Then, managers should determine strategically, rather than in a short-term or ad hoc For this purpose. Meaning "to this" in Latin, it refers to dealing with special situations as they occur rather than functions that are repeated on a regular basis. See ad hoc query and ad hoc mode. fashion, which activities to maintain internally and which to outsource. Finally, managers should assess the relative risks, especially the potential loss of crucial skills or control over the company's future directions, of outsourcing in particular situations (Bettis, Bradley and Hamel 1992; Doig, Ritter rit·ter
n. pl. ritter
[German, from Middle High German riter, from Middle Dutch ridder, from r , Speckhals and Woolson 2001; Quelin and Duhamel 2003).
Brown and Eisenhardt (1998) argued that core competencies as well as make-or-buy decisions are not static but rather dynamic and must be reconsidered as conditions (especially core competencies) change. An initial make-or-buy decision should not be regarded as final, but must be continuously revised at a later point in time. The outsourcing strategy must be designed to be dynamic and flexible; it has to evolve as the business evolves (Sanders and Locke 2005).
[FIGURE 1 OMITTED]
As operations progress, enterprises perform make-or-buy analyses at more tactical levels. These make-or-buy issues are viewed from an intermediate time perspective or from the standpoint of short-term planning. An intermediate make-or-buy planning may involve adjustments in production capacity and consideration of new or additional suppliers. Short-term make-or-buy planning focuses on decisions considering existing production capacities, established supplier relations and forecasted product demand for the immediate future. On both intermediate and short-term bases, make-or-buy issues may be triggered due to quality problems, cost considerations, lack of capacity, unsatisfactory supplier performance, sales fluctuations, introduction of a new product and modification of an existing product (Canez, Platts, and Probert 2000; Burt, Dobler and Starling starling, any of a group of originally Old World birds that have become distributed worldwide. Starlings were brought to New York in 1890; since then the common starling (Sturnus vulgaris) has spread throughout North America. 2003; Baily et al. 2005).
The relationship between uncertainty and structure is based on the premise that fast-changing environments result both in administrative difficulties and in nonstandard non·stan·dard
1. Varying from or not adhering to the standard: nonstandard lengths of board.
2. , highly complex tasks requiring high levels of adaptability and flexibility (Swamidass and Newell 1987; Vickery, Droge and Germain 1999). Organizational theory suggests that firms organized to deal with reliable and stable markets will not be as effective in complex, rapidly changing and unpredictable environments (Spekman and Stern 1979; Gordon and Narayanan 1984).
There are two apparently conflicting views of the relationship between environmental uncertainty and organizational structure. According to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. contingency theory Contingency theory refers to any of a number of management theories. Several contingency approaches were developed concurrently in the late 1960s.
They suggested that previous theories such as Weber's bureaucracy and Taylor's scientific management had failed because they , firms, in order to engender en·gen·der
v. en·gen·dered, en·gen·der·ing, en·gen·ders
1. To bring into existence; give rise to: "Every cloud engenders not a storm" the adaptability that permits rapid reaction to external change, should adopt "organic" structures that are less reliant on formal control, are decentralized de·cen·tral·ize
v. de·cen·tral·ized, de·cen·tral·iz·ing, de·cen·tral·iz·es
1. To distribute the administrative functions or powers of (a central authority) among several local authorities. and operate with fewer layers and narrower spans of control (Thomas and Grashof 1982; McQuiston 1989; Handy 1990; McWilliams, Naumann and Scott 1992; Hammer and Champy 1993).
In contrast to the contingency model, support is found in the buying literature (Cardozo 1980; Dutton 1986; McCabe 1987; Morris, Hansen and Pitt 1995) for the view that at high levels of environmental uncertainty, organizational decision-making processes are characterized by a constriction constriction /con·stric·tion/ (kon-strik´shun)
1. a narrowing or compression of a part; a stricture.constric´tive
2. a diminution in range of thinking or feeling, associated with diminished spontaneity. of authority. This means that decisions are made at higher levels of the organization by a smaller number of organizational members with an increase in rule-governed behavior, as decision units act to minimize the errors often associated with decision making in uncertain situations.
The role of operations technology in the structure and functioning of complex organizations has been the focus of a number of empirical studies Empirical studies in social sciences are when the research ends are based on evidence and not just theory. This is done to comply with the scientific method that asserts the objective discovery of knowledge based on verifiable facts of evidence. . However, this research seems to have generated more controversy than agreement about the importance of operations technology to organization.
On the one hand, some researchers, in line with the contingency theory, suggest that organizations should structure their activities in accordance with the demands of their transformation technologies (Avlonitis 1985; Naumann and Kim 1986). Specifically, organizations with routine technologies exhibit greater formalization for·mal·ize
tr.v. for·mal·ized, for·mal·iz·ing, for·mal·iz·es
1. To give a definite form or shape to.
a. To make formal.
b. and centralization cen·tral·ize
v. cen·tral·ized, cen·tral·iz·ing, cen·tral·iz·es
1. To draw into or toward a center; consolidate.
2. than organizations with nonroutine technologies.
On the contrary, a number of researchers argue that operations technology is not very important to organization structure, especially when compared to other "contextual" factors, such as size and dependence on other organizations (Reimann 1980; Marsh and Mannari 1981; Lincoln, Hanada and McBride 1986).
Type of Item/Service
The choice of whether to manufacture an item internally or purchase it on the outside can be applied to a wide variety of decisions on the following: parts needed for the production of goods for sale, a new building, new equipment, tooling and the like (Yoon and Naadimuthu 1994; Tayles and Drury 2001).
There is a whole class of make-or-buy decisions involving services or intangibles. Typical examples include marketing, information technology, legal, accounting, insurance, personnel, quality control, cleaning, security and maintenance (Anderson and Weitz 1986; Bryce and Bryce 1987; Buchowicz 1991; Fields 1995; Lacity, Willcocks and Feeny 1995; Kent 1996; Smith 1996).
The evolution of third-party logistics A third-party logistics provider (abbreviated 3PL) is a firm that provides outsourced or "third party" logistics services to companies for part, or sometimes all of their supply chain management function. providers (3PL) has led companies to the make-or-buy issue in logistics services (Dapiran, Lieb, Millen and Sohal 1996; Lieb and Randall 1996; Bhatnagar, Sohal and Millen 1999; Laarhoven, van, Berglund and Melvyn 2000).
Method of Acquisition
All make-or-buy decisions fall into one of the three categories defined as follows:
* M items are the items/services made by the enterprise before the make-or-buy issue.
* B items are the items/services bought before the make-or-buy issue.
* N items are the items/services used for the first time by the enterprise.
This classification of make-or-buy situations is quite similar to the well-known buyclass framework (Robinson, Faris and Wind 1967; Lilien and Wong 1984) of industrial buying decisions, as far as it makes a distinction in the way enterprises handle make-or-buy decisions between new items and existing items (i.e., M and B items). Moreover, this classification is realistic and parallels actual managerial decisions Managerial decisions
Decisions concerning the operation of the firm, such as the choice of firm size, firm growth rates, and employee compensation. . Managers often find themselves in situations where they are tempted to outsource an item produced internally, or to produce items bought from suppliers. By observing many make-or-buy situations, it can be established whether enterprises "increasingly move toward buy" (Lamming 1993; Nishiguchi 1994) and, more importantly, company practices can be analyzed and tested.
The previous sections indicate that organizational characteristics (environmental uncertainty, operations technology) and characteristics of the item/service under make-or-buy investigation (type, method of acquisition) are the independent variables, whereas the five make-or-buy triggers are the dependent variables. The exploratory nature of the research and the fact that make-or-buy triggers have not been examined before in this way precluded individual and detailed hypotheses. More specifically, in order to investigate the relationships between the independent and the dependent variables, the following null A character that is all 0 bits. Also written as "NUL," it is the first character in the ASCII and EBCDIC data codes. In hex, it displays and prints as 00; in decimal, it may appear as a single zero in a chart of codes, but displays and prints as a blank space. hypotheses were tested:
[H.sub.1]: The importance of make-or-buy triggers is not related to environmental uncertainty.
[H.sub.2]: The importance of make-or-buy triggers is not related to operations technology.
[H.sub.3]: The importance of make-or-buy triggers is not related to the type of the item/service.
[H.sub.4]: The importance of make-or-buy triggers is not related to the method of acquisition of the item/service.
Questionnaire Design and Content Validity content validity,
n the degree to which an experiment or measurement actually reflects the variable it has been designed to measure.
The 10 depth interviews were made with those companies that agreed to collaborate on the basis of a judgmental judg·men·tal
1. Of, relating to, or dependent on judgment: a judgmental error.
2. Inclined to make judgments, especially moral or personal ones: request sample of 35 companies operating in the Athens area. The interviews were conducted during working hours with the organizational equivalents of the Logistics Manager, the Purchasing Manager A Purchasing Manager is an employee within a company, business or other organization who is responsible at some level for buying or approving the acquisition of goods and services needed by the company. , the Production Manager, the Financial Director and the Engineering Executive. More specifically, interviewees were asked to recall a make-or-buy decision for an item/service carried out during the previous 2 weeks and to describe in detail the decision-making process (e.g., triggers, departments and/or hierarchical levels involved, decision-making factors, final choice).
The literature review and, mainly, the 10 depth company interviews led to the identification of five make-or-buy triggers (new product development, cost problems, quality problems, sales fluctuations and workload fluctuations). During the mail survey, respondents were asked to rate, using an anchored five-item interval scale (1=very low, 5=very high), the importance of each trigger for the specific make-or-buy situation.
Five dimensions (frequency of new product development in the enterprise, frequency of technological changes in the enterprise, frequency of appearance of new products in the market, frequency of changes in specifications and frequency of technological changes in the market) were used to assess environmental uncertainty. These dimensions, which were very similar to those developed by previous authors (Thomas and Grashof 1982; Miller and Friesen 1983; Dess and Beard 1984), were selected to be general enough to apply to all firms and products.
Respondents were asked to indicate the extent to which their firms use each of the five types of operations technology: custom, small batch, large batch, mass and continuous. This typology typology /ty·pol·o·gy/ (ti-pol´ah-je) the study of types; the science of classifying, as bacteria according to type.
the study of types; the science of classifying, as bacteria according to type. is easily understood in any business environment and is considered by a number of authors (Marsh and Mannari 1981; Heide and John 1992; Schmenner 1993; Stump stump (stump) the distal end of a limb left after amputation.
1. The extremity of a limb left after amputation.
Respondents were asked to indicate an item/service for which a make-or-buy decision has been made during the previous 2 weeks. This recall period was chosen to ensure that respondents would be able to provide accurate data. Moreover, they were asked to identify the method of acquisition (made, bought, used for the first time) of this item/service prior the make-or-buy issue.
To investigate the impact of the type of the item/service on the make-or-buy triggers, the items/services were classified in three categories. The first category, product-incorporated items, included the items that become part of the final product (e.g., product parts, raw materials, packaging items). The second category, nonproduct-incorporated items, included the items that are used in the production process but do not become part of the final product (e.g., maintenance items, capital items, spare parts Spare parts, also referred to as Service Parts is a term used to indicate extra parts available and in proximity to the mechanical item, such as a automobile, boat, engine, for which they might be used.
Spare parts are also called “spares. ). The third category, services, included all the services under make-or-buy investigation (e.g., maintenance, software, advertising). This classification is easily understood in any business environment and is proposed by a number of authors (Woodside and Samuel 1981; Kotler 1984; Mattson 1988).
A measure has content validity if there is general agreement among the subjects and researchers that the instrument has measurement items that cover all aspects of the variable being measured. Thus, content validity refers to the adequacy with which a measure assesses the domain of interest (Saraph, Benson and Schroeder 1989; Hinkin 1995). Content validity is not evaluated numerically, but it is subjectively judged by the researchers. Measures of each variable developed in this study have content validity, as selection of measurement items was based on both an extended review of the literature and the 10 depth company interviews.
The Annual Census of Greek Industry provided the sample frame for this study. The sample was drawn from a population of 580 industrial firms of all branches employing over 100 employees. Stratified sampling Noun 1. stratified sampling - the population is divided into subpopulations (strata) and random samples are taken of each stratum
proportional sampling, representative sampling
sampling - (statistics) the selection of a suitable sample for study was used, because it can produce sample statistics that are more precise and offer an opportunity for reducing sampling error (Churchill 1996).
The population of the companies was stratified stratified /strat·i·fied/ (strat´i-fid) formed or arranged in layers.
Arranged in the form of layers or strata. by size and, specifically, according to the number of employees (small=100-299; medium=300-499; large=500-999; very large=over 1000 employees). As the majority of the companies in the population (about 68 percent) were small in size (100-299 employees), the selection of the companies from each size stratum stratum /stra·tum/ (strat´um) (stra´tum) pl. stra´ta [L.] a layer or lamina.
stratum basa´le was based on a variable sampling fraction giving more weight to the large and very large companies. More specifically, a complete census coverage was undertaken within the large and the very large size strata, while only 60 percent of the companies in the medium size strata and 40 percent of the companies in the small size strata were selected using a random sampling procedure. The total sample selected for the mail survey was 300 industrial firms.
A detailed questionnaire was mailed to the General Manager of each firm. Respondents were sent a cover letter, questionnaire and stamped self-addressed return envelope. In addition, participants were promised an executive summary of the findings. Follow-up telephone calls were placed approximately 2 weeks after the mailing. The initial mailing and follow-up efforts generated 85 responses (28.3 percent response rate from the sample contacted).
One potential problem with a survey methodology is nonresponse bias (Lambert and Harrington 1990). One test for nonresponse bias is to compare the answers of early versus late respondents to the survey. The idea is that late respondents are more likely to answer the questionnaire like nonrespondents than are early respondents (Armstrong and Overton 1977). A multivariate T-test (the Hotelling-Lawley Trace) was computed using the key study variables to determine whether significant differences existed between early and late respondents. The results suggest that early respondents do not display statistically significant differences from late respondents.
Developing sound scales is a difficult and time-consuming process (Schmitt and Klimoski 1991). The success in observing true covariance Covariance
A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns move together. A negative covariance means returns vary inversely. between the variables of interest is dependent on the ability to operationalize the unobservable construct. Several criteria have been proposed for assessing the psychometric psy·cho·met·rics
n. (used with a sing. verb)
The branch of psychology that deals with the design, administration, and interpretation of quantitative tests for the measurement of psychological variables such as intelligence, aptitude, and soundness of behavioral measures. More specifically, measures should demonstrate internal consistency In statistics and research, internal consistency is a measure based on the correlations between different items on the same test (or the same subscale on a larger test). It measures whether several items that propose to measure the same general construct produce similar scores. reliability and construct validity construct validity,
n the degree to which an experimentally-determined definition matches the theoretical definition. .
The internal consistency of a set of measurement items refers to the degree to which items in the set are homogeneous. The internal consistency was examined by calculating Cronbach's [alpha].
In this study, the two organizational characteristics (environmental uncertainty, operations technology) as well as make-or-buy triggers were measured using an anchored five-item interval scale. The two-item/service characteristics (type, method of acquisition) were measured using a nominal scale See: principal scale; scale. . Factor analysis was applied to form a composite measure of environmental uncertainty. Using the SPSS A statistical package from SPSS, Inc., Chicago (www.spss.com) that runs on PCs, most mainframes and minis and is used extensively in marketing research. It provides over 50 statistical processes, including regression analysis, correlation and analysis of variance. reliability program, an internal consistency analysis was performed for the factor of environmental uncertainty. The overall scale demonstrates an acceptable degree of internal consistency with a Cronbach's [alpha] coefficient equal to 0.87, substantially exceeding Nunnally and Bernstein's (1994) threshold level Noun 1. threshold level - the intensity level that is just barely perceptible
intensity, intensity level, strength - the amount of energy transmitted (as by acoustic or electromagnetic radiation); "he adjusted the intensity of the sound"; "they measured the of 0.70.
A measure has construct validity if it measures the theoretical construct or trait that it was designed to measure (Saraph, Benson and Schroeder 1989). In this study, the construct validity of environmental uncertainty was evaluated by factor analyzing (principal components analysis with varimax rotation) the measurement items of environmental uncertainty. Only one factor with an Eigen value greater than I was extracted. This factor had an Eigen value of 7.60, and accounted for over 60 percent of the variance in the data. These findings suggest that the measure of environmental uncertainty is unidimensional with all items loading as expected. This can be used as tentative evidence of construct validity for environmental uncertainty. The score of this factor was used to assess the impact of environmental uncertainty on each make-or-buy trigger.
Cost and/or Quality Problems Mainly Force Companies to Investigate Make-or-Buy Issues
The analysis of responses to the 10 depth company interviews indicated that the most important make-or-buy trigger is the existence of cost problems for the item/service under consideration. More specifically, in four of the 10 cases, a make-or-buy investigation took place in order to reduce the cost of the item/service. Respondents in three enterprises stated that they investigated a make-or-buy issue in order to improve the quality of the item/service. On the other hand, in two cases enterprises decided to investigate a make-or-buy issue due to existence of significant fluctuations in workload and sales, whereas in one case the introduction of a new product was the major make-or-buy trigger.
The investigation of the responses within the sample interview companies provided insights into the reasons leading companies to the make-or-buy situation. Five reasons were uncovered in this investigation, and one of the main objectives of the mail survey was to determine their relative importance. The mean scores and standard deviations shown in Table I indicate the relative importance of each trigger.
It is interesting to note that none of the make-or-buy triggers scored a mean exceeding 3.62, probably because the importance attached to each one depends on the particular situation that the item/service faces when a make-or-buy issue arises. However, "Cost problems" and "Quality problems" appear to be the most important triggers, thus substantiating the argument that many firms are forced to investigate a make-or-buy issue on a piecemeal piecemeal
patchy, e.g. necrosis of the liver in which groups of hepatocytes are separated by small groups of inflammatory cells and fine, fibrous septa following extension of the inflammatory process beyond the limiting plate. basis and under pressure to reduce the cost and/or to improve the quality for the item/service under consideration.
There are, however, a number of triggers (workload fluctuations and sales fluctuations) that were noted as being of slight or little importance by the vast majority of the respondents. One possible explanation for the relatively low importance of these issues is that they tend, as the mail survey findings indicate, to be item/service-specific, in that the emphasis placed upon them tends to vary with the kind of item/service under investigation. In fact, unless the item/service under make-or-buy investigation influences considerably the quality of the final product and sales revenue, no considerable importance of these triggers is anticipated.
Organizational Characteristics and Item/Service Characteristics Influence Make-or-Buy Triggers
The framework for integrating make-or-buy triggers cannot be viewed as being equally applicable to all companies and to all make-or-buy decisions within a company. It is to be expected that some triggers are more important than others, depending on a number of organizational and item/service characteristics.
incremental; additional information is added at each step.
stepwise multiple regression
used when a large number of possible explanatory variables are available and there is difficulty interpreting the partial regression multiple regression analysis In statistics, a mathematical method of modeling the relationships among three or more variables. It is used to predict the value of one variable given the values of the others. For example, a model might estimate sales based on age and gender. was used to determine which triggers listed in Table I were significantly related to environmental uncertainty and operations technology. Because the data supported the assumptions for a multiple regression analysis (normality normality, in chemistry: see concentration. , linearity and equality of variances), no transformation was performed on the dependent variable (make-or-buy triggers).
Multivariate analysis of variance (MANOVA MANOVA Multivariate Analysis of the Variance ) was employed to compare simultaneously the importance of make-or-buy triggers across the type and the method of acquisition of the item/service under make-or-buy investigation. The model satisfied the assumptions of multivariate analysis of variance (identity of the population correlation matrix Noun 1. correlation matrix - a matrix giving the correlations between all pairs of data sets
statistics - a branch of applied mathematics concerned with the collection and interpretation of quantitative data and the use of probability theory to estimate population , homogeneity Homogeneity
The degree to which items are similar. of covariance matrices, equality of error variances). When significant differences were noted in the MANOVA results, a post-hoc analysis using Tukey's studentized range test for pairwise comparisons of means was conducted to identify the differences.
The results of the statistical analyses, shown in Tables II-V, as well as the post-hoc analysis suggest the following points:
* As the level of environmental uncertainty increases, sales fluctuations exert more impact on the make-or-buy initiation process for an item/service. Therefore, the first null hypothesis null hypothesis,
n theoretical assumption that a given therapy will have results not statistically different from another treatment.
n is rejected.
* As the extent of use of custom operations technology increases, workload fluctuations exert more impact on the make-or-buy initiation process for an item/service. Therefore, the second null hypothesis is rejected.
* As the extent of use of continuous operations technology increases, new product development exerts less impact on the make-or-buy initiation process for an item or service. Therefore, the second null hypothesis is rejected.
* Workload fluctuations and sales fluctuations exert more impact on the make-or-buy initiation process for product-incorporated items than on the respective process for nonproduct-incorporated items and services. Therefore, the third null hypothesis is rejected.
* Cost problems and quality problems exert more impact on the make-or-buy initiation process for M and B items than on the respective process for N items. Therefore, the fourth null hypothesis is rejected.
Enterprises Investigate Make-or-Buy Issues on an Ad Hoc Basis
The findings of this study confirm the composite nature of the make-or-buy initiation process. The evidence suggests not only that some triggers are more important than others but also that the effect of some issues is greatly influenced by organizational and/or item/service characteristics.
This investigation highlights the fact that enterprises in Greece apply the practice of make-or-buy decision-making on an ad hoc basis, without a predetermined pre·de·ter·mine
v. pre·de·ter·mined, pre·de·ter·min·ing, pre·de·ter·mines
1. To determine, decide, or establish in advance: plan. Most responding firms were forced to investigate a make-or-buy situation under the pressure to reduce cost and/or to improve the quality of the item/service. In this study, over two-thirds of the companies stated that they investigated the make-or-buy issue due to cost and/or quality problems. It is interesting to note that the effect of these two triggers is not significantly differentiated according to organizational characteristics and to the type of the item/service under make-or-buy investigation. On the contrary, the method of acquisition of item/service greatly influences the importance of cost and quality problems as make-or-buy triggers. Both issues exert more impact for items/services used prior the make-or-buy investigation. This can be attributed to the fact that for these items/services, enterprises have been able to gain data and experience regarding in-house production or buying and, therefore, can assess the necessity of examining the possibility of outsourcing or in-house production in order to overcome these problems.
Besides cost and quality problems, a number of companies stated that they are forced to investigate a make-or-buy situation for an item/service due to new product development, workload fluctuations and sales fluctuations. Whereas the overall importance of these triggers is lower than the respective importance of cost and quality problems, this importance is rapidly increasing under certain circumstances.
The impact of sales fluctuations is very large for companies operating in a rather unstable environment. This may be attributed to the fact that a turbulent environment is characterized by frequent introduction of new products in the market, major modifications of the existing products and extensive technological improvements. Under these circumstances, companies are forced to proceed to a make-or-buy investigation for an item/service in order to minimize the effect of sales fluctuations on the level of production capacity.
Workload fluctuations are an important driving force for make-or-buy investigations in enterprises using custom operations technology. This may be due to the fact that the production process of these enterprises is not stable during the year. The workload is characterized by large ups and downs ups and downs
Alternating periods of good and bad fortune or spirits.
ups and downs
alternating periods of good and bad luck or high and low spirits , because the final products are not consumable A material that is used up and needs continuous replenishment, such as paper and toner. "The low-tech end of the high-tech field!" , but are produced to meet the customized requirements of the customers. These huge workload fluctuations increase the risk of overloading or idle production capacity. In order to resolve this problem, companies investigate the feasibility of insourcing (1) Doing work with inhouse employees. Contrast with outsourcing.
(2) Creating jobs in your country by an organization that is foreign owned. Contrast with outsourcing. or outsourcing items/services.
New product development is not an important driving force for make-or-buy investigations in enterprises using continuous operations technology. This may be due to the fact that these enterprises adopt a routine technology, which is characterized by relatively limited introduction of new products and/or major modifications of existing ones.
The type of item/service differentiates the effect of workload fluctuations and sales fluctuations. More specifically, these triggers play a significant role in leading firms to investigate a make-or-buy situation for product-incorporated items. This can be explained by the fact that workload and sales fluctuations frequently change the conditions of production and distribution of the final products. This situation usually forces companies to review the manner of acquisition (make versus buy) of product-incorporated items in order to free production capacity or to prevent the risk of idle capacity.
Implications for an Enterprise Facing a Make-or-Buy Issue
The basic conclusion derived from this study is that firms operating in Greece are forced to investigate make-or-buy situations mainly due to cost and/or quality problems. The impact of the remaining triggers is generally limited, but is exaggerated under certain circumstances. The findings tend to suggest that the nature of the make-or-buy initiation process will be affected by organizational and item/service characteristics.
The most obvious implication of this study is that it is quite difficult to set a formal procedure that management should follow at the make-or-buy initiation process, which will be applicable to all companies and all items/services within a company. There are distinct variations in behavior patterns vis-a-vis the make-or-buy initiation process, not only among companies operating in different business environments but also within a company.
This does not mean that normative models will have no place in the area of make-or-buy situations. The point here is that the search for the "golden," "general purpose" make-or-buy model should be replaced with a search designed to uncover the make-or-buy decision-making process as it is being conducted by management in particular organizational settings and for particular items/services.
The results of this research have important practical implications for purchasing and other managers involved in make-or-buy investigations. They show that the vast majority of firms operating in Greece have not taken a strategic view of make-or-buy situations. These decisions are made most frequently by default with little consideration for the long-run competitiveness of the organization. Also, the strategic aspects of make-or-buy analyses, including core competencies, are not taken into consideration. Clearly, there is a need for enterprises to develop sound supply strategies and formalized for·mal·ize
tr.v. for·mal·ized, for·mal·iz·ing, for·mal·iz·es
1. To give a definite form or shape to.
a. To make formal.
b. plans so they can gain access, by make-or-buy investigations, to important items in an optimum, long-term and advantageous way.
Implications for an Enterprise Offering to Provide the Item/Service Under Make-or-Buy Investigation
For suppliers, the make-or-buy phenomenon has some more challenging implications. To illustrate, if a prospective customer firm has the production and engineering capabilities to produce a component part, all the firms in the industry supplying such a part now face a new competitor--their own prospective customer. This means a supplier must compete with his own customers as well as with industry competitors. Orders can be lost not only to competitors but also to prospective customer firms that decide to manufacture themselves rather than to purchase from supplying firms.
This fact poses a real threat for supplying organizations. Not only must they know the marketing behavior of all competitive suppliers, but they must also know enough about prospective customer firms to determine whether or not they have the capability of producing required products in-house. If these firms do have this capability, the marketing people must then determine the customers' costs of producing that product, because it is with these costs that the marketer's price must compete whether it is realized or not. Stated in another manner, a particular supplier may have the lowest price of all respected suppliers in an industry and yet lose an order if that price is higher than the cost to a prospective customer firm to produce the required product in-house. What this implies is that many suppliers must know as much about their present and potential customers' cost structures as they know about their competitors' prices.
On the other hand, make-or-buy represents a major opportunity to sell the marketer's offerings to companies that had previously been self-sufficient for a product or service. To be able to do this successfully, the supplier must have a clear and detailed knowledge of a customer's requirements, skills, internal operations and strategy. Perhaps more important, it means that the supplying firm must have a clear view of exactly what it has to offer and what its own capabilities are. For example, many companies choose to buy rather than make because of the production skills of a supplier rather than because of its superior product specification. This means that the purchaser is concerned about product consistency and cost rather than enhanced performance. So the successful supplier must have a thorough knowledge of its own production capabilities to be able to take a proactive approach to potential clients.
LIMITATIONS AND DIRECTIONS FOR FUTURE RESEARCH
The results should be interpreted in light of limitations inherent in the study. First, the response rate was 28.3 percent. This rate can be considered fair for mail surveys, and the final sample size was considered adequate. Obviously, a larger sample would permit firmer conclusions to be drawn from the statistical analysis. Second, this study was conducted in a specific country in the Balkans and in European Union, limiting the generalization gen·er·al·i·za·tion
1. The act or an instance of generalizing.
2. A principle, a statement, or an idea having general application. of the results. Due care must thus be exercised in extrapolating the conclusions and implications from this research to a wider region or to the whole population of European manufacturers. Finally, each respondent described only one recent make-or-buy issue. Therefore, caution should be exercised in generalizing the findings to all make-or-buy issues faced by an enterprise.
The limitations of this study provide directions for future research. It would be useful to replicate this research, achieving a higher response rate, in Greece as well as in other countries in the Balkans and in European Union, in order to investigate the extent to which the findings presented above can be generalized. Future studies should investigate the make-or-buy process at a more strategic level. Furthermore, it would be of interest to investigate whether findings of this study are applicable in countries with an extended supply/subcontractor base. During these studies, each participating company could be asked to contribute and describe two most recent make-or-buy cases instead of one. This would permit each responding firm to offer more valuable information.
Given the above limitations, the research still provides a useful perspective on the challenges and opportunities associated with make-or-buy decisions. As outsourcing initiatives increase, more sophisticated research attention should be focused on make-or-buy processes in organizations.
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Table I MEANS AND STANDARD DEVIATIONS FOR MAKE-OR-BUY TRIGGERS Make-or-Buy Triggers Means Standard Deviations Cost problems 3.62 1.54 Quality problems 3.40 1.63 New product development 2.34 1.61 Workload fluctuations 1.90 0.92 Sales fluctuations 1.84 1.13 Table II STEPWISE REGRESSION MODEL OF ORGANIZATIONAL CHARACTERISTICS ON SALES FLUCTUATIONS Variable B SE [beta] [R.sup.2] F-Statistic Environmental uncertainty 0.267 0.124 0.236 0.056 4.67 (a) (a) p < 0.05. Table III STEPWISE REGRESSION MODEL OF ORGANIZATIONAL CHARACTERISTICS ON WORKLOAD FLUCTUATIONS Variable B SE [beta] [R.sup.2] F-Statistic Custom 0.355 0.128 0.298 0.089 7.71 (a) operations technology (a) p < 0.01. Table IV STEPWISE REGRESSION MODEL OF ORGANIZATIONAL CHARACTERISTICS ON NEW PRODUCT DEVELOPMENT Variable B SE [beta] [R.sup.2] F-Statistic Continuous -0.264 0.089 -0.316 0.100 8.77 (a) operations technology (a) p < 0.01. Table V MANOVA MODEL OF ITEM/SERVICE CHARACTERISTICS ON MAKE-OR-BUY TRIGGERS Make-or-Buy Triggers Type (a) Method of Acquisition Cost problems 1.43 (0.25) 11.59 (0.00) (b) Quality problems 0.78 (0.46) 6.79 (0.00) (b) New product development 0.65 (0.52) 0.52 (0.60) Workload fluctuations 10.80 (0.00) (b) 1.92 (0.15) Sales fluctuations 9.16 (0.00) (b) 0.06 (0.94) Make-or-Buy Triggers Type x Method of Acquisition Overall Model Cost problems 2.20 (0.08) 5.46 (0.00) (b) Quality problems 2.40 (0.06) 3.16 (0.00) (b) New product development 1.87 (0.13) 1.27 (0.27) Workload fluctuations 1.41 (0.24) 3.96 (0.00) (b) Sales fluctuations 0.19 (0.94) 2.77 (0.02) (a) The first number represents F-values, and the second number in parentheses represents p-values. (b) p < 0.01. MANOVA, multivariate analysis of variance.