The Complexity of ‘Make or Buy’

Manufacturers have to decide between containing ancillary technologies within a shop itself and finding suppliers that are better at manufacturing certain technologies that are outside the shop’s core competencies.

Production Machining’s readers make things. It’s in your DNA, and in most cases, this penchant has been parlayed onto successful businesses. These businesses form the foundation for our manufacturing base, which is a vital pillar of wealth creation so critical to our national economy.

There is a strong, independent spring that runs through manufacturers. For much of Industry 2.0 and Industry 3.0, manufacturing could feasibly expect to structure the business in a vertical integrated unit with much of the skill sets contained within the shop itself.

Early in my career, I worked for a large machine tool builder that took the concept of vertical integration to extremes. It had its own foundry where I started my metalworking career, ground its own ballscrews, made its own boxways, and manufactured a control for its CNC machines.

Today, that degree of integration sounds rather archaic, but it worked for many years for the company—until it didn’t. What the company eventually had to come to face was the classic decision that all shops are faced with—make or buy.

As technology has advanced, manufacturers look toward finding suppliers that are better at manufacturing certain technologies that are outside the shop’s core competencies. There was a time that many of these ancillary technologies could be contained within the shop itself. However, today the shear breadth of complexity required to operate a manufacturing enterprise is often beyond the ability of a single shop to integrate into its production mix.

At the company that I first worked for, management realized that building its own CNC was outside its core competency. The company built a good CNC, but economies of scale kicked in and the cost of manufacture coupled with software development caused the company to fall behind in the rapidly developing world of electronics. The company was founded on building machine tools, and trying to compete in a fast-moving specialty technology such as CNC was simply outside of its wheelhouse. Besides, there were good companies that supplied CNCs as their core business and focused exclusively on that technology. CNC was not a sideline for these companies. Nor is it today.

I wrote an article earlier this year about a Chicago shop that has been very successful in multi-spindle production of precision parts. It’s a multi-generational family business. Between its cam and CNC multi-spindles, it burns through many form tools in its production schedule. For a long time, as the business grew, it used a local tooling house to supply its new form tools and regrind its existing tools.

As it happens, this shop’s growth eventually out-stripped the supplier’s ability to keep up. Delivery became a problem, and the situation was a problem for both companies. The supplier was stretched to provide proper service to its longtime customer, and the customer needed its tools yesterday.

The shop, by agreement with the supplier, installed an EDM unit in its tool room—the idea being to cut and sharpen its form tools in house. One of the main motivations for the make or buy decision is to maintain a secure line of supply. This shop is learning EDM technology in house and securing its form tool availability when it’s needed. Long term, it may consider commercialization of its EDM capability.

The make or buy decision is dynamic. Choosing to buy, for example, requires analysis of in-house capabilities versus what might be available in the marketplace. In addition, a cost analysis of producing in house as opposed to purchasing is another factor.

However, regardless of whether the decision is make or buy, the topic should be revisited periodically. Change is inevitable, both inside the organization and outside of it, and monitoring performance and P&L is an important aspect of the decision.

Ours is a much more complex world than what our fathers and grandfathers inhabited. The modern manufacturing environment would probably blow their minds. At the end of the day, manufacturers still make things and that’s their core competency.

There are many more non-core competency distractions to running a shop; deciding which to deal with and which to farm out is at the crux of the make or buy decision. However, it’s also important to remember that things change and being nimble enough to react is also part of the make or buy decision.