General Motors

2001
Revenue 177.3 Billion $
Annual Spending 143.8 Billion $
Net profit margins 0.3 %
Reduction in spending by 0.5 % would
increase the profits by 0.72 Billion $
The same amount of profits through higher
sales, GM would have to increase revenue by
a startling 240$ an impossible challenge

A Framework for buy and make

decisions
A Frame work developed by fine and whitney.
As per whtney firms ususally decides to
outsource because of :
Dependency on capacity
Dependency on knowledge

Outsourcing decisions at
Toyota
Engines:

Has knowledge and the capacity to

produce and indeed produces 100% of its
requirement

Transmissions

components:

Has
the
capability and knowledge but no capacity. It
designs all the components but depends on its
suppliers capacities. 70% of its components are
outsourced

Vehicle Electronic system: It is designed and

supplied by suppliers. The firm has a dependency
on both capacity and knowledge.

Toyota seems to vary its outsourcing practices

depending on the strategic role of the
components and subsystems
The more strategically important the
component is the smaller dependency on the
knowledge or capacity
It is important to understand the product
architecture when considering what to outsource

Product Architecture
Integral product:
Product made up from components whose functionalities are
tightly related

Integral products are made up of the shelf components

Integral products are designed as a system by taking a top

down design approach

Integral products are evaluated based on system

performances and not based on component performance

Components in integral products perform multiple functions.

Example:

Product Architecture
Modular product:
Product can be made

up after combining different

components

Components are independent of each others

Components are interchangeable

Standard interfaces are used

A Components can be designed or upgraded with

little or no regards to other components

A Customer preferences determines the products

configurations
Example:

Fine and Whitneys Frame work for

make or buy decisions
A Frame work for make or buy decisions:

Product

Dependency on
knowledge and
capacity

Independent
for
knowledge dependent
for capacity

Modular

Outsourcing is
risky

Outsourcing is
an opportunity

Integral

Outsourcing is
very risky

Outsourcing is
an options

Independent
for
knowledge and
capacity
Opportunity
to
reduce cost through
outsourcing
Keep production internal

The hierarchical model for

make or buy decisions
Fine and whitney provides general
approach for make and buy decisions but
does not help with component level out
sourcing strategies.
How to determine whether a particular
component should be made, in house or
outsourced.

The five criteria which determines whether to make or

outsource the component was developed by fine and
whitney, these criteria are:
1.
2.
3.
4.
5.
a.
b.
c.
d.

Customer importance
Component clock speed
Competitive positions
Capable suppliers
Architecture
Based on the above criteria the decisions may be to
Outsource
Keep in house
Acquire capability
Develop strategic partnership with a supplier or help develop
supplier capabilities

Decision Criteria
Components

Clock speed

Competitive
position

Decisions

Important

Fast

Strong

Produce in house

Not Important

Slow

Weak

Out source

Customer value high

Fast

Weak

Develop in house
capacity

Customer value high

Slow

Weak

Depends on the
product
architecture , If
modular,
outsource, if
integral, produce
or joint develop

Discussion Question
Discuss the appropriate sourcing strategies
for a component with low customer
importance, fast Technological clock-speed
and no competitive advantage