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Conduct Make vs. Buy Decision Analysis

Once the Postal Service has produced an internal cost estimate and suppliers have shared their cost estimates in response to the request for information (RFI), the Postal Service is able to determine whether to make or buy the given requirement. This decision is reached by conducting a Make vs. Buy Decision Analysis. In some cases, specifically those involving contracting out services currently performed by Postal Service bargaining unit employees, the make vs. buy decision is made following the receipt and review of proposals. Such make vs. buy decisions require coordination between the Client, Legal Counsel, Labor Relations, Supply Management (SM), and potentially the Strategic Initiatives Action Group (SIAG).

A make vs. buy decision analysis should cover both strategic and operating considerations. The strategic aspect is centered on protecting the Postal Service's competitive advantage, while the operating aspect is concerned with tactical and cost-related issues. If the strategic decision conflicts with the tactical decision, the former takes precedence over the latter.

Strategic Considerations

A product or service meeting the following conditions is considered strategic:

It is critical to customer satisfaction.

It requires specialized design and manufacturing skills or equipment, and the number of capable and reliable suppliers is extremely limited.

It falls under existing Postal Service core competencies or within those that must be developed to fulfill future plans.

Products/services that do not meet these conditions are considered nonstrategic and should always be outsourced unless compelling tactical reasons indicate that outsourcing would compromise best value to the Postal Service.

A strategic product/service requires further analysis before one can decide whether to make or buy from a strategic standpoint. Specifically, if the strategic product/service can be broken down into families of components and parts that are also strategic, it should be made in-house. On the contrary, if it is not divisible or its components or parts are not strategic, it should be outsourced.

Figure 1.10

Analyzing Strategic Make vs. Buy Decisions

image of a diagram analyzing strategic make vs buy decisions

* Note: In some cases, it is not possible to make an item in-house in the short term. This may be the result of budget constraints, capability problems, capacity limitations, etc. In these cases, the item must be outsourced.

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Operating Considerations

The following considerations can help the Purchase/SCM Team consider relevant tactical factors affecting the make vs. buy decision:

Considerations that favor a "make decision" include:

Cost considerations (less expensive to make)

Desire to integrate plant operations

Productive use of excess plant capacity to help absorb fixed overhead

Need to exert direct control over production and ensure supply continuity

Need to exert direct control over quality

Design secrecy required

Unreliable suppliers

Desire to maintain a stable workforce (in periods of declining sales)

Considerations that favor a "buy decision" include:

Limited production facilities

Limited internal labor/resources

Cost concerns (less expensive to buy)

Small volume requirements

Suppliers' research and specialized know-how

Desire to maintain a stable workforce (in periods of rising sales)

Desire to maintain a multiple-source policy

Indirect managerial control considerations

Purchasing and inventory considerations

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Cost Considerations

Cost is a crucial tactical consideration. An estimate of the cost for the requirement must be developed based on a detailed analysis of the costs expected to be generated by performing the work in-house or through a supplier. The following costs should be major elements in a make vs. buy cost estimate.

To Make:

Delivered purchased material costs

Direct labor costs

Any follow-on costs stemming from quality and related problems

Incremental inventory carrying costs

Incremental factory overhead costs

Incremental managerial costs

Incremental purchasing costs

Incremental costs of capital

Environmental costs

Disposal costs

To Buy:

Purchase price of the part

Transportation costs

Receiving and inspection costs

Incremental purchasing costs

Any follow-on costs related to quality or service

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Justify Postal Service Investment

Whether the decision is to make or buy, all investment projects must be justified either as an economic opportunity or as a means of sustaining existing Postal Service operations into the future by correcting or eliminating a problem. The Decision Analysis Report (DAR) is a document prepared by the requiring organization to recommend an investment for approval, and it is used for decisions regarding high-dollar-value projects. For sample DARs and specific DAR requirements, including dollar-value thresholds for investments requiring Headquarters approvals and DARs, refer to Handbook F-66, General Investment Policies and Procedures.

The Justification of Expenditure (JOE) is a one-page document used to request approval for small field projects that do not require a more formal DAR. Although not required, Headquarters organizational units may use JOEs to justify small investment expenditures within their approval authority. For a more detailed discussion of JOEs, including samples in the recommended format, refer to Handbook F-66C, Field Investment Policies and Procedures.

All investment projects that require Headquarters review and approval must follow the instructions detailed in Handbook F-66, including validation, before being forwarded to the appropriate official for final approval. Capital items that are centrally purchased by Headquarters, but are locally funded (such as administrative or non-mail-hauling vehicles), must be justified by the responsible Headquarters organization. This also applies to other nationally mandated programs.

Quadrant Approach

A quadrant approach classifies all Postal Service purchases into four categories, depending on their impact on the Postal Service's core competencies (noncore versus core) and complexities (standard versus custom). Attributes of certain quadrants may cause a propensity for outsourcing over making in-house or vice versa.

Figure 1.11

Four Quadrants

pp_ps1_At Anchor0drawing showing four quadrants

Quadrant I: Noncore/Customized Purchases

Products and services in this quadrant require customized attention, but do not provide direct value to the end Client. A potential opportunity exists to take advantage of suppliers' specialized knowledge and research.

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Quadrant II: Core/Customized Purchases

Products and services in this quadrant are highly unique and specialized. External suppliers may face challenges in meeting quality specifications on a consistent basis; making the item in-house would seem to assure quality and lower risk. However, strategic concerns and resource limitations may justify buying from established and innovative suppliers. Further cost/benefit analysis is recommended to finalize the make vs. buy decision for products and services of Quadrant II.

Quadrant III: Noncore/Standard Purchases

Products and services in Quadrant III are fairly standardized and available from a wide pool of suppliers. Suppliers may have a more effective and reliable process for producing the requirement than the Postal Service.

Quadrant IV: Core/Standard Purchases

Products and services in this quadrant are central to Postal Service operations and fairly uniform in their makeup. They often have significant impact on reducing cycle time, a key strategy for gaining competitive advantage. The impact on cycle time and business continuity is an important consideration of the make vs. buy decision. Further cost/benefit analysis is recommended to finalize the make vs. buy decision for products and services of Quadrant IV.

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