Abstract
An important facet of a company’s manufacturing strategy concerns the question of whether to make or buy: the issue of process positioning. This consists of the width of a firm’s internal span of process, the degree and direction of vertical integration alternatives, and its links and relationships at either end of the process spectrum with suppliers, distributors and customers. The make-or-buy decision, therefore, has major ramifications within the business itself. As an integral part of corporate strategy, it can be crucial to survival. However, the investment involved in earlier integration moves, or decisions to buy rather than make parts of products (often justified on the short-term rationale of profit return),1 can restrict a company’s ability to change direction in the future.
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Notes and references
R. H. Hayes and J. Abernathy, ‘Managing Our Way to Economic Decline’, Harvard Business Review, July–August 1980, pp. 67–77.
‘Why They’re Integrating into Integrated Circuits’, Business Week, 28 September 1974, p. 55.
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For example, refer to C. Batchelor’s review of the gains secured through subcontracting and reported in his article, ‘Lower Overheads and Increased Productivity’, Financial Times, 23 April 1991, p. 14.
K. R. Harrigan, Strategies for Vertical Integration (Lexington, Mass.: Lexington Books, 1983) also addresses these issues.
Ibid., ch. 2, discusses these alternatives and offers frameworks to help in their selection.
See, for example, a special report entitled ‘The Hollow Corporation’, Business Week, 3 March 1986, pp. 56–76.
The ripple effect concerns the real cost of imports to an economy. For each $1 billion of foreign-made consumable its was estimated that the total cost to the US economy was $1.43 billion on top of the $1 billion imports themselves, as reported in the following table.
Business Week, March 1986, pp. 63–6 introduces the notion of post-industrial corporations that could subcontract everything from manufacturing to invoicing customers.
Thomas Hobson, a Cambridge carrier, had a policy of letting out his horses in rotation, without allowing his customers to choose among them. Hence, they had to take or leave the one on offer.
K. R. Harrigan, ‘Managing Joint Ventures — Part I’, Management Review, February 1987, p. 24.
Ibid, p. 28.
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An extensive review of this approach is provided in the NEDC Report, The Experience of Nissan Suppliers: Lessons for the United Kingdom Engineering Industry. May 1991. This approach not only characterises the Japanese motor industry (also refer to J. Griffiths, ‘How Toyota Filters Its Component Suppliers’, Financial Times, 10 April 1991, p. 11) but also other Japanese industries as well. Also refer to C. Batchelor,’ supplying the Japanese — Painstaking Assessment of Product Quality — A Close but Informal Relationship’, Financial Times, 21 May 1991, p. 12.
‘World Automotive Suppliers’, Financial Time Survey, 28 June 1993, Section IV.
K. Done, Shockwaves are Coming, Financial Times Survey, 28 June 1993, Section IV, p. I.
Financial Times Survey, 28 June 1993, p. III.
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R. J. Schonberger, Japanese Manufacturing Techniques: Nine Hidden Lessons in Simplicity (New York: Free Press, 1982), p. 16.
Taken from G. O’Donnell, ‘How Australian Industry Points the Way on Kanban’, Production Engineer, July–August 1984, pp. 19–20.
A. Baxter, Wanted: ‘A More Gentlemanly Style’, Financial Times, 22 March 1994, p. 14.
A. Griffiths, ‘Making it Just in Time’, The Daily Telegraph, 19 October 1992, p. 29.
The Lean Emterprise Benchmarking Project’ by Andersen Consulting, Cardiff Business School and University of Cambridge (1993).
Further reading
Armour, T. J. and D. H. Teece, ‘Vertical Integration and Technological Innovation’, Review of Economics and Statistics, 62 (August 1982), pp. 470–4.
Arrow, K. J., ‘Vertical Integration and Communications’, Bell Journal of Economics, 6 (Spring 1975), pp. 173–82.
Bailey, P. and D. Farmer, Purchasing — Principles and Management, 5th edn (London: Pitman, 1986).
Blois, K. J. ‘Vertical Quasi-integration’, Journal of Industrial Economics, July 1972, pp. 253–72.
Buzzell, R. D., ‘Is Vertical Integration Profitable?’, Harvard Business Review, January–February 1983, pp. 92–102. (Offers an analysis based on the profit impact of market strategies (PIMS) data to assess a number of relationships including vertical integration and profitability; vertical integration, investment intensity and return on investments; and vertical integration, relative market share and profitability.)
Cavinato, J. L., Purchasing and Materials Management (St. Paul, Minn.: West, 1984).
Cherry, J. V., ‘Vendor’s Viewpoint: Quality, Response, Delivery’, Quality Progress, 17, no. 11 (November 1988), pp. 40–2.
Dempsey, W. A., ‘Vendor Selection and the Buying Process’, Industrial Marketing Management, 17 (1978), pp. 257–67.
DTI and Society of Motor Manufacturers and Traders, ‘A Review of the Relationships Between Vehicle Manufacturers and Suppliers’, February 1994.
Ford, H., Today and Tomorrow (Productivity Press, 1988).
Gale, B. T., ‘Can More Capital Buy Higher Productivity?’, Harvard Business Review, July–August 1980, pp. 78–90.
Harrigan, K. R., Managing for Joint Venture Success (Lexington, Mass.: Lexington Books, 1986).
Kraljic, P., ‘Purchasing Must Become Supply Management’, Harvard Business Review, September–October 1983, pp. 109–17.
Petit, R. E., ‘Vendor Evaluation Made Simple’, Quality Progress, 17, no. 3 (March 1984), pp. 19–22.
Porter, M. E., Competitive Analysis (New York: Free Press, 1980). Ch. 14 provides an extensive discussion of the potential benefits and limitations of vertical integration.
Schonberger, R. J., Building a Chain of Customers (London: Hutchinson Business Books, 1990).
Schmalensee, R., ‘A Note on the Theory of Vertical Integration’, Journal of Political Economy, March–April 1973, pp. 442–59.
Williamson, O. E., ‘The Vertical Integration of Production: Market Failure Considerations’, American Economic Review, 61 (May 1971), pp. 112–23.
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© 1995 Terry Hill
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Hill, T. (1995). Make or buy?. In: Manufacturing Strategy. Palgrave, London. https://doi.org/10.1007/978-1-349-13724-4_9
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