MAKE OR BUY DECISION IN WORKSHOPS

WORKSHOP ACCOUNTS
There is a Proposal to off-load certain items from manufacture in Rail­way workshop to trade. What are the points to be seen in such a propo­sal?
The decision to make or buy is a crucial Management decision. It leav­es an indelible mark on the efficiency of any organization. While the decision to off-load certain items from manufacturing to trade improves the Stores Inventory and overall turnover ratio, any erroneous decision to off-load vital items to trade will adversely affect the efficiency of the organization. Sometimes it can be detrimental to the very work­ing of the organization.
In Railways traditionally, many items relating to steam locos were manufactured. Additionally, small items were also manufactured. With modernization and change over to traction from steam loco to diesel and electric tractions, many items of steam loco have become obsolete and production of such items have become redundant.
The decision to make or buy an item depends various parameters like the availability in market, relative economy, sophistication of the items required and whether the item is a safety item for the rolling stock and so on.
It would be simpler to make such a decision 'ab-initio' in a new organization, but in a running and ongoing organization like the Railways where considerable infrastructure has already been built for manufac­ture of various stores items in the workshops, the decision to off-load item to trade has to be taken considering many factors.
QUALITY CONSIDERATION:
1. Vital components requiring close quality control.
2. No manufacturer is making the desired quality.
3. Specialized item requiring extensive investment.
4. Inspection standards are very high.
5. Specification may be too exacting.
6. Maintenance of desired quality standard in a finished product.
7. Producer is likely to be particularly skilled in manufacture of the item.
8. Primary or secondary interest.
9. Patent of production method used by the supplier.
10. Flexibility for changing the quality -characteristics of the compo­nent.
COST CONSIDERATION:
1. Is it cheap to buy or make based on the BREAK EVEN ANALYSIS. If the cost of production does not commensurate the break even cost the item has to be procured and vice versa.
2. Current level of production in the workshop. -^
3. Utilization of facilities already exists in the workshop.
4. Is the choice between expansion of facilities and outside purchase?
5. Probable future course of prices.
6. Return on investment.

CONSIDERATION:
Demand is large and stable, it may be decided to manufacture the item and vice versa.
SERVICE CONSIDERATION:
There must be steady supply of material and assurance of supply to mat the decision to buy.
In Southern Railway:
Based on a survey, there are about 2120 shop-manufactured items exist in Southern Railway. These are spread out in five major depots. The make or buy decision that has to be faced by the Railways sooner or later in view of the multi-various changes taking place within and outside Railways.
As discussed earlier, the steam loco components are shop-manufactured items. As steam loco requirement is gradually tapering down, it would be difficult to off-load the steam loco components from manufacture to trade from the point of view of locating dependable source of supply from trade. In any case, after another three to four years, there will not be any demand for steam loco component, when the steam locos are completely phased out»
In view of the PROJECT UNIGAUGE and modernization of Railway workshops under COFMOW (Central Organization For Modernization of Workshops) there is a possibility to off-load certain items which can be easily procured at the trade with the guaranteed standard and at the cheaper rate
FOR PROCUREMENT:
1. When there is no space, equipment, time and non-availability of skills in the Railway workshops, the item can be procured.
2. When Railway workshops lack certain special facilities for the manufacture of the component, the same should be procured from the trade.
3. Railway Administration due to scarcity of funds may decide to invest in more profitable works. r^^T
4. The present day installed capacity of workshops may be utilized to other components more profitably.
5. Railway workshops can concentrate on other production.
6. When there is a need for technology and equipments, it is profitable to buy.
7. When there are a number of suppliers for the specific. -tern, it is always better to buy rather than to make.
Traditionally, in Railways, the stores inventory is charged to stores suspense - a capital allocation. Hence, any huge balance in inventory would attract the payment of dividend to the General Revenue.
Board has already taken the above aspect of paying more re divi ken various measures to reduce the huge inventory. De-stock items valuing more than Rs.50000/- is a step in this Similarly, Divisionalization of stores is another step to reduce heavy inventory. Further, the off-loading certain items from the shop floor to trade would reduce the heavy inventory.
Such off-loading would also help the Railways to employ the surplus labour profitably elsewhere. Finally, in the days of resource paucity and economic spending, the off-loading can definitely contribute to reduction in the working expenditure, which has been time and again emphasized by various committees and the second Corporate Plan 1985-2000.
MAKE OR BUY DECISION
1. QUALITY CONSIDERATION:
Ø Vital components requiring close quality control
Ø No manufacturer is making the desired quality
Ø Specialized item requiring extensive initial investment
Ø Specifications may be too exacting
Ø Inspection standards are very rigid
Ø Maintenance of a desired quality standard in a finished product
Ø Producer is likely to be particularly skilled in manufacturing the item
Ø Primary or secondary interest
Ø Patent of production method used by the supplier
Ø Flexibility for changing the quality – characteristics of the part
2. COST CONSIDERATION:
Ø Is it cheap to make or buy
Ø Current level of production in the plant
Ø Utilization of facilities
Ø Is the choice between expansion of facilities and outside purchase
Ø Probable future course of prices
Ø Return on investment
Ø Economics of scale – the transportation cost of raw material may be too high compared to the component
3. QUANTITY CONSIDERATION:
Ø large and stable demand – decision to make
Ø quantity too small to attract supplies decision to buy
Ø closer co –ordination of quality produced and quantity required – decision to buy
4. SERVICE CONSIDERATION:
Ø assurance of supply
Ø flexibility when purchased – buy and make
MAKE
1. excess plant capacity availability
2. the item may be closely allied to some of the other components made by the company
3. making will facilitate control of parts changes inventories and deliveries
4. the component maybe too big and difficult to transport
5. confidentiality
6. monopoly and unreliable sources
7. suppliers are totally unreliable
8. integrity of the plant operator
9. maintenance
10. Tax consideration

BUY:
space , equipment, time and or skills non availability for manufacture
absence of facilities for manufacturer
better opportunities for more profitable investment
The existing faculties are capable of being used more profitably to make other components.
Make or buy decision in the railways:
The decision to make or buy any item depends on various parameters like availability in market, relative economy, sophistication of the items required and whether the item is a safety item for the rolling stock and so on. It would have been simpler to take such a decision abinitio in a new organization but in a running and ongoing organization like the railways where considerable infrastructure has already been built for manufacture of various stores items in the workshops, the decision to off load item to trade has to be taken considering all the above mentioned factors.
In railways traditionally many items relating to steam locos were manufactured. Additionally small items were also manufactured. With modernization and change over from steam locos to diesel- electric and electric locos, many items of steam loco have been obsolete and production of such items have become redundant.
Based on survey, the steam loco components some 2120 shop manufactured items existed in this railway. These were spread out in major five depots. As steam loco requirement was gradually tapering down, it would be difficult to off-load the steam loco components from manufacture to trade from the point of view of locating dependable source of supply from trade. Finally items were earmarked for off loading. Such off loading would help railways to employ the surplus labor profitably elsewhere. In the long run, such off loading would benefit railways immensely to down size the labor in view of the financial crisis.