Question

A firm must decide whether to make a compo- nent part in-house or to contract it out to an in- dependent supplier.

Manufacturing the part requires a nonrecoverable investment in special- ized assets.
The most efficient suppliers are lo- cated in countries with currencies that many foreign exchange analysts expect to appreciate substantially over the next decade.

What are the pros and cons of (a) manufacturing the compo- nent in-house and (b) outsourcing manufacturing to an independent supplier?

Which option would you recommend? Why?

Answer 1

Answer: Manufacturing in-house gives a guarantee of supply, improved skills in manufacturing and ensures continuity of business.

In house manufacturing may not be comparatively cost effective as there may be other firms who can produce cheaper and may require additional unrecoverable capital expenditure which may be back breaking to the firm.

Outsourcing manufacturing may be cheaper and equally save the company sunk cost in experimentation procedures towards producing a new product.

However outsourcing manufacturing may not guarantee continuous supply due difficulty or competition from the company taken up the outsource contract and firm losses opportunity to diversify into new products which may be beneficial on the long run.

In house manufacturing is a better option for it guarantee continuous supply, it provides shield from shocks of international trade obstacles like currency devaluation or political instability, it provides additional skills and products for diversification, increase turnover and finally continuous existence.