Make-or-Buy

Test Your Knowledge

Make or Buy Quiz

Instructions: Choose the best answer for each question.

1. What is the primary factor driving the make-or-buy decision in the oil and gas industry?

a) Minimizing environmental impact b) Maximizing project efficiency and profitability c) Reducing reliance on external suppliers d) Expanding internal manufacturing capabilities

2. Which of the following is NOT a consideration when deciding between making or buying in the oil and gas sector?

a) Availability of specialized equipment b) Company's financial resources c) Availability of skilled labor d) Market trends in the fashion industry

3. What is a potential drawback of external sourcing in the oil and gas industry?

a) Lower cost compared to internal manufacturing b) Access to specialized expertise and technology c) Potential for supply chain disruptions d) Enhanced control over production processes

4. Which of the following is a benefit of internal manufacturing in the oil and gas sector?

a) Greater flexibility to adapt to fluctuating demand b) Potentially lower initial investment costs c) Reduced dependence on external suppliers d) Access to a wider range of supplier options

5. Why is safety and compliance particularly important when making the make-or-buy decision in oil and gas?

a) To minimize environmental impact b) To meet regulatory requirements and ensure product safety c) To improve public image and stakeholder relations d) To reduce insurance premiums

Make or Buy Exercise

Scenario:

You are a project manager for an oil and gas company developing a new offshore drilling platform. Your team needs specialized drilling equipment. You have two options:

1. Make: Invest in new machinery and hire skilled personnel to manufacture the equipment in-house. This would cost an estimated $10 million upfront, but could potentially save money in the long run.
2. Buy: Purchase the equipment from a reputable supplier for an estimated $8 million. However, you have concerns about their ability to meet tight delivery deadlines and potential supply chain disruptions.

Task:

1. Analyze: Based on the information provided, create a table comparing the advantages and disadvantages of each option (Make vs. Buy).
2. Recommend: Which option would you recommend and why? Justify your recommendation considering the specific context of the oil and gas industry.

Techniques

Chapter 1: Techniques for Make-or-Buy Decisions

This chapter delves into the analytical techniques used to inform the make-or-buy decision in the oil & gas industry.

1.1 Cost Analysis:

• Internal Manufacturing: Calculate costs related to labor, materials, overhead, equipment, and potential infrastructure investments. Factor in learning curves and potential productivity gains over time.
• External Sourcing: Analyze supplier quotes, considering volume discounts, transportation costs, and any additional fees. Assess potential risks associated with supply chain volatility and potential price fluctuations.

1.2 Break-Even Analysis:

• Determine the production volume at which the cost of internal manufacturing equals the cost of external sourcing. This helps identify the optimal scenario based on anticipated demand.

1.3 Total Cost of Ownership (TCO):

• Evaluate the long-term costs associated with both options, including maintenance, repairs, warranties, and potential obsolescence.
• Consider the impact of downtime on production operations and factor in associated costs.

1.4 Sensitivity Analysis:

• Analyze the impact of changing factors (e.g., material costs, labor rates, demand fluctuations) on the overall decision. This provides a clearer understanding of potential risks and uncertainties.

1.5 Qualitative Considerations:

• Beyond financial metrics, consider factors like control over quality, intellectual property protection, and the potential for developing core competencies.

1.6 Decision Matrix:

• Develop a matrix that weighs different factors (cost, quality, delivery, risk) against their importance to the project. Assign scores to each option based on their performance in each factor.

1.7 Software Tools:

• Utilize software tools designed for make-or-buy analysis, which can streamline the process and automate calculations.

1.8 Conclusion:

• By employing these techniques, oil & gas companies can make informed decisions about make-or-buy choices, optimizing project outcomes and maximizing their competitive advantage.

Chapter 2: Models for Make-or-Buy Decisions

This chapter explores various models used in the oil & gas industry to guide make-or-buy decisions.

2.1 The Make-or-Buy Model:

• This basic model compares the cost of internal production to the cost of external sourcing. It's often used for simple components or items where the focus is primarily on cost.

2.2 The Total Cost of Ownership Model (TCO):

• This model considers the entire lifecycle cost of an asset, including acquisition, operation, maintenance, and disposal. It's particularly valuable for complex equipment with long lifecycles.

2.3 The Strategic Sourcing Model:

• This model focuses on identifying strategic sourcing opportunities, considering factors like supply chain risk, supplier capabilities, and the potential for collaboration.

2.4 The Portfolio Model:

• This model categorizes products and services based on their importance and complexity. Different sourcing strategies are applied based on the category, ranging from strategic partnerships to competitive bidding.

2.5 The Hybrid Model:

• This model combines elements of different models, tailoring the approach to the specific needs of the project. It allows companies to leverage internal expertise while taking advantage of external sourcing opportunities.

2.6 Conclusion:

• The choice of model depends on the complexity of the project, the company's strategic objectives, and the availability of data and resources. By applying appropriate models, companies can make more informed and strategically sound decisions.

Chapter 3: Software for Make-or-Buy Decisions

This chapter outlines the software tools available to support make-or-buy decisions in the oil & gas industry.

3.1 Cost Estimation Software:

• These tools help calculate the cost of internal manufacturing, considering labor, materials, overhead, and equipment costs. Examples include SAP, Oracle, and Deltek.

3.2 Supply Chain Management Software:

• These tools manage supplier relationships, track inventory, and optimize procurement processes. Examples include Ariba, Coupa, and Ivalua.

3.3 Risk Management Software:

• These tools help identify and analyze potential risks associated with make-or-buy decisions, including supply chain disruptions, quality issues, and cost overruns. Examples include Riskonnect, LogicManager, and Protiviti.

3.4 Decision Support Systems (DSS):

• DSS tools combine various data sources and analytical techniques to support informed decision-making. They can be tailored to specific make-or-buy scenarios and help visualize potential outcomes.

3.5 Project Management Software:

• Tools like Microsoft Project and Jira can help track project timelines, manage resources, and communicate progress. This helps ensure that make-or-buy decisions align with overall project goals and timelines.

3.6 Conclusion:

• Leveraging software tools can significantly streamline the make-or-buy decision process, improve accuracy, and facilitate better collaboration within the organization.

Chapter 4: Best Practices for Make-or-Buy Decisions

This chapter provides practical best practices for navigating the make-or-buy decision process in the oil & gas industry.

4.1 Establish a Clear Decision Framework:

• Define a clear set of criteria for evaluating both make and buy options, including cost, quality, delivery, risk, and strategic alignment.

4.2 Conduct Thorough Market Research:

• Identify potential external suppliers, assess their capabilities, and compare their offerings to internal capabilities.

4.3 Develop a Strong Negotiation Strategy:

• Prepare for negotiations with potential suppliers, understanding their cost structure, market dynamics, and negotiating power.

4.4 Establish Robust Quality Control Processes:

• Regardless of the decision, implement rigorous quality control measures to ensure products meet required standards. This applies to both internal manufacturing and external sourcing.

4.5 Develop Strong Supplier Relationships:

• Establish long-term partnerships with reliable suppliers, fostering trust and collaboration.

4.6 Continuously Monitor and Evaluate Decisions:

• Regularly review the outcomes of make-or-buy decisions, considering actual performance against initial expectations. Make adjustments as needed to improve future decision-making.

4.7 Conclusion:

• By implementing these best practices, oil & gas companies can make more effective and strategic make-or-buy decisions, maximizing value and achieving project success.

Chapter 5: Case Studies in Make-or-Buy Decisions

This chapter presents real-world examples of make-or-buy decisions in the oil & gas industry, highlighting the outcomes and lessons learned.

5.1 Case Study 1: Offshore Platform Construction

• A company faced a decision on whether to manufacture key components for an offshore platform in-house or outsource production. They analyzed costs, capacity, and expertise, ultimately opting to outsource due to the specialized nature of the components and the availability of experienced suppliers. The decision saved time and resources, allowing for a faster project completion.

5.2 Case Study 2: Downhole Technology Development

• An oil & gas company had to decide whether to develop a new downhole technology internally or acquire it from a technology provider. After a thorough analysis, they chose to acquire the technology, recognizing the expertise and resources needed for successful development. This allowed them to focus on their core competencies and bring the new technology to market faster.

5.3 Case Study 3: Production Optimization Software

• A company was considering developing its own software for production optimization or purchasing a pre-existing solution. They evaluated the cost, time, and expertise required for development, ultimately choosing to purchase a software package that met their specific needs. This allowed them to implement the software quickly and achieve immediate benefits.

5.4 Conclusion:

• By learning from real-world examples, oil & gas companies can gain valuable insights into the complexities and nuances of make-or-buy decisions, applying lessons learned to future strategic choices.