Make-or-Buy Decision

Test Your Knowledge

Quiz: The Make-or-Buy Decision in Oil & Gas

Instructions: Choose the best answer for each question.

1. Which of the following is NOT a key factor influencing the make-or-buy decision in oil & gas? a) Cost analysis b) Capacity and expertise c) Government regulations d) Time constraints

2. What is a potential advantage of outsourcing a component or service? a) Greater control over quality b) Increased internal expertise c) More flexibility and scalability d) Reduced dependence on external suppliers

3. Which of the following is a common make-or-buy decision in the oil & gas sector? a) Marketing strategy development b) Pipeline construction c) Human resources management d) Financial reporting

4. What is a potential disadvantage of producing components in-house? a) Reduced production costs b) Increased control over quality c) Potentially longer production times d) Enhanced flexibility and scalability

5. What is the key principle behind the make-or-buy decision? a) Choosing the option with the lowest initial investment b) Maximizing production capacity c) Balancing internal capabilities with external efficiencies d) Minimizing the number of external suppliers

Exercise: The Case of XYZ Oil & Gas

Scenario: XYZ Oil & Gas is considering whether to build a new drilling rig in-house or purchase it from a specialized manufacturer.

Task: Analyze the following factors and recommend whether XYZ should "make" or "buy" the drilling rig:

• Cost: Building a rig in-house could cost $50 million, while purchasing a pre-built rig would cost $60 million.
• Expertise: XYZ has limited experience in rig construction, while the manufacturer has extensive expertise and experience.
• Time: Building the rig in-house would take 18 months, while purchasing a pre-built rig would take 6 months.
• Quality: The manufacturer has a proven track record of building high-quality rigs.

Write a brief justification for your recommendation.

Techniques

Chapter 1: Techniques for Make-or-Buy Decision in Oil & Gas

This chapter delves into the techniques used to analyze and evaluate the make-or-buy decision in the oil and gas industry. These techniques provide a structured approach to weighing the pros and cons of each option and arriving at an informed decision.

1.1 Cost Analysis:

• Direct Cost Comparison: A simple comparison of the direct costs of manufacturing in-house versus procuring externally. This includes raw materials, labor, manufacturing overhead, and transportation.
• Life Cycle Cost Analysis (LCCA): A more comprehensive approach that considers the total cost of ownership over the entire lifespan of the product or service. This includes acquisition cost, operating cost, maintenance cost, and disposal cost.
• Break-Even Analysis: This technique identifies the production volume at which the cost of making equals the cost of buying. This helps determine the optimal production quantity to justify in-house manufacturing.

1.2 Qualitative Considerations:

• Capacity and Expertise: Evaluate the company's internal capacity and expertise to handle the production process effectively. This includes available equipment, skilled labor, and knowledge of manufacturing processes.
• Quality Control: Assess the ability to maintain consistent quality control over in-house production. Consider the impact on product reliability and potential warranty costs.
• Flexibility and Scalability: Determine the ease with which the production process can be adjusted to meet fluctuating demand and changes in market conditions.
• Risk Management: Identify potential risks associated with each option. For example, relying on external suppliers could lead to supply chain disruptions or quality issues.

1.3 Decision Matrices and Weighted Scoring:

• Decision Matrices: Create a table listing various factors influencing the decision along with their relative importance. Assign scores to each option based on its performance against each factor.
• Weighted Scoring: Assign weights to each factor to reflect its importance. Multiply the scores by the corresponding weights to calculate a weighted score for each option. This provides a quantitative basis for comparison.

1.4 Sensitivity Analysis:

• Varying Key Parameters: Change key input variables, such as cost assumptions or market demand, to understand their impact on the decision outcome. This helps assess the robustness of the chosen solution under different scenarios.

1.5 Collaboration and Expert Input:

• Cross-Functional Teams: Involve relevant departments such as engineering, procurement, manufacturing, and finance in the decision-making process.
• External Expertise: Consult with industry experts, consultants, or specialized research firms to gather insights and validate internal analysis.

Conclusion:

By employing these techniques, oil and gas companies can systematically analyze the make-or-buy decision, ensuring a well-informed and cost-effective choice aligned with their strategic objectives.