From the course: Managing Logistics
Make or buy?
- Peter Drucker, the father of modern management, once stated, "Whenever you see a successful business, "someone once made a courageous decision." I couldn't agree more. Effective decision-making is critical to a company's success. And making those decisions often takes quite a bit of courage. The make or buy decision is a good example. At first glance, it seems like a pretty straightforward decision. But think about this a minute. Whether do you do something yourself or hire someone to do it for you, actually defines your company and how it will operate. But it's not just a question of whether you make or buy, it's also a question of where you make or buy. Are you going to manufacture internationally, as large companies do today? Or are you going to manufacture domestically? Now we can easily apply the concept of make-or-buy to the logistics world. Do we operate our own fleet of trucks, or ships, or airplanes? Or do we hire a transportation company to deliver our products for us? Do we build our own warehouses and distribution centers? Or do we outsource that to someone else? Or do we lease the buildings from someone else but operates a distribution centers with our own people? These are indeed courageous decisions, and you really must understand your company's business to make the right decision here. Which brings us to an important question. What are the reasons a company might want to do the logistics function themselves? Most companies want to keep in-house the things that they do best. If you're really good at on-time delivery to your customers, for example, then do it yourself. If you're an expert in logistics, you also might have a much lower cost than other companies. And what are the reasons a company might want to outsource their logistics functions? Again, core competency is a factor here. For those things that you really aren't very good at, it's better to have someone else do it for you. That's why so many companies outsource customer deliveries to UPS, FedEx, and DHL. Outsourcing to a logistics expert can be less expensive than doing these activities yourself. But be careful to avoid cost grazing, for you continuously search the globe for the lowest-cost supplier. The lowest-cost delivery service, for example, may not always deliver on time. And this can create significant problems for your customers. But if you choose to outsource, you save the expense of owning and operating a fleet of trucks, and a set of warehouses and distribution centers. You avoid this very large capital outlay. With suppliers and customers all around the world, logistics is even harder than before. And it often makes sense to hire an expert. But you must closely supervised any company that you hire to provide logistic services for you. So whether you make or buy, you still must be very good at managing logistics.
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