Decision making, whether in the short or long term, can be defined in the simplest terms as the process of selecting between two or more alternative courses of action.
Managerial decision making is a complex problem-solving process that consists of a series of successive stages. These stages will be linked as possible if management expects any degree of success from the decision-making process.
The six stages in the decision-making process are:
Detection and identification of the problem
Search for an existing model applicable to the problem or to the development of a new model.
Definition of alternative courses in light of the problem and the chosen model
Determination of the quantitative and qualitative data that are relevant to the problem and an analysis of the relative data for the alternative course of action. Selection and implementation of an optimal solution that is consistent with management goals.
Post-decision evaluation through feedback to provide management with the means to determine the effectiveness of the chosen course of action in solving the problem.
Make or Buy
"Doing" means that the company carries out an activity by itself. "Buy" means that the company depends on an independent company to carry out this activity, possibly under a contract. Classic buy-or-make decisions are to develop raw materials, the distribution chain, or service centers.
While some companies have been successful in carrying out their own support processes and activities, others buy the latter from market specialists, which we call market firms, for example, companies specializing in marketing or distribution. Using these companies, a producer can get a better marketing plan, low-cost distribution, better use of inventories, etc.
Defining limits
To resolve the MAKE or BUY decisions, the company must compare the benefits and costs of using the market with the benefits and costs of carrying out the activity at home.
Criteria on Make or Buy.
In favor of Doing in favor of buying
Due to the instability of the supply. Due to lack of capital.
Due to the poor quality of supply. Transfer of risk to the supplier.
Out of the desire to keep the process secret. Lack of experience in manufacturing.
For having unused facilities. Wider selection.
Reasons to Buy
It's conventional advice that companies should focus on what they do best and leave everything else to independent companies. That is, market companies are more efficient because they have the right incentives and “have specialized in that activity”.
Some reasons why market companies can become more efficient are:
- They have property rights to produce their goods By having several clients they can obtain economies of scale They can exploit their experience producing for different firms.
A very important element in the decision to make or buy an input is “private information” that sometimes gives companies an advantage in the market. It can be embodied in know-how, product design, and consumer information. Generally, companies develop internally the activities that are part of their competitive advantage. For example, the production of the syrup by The Coca Cola Company.
Reasons to Do.
We can say that doing has two dimensions: the first, possession or possession implies property rights to assets; the second, the way of governing implies the way in which decisions are made.
The first determines who has possession of the assets and is decisive in decision-making. For example, what to do when there is a change in raw material costs?
The second determines the type of relationships within the company, for example, the treatment of an employee is very different from the treatment of a client.
The differences in the relationships between the agents of a company can be understood in terms of:
- Differences in legal obligations. Unlike customers, employees must obey orders, provide information, and act in the best interests of the owner.Differences in the resolution of disputes. Disputes between two independent companies are generally resolved by a third party, while disputes within a company are generally resolved by the general manager or the highest internal authority.
DO vs. BUY ADVANTAGES
Reduction of time, effort and resources
- Technical problems already resolved Relatively short implementation Technical support from the vendor in testing and implementation Regular maintenance and enhancements of the applications by the vendor
DO vs. TO BUY
DISADVANTAGES
- Functionality restrictions Excess functionality Conversion costs Maintenance limitations when the code needed to be modified to adapt the Software to the company's requirements Hidden costs (additional, conversions)
* MAKE OR BUY
Management has the ability to make or buy parts of a product from the supplier when it has plant space, equipment, and idle labor. In order to properly evaluate the make-or-buy decision, both the component's quality and quantity standards must be equal to both alternative courses of action.
Example:
A company has capacity in its plant so it considers the possibility of making a part of a product it manufactures, the same one that will have a lower price and stop buying it, so this possibility should be analyzed taking into account the following information per unit:
Purchase price $ 41, transportation costs $ 4, raw material cost $ 12.5, labor cost $ 20, variable manufacturing overhead costs $ 10, production 13,000 units.
Download the original file
