GB519 Unit 8 Make-or-Buy Decision Memo Example

Keep Digital Modeling In-House or Send It Out: A Unit 8 Make-or-Buy Decision Over Three Years

[Student Name]

Purdue University Global

GB519: Measurement and Decision Making

Unit 8 Make-or-Buy Decision

[Instructor Name]

[Date]

The lab, the modeling service and every figure are composite and illustrative; the sources cited are real.

To: Owner, Fernhill Orthotic Lab

From: Operations Manager

Subject: Outsourcing digital modeling for foot orthoses and AFOs

Recommendation

Keep foot orthosis and AFO modeling in-house. Over three years, buying from the modeling service would cost about $11,200 less, roughly 2 percent of the total, but a small rise in remakes or a missed day in the year-end rush would cost more than that. I propose a one-quarter pilot on a tenth of foot orthosis orders to measure the service's error rate before the workstation refresh is due.

Which Costs Would Stop

Every modeling cost was tested with one question: would this amount stop if Fernhill stopped modeling foot orthoses and AFOs? Spinal brace modeling stays in-house under both options, because braces need an engineer who knows the clinic's correction plan.

Avoidable:

Two modelers' wages and benefits: $142,000 a year.

Two modeling software seats: $9,600 a year.

Workstation refresh due next year: $18,000, once.

Unavoidable:

The modeling platform license: the brace modeler still needs it.

The engineering supervisor's salary: the supervisor would still oversee brace modeling and would also check the service's incoming files.

Office space and power for the digital department: shared with the mills.

Depreciation on existing workstations: already sunk.

Datar and Rajan (2021) note that the per-unit modeling cost in the product cost report includes the unavoidable items above, which is why comparing a supplier's price with that figure would overstate the saving.

Three Years, Not One

The workstation refresh and the resale of two workstations are one-time amounts, and the service's price is per device, so its cost grows with volume. A three-year horizon captures both.

Make: $151,600 a year for three years plus the $18,000 refresh, or $472,800.

Buy: $4.25 per pair of foot orthoses and $16.50 per AFO, on volume growing 4 percent a year, plus a $1,000 monthly integration fee. That comes to $149,300, $154,792 and $160,504, or $464,596, less $3,000 from selling the two workstations, for $461,596.

Difference: about $11,200 in favor of buying.

The service would need to raise its prices by only 2.6 percent, to about $4.36 a pair and $16.93 an AFO, for the two options to cost the same.

Making is mostly fixed cost and buying is mostly variable. If volume grows faster than 4 percent, buying becomes more expensive; if it stalls, buying looks better.

What the Numbers Leave Out

Remakes. Each remake costs about $330 in rework, as the activity costing work found. If the service's models produced half a percentage point more remakes across about 20,200 devices, the added rework would be about $33,000 a year, nearly three times the three-year saving. Our modelers know each clinic's habits; the service would not.

Turnaround. Our modelers finish a scan the same day. The service promises 24 hours, and its capacity in November and December is shared with other labs during the same deductible rush. A day's delay matters because clinics choose labs partly on turnaround.

Patient data. Scans carry patient information, so any service would need a business associate agreement and a review of how it stores files.

Venkatesan (1992) argued that firms should keep activities that shape what customers value and buy those that do not. Quinn and Hilmer (1994) add that outsourcing works best when the supplier's output can be specified and checked easily. Modeling a custom device meets neither test well: fit is what clinics buy, and a model's errors appear only at the fitting.

The Pilot

Send 10 percent of foot orthosis scans to the service for one quarter, about 400 pairs, and track remakes, turnaround and file problems against our own models. If the service's remake rate matches ours and it meets 24 hours in the busiest weeks, revisit the decision before the workstation refresh. Garrison et al. (2021) note that qualitative factors often decide close make-or-buy cases, and a pilot turns two of them into measured figures.

What Would Change the Recommendation

A modeler's resignation, a lower price from the service or proof from the pilot that its error rate is no higher than ours would each favor buying. Faster growth than planned would favor keeping the work in-house, because our modelers' cost would stay flat while the service's bill rose with every device.

References

Datar, S. M., & Rajan, M. V. (2021). Horngren's cost accounting: A managerial emphasis (17th ed.). Pearson.

Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial accounting (17th ed.). McGraw Hill.

Quinn, J. B., & Hilmer, F. G. (1994). Strategic outsourcing. Sloan Management Review, 35(4), 43-55.

Venkatesan, R. (1992). Strategic sourcing: To make or not to make. Harvard Business Review, 70(6), 98-107.