Buy Analysis in it Procurement

¶ … Buy Analysis in it Procurement

Analysis in it Procurement

For small companies, the Make or buy decision is a matter of choice but as the companies grow, the decision becomes more important from an economics' perspective. Here is an article "Incentives vs. transaction costs: a theory of procurement contracts" selected from RAND Journal of Economics. This paper critically analyzes the article and the model presented in it discussing procurement contracts facts.

The paper by Tadelis and Bajari (2001) discusses how different sectors need to make procurement decisions. The public sector as well as the private sector needs to know about the supplier of the product or the service so that the institution can finalize a procurement decision. The article discusses cost as a major factor while deciding which technology to select and from which supplier. However, in science and information technology, there are many other factors that are kept in mind while making make or buy decisions; the technology should not be replaced by any other technology; there should be sufficient after-sales services, maintenance services and support services.

The article suggests that major procurement problems occur at the stage of adoption and not the screening stage. However, it should be understood that make or buy decision deals with screening stage as well as the adoption. The managers should carefully know about a firm's internal capacity i.e. The adoption of technology as well as the external factor i.e. The supplier screening. Only after understanding that, one can make an effective make or buy decision.

The article uses an effective approach; it concentrates on what to know about the supplier in the data gathering stage. Once the information is collected, the article suggests that the procurement team should not hesitate to rely on the information. However, the article should have mentioned that there is always a factor of uncertainty and the procurement manager should take steps to minimize the uncertainty in procurement. This can be done by preparing a written document that outlines procurement agreement with the supplier.

The article suggests that in "make" decision, the costs of production are borne by the buyer. In the "buy" decision, the seller bears all the production cost. However, there are not only the production costs involved in making a product. The article did not mention that there are research costs associated with production as well (Li, 2013). A company producing electronic goods or mobile phones will need months or probably years of research before it finally produces the product. In buy decision although the buyer pays more than the production cost, the full expense of R&D is not paid by every buyer but it is distributed among other buyers too.

The authors say that the make-or-buy decision is based on what is the scope of the firm. However, it should be mentioned that not only the present scope counts, the firm's future plans have an impact on make-or-buy decision too. An it company may be concerned about its security and privacy concerns, hence it may like to make rather than buy, however, this may be an expensive procedure at the beginning.