Make or buy decision and exporting strategies

Business Qs

Specific Topics in International Trade: Make-or-Buy Decisions and Exporting

Make-or-Buy

The "make-or-buy" decision is fairly straightforward, though it can have enormous and quite complex effects; essentially, this decision refers to the choice between in-house manufacture and outsourcing (Answers 2010). Especially with the ever-extending reach of international markets and the global supply chain, the decision as to whether manufacturing firms should make or buy their products or product elements -- that is, whether they should expend capital and energy engaged in bringing together raw materials and manufacturing them into products themselves, or whether they should simply pay another company to complete these steps for them -- is increasingly important. This can have a major effect on a company's bottom line, and with increasing competition also a major force in the global market price and cost differences can mean the difference between a manufacturing firm's ongoing success and its imminent failure.

The cost to the manufacturer presented by both the make and buy options that form the two parts of the choice in this framework -- and ultimately the cost of the finished good to the consumer -- is usually the primary consideration in the making of this decision. It is not the only consideration in this decision, however, and in fact certain strategies have a definite and major impact on he make-or-buy choice. Much of this comes down to marketing strategy and brand identity for many firms; something as simple as being able to says that a product was entirely locally made, such as the "Mad in the U.S.A." campaign that still exists (though without the fervor or the number of products that existed in previous decades) can make a company absorb higher costs to make rather than to buy. There are also more complex considerations of strategy that can influence this decision.

For instance, brand differentiation in marketing strategy for a particular organization might be accomplished by a reputation for extremely high quality and reliability when compared to other firms in the given industry. This would make outsourcing a definite problem for the company, as quality control would not be as possible were the company to hire out its manufacturing needs in whole or even in part to other firms. Quality control being a major part of the company's continued reputation for reliability and excellence, it would very likely see this reputation faltering and lose the competitive edge it had gained through its years of operation if it were o suddenly switch to outsourced manufacturing efforts. Other companies that have built their reputation on having the lowest prices for a given product class would operate on an opposite strategy, attempting to outsource manufacturing to the cheapest providers (with a modicum of reliability, of course).

Exporting

There are, of course, many different issues in exporting that affect how profitable it ends up being for certain companies and how best to go about exporting efforts. While an examination of the issue as a whole is a necessity for any organization attempting to penetrate the global market, only two major components of exporting will be discussed below. These are the different payment methods that are typically used to compensate firms for exported goods, and the common quoting methods used to determine and display the estimated cost of exporting and of exported goods specifically. Understanding these two concepts provides a broader understanding of exporting and the various costs associated with it, which helps to paint a picture of its potential profitability in various scenarios and in different industries and different international markets.

When it comes to payment for exported goods, there are several options that the receiving company has, in conjunction with agreements made with the exporter, of course. Cash in advance is a method that often seems preferable to the selling entity in a typical exporting transaction, as they receive the agreed-upon amount of cash (or a credit card payment, which is equivalent to cash in this scenario) for their goods prior to shipping them, guaranteeing the cash flow needed for the next cycle (UNZCO 2010). This can create cash flow problems for the buy entity, however, as they must pay for the product before they receive cash from the end consumer and thus must carry the balance in the interim (UNZCO 2010). Letters of credit, which give a guarantee from a financial institution to the exporter that the goods will be paid for assuming all conditions are met, provided added assurance to exporters that the transaction will truly be profitable, while insulating importers from the cash flow issues described above (UNZCO 2010).

A draft operates n a manner similar to a check, and carries the same risk that it will not be honored due to a lack of funds or credit, but until the draft has been paid to the exporter the ownership of the goods still technically resides with the exporting company (UNZCO 2010). For truly well-established buyers, open accounts might be used that allow for the exporter to simply bill the importer when necessary, and allow the importer to order more goods whenever they are needed (UNZCO 2010). This method carries some risk for the exporter, but simplifies matters for both companies. Finally, consignment deals can be arranges wherein the exporter is the technical owner of the goods until they are sold to final consumers by a foreign distributor, and the distributor pays the exporter only after the sale of the goods (less the distributor's commission/fee, of course) (UNZCO 2010).