Vertical integration provides its own set of

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Vertical integration provides its own set of advantages. An integrated company depends less on its suppliers and so can be certain of a smoother flow of materials
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75 and parts for the manufacture than a non-integrated company. In addition, some companies believe they can manage quality better by manufacturing their own parts and materials instead of depending on the quality control standards of external suppliers. What’s more, an inte grated company realizes revenue from the parts and material that it is “making” rather than “buying” in addition to income from its usual operations. The benefits of vertical integration are counterbalanced by the benefits of using outside suppliers. By combining demand from different companies, a supplier can enjoy economies of scale. These economies of scale can cause better quality and lower expenses than would be possible if the business were to endeavor to manufacture the parts or provide a service by itself. At the same time, a business should be careful to retain control over those tasks that are necessary for maintaining its competitive position. Case in point: Hewlett Packard manages the software for laser printers that it manufactures in collaboration with Canon Inc. of Japan. In the book “ World Class Supply Management ” published in 2003, Donald Dobler, Stephen Starling and David Burt provide a rule of thumb for outsourcing. The rule recommends that companies outsource all goods that do not fall into one of the following three classes: 1) the good is critical to the product’s success including customer discernment of key product attributes 2) the good falls well within the firm’s key competencies, or within those the company should develop to accomplish future plans, or 3) the item calls for specialized design and manufacturing equipment or skills.
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76 6.3.2 FACTORS INFLUENCING MAKE OR BUY DECISION To come to a make-or-buy decision, it is essential to thoroughly analyze, all of the expenses associated with product development in addition to expenses associated with buying the product. The assessment should include qualitative and quantitative factors. It should also separate relevant expenses from irrelevant ones and consider only the former. The study should also look at the availability of the product and its quality under each of the two situations. 6.3.2.1 Quantitative and Qualitative Analysis Quantitative aspects can be calculated and compared whereas qualitative aspects call for subjective judgment and, frequently require multiple opinions. In addition, some of the associated factors can be quantified with sureness while it is necessary to estimate other factors. The make-or-buy decision calls for a thorough assessment from all angles.
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