Managing Business Transactions [Paperback]

Paul H. Rubinis professor of economics at Emory University and vice-president of Glassman-Oliver Economic Consultants in Washington, D.C. He is the author ofBusiness Firms and the Common Lawand over fifty articles in the economics literature.Chapter 1

Make or Buy?

The make-or-buy decision is a classic management concern. Every firm uses thousands of inputs, and for each there is a potential to either manufacture the input itself or acquire it on the market. In its broadest interpretation, this decision includes choices like hiring a consultant or employing internal labor to perform a given task. If a firm decides to make an input, it will transact internally with a division or another part of the firm. If it decides to buy, it will contract with another organization. In either case, it is important to understand the principles behind the structure chosen and behind the transaction. The make-or-buy decision is sometimes treated as an accounting or financial decision. While it is obviously important to perform accounting analyses and to choose the low-cost method, it is more important to understand the managerial basis of the decision.

One advantage of such understanding is that it will economize on decision-making time. There are virtually thousands of products that a firm will use, and each of them could potentially be produced internally. Managers need some method of deciding which products are good candidates for internal production and are worth a detailed internal cost analysis. Of course, some of the decisions are obvious -- a messenger firm will not go through a complex analysis in order to decide whether or not to build its own cars. But other decisions are less obvious -- if the messenger firm gets large enough, should it make its own uniforms or buy them? (Answer: Buy them.) The principles in this chapter will enable a manager to quickly and easily eliminate a whole host of products from consideration l“w