You are a procurement and supply manager at a company that m

You are a procurement and supply manager at a company that manufactures and assembles construction equipment. The company is about to launch a project to develop a new tractor. Based on the above scenario, answer the following questions: What are the factors that influence a \"make versus buy\" decision for the components that make up the tractor bill? What is the importance of developing a financial strategy? Provide examples to support your reasoning.

Solution

1. The make or buy decision depends upon the returns that is expected from the particular capital procurement. The incremental cash flows and the positive returns on the capital investment will decide whether to make or to buy. In cases where leasing out or sourcing out happens to be much easier due to availability of readymade resources and heavy investment is not needed. , it is better for the company to hire a tractor as it will be much cheaper. If the construction company is in need of heavy equipment for all its processes and work over the long run, it is better to buy a tractor for future revenues. Though the initial investment would be high, over the long run it would pay off as incremental cash flows will equal net present values.

2. If a good financial strategy is developed, a good investment proposal including a clear understanding of the returns on the project can be well developed. It brings in fiscal and financial discipline into working. In the example cited above, it it is much cheaper to buy tractor, the financial strategy will clearly show how to source for funds to buy the tractor and how this cost could be absorbed over revenues expected .