Make or buy decision, leasing

Leasing, Make or Buy Decision,

Supply Chain Management

Purchasing Decisions Make or Buy, Buy or Leasing and Sub-Contracting

Make or buy decision, leasing

Make or buy decision, leasing; Manufacturing company cannot produce by itself all the components required by it sometimes it may have capacity to produce still a decision has to be made weather it is economical to produce in house or buy it from outside

Factors in favour of making components in house

  1. It is cheaper in cost as compared to buying from outside
  2. Excess plant capacity available which can absorb overheads
  3. Extensive investments beyond capacity of supplier required to create facilities to produce CC specialised items
  4. The item has relatively large and consistent demand
  5. Supplier not interested due to small quantity required
  6. Company has necessary equipments expertise which can be utilised for family to produce an item similarly closely allied to its main products components
  7. very big items which are difficult to transport
  8. Company intends to maintain secrecy of product design and manufacturing prices
  9. Existence of only 1 non dependable supplier in terms of quality delivery schedule financial stability etc
  10. Company may be interested in forward or backward integration
  11. To utilise the existing manpower effectively in recession Times
  12. To reduce ultimate cost of product by reducing expensive in exercise duty is sales tax octroi etc

Factors in favour of buying a component from outside sources

  1. Cheaper in cost as compared to a in house production
  2. Necessary space equipments time and manpower skills not available in house
  3. Company does not want to make new investments which can be am used beneficially elsewhere
  4. Existing facilities can be used more profitable by produce other components
  5. Legal barriers prevent company to produce in house for example environment problems patents etc
  6. Inconsistent demand
  7. Supplier specialises in that component and can give better quality
  8. Availability of good number of suppliers offering better selection choice
  9. Status of Industrial Relations in company

Make or buy decision should be evaluated continuously as Technology as well as internal and external environment of company is changing continuously for this purpose and analysis of the present and future market and economic Trends supplier evaluation new development in the raw materials and processes etc is necessary

Engineering units generally preferred to buy them to make due to following factors

  1. Components manufacturing specialist for that product can produce at much lower price than producing in house
  2. Such specialist manufacturer keep track of new technologies and can make necessary investments to ensure good Returns
  3. Parent company sets up ancillary units which are joint venture of partnership companies e.g. Telco have set up ancillary units like Tata toyo Limited JBM tools PVT Ltd etc which produce specialised components for a Telco
  4. Due to less inventory new concepts like just in time total quality management tqm etc  can be taken up

Buy or lease decision

 Leasing

Leasing the international accounting standard 17 define sleeves as an agreement whereby the lesser conveyor to the lessee for rent the right to use an asset for an agreed period of time this includes a contract for the hire of an asset which provides for giving the higher an option to acquire title to the Asset upon the fulfillment of certain agreed conditions

The point to be noted here is that the easy pace lease rental 2 laser over a period of time and prefix rate at fixed interval ownership of acid remains with laser or Lisa gets only right to use that asset

Types of leases

  1. Financial lease

 This transfers majority of the risks and rewards pertaining to the ownership of an asset though its title may or may not be subsequently transferred. in this these the rental Evil during the period recover the capital cost of the acid and contributes to the prophets of laser this enables laser light of the acid and dispose it off the way he likes

In this leaves the lesser retains the ownership of the assets during the lease period through a purchase option or reduced rentals may be provided after the lease period during the leaves period primary period laser receives the cost of the Asset and his profit next paragraph

During secondary period the lease may be continued on payment of substantially lowered rental through the list is the legal owner the risk and reward incidental to ownership pass on to the lessee hence lassey is supposed to pay for the insurance maintenance of the Asset etc

This release this Lizy is non cancellable were both sides except in the event of default according to provisions of the law during the primary period of leaves the least she has the exclusive right to retain position and to use the assets object to complying with the terms of the lease agreement

  1. Operating leases

In this type of lease the owner lesser of an asset agreement to leave the acid for specified period for an agreement some to be paid as rentals and who Returns all this and rewards incidental to ownership

In this lease the lesser maintenance that’s at least in good condition and retains ownership of an acid during and after the lease period the Lizzie has the exclusive right to passes and use the assets the lazy period is generally shorter up to 1 year the lease rentals over one single leaves period generally do not cover the cost of the Asset

Advantages of leasing

  1. Burden and cost of likely obsolescence shifted to the laser
  2. Leasing is better option on short term basis then out right purchase of an acid in rapidly changing technological environment
  3. Enables organisations with uncertain incomes the use of an asset
  4. It is more flexibale than ownership
  5. Allows companies to expand gradually as they cannot invest in assets
  6. Leasing offer sometimes cost savings over direct borrowings allow
  7. Allows companies to expand gradually as they cannot invest in assets
  8. Lease financing is better option when an equivalent amount of Dept finance is not available
  9. enable to avail certain tax benefit as lease payment is tax deductible
  10. Leasing reduces the risk of obsolescence of assets
  11. More preferred by institutional in inventor who want to earn higher rate of return on their assets
  12. Preferred by companies who operate within Limited working capital
  13. Leasing companies provide asset along with labour so lazy need not face Union and Labour problems

Disadvantages of leasing

  1. Cost of living high on long term basis
  2. In case of Wrong Turn and non cancellable lease Alizee is required to face the danger of Excellence obsolescence
  3. Lease rentals being fixed lazy cannot enjoy the benefit of decreasing interest rates
  4. when the lessee Enter into leasing agreement it is difficult to understand the implications of financial resources
  5. lessee cannot take advantage of and potential capital gain in case real estate value increases during lease period
  6. The interest cost of lease financing is generally higher than that of debt financing
  7. Ownership of asset remains with laser hence we cannot benefit from increase in value of property due to inflation and demand

Contents of the lease agreement 

The lease agreement generally contains information of following

  1. The least transaction
  2. Title identification and ownership of an asset
  3. Cost of maintenance and use
  4. Liabilities of the lazy
  5. Liabilities of the laser
  6. Default of the leases
  7. Remedies in event of default
  8. Arbitration

Subcontracting

Subcontracting in walls procuring parts and components required to produce main product from outside sources

For example Bajaj Auto Limited manufacturers scooter and motorcycles Bajaj Auto Limited broke your large number of components and parts required to manufacture scooter on motorcycle from outside resources the main reason for subcontracting is to reduce costs the small manufacturers overhead Bangalore he can supply the same components that much lower cost than producing in house

This is a common practice in large automobile and Engineering companies Tu subcontract large number of components to small scale manufacturers who specialise in particular line activity se casting forging auto Electricals rubber parts transmission products like there’s police etc

Subcontracting in was following activities

  1. Vendor development – Various actions related to this activity can be given below
  • Identification of vendors
  • Guidance two vendors to procure the required components of desired quality and price
  • Optimisation of number of vendors
  • Evaluating of  vendors
  • addition and deletion of vendors

Before selecting the vendor companies first evaluate their strength capabilities by Reference visit to their factory they inspect the facilities available for production quality control etc now add a large companies are trying to reduce the number of vendors and new suppliers are not encouraged unless they have something special than others new suppliers are asked to root their products through selected few when does the intention behind this is to reduced administrative time and cost spent on dealing with large number of surplus secondly companies want to develop strong business relationship with selected few vendors

  1. Purchase formalities-This includes routine formalities like sending enquiries obtaining quotations placing orders follow-up and receiving and inspection
  2. Systems-Standardizing the designs of the components needed frequently enables to develop specialised skill of vendors it is also expected that purchasing procedure should also be standardizedVarious areas in which purchaser in large company should provide attention in subcontracting are as follows
  3. Establishing delivery schedule-This is necessary to receive uninterrupted flow of components from window to the company or desired time company is expected you sufficient Lead time as well as necessary drawings and designs to winter to ensure getting deliveries as perfect delivery schedule
  4. Prompt payment to vendor on delivery
  5. Ensuring quality standards-For obtaining desired quality from supplier it is necessary that company provides guidance Technology know how and test facilities to vendor when not available with him sometimes companies may provide raw material and to the necessary to produce the desired component in such case company pays the full cost of the tools required by vendor for producing the components required by the company the vendor is responsible for maintaining the tools in good condition it is expected that the vendors should send back the tools along with the components produce to the company on completion of orderSometimes the cost of tools is bore by Inder and the company on mutually agreed terms
  6. Record Keeping –Company is expected to keep records of all new raw materials paint Saint to vendor and received back from him similarly annual or 6 months is stock level maintaining Binder for all goods supplied by company should be recorded this is necessary from audit point of you