STUDY GUIDE L4M6.docx

**INTERNAL SUPPLIER** The use of an internal supplier is often referred to as \'in-house\', that is, the internal supplier is an in-house supplier. The choice to use an internal supplier is based on a corporate decision linked to the make-or-buy decision. Procurement has a key role to play in suppo...

**INTERNAL SUPPLIER** The use of an internal supplier is often referred to as \'in-house\', that is, the internal supplier is an in-house supplier. The choice to use an internal supplier is based on a corporate decision linked to the make-or-buy decision. Procurement has a key role to play in supporting the business to make this decision. To help your understanding of internal suppliers we will look at a brief example. Imagine that an advertising company is developing a marketing campaign. As part of the campaign the advertising company must develop a new website. Instead of finding an external web design supplier to undertake this work the advertising company uses its internal IT team to develop the website. The make-or-buy decision is a key part of the sourcing process. Will an organisation manufacture a product or provide a service itself, or will it outsource this to a supplier or external organisation? Products or services produced by an internal supplier are usually those that are considered core to the business and therefore are not suitable to be produced by an external supplier. Producing the products or services in-house allows the organisation to keep a greater degree of control over the process than if this was outsourced to an external supplier. This can be key for products or services that are time critical or subject to frequent design changes. These core products and services are likely to be the aspects of a business that provide it with a competitive advantage. The decision whether to make or buy must be linked to the overall strategy and future plans of the organisation. Whether a product or service should be made or bought must be fully analysed in order to make the best decision for the business. When making the decision it will be necessary to try and anticipate future developments in both the market and the business. The procurement department, along with key internal stakeholders, will need to compare the costs of producing the product or service in-house with the cost of procurement from an external supplier. Non-price factors such as quality should also be included in the review. The decision involves achieving the best balance between cost and flexibility. One of the non-price factors which requires detailed review is the risk using an external supplier could create. This is covered in greater detail in \'External suppliers\' later in this section. There are several advantages for a business using an internal supplier. Greater control and continuity of supply, as there is less dependence on parties that are external to the business The relationship between customer and supplier is likely to be stable and long term, as they are part of the same organisation. As a result, they should also share the same culture and values, which supports relationship building Improved quality control due to having a higher degree of control over the manufacturing process Potential lower costs as no external supplier margin is added to the cost of the product or service and there will be no, or limited, transaction costs Intellectual property (IP) is protected from passing to competitors. This is often key in the technology and food industries There can also be disadvantages to using an internal supplier. Unless the price is benchmarked against external supplier offerings then there is no guarantee that the internal supplier is providing value for money When the product or service is created in-house, the internal supplier will have both fixed and variable costs. However, when using an external supplier, as the buyer is only paying for the product or service when it is required, there are effectively only variable costs As no money is changing hands the internal supplier may be less motivated to meet the required performance standards The organisation can become out of touch with market trends and developments in technology and innovation ⚫ In order to ensure the products and services provided by the internal supplier are up to the standards that could be sourced from external suppliers, the procurement organisation must continually invest in the internal supplier. An example of this would include investing in new machinery. There is an opportunity cost to this investment as perhaps the greater value could be obtained investing in other aspects of the business In many cases, following a full review of the current situation, it may not be possible for an organisation to produce a product or service itself or to continue the production of this internally. This could be due to various different factors. High costs of production if the required volumes are low Legislative barriers, for example, permits or licences are required for some services such as asbestos removal. Skill shortages in areas that are key to producing the product or service The need for access to patented items, IPR or specialised processes An internal supplier should be evaluated, reviewed and managed in the same way as an external supplier. This should correct or prevent any poor performance that could have a negative impact on the final product or service. Effort should also be spent on maintaining positive working relationships with an internal supplier. Poor service from an external supplier could lead to a company reversing its make-or-buy decision and insourcing the production of a product or service so that it is back in-house. However, the decision should not be taken lightly, insourcing can be very costly for an organisation.