External manufacturing

External production (or external service ) in the economy is the procurement of intermediate goods by a company from suppliers / subcontractors for the purpose of further processing into an end product . The opposite is in- house production .

General

The operational function of production is always understood to mean in-house production. Are for the production or semi-finished products required, these intermediate goods have as a foreign production over the receipt be obtained. From the point of view of their manufacturer, semi-finished products are in-house production, from the point of view of the company processing them externally. Raw materials , consumables and supplies are not economically to the semi-finished products, are nevertheless strictly speaking, at least semi-finished materials and supplies because they are intermediate goods. External production means externalization , i.e. the organization of economic activities via the market . The decision on the proportion of external production in production must be made for the first time before the company is founded .

Demarcation

The specialist literature distinguishes the terms external production and outsourcing from one another. The latter is an organizational tool with which previous parts of the in-house production are outsourced to other companies without the external production being affected. Furthermore, a distinction is made between external procurement and external production . Third-party procurement is the purchase of components , while external production means placing orders based on in-house engineering . If a company does not have any in-house production ("virtual company"), no external production is required; it can be completely manufactured by other companies within the framework of the contract procedure (for example common in the textile industry ).

Business aspects

The terms internal and external manufacturing diving especially in the vertical integration on. This can therefore be characterized as the percentage of in-house production for the end product. The vertical range of manufacture decides how high the proportion of in-house and external production is in a company:

${\displaystyle {\text{Fertigungstiefe in Prozent}}={\frac {\text{Fremdfertigung}}{\text{gesamte Fertigung}}}\cdot 100\,\%}$.

The vertical range of manufacture (or in- house production rate ) decreases with outsourcing ( offshoring , onshoring ) and increases with insourcing and forward integration .

The question of whether house production or external reference ( English make or buy ) is to be preferred, is part of the strategic planning . If in-house production is reduced, the manufacturing costs will decrease , but components that have previously been manufactured in- house must be procured as semi-finished products from other companies (suppliers / subcontractors), so that the material costs also increase by the profit of these suppliers (higher cost price ). In addition, there are dependencies, especially in just-in-time production , while any storage costs do not change due to the storage of semi-finished products. The higher the estimated sales volume , the more profitable in-house production is due to the usable fixed cost degression .

criteria

The following criteria must be taken into account when deciding between in-house and external production:

criteria	Reasons for outsourcing
Product quality	Problem solving through specialization in research and development high product quality through specialization of production factors Use of comprehensive test methods even for small quantities Use of third-party property rights
capacities	Reduction of capacity bottlenecks Avoidance of underemployment of specialized production factors
costs	low unit costs due to high utilization of the production factors Relocation of parts of the business with a low contribution margin low research and development costs low fixed costs / storage costs
Risks	Risk diversification through distribution to several suppliers ( redundancy ) Low risk in the event of a decline in production No risk when acquiring unsuitable production factors No risk of incorrect production

It makes sense to procure it externally if there is a high level of availability for the procurement objects ; In-house production, on the other hand, is useful if the procurement object is of high strategic importance and external procurement would be associated with a high level of uncertainty and dependence on the supplier. Outsourcing is particularly necessary if the comparison of the transaction costs turns out to be in favor of the external procurement.

Strategies

In-house or third-party production is also a production strategy , because a decision has to be made as to whether extensive in-house production represents a core competence that will also be maintained in the future or not. The lean management and its strand lean production aimed among other things at reducing the proportion of in-house production in favor of external procurement, so as to reduce the level of vertical integration and to take goods originally self-produced by suppliers strange. In the context of these concepts, the optimal vertical range of manufacture is automatically answered by in-house production or by external sources.

A motor vehicle manufacturer, for example, usually does not have complete in-house production because it procures, among other things, car tires or car glass as part of external production from suppliers. In his in-house production he mainly concentrates on chassis , bodies or engines . If he now decides to have the engines manufactured by other companies and outsources engine production, then it is outsourcing. The intermediate goods he has previously taken over from outside production are not affected.

Individual evidence

1. ↑ Clemens Büter, Internationale Unternehmensführung , 2010, p. 133
2. ↑ Heinz Kremeyer, In-House Production and External Procurement under Financial Aspects , 1982, p. 22
3. ↑ Bianca Wolfschmidt, Basic Knowledge - Certified Technical Business Economist , 2015, p. 13
4. ↑ Max-Michael Bliesener, Outsourcing as a possible strategy for reducing costs , in: Betriebswirtschaftliche Forschung und Praxis vol. 4, 1994, p. 277 ff.
5. ^ Stefan Bernhard Eckel, The Just-in-time Contract , 1998, p. 26
6. ↑ Dominik Endler, Product Parts as Means of Product Design , 1992, p. 131
7. ↑ Clemens Büter, Internationale Unternehmensführung , 2010, p. 133
8. ↑ Volker Trommsdorff (Ed.), Handelsforschung 1997/98: Kundenorientierung im Handel , 1997, p. 141
9. ↑ Dietram Schneider / Cornelius Baur / Lienhard Hopfmann, Re-Design of the value chain by Make or Buy , 1994, p. 54
10. ↑ Michael Lorth, Optimal Risk Allocation in Supplier-Buyer Systems , 2000, p. 30