MARKETS
Purchase or Manufacture? Supply situation a n d e q u i p m e n t investment a m o n g factors that should decide question, buyers' g r o u p told -13 AW MATERIAL COSTS and
supplies,
- ^ patents, and competition must all be considered when a company faces the question: W h e n to manufacture and when to buy? Money c a n be saved by buying an item w h e n there is little or no chance that y o n will foe the low cost producer, or w h e r e the competition has a basic raw material position. The question of w h e n t o buy a n d when to manufacture got a thorough going-over by chemical a n d allied products buyers' group of t h e National Association of Purchasing Agents. E. H . Doht, who h e a d s up purchases for Mallinckrodt, said there were times when an item is offered for sale b y competitors before its potentialities can be evaluated. If it fits into your existing line of products a n d if there is n o patent question, then it would be a d visable to buy the product until customer acceptance is established. T h i s may also save a considerable capital investment i n facilities. Patent Situation. There is this d a n ger, however; the changeover to manufacturing may b e poorly timed, and if customer acceptance grows t o o rapidly there may not b e sufficient material t o supply your customer. Buying may b e t h e solution w h e n someone else has a patent o n an item that fits well into a n existing product line and distribution facilities. E v e n under these circumstances, Doht said, the possibility of obtaining a license should be investigated before a final decision is made to purchase In cases where the sales department feels that it is important to maintain a full line, even if sales of some items are small, money can usually be saved b y purchasing the small items. While buying of the latter may appear t h e most economical, it i s also possible to weaken a company's sales position w i t h respect to a particular line through p u r chases of too many of these small items. In the matter of r a w materials for manufacture, capital expenditure u p o n producing facilities is not always justified, as when the material requirement is only a small fraction of national p r o duction. In this connection t h e speaker cited the raw materials needed in the manufacture of fine chemicals. These are purchased from heavy chemical makers. I n many cases, h e said, there is a practical lower limit t o the size of a plant for the most economical production. 2564
Cost of Learning. There are other costs i n addition to capital expense. Among them are the learning of certain manufacturing skills a n d how to handle hazardous chemicals. It is often cheaper to b u y from suppliers who a r e already experienced in making certain lines. An example is offered b y highly purified chemicals. In deciding when to manufacture, the purchasing agent can often b e helpful. H e will know when a purchased item h a s graduated from the small item class and when to consider its manufacture. When a company plans to market an item with a potentially large sales volume, a n d the profit margin is favorable, the obvious thing to do is t o make it yourself. One of the more compelling cases for manufacturing instead of b u y i n g can result from a discovery in the company's own research laboratory. Not only is manufacturing likely to be more profitable, but it will also protect t h e discovery and provide a basis for making other similar new products. Producing Facilities. E). B. Black, manager of Dow's fine chemical sales, emphasized the importance of existing equipment in deciding whether to b u y or manufacture. For the production of custom chemicals, h e said, it is n e c essary t o have versatile b a t c h e q u i p ment. Some companies have thus available specifically for t h e manufacture of a wide variety of products. In other instances temporary e q u i p ment is available because of a r e d u c tion in sales and production of another item. H e r e we are treading on dangerous ground because sooner or later d e mand for the original p r o d u c t can r e turn a n d production facilities might not be ample to take care of b a t h products. W h e r e production is m a d e on existing equipment, w e should take a realistic approach of actual cost, Black said. Some people try to **kidw t h e m selves into believing that t h e only expens; involved is t h e ont-of-pocket cost, a n d that this can be shaved off for a m o r e solid position. But in p a r ing that margin you r u n t h e risk of jeopardizing the product for which t h e plant w a s orginally built. M a n p o w e r Q u e s t i o n . I n deciding to manufacture, consideration must b e given t o manpower. Does it possess the know-how and the experience for this move? Is it a type of synthesis
that will require Ph.D.'s a n d take them away from valuable research work? In many cases manufacture of custom chemicals can b e d o n e b y trained operators under t h e supervision of comp e t e n t chemists. If this can b e done, t h e reduction of labor cost will reflect directly in the cost of the chemical manufactured. Efficient utilization of technical manpower and operating personnel is of vital importance in making custom chemicals. Food-Drug G u a r a n t y . T h e guaranty provisions i n the Federal Food, Drug, and Cosmetic Act provide in some cases a n extremely limited degree of production against prosecution, said James G. Flanagan o f S. B . Penick a n d Co. T h e s e in effect extend protection to a manufacturing customer or distributor in connection with shipments in interstate commerce against adulteration or misbranding prohibited by the law. For one thing, t h e guaranty against adulteration or m i s b r a n d i n g is limited to persons residing in the United States, except i n t h e case of certified colors. Penalties against a false guaranty a r e severe even if accepted in good faith. The integrity and responsibility of t h e s u p p l i e r is i n reality t h e best safeguard f o r t h e customer-manufacturer, Flanagan said. Under court interpretation, a n y further manufacturing of the guaranteed product or its single admixture w i t h one or more ingredients eliminates the effectiveness of the original supplier's guaranty. J o i n t Meetings. Outgoing group chairman Glenn Reinier, Abbott Laboratories, said h e was opposed to t h e suggestion t h a t t h e chemical buyers' group separate from t h e fine chemicals group. Reinier indicated, however, t h a t h e favored the proposal t h a t t h e chemical buyers meet jointly with t h e Chemical Market Research Association. H e also t h o u g h t they should continue t o invite sales people to attend their meetings, provided they did n o t participate i n the group's business a n d policy matters. In contrast to t h e procedure followed b y some other g r o u p s , the purchasing agents do not favor a meeting program based upon more t h a n t w o subjects. These are fully explored by speakers and followed up by a question-answer session. For their new chairman, the chemical buyers named G. C . Fordyce, American Cyanamid, to succeed Reinier. T h e New York meeting this year was h e l d in connection with t h e 40th annual convention of t h e National Association of Purchasing Agents. A feature was the 1955 "Inform-A-Show" of some 40 exhibitors.
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