WHEN YOU CAN USE OR NOT USE INTERNAL SUPPLIERS

Internal suppliers are suppliers that are part of the same company as its customer. These suppliers provide the products or services that co-workers within the organization need in order to do their job.

The internal suppliers are an “in house” suppliers.

The choice to use an internal supplier is based on a corporate decision regarding the make-or-buy decision.

Make-or- buy decision refers to the action of choosing whether to manufacture a product or provide a service in-house or purchase it from an external supplier.

EXAMPLE OF INTERNAL SUPPLIERS

Assume a company is developing a marketing campaign and decides that it needs a website. If the company decides to use their own I.T department for this rather than paying outside parties. Their own I.T team becomes internal suppliers.

Whether a product or service should be made or brought 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.

WHEN YOU CAN USE OR NOT USE INTERNAL SUPPLIERS

The question of when to or when not to use internal suppliers rather than the external ones will come down to the advantages and disadvantages one can derive from them.

Advantages for a business using an internal supplier

1. Greater control and continuity of supply, as there is less dependence on parties that are external to the business.

2. The relationship between customer and supplier is likely to be stable and long term, as they are part of the same organization. As a result, they should also share the same culture and values, which supports relationship building

3. Improved quality control due to having a higher degree of control over the manufacturing process

4. Potential lower cost as no external supplier margins is added to the cost of the product or service and there will be no, or limited, transaction costs.

5. Intellectual property (IP) is protected from passing to competitors. This is often key in the technology and food industries

RELATED: How to maintain good relationship with suppliers

Disadvantages of using an internal supplier

1. Unless the price is benchmarked against external supplier offerings then there is no guarantee that the internal supplier is providing value for money
2. 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, the buyer only pays for the product or service when it is required, there are effectively only variable costs.
3. As no money is changing hands the internal supplier may be less motivated to meet the required performance standards.
4. 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 organization must continually invest in the internal supplier. For instance, this could 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.

NOTE

It is not always the case that an organization will make products or services internally. This could be due to various different factors such as;

• High costs of production if the required volumes are low
• Legislative barriers, for example, permits or licenses are required for some services such as asbestos removal
• Skill shortages in areas that are key to producing the product or services

Internal suppliers should be evaluated, reviewed and managed in the same way as external suppliers. This should correct or prevent any poor performance that could have a negative impact on the final product or service.