Accounting Principles, 11th Edition

Feature Story

Make It or Buy It?

When is a manufacturer not a manufacturer? When it outsources. An extension of the classic “make or buy” decision, outsourcing involves hiring other companies to make all or part of a product or to perform services. Who is outsourcing? Nike, General Motors, Sara Lee, and Hewlett-Packard, to name a few. Even a recent trade journal article for small cabinetmakers outlined the pros and cons of building cabinet doors and drawers internally, or outsourcing them to other shops.

Gibson Greetings, Inc., one of the country's largest sellers of greeting cards, has experienced both the pros and cons of outsourcing. In April one year, it announced it would outsource the manufacturing of all of its cards and gift wrap. Gibson's stock price shot up quickly because investors believed the strategy could save the company $10 million a year, primarily by reducing manufacturing costs. But later in the same year, Gibson got a taste of the negative side of outsourcing: When one of its suppliers was unable to meet its production schedule, about $20 million of Christmas cards went to stores a month later than scheduled.

Outsourcing is often a point of dispute in labor negotiations. Although many of the jobs lost to outsourcing go overseas, that is not always the case. ...