Make or Buy Decision

  • A make-or-buy decision is an act of choosing between manufacturing a product in-house or purchasing it from an external supplier. 
  • Companies use quantitative analysis to determine whether making or buying is the most cost-efficient method.
  • There are many factors at play that may tilt a company from making an item in-house or outsourcing it, such as labor costs, lack of expertise, storage costs, supplier contracts, and lack of sufficient volume.
  • Make-or-buy decisions, like outsourcing decisions, speak to a comparison of the costs and advantages of producing in-house versus buying it elsewhere.

 

 

Key factors in the make or buy decision.

Process available inhouse: If a given process is not available internally, then the obvious decision is to purchase. Vendors often develop proficiency in a limited set of processes that makes them cost competitive in external-internal comparisons. There are exceptions to this guideline, in which a company decides that, in its long-term strategy, it must develop a proficiency in a manufacturing process technology that it does not currently possess.

Production quantity:  Number of units required. High volume tends to favor make decisions. Low quantities tend to favor buy decisions.

Product life:  Long product life favors internal production.

Standard items: Standard catalog items, such as bolts, screws, nuts, and many other types of components are produced economically by suppliers specializing in those products. It is almost always better to purchase these standard items. 

Supplier reliability: The reliable supplier gets the business. Alternative source In some cases, factories buy parts from vendors as an alternative source to their own production plants. This is an attempt to ensure uninterrupted supply of parts, or to smooth production in peak demand periods

Source: Mikell P. Groover, Fundamentals of Modern Manufacturing: Materials, Processes, and Systems, 7th Edition


Make-or-Buy-Decision