makeorbuy

Make-or-buy is a decision framework used in operations management to determine whether a company should manufacture a product or component in-house or source it from an external supplier. The decision affects cost, control, capacity, quality, and strategic focus, and can apply to raw materials, subassemblies, or finished goods.

Key considerations include total cost of ownership, which encompasses direct production costs, fixed overhead, capital requirements, procurement costs, inventory, transportation, and potential salvage value. Qualitative factors also play a role, such as core competencies, intellectual property, supplier reliability, lead times, quality control, flexibility, and strategic risk. Internal production offers greater control over quality, timing, and IP but may require capital investment and can reduce flexibility. Outsourcing can lower capital needs and access specialized capabilities, but may increase dependency on suppliers and expose the firm to supply and quality risks.

A typical process involves: defining the item and demand, gathering data on make and buy costs and capabilities, evaluating total cost of ownership for both options, considering qualitative factors, conducting sensitivity analyses, and selecting the option aligned with strategic objectives and risk tolerance.

Common metrics include total cost of ownership, unit cost, breakeven analysis, and expected impact on cash flow and capacity. Make-or-buy decisions are influenced by industry dynamics, market volatility, supplier markets, and corporate strategy, and are often revisited as conditions change. Related concepts include outsourcing, insourcing, and vertical integration.