In brief
The make-or-buy decision determines whether a company produces a part or service itself or obtains it from an external supplier.
Contents
What is Make-or-buy decision?
Make or buy is a classic question in strategic procurement and controlling. It concerns components and assemblies as well as services, such as maintenance work, repairs or procurement itself. Intermediate forms include partnerships, contract manufacturing or outsourcing individual work steps. The decision is not taken once and for all but should be reviewed when costs, capacities or requirements change.
The basis is a cost comparison: the costs of in-house production for material, personnel, machine time and a share of overheads are set against the purchase price and incidental costs of external sourcing. In the short term, with spare capacity, often only the variable costs count; in the long term, all costs do. In addition, there are qualitative criteria such as protection of know-how, quality, flexibility, dependence on suppliers, core competence and capacity utilisation.
In maintenance, the question arises, for example, with the in-house repair of defective assemblies, the manufacture of simple spare parts in the company's own workshop or outsourcing spare parts procurement. For discontinued parts, remanufacture from drawings or by reverse engineering can be a make option that is weighed against buying a successor model.
In practice: maintenance and procurement
For a robust decision, hidden costs should also be recorded: inspection effort, documentation, stockholding and liability for defects. For safety-relevant parts, it must also be clarified whether in-house production affects the conformity of the machine.
Synonyms and abbreviations: make or buy · in-house production or external sourcing · insourcing or outsourcing · make-versus-buy analysis
Frequently asked questions
What criteria apply to the make-or-buy decision?
Quantitatively, what counts above all are the costs of in-house production compared with the purchase price including incidental costs, as well as any investment required. Qualitatively, protection of know-how, quality requirements, flexibility, supply risks, available capacity and the strategic importance of the part are assessed. Both sides are often brought together in a weighted scoring matrix.
How is make or buy calculated?
You determine the cost of in-house production per unit and compare it with the purchase price including incidental costs. With spare capacity, a comparison with the variable costs is sufficient in the short term, because fixed costs are incurred anyway. In the long term, full costs are decisive. The difference can also be used to derive a break-even quantity above which in-house production becomes cheaper.
When is external sourcing worthwhile?
External sourcing is typically worthwhile when suppliers produce more cheaply or better through specialisation, in-house capacity is lacking, demand is low or fluctuating, or the part is not a core competence. For parts involving sensitive know-how or of great importance for product quality, by contrast, companies tend to opt for in-house production.