Make or Buy decision

Written by Fmi.Online Friday January 6, 2023
The make or buy decision analysis is an evaluation of manufacturing something in-house versus buying that product from another seller. In other words, it is when a business weighs the pros and cons of making or doing something within the business using company resources or outsourcing  that part of production or business function to an outside party.

Explanation :

  The make vs buy decision traditionally relates to parts in a manufacturing process. If an organization finds that they can make one or more of the manufacturing inputs that they use in house, then the organization should evaluate the cost and compare it to the cost of purchasing those inputs elsewhere. However, a company also has to make this decision as it relates to building software or carrying out business functions. For example, if an organization needs a certain type of software but does not have the IT resources necessary to build it in-house, then it makes sense for the business to look outside of the business to purchase this software.There are pros and cons to each of the alternatives, and they depend on the amount and type of resources that the firm holds. Things that business should think about other than cost include: cost of ownership, legal considerations, and how often modifications will need to be made to the product.

In a nutshell :

  • A make-or-buy decision is an act of choosing between manufacturing a product in-house or purchasing it from an external supplier.
  • Make-or-buy decisions, like outsourcing decisions, speak to a comparison of the costs and advantages of producing in-house versus buying it elsewhere.
  • 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.
  • Companies use quantitative analysis to determine whether making or buying is the most cost-efficient method.
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