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Sourcing & Suppliers

Make-or-Buy Decision

A make-or-buy decision is the choice between producing a good or service in-house or purchasing it from an external supplier.

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The decision compares the full cost and strategic implications of making something internally against buying it from the market. Cost is only part of the picture: buyers also weigh capacity, capability, quality control, intellectual property, flexibility and how core the activity is to the business. Items central to competitive advantage are often kept in-house, while commoditised inputs are usually bought.

A rigorous analysis uses total cost of ownership rather than headline price, capturing overheads, capital, management effort and risk on the make side, and pricing, lead time and supplier dependence on the buy side. Because conditions change, make-or-buy is periodically re-examined; outsourcing that made sense at one volume may not at another.

Example

A manufacturer weighing whether to keep producing a sub-assembly internally compares its fully loaded in-house cost against supplier quotes, factoring in freed-up capacity and the risk of depending on a single external source.

Frequently asked questions

What is a make-or-buy decision?
It is the choice between producing a good or service internally or purchasing it from an external supplier, based on cost, capability, quality, risk and strategic importance.
What factors affect a make-or-buy decision?
Total cost of ownership, available capacity and capability, quality control, intellectual property, flexibility, supplier reliability and how core the activity is to the business.

Go deeper

Cost avoidance and savings

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