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.Also referred to as an outsourcing decision, a make-or-buy decision compares the costs and benefits associated with producing a necessary good or service internally to the costs and benefits involved in hiring an outside supplier for the resources in question.To compare costs accurately, a company must consider all aspects regarding the acquisition and storage of the items versus creating the items in-house, which may require the purchase of new equipment, as well as storage costs.
Make-or-Buy Decision
Definition
A make-or-buy decision refers to the process of choosing between manufacturing a product in-house or purchasing it from an external supplier. Also known as outsourcing decision, it involves comparing the costs and benefits associated with internal production of goods or services with those of acquiring resources from external suppliers.
Origin
The concept of make-or-buy decision originated during the Industrial Revolution when companies began mass-producing goods and faced the choice of whether to produce all components in-house or procure them externally. With the advent of globalization and supply chain management, this decision has become more complex and critical.
Categories and Characteristics
Make Decision: The company chooses to produce the required goods or services internally. Advantages include complete control over the production process, quality assurance, and potential cost savings. Disadvantages may include high initial investment and maintenance costs.
Buy Decision: The company opts to procure goods or services from external suppliers. Advantages include reduced initial investment, flexibility, and leveraging suppliers' expertise. Disadvantages may include dependency on suppliers, quality control issues, and potential long-term cost increases.
Specific Cases
Case 1: An automobile manufacturer needs to decide whether to produce engines in-house or purchase them from an external supplier. After a cost-benefit analysis, it was found that in-house production required significant equipment investment and technical training, while external procurement reduced initial costs and leveraged supplier expertise. The company chose to buy.
Case 2: An electronics company needs to decide whether to produce batteries in-house or procure them externally. Analysis revealed that in-house production allowed better quality control and supply chain management but required substantial R&D investment and equipment costs. The company decided to make the batteries to ensure product quality and supply chain stability.
Common Questions
1. How to accurately compare the costs of make and buy decisions?
Answer: Consider all relevant costs, including direct costs (e.g., materials and labor) and indirect costs (e.g., equipment and storage).
2. What are common misconceptions in make-or-buy decisions?
Answer: Common misconceptions include underestimating the long-term costs of buying and overlooking potential quality control issues in making.
