Make-or-buy decisions refer to the process of deciding whether to produce a particular product or service internally (in-house) or to purchase it from a supplier (outsource).
Introduction
A make-or-buy decision is based on numerous factors such as cost, quality, expertise, availability, and strategic importance. In this article, we will discuss some easy to understand make-or-buy decisions that can help businesses reach informed decisions about their operations.
What factors should I consider?
Cost |
Companies need to evaluate the cost of producing the product or service in-house versus outsourcing to a supplier. If the cost of producing the product or service is higher than the cost of outsourcing, it may make more sense to outsource. |
Expertise |
If the business lacks the necessary skills, knowledge, or experience to produce a particular product or service, it may be more advantageous to outsource it to a supplier who specialises in that area. |
Quality |
A business must evaluate whether it can produce the product or service to the desired level of quality. If not, it may be better to outsource to a supplier who can provide the required quality. |
Availability |
If a business does not have the necessary resources, such as equipment or employees, to produce the product or service, it may be best to outsource to a supplier who can provide those resources. |
Capacity |
If a business does not have enough production, storage or labour force capacity, to meet the demand for a particular product or service, it may be best to outsource to a supplier who can provide the necessary capacity. |
Strategic importance |
If the product or service is critical to the business’s operations or competitive advantage, it may be best to produce it in-house to maintain control over the process. |
Decision Making: The key to make-or-buy
Ultimately the make-or-buy decision is about comparing the costs and benefits that can be achieved by making a product or service internally against the costs and benefits that are achieved from outsourcing.
Product Example
Sarah owns a pizza business based in Cavan and she gets fresh tomato sauce from a supplier based in Bristol. Sarah has experienced problems with the quality of the product and delivery delays and despite multiple conversations with the supplier she is not convinced that the issue can be resolved. Sarah already knows the nine ingredients for making the tomato sauce, has worked out the cost of producing the sauce in-house, and knows she can manage this new workload within her business.
Outcome: Having considered all the factors involved Sarah decides to make the product herself as she will have the benefit of being in total control of the manufacturing process.
Service Example
Sarah owns a pizza business based in Cavan and offers a delivery service employing two people on a casual basis to make the deliveries at the weekend. Sarah is concerned about her ability to control her costs as a result of fluctuating exchange rates, increases in interest rates and utility costs. Having looked at each aspect of her business Sarah has concluded that the only area where she can make savings to enable her to control her costs is her delivery service.
Outcome: Having considered all the factors involved Sarah decides to outsource the deliveries to a delivery platform.
Key tips for making the right make-or-buy decision:
By following a structured process, you can make an informed decision on making-or-buying that is best suited for your business.
1. Preparation
Appoint a member of the team to oversee this process and identify the product requirements.
2. Collect information
Collect information on the various aspects of the make-or-buy decision and work out the direct and where possible, the indirect costs.
3. Review and feedback
Review the information from step one and step two, this will have pulled together important information for the decision making process to either buy-or-sell.
Article reviewed: June 2023