The Make or Buy Decision

Today’s businesses are running at global scale in a highly competitive environment. Hence quality at lower optimized cost is the need of the hour. Companies are continuously exploring ways to reduce the cost of an item. In the process the companies continuously deal with the dilemma of whether the item should be developed/made in-house or the same should be developed/made by an outside agency, which can develop the item at a lower cost and with better efficiency. Get PMP training to know more about development priorities in your organization.

This has led to the phenomenon of outsourcing in companies, wherein companies have been exploring outsourcing many of their manufacturing and development activities to agencies which are more efficient in doing them and can deliver them at a lower cost per unit. Outsourcing has become an integral part of today’s manufacturing or even new product/service/solution development, so that they can focus on their core business function and can outsource many of their non-core functions.

This is where they undertake the make-or-buy analysis to decide whether the same work should be done in-house or should be bought from an outside agency by outsourcing. Cost becomes one of the major factors in doing make-or-buy analysis.

In case of manufacturing, the companies analyse and compare the cost of making per unit versus cost of purchasing per unit from outside agency. In case of project development also, companies look for outsourcing the development. In addition to cost factor, companies also consider various other factors while doing make-or-buy analysis as explained below.

Factors favouring in-house manufacture

• Cost concerns
• Desire to expand the manufacturing focus
• Need of direct control over the product
• Intellectual property concerns
• Quality control concerns
• Supplier unreliability
• Lack of competent suppliers
• Volume too small to get a supplier attracted
• Reduction of logistic costs (shipping etc.)
• To maintain a backup source
• Political and environmental reasons
• Organizational pride

Factors favouring purchase from outside

• Suppliers’ specialized know-how and research are more than that of the buyer
• Wish to sustain a multiple source policy
• Lack of in-house technical experience
• Cost considerations
• Need of small volume
• Insufficient capacity to produce in-house
• Brand preferences
• Strategic partnerships

Conclusion

While doing make-or-buy analysis all the above factors are taken into consideration by the organization. While quantitative factors are important, qualitative factors are also equally important in doing make-or-buy analysis and arriving at a decision. Make-or-buy analysis is a very critical decision to be undertaken by organizations who seriously explore outsourcing.