Make-or-Buy Decision

What is a Make-or-Buy Decision and which criteria are decisive in the decision making process?

Smartpedia: A make-or-buy decision addresses the in-house production or external procurement of a product. It is about producing a product yourself (make) or purchasing it (buy).

The decision on in-house production or external procurement

A “make-or-buy decision” is a decision made by an organisation to manufacture a product in-house or to purchase it from an outside source. It is a decision,

  • to produce a product yourself
  • or to have it produced by a manufacturer or to buy it from him as a finished solution.

Make-or-buy decisions depend on economic, technical, organisational and strategic factors. The PMBOK Guide explains make-or-buy decisions in the “Plan Procurements” process and demands the consideration of costs including a comparison of purchase and leasing.

Criteria for a make-or-buy decision

There are many aspects and criteria that can be considered in a make-or-buy decision:

  • costs,
  • possible expenses for the definition of specifications or software selection,
  • the expected quality of a product,
  • the support during the application,
  • the availability of employees,
  • possible opportunity costs,
  • opportunities and risks,
  • dependencies and freedoms

In practice, decision trees and decision tables have proven to be useful tools for organisations in making decisions.

Make-or-Buy Decision

Difference between make-or-buy and business case

Various factors play a role when making a make-or-buy decision. Often, the factors go beyond a business case, in which the impact of a company’s investment is presented and assessed, and which is often the basis for the approval, rejection or ongoing justification of projects. The difference lies in the operational or strategic orientation. Even if a project can also have a strategic character, strategic make-or-buy decisions often lead to organisational company adjustments that are difficult to reverse. With smaller operative decisions, the effects are less sustainable and lasting.

Difference between make-or-buy and outsourcing

In contrast to a make-or-buy decision, which refers to the in-house production or external procurement of products and thus to the manufacturing process, an outsourcing decision rather revolves around processes and services such as, for example, the writing of invoices, which were carried out by the company itself until the decision was made. The criteria for an insourcing decision are also similar to those for a make-or-buy or outsourcing decision. Insourcing describes the reintegration of previously outsourced tasks, processes, developments or divisions. Here, too, the aspects and criteria mentioned above must be assessed.

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Notes:

Here you will find additional information from our Smartpedia section:

Smartpedia: What is a Decision Tree?

What is a Decision Tree?

Smartpedia: What is a Decision Table?

What is a Decision Table?