Make-or-buy analysis

Definition

Make-or-buy analysis is a decision-making process used to determine whether it is more cost-effective to produce a product or service internally (make) or to purchase it from an external supplier (buy). This analysis helps organizations evaluate factors such as costs, capacity, quality, and strategic alignment when deciding how to procure goods and services.

5 Must Know Facts For Your Next Test

1. Make-or-buy analysis often considers both direct and indirect costs associated with production or procurement.
2. This analysis can help organizations assess their core competencies and focus on areas where they have a competitive advantage.
3. Factors like lead time, flexibility, and scalability can heavily influence the make-or-buy decision.
4. Risk assessment is essential in make-or-buy analysis, as outsourcing can introduce supply chain vulnerabilities.
5. Regulatory compliance and industry standards can impact whether a company decides to make or buy a specific product or service.

Review Questions

• How does make-or-buy analysis help organizations align their procurement strategies with overall business goals?
  • Make-or-buy analysis enables organizations to critically evaluate their internal capabilities versus the offerings of external suppliers. By considering cost-effectiveness, resource allocation, and core competencies, this analysis supports decision-making that aligns procurement strategies with broader business objectives. This ensures that organizations can maximize value from their investments while focusing on strategic areas that drive growth.
• What key factors should be considered in the risk assessment component of make-or-buy analysis?
  • In the risk assessment of make-or-buy analysis, organizations should consider potential supply chain disruptions, quality control issues, and the reliability of external vendors. Additionally, they need to evaluate the risks related to maintaining production capacity internally versus dependencies on outside suppliers. By understanding these risks, companies can make informed decisions that balance cost savings with operational stability.
• Evaluate how changing market conditions might affect an organization's make-or-buy decisions over time.
  • Changing market conditions can significantly impact make-or-buy decisions by altering cost structures, supplier availability, and consumer demand. For instance, if raw material prices increase or new technologies emerge that enable cheaper production methods, an organization may shift from buying to making in response. Furthermore, economic fluctuations may lead businesses to reassess their supplier relationships and internal production capabilities to remain competitive. This dynamic nature requires continual reevaluation of procurement strategies through regular make-or-buy analyses.

Related terms

Total Cost of Ownership: The total cost of acquiring a product or service, including purchase price, maintenance costs, and any associated indirect costs.

Procurement Strategy: A plan that outlines how an organization will acquire goods and services, focusing on optimizing the procurement process to achieve best value.

Vendor Evaluation: The process of assessing potential suppliers based on criteria such as quality, price, reliability, and service capabilities.