<MAKE OR BUY ANALYSIS> 

Make or buy analysis

• • One of the key factors for operations managers to consider when making the ‘make ourselves or buy-in’ decision is the relative costs of these two options. In quantitative terms, if it can be shown that the long-term costs of outsourcing (buying-in) a component or product are less than the cost of making that component or product then outsourcing might be the better option. However, qualitative factors should also be considered, such as the impact of redundancies on worker morale, social responsibility objectives and quality issues.

  • If CTM > CTB, then 'BUY-IN'

  • If CTN < CTB, then 'MAKE IN-HOUSE'

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  • CALCU;LATION based solely on costs

  • OTHER CONSIDERATIONS 

  • Make-or-buy decisions are not just about numbers, however. Other questions that an operations manager should ask before outsourcing an operation include:

  • Is this the organisation’s core competency – and would the business be losing key skills by outsourcing?

  • Could the business risk losing a competitive advantage by disclosing detailed information about production designs and methods to an outsourcing business?

• What will the impact on quality and perceived image be?

• Can the outsourcing business be relied upon to deliver as and when required? This is an especially important consideration if the purchasing business operates JIT.

• What additional risks would the business be taking?

• How irreversible is the decision? Could the business return to making the product if a supplier lets them down completely?

TIP

For make-or-buy decisions remember to consider: Will the

supplier increase prices once the firm has closed down its

own production capability? Will the quality be as good? Is the

supplier reliable?