Make-or-Buy Analysis
Make-or-Buy Analysis is a decision-making process in business analysis used to determine whether a company should produce a good or service in-house (“make”) or purchase it from an external supplier (“buy”). This analysis is critical in operations, procurement, and strategic planning.
🔍 Purpose of Make-or-Buy Analysis
- Cost Efficiency: Identify the most cost-effective option.
- Resource Optimization: Determine if internal capabilities and resources are sufficient.
- Focus on Core Competencies: Allow the organization to focus on what it does best.
- Risk Management: Assess risks associated with outsourcing or internal production.
✅ Key Factors Considered
| Factor | Description |
|---|---|
| Cost | Direct and indirect costs of making vs. buying. |
| Capacity | Internal resource availability (manpower, equipment). |
| Quality | Whether in-house or external sources meet quality standards. |
| Time | Lead time for production vs. procurement. |
| Confidentiality | Risk of exposing sensitive information to vendors. |
| Control | Level of control over production or service delivery. |
| Flexibility | Ability to scale production or service quickly. |
📊 Steps in Make-or-Buy Analysis
- Define the Need: Identify the product/service in question.
- Gather Cost Data:
- Make: Labor, materials, overhead, opportunity cost.
- Buy: Vendor price, shipping, tariffs, inspection.
- Analyze Capabilities: Assess internal ability to produce effectively.
- Evaluate Risks: Legal, quality, supplier reliability, etc.
- Consider Strategic Fit: Align with long-term business goals.
- Make a Decision: Choose the most beneficial and sustainable option.
📘 Example
A software company needs a new customer support tool.
- Make: Develop in-house with the IT team.
- Buy: Subscribe to an existing SaaS product.
| Criteria | Make | Buy |
|---|---|---|
| Cost | $200,000 | $100/month |
| Time to Implement | 6 months | 1 week |
| Customization | High | Low |
| Maintenance | Internal team | Vendor handles |
If speed and cost are priorities, buying may be the better option.
📌 When to Make
- The product/service is a core competency.
- There is a need for high customization.
- You want to maintain control over quality or intellectual property.
📌 When to Buy
- The product/service is non-core.
- There are cost savings from outsourcing.
- You need to scale quickly or lack in-house expertise.
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