A make vs. buy analysis is derived after conducting a thorough strategic investigation. To make a decision on the basis of a make vs buy analysis, you must choose between two options: manufacturing a product in house or purchasing products from some supplier externally. This decision is taken when the production department of a company is facing capacity shortage, or there are prevailing important issues with the suppliers that need to be addressed.
Comparison between make vs buy decision
The make vs. buy decision involves a comparison between the costs and the benefits of a product or a service incurred while subcontracting a product or service. For a most accurate comparison between the costs and benefits, the managers must evaluate the benefits of the expertise in purchasing, regarding the development and nurturing of the same expertise within the company.
Understanding make vs. buy analysis
This is a very crucial part of managing the operations within a company. The managers incorporate different in-house production costs when an in-house production is considered. A thorough evaluation is conducted when approving a product to be produced in-house, such as the transaction costs, the labor incurred, monitoring costs, waste product disposal costs, and storage requirement costs to make the production process foolproof.
Businesses are required to focus on production and transaction costs when considering outside suppliers for a particular product. They need to consider the price, sales tax charges and shipping costs in relation to the product’s price. They must also consider the overall inventory holding costs to manage the risk factor and the ordering costs of the product.
The make vs buy decision is considered as the most critical decision for a business. It can be a financial or accounting decision, or both. It is very important for a business to assess its dimensions with a low-cost approach, while understanding the core of the make vs. buy decision.
The businesses may strategically devise different make vs buy choices of production according to the prevailing conditions. At different time intervals, different decisions and choices are made in accordance with the profitability quotient to determine the financial wellbeing of the business.
The make vs. buy decisions impact directly on the core competence, cost structure, customer service, corporate strategy and flexibility of the business.
What causes make vs buy decisions
A business’s decision to decide whether to make or buy a product is solely based on its competence. The product’s cost and quality problems are the main factors that let the company decide whether to make it themselves or buy from the suppliers. Other contributing factors for these important decisions relate to a company’s long term business strategy to carry out its operations.
Historic events can affect the make vs. buy decisions of a business. A business may consider outsourcing or insourcing of a product due to some events that affect business operations. If a business is highly affected by any historic event, it all comes down to the make vs buy analysis, to ascertain whether to outsource the production or not.
Sometimes, a business is compelled to outsource a product or a part of a product because the internal cost is high, or the kind of expertise needed are lacking. Often, a product is outsourced to sustain a business relationship with the supplier.
How to take a make vs. buy decision?
Arriving at a make vs. buy decision is a complicated procedure. Different factors can affect the decision, whether to make a product in house or get it from a supplier. Usually the cost is the primary factor that affects the make vs. buy decision.
Businesses evaluate their overhead costs to determine whether it’s fruitful to produce a certain product in-house or outsourcing it will be more cost-effective. Strategic competence, risk involvement and technological factors also contribute when it comes to decide whether to make or buy a product.
Make vs buy analysis – benefits
The make vs. buy analysis helps a business to determine low costs while investing a large amount of money regardless of the decision about developing a product in-house or otherwise.
A make vs buy analysis also provides competitive advantage to a business, if it delivers a product that adds value for the clients and shareholders in terms of the skills and services.
It helps the companies take into account their internal and external key factors, thereby streamlining operations of the business.