What is Make-Or-Buy Decision?
1201 reads · Last updated: December 5, 2024
A make-or-buy decision is an act of choosing between manufacturing a product in-house or purchasing it from an external supplier.Also referred to as an outsourcing decision, a make-or-buy decision compares the costs and benefits associated with producing a necessary good or service internally to the costs and benefits involved in hiring an outside supplier for the resources in question.To compare costs accurately, a company must consider all aspects regarding the acquisition and storage of the items versus creating the items in-house, which may require the purchase of new equipment, as well as storage costs.
Definition
The make-or-buy decision refers to the choice between manufacturing a product in-house or purchasing it from an external supplier. Also known as outsourcing decision, it involves comparing the costs and benefits associated with internal production of goods or services against those involved in acquiring resources from external suppliers.
Origin
The concept of make-or-buy decision originated during the Industrial Revolution when companies began considering the most efficient ways to produce goods. With globalization and the complexity of supply chain management, this decision-making process has become increasingly important.
Categories and Features
Make-or-buy decisions can be categorized into several types: complete in-house production, complete outsourcing, and hybrid models. Complete in-house production means the company produces all products internally, offering full control over the production process but potentially leading to higher fixed costs. Complete outsourcing relies on external suppliers, reducing fixed costs but posing risks of supply chain disruptions. Hybrid models combine the advantages of both, offering greater flexibility.
Case Studies
Case Study 1: Apple Inc. employs a hybrid model in its product manufacturing. Apple designs and develops the core components of its products but outsources production to companies like Foxconn. This strategy allows Apple to focus on innovation while leveraging the production capabilities of external suppliers. Case Study 2: Tesla chose a make strategy for battery production by building a Gigafactory in Nevada to produce batteries. This decision enables Tesla to control the quality and cost of battery production.
Common Issues
Investors might encounter issues such as accurately assessing the costs of internal production versus external procurement and managing the risks of supply chain disruptions. A common misconception is that outsourcing is always cheaper, but long-term strategic impacts must be considered.
