Make or buy analysis project management

Q: How do you determine make

A companys decision on whether to make or buy is based on its core competence. The production cost and quality problems are the major triggers of a make-or-buy decision. Other factors are managerial decisions and a companys long-term business strategy that dictate the current operations pattern.

What Is a Make-or-Buy Decision?

A make-or-buy decision is an act of choosing between manufacturing a product in-house or purchasing it from an external supplier.

Table of Contents Show

What Is a Make-or-Buy Decision?
Key Takeaways
Understanding a Make-or-Buy Decision
Choosing Make or Buy
Why Choose?
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What is a make
What is the importance of a make
How do you determine make
What are the major factors you should consider when completing a make

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.

Key Takeaways

A make-or-buy decision is an act of choosing between manufacturing a product in-house or purchasing it from an external supplier.
Make-or-buy decisions, like outsourcing decisions, speak to a comparison of the costs and advantages of producing in-house versus buying it elsewhere.
There are many factors at play that may tilt a company from making an item in-house or outsourcing it, such as labor costs, lack of expertise, storage costs, supplier contracts, and lack of sufficient volume.
Companies use quantitative analysis to determine whether making or buying is the most cost-efficient method.

Understanding a Make-or-Buy Decision

Regarding in-house production, a business must include expenses related to the purchase and maintenance of any production equipment and the cost of production materials. Costs to make the product can include the additional labor required to produce the items, which takes the form of wages and benefits, storage requirements within the facility, holding costs overall, and the proper disposal of any remnants or byproducts from the production process.

Buy costs related to purchasing the products from an outside source must include the price of the good itself, any shipping or importing fees, and applicable sales tax charges. Additionally, the company must factor in the expenses relating to the storage of the incoming product and labor costs associated with receiving the products into inventory. It also includes signing any contracts with suppliers that might require the company to be locked-in to certain deals for a certain period of time.

In a make-or-buy decision, the most important factors to consider are part of quantitative analysis, such as the associated costs of production and whether the business can produce at required levels.

Choosing Make or Buy

The results of the quantitative analysis may be sufficient to make a determination based on the approach that is more cost-effective. At times, the qualitative analysis addresses any concerns a company cannot measure specifically.

Factors that may influence a firm's decision to buy a part rather than produce it internally include a lack of in-house expertise, small volume requirements, a desire for multiple sourcing, and the fact that the item may not be critical to the firm's strategy.

A company may give additional consideration if the firm has the opportunity to work with a company that has previously provided outsourced services successfully and can sustain a long-term relationship.

If a firm is going to buy or outsource, it's essential that they work with a company that they can rely on for the long-term.

Similarly, factors that may tilt a firm toward making an item in-house include existing idle production capacity, better quality control, or proprietary technology that needs to be protected. A company may also consider concerns regarding the reliability of the supplier, especially if the product in question is critical to normal business operations. The firm should also consider whether the supplier can offer the desired long-term arrangement if that is what it requires.

Why Choose?

If a company is already in business there may be a point when certain situations arise that will cause a company to pause and consider which direction it should proceed in; whether it should buy or make the parts or products it needs.

Some of these events could be a trusted supplier shutting down, an increase or decrease in demand for the product, or a possible path for new opportunities. At these junctions, management will have to consider the advantages of either making or buying the product, which can also be outside of a cost-benefit analysis. Will one decision lead to economies of scale, to a possible new product line, or a restructuring of the core business?

Depending on the business and its place in the market, there will be both advantages and disadvantages of continuing down the same path or forging a new one.

A make-or-buy analysis is a general project management technique that is used to identify if a particular work can be accomplished by the project team or should just be purchased from external sources. In most cases, capabilities always exist within the organization that has already been committed to working on existing projects. In such matters, it might be important for the project management team to source work from outside the organization to meet the scheduled commitments.

There are many things that can influence the make-or-buy decisions and one of them is budget constraints. This is the reason why an analysis should be made to consider all the related costs such as the direct and indirect costs.

Another aspect of project management that should be considered is the available contract types. The risk between the seller and the buyer also determines the contract type to be used. It is the responsibility of the seller and the contract parties to identify the appropriate types of contract as soon as the applicable law has been agreed on.

The make-or-buy decision is important in project management as it helps project managers decision where to source their task.

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What is a make

Make or Buy Analysis: The process of gathering and organizing data about product requirements and analyzing them against available alternatives, including the purchase or internal manufacture of the product.

What is the importance of a make

Some of the advantages of making or buy decisions are as follows: The finding helps choose the most efficient option to go about in-house production of outsourcing. The decision helps in the strategic maneuver of the business. The decision helps save the cost for many businesses.

How do you determine make

A company's decision on whether to make or buy is based on its core competence. The production cost and quality problems are the major triggers of a make-or-buy decision. Other factors are managerial decisions and a company's long-term business strategy that dictate the current operations pattern.