Make-Or-Buy Decision + SUBSCRIBE SHARE
What is a 'Make-Or-Buy Decision'
Loading the player...
A make-or-buy decision is the act of choosing between manufacturing a product in-house or purchasing it from an external supplier. In a makeor-buy decision, the most important factors to consider are part of quantitative analysis, such as the associated costs of production and whether the business has the capacity to produce at required levels.
Next Up IN-HOUSE FINANCING
IN-HOUSE
CAPACITY MANAGEMENT
INTERNALIZATION
BREAKING DOWN 'Make-Or-Buy Decision'
Also referred to as the outsourcing decision, the 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, all aspects regarding the acquisition and storage of the items must be considered.
Make Costs
In regards to in-house production, a business must include expenses related to the purchase and maintenance of any production equipment as well as the cost of production materials. Further costs can include the additional labor required to produce the items, storage requirements within the facility or if additional storage space must be purchased, and the proper disposal of any remnants or byproducts from the production process.
Buy Costs
Costs relating 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 expenses relating to the storage of the incoming product and labor costs associated with receiving the products into inventory must be factored into the decision.
HOT DEFINITIONS Standard Deviation Entrepreneur Money Market
Decision-Making Points
Perfect Competition
The results of the quantitative analysis may be sufficient to make a determination based on the approach that is more cost-effective. At times, qualitative analysis addresses any concerns that cannot be measured specifically.
Compound Interest Income Statement
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. Additional consideration may be given if the firm has the opportunity to work with a company that has previously provided outsourced services successfully in the past and can sustain a long-term relationship. Similarly, factors that may tilt a firm towards making an item in-house include existing idle production capacity, better quality control or proprietary technology that needs to be protected. Concerns regarding the reliability of the supplier may also be considered, especially if the product in question is critical to normal business operations. The firm should also consider whether the supplier can offer a long-term arrangement, if that is desired.
Free Webinar — Options and Income
Trading Center
SPONSORED
Options offer multiple routes to potential income generation. Join OIC and Alan Ellman of Blue Collar Investor on March 22, 2 PM ET, for an overview of his preferred strategy — portfolio overwriting. Register today.
Compare Popular Online Brokers Partner Links
Provider
Open an account at E*TRADE today. TD Ameritrade
blooom
Name
TD Ameritrade
blooom
Description
Account Minimum: $0 Fee/Trade: $6.95
Do you know what your 401k is invested in? Get professional help in less than 5 minutes. > Learn More
Get up to $600 when you open and fund an… > Learn More account.
Start your career in financial services at Fidelity. Apply now! Trade Bitcoin Futures with TradeStation. $1.50/contract/side. No software fees. Trade Now.
Advertiser Disclosure
RELATED TERMS In-House
In-House Financing
Conducting an activity or operation within a company, instead ...
In-house financing is a type of seller financing in which a firm ...
Capacity Management
Internalization
Capacity management is the management of the limits of an organization's ...
Internalization can refer to any process that is handled within ...
Unit Cost
Outsourcing
The cost incurred by a company to produce, store and sell one ...
Outsourcing is a practice used by different companies to reduce ...
RELATED ARTICLES INVESTING
Amazon Selling Products Made In-House Under Different Brand Names: Report Ever heard of Arabella? Amazon has been busy selling a slew of products manufactured in-house in a range of product categories. INVESTING
Using Porter's 5 Forces to Analyze Stocks Porter's five forces are a set of qualitative measures that allow investors to draw conclusions.
PERSONAL FINANCE
Most Popular Outsourced Jobs The reasons behind outsourcing vary, and can create more efficient processes and products.
INSIGHTS
The Unintended Consequences of Outsourcing The outsourcing of labor overseas is a natural result of globalization of world markets and the drive for businesses to cut costs in order to maximize profits.
INVESTING
Mergers Put Money In Shareholders' Pockets Learn the five ways mergers and acquisitions can increase a company's value.
SMALL BUSINESS
Training New Employees Vs. Hiring Skilled Workers The decision to hire internally or externally is based on many considerations, and not all of them are financial.
FINANCIAL ADVISOR
Steps For Adding New Services To Your Finance Business Advisors who seek to add additional lines of business to their practices need to carefully consider all the factors involved.
INVESTING
GE and the Future of Energy Storage Find out how energy storage, led by GE, is surging as power companies search for methods to smooth usage and backstop new technologies.
RELATED FAQS Q: What is the difference between cost and price? Consider how cost affects a product's price. Corporate expenses and the current cost of living both impact the final sticker ... Read Answer >>
Q: How much inventory space is available in the United States to store oil? Find out how much available storage space there is for crude oil in the United States and why continuing rising supply levels ... Read Answer >>
Q: What are the differences between period costs and product costs? Find out why GAAP separates all company expenses into either period or production costs and how this impacts the way expenses ... Read Answer >>
Q: What is the prime cost formula? Learn about the prime cost formula and how to determine which costs are included in this calculation, including the difference ... Read Answer >>
Q: What are the main problems with a JIT (just in time) production strategy? Learn about the just in time (JIT) production strategy and how the precise coordination and timing it requires can end up ... Read Answer >>
Q: What are the disadvantages of backward integration for a mid-sized business seeking ... Learn more about backward vertical integration and the disadvantages of this business strategy for some small and midsized ... Read Answer >>
Search Investopedia
DICTIONARY: # A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
CONTENT LIBRARY Articles
Terms
Stock Analysis
Videos
CONNECT WITH INVESTOPEDIA Guides
Stock Simulator
Slideshows
FAQs
Exam Prep Quizzer
Calculators
Net Worth Calculator
Chart Advisor Mortgage Calculator
WORK WITH INVESTOPEDIA About Us
Advertise With Us
Contact Us
GET FREE NEWSLETTERS Careers
© 2018, Investopedia, LLC. All Rights Reserved Terms Of Use Privacy Policy
Newsletters
How to Speak ‘Retirement’ SPONSORED BY FIDELITY
