A make-or-buy decision is an act of choosing between processing a product in-house or purchasing it from an external supplier. Another term for this is an outsourcing decision. This decision compares the costs and benefits related to producing a beneficial good or service internally to the costs and benefits of hiring an external supplier for a good or service.
In order to compare costs accurately, we must consider all aspects regarding the procurement and storage of the items against making items in-house. The best decision is one that maximizes the long-term financial outcome for a business. Several factors should be considered when making this decision, including the following:
Cost of the products
A make decision for in-house production must include costs associated with the purchase and maintenance of any production equipment and costs of production supplies. It also includes the labor costs of manufacturing workers required to produce internally. These costs include incomes and profits, storage requirements within the facility, holding costs, and the proper disposal of byproducts from the manufacturing process.
When evaluating a buy decision, you must include the price of goods, shipping fees, and sales tax charges. Moreover, the business must evaluate the costs of storing incoming products and labor costs associated with receiving the products into inventory. Lastly, signing contracts with suppliers oftentimes requires a company to be locked in a deal for a stated period of time.
The two major causes of a make-or-buy decision are production cost and quality difficulties. These two factors are based on whether or not it is a core competence of the company. Other factors include the company’s long-term business strategy and managerial decisions that dictate the current operations pattern.
In-sourcing or outsourcing, we may consider the historical policy as patterns to acquire some parts of services from external suppliers regardless of the company’s competence. The framework in sourcing can be accredited to better quality control, idle production, or unsatisfactory performance of external suppliers.
In contrast, factors that cause a company to outsource include the need for multiple sourcing, lack of internal expertise, cost reduction, the introduction of a new product, and reduced risk exposure. However, a company with a good reputation in providing outsourcing services may consider sustaining a long-term relationship.
Additional Resource: The Advantages of Make or Buy Decision
All companies have standards that they must execute. This is due to behavior patterns and the truths that the business works in diverse business environments exclusive to each other.
The most significant factor in the make-or-buy decision during sourcing is quantitative analysis. This accounting assessment helps to understand the costs associated with the production of design, research and development, manufacturing, and engineering. Quantitative analysis will also unveil whether the business can yield at required levels based on financial competencies and technological capacities. Therefore, we must consider this strategic dimension because they determine profitability and financial health, and impact corporate strategy, core competence, customer service, and flexibility.
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