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Make or buy, you decide

Take a look at things to consider when deciding whether to make or buy

What is a make-or-buy decision?

A make-or-buy decision is choosing whether you want to manufacture the product in house or procure the product from an external supplier. One of the main reasons why an organisation chooses to buy, is to reduce the cost base for the procurement of indirect or direct material. However, this is not the only reason. Take a look below at some of the reasons why an organisation may choose to buy goods rather than choose to make.

  • It’s not one of the core competencies of the organisation manufacture that item
  • In house team may lack the expertise and skills needed
  • Short term needs for a particular project
 

Three pillars of a make-or-buy-decision

There are three key pillars to think about when making your decision to make or buy. These can be defined into three areas:

Business strategy

  • Think about the strategic importance of the product or service
  • Consider the current competitive environment and how it might change in the future
  • If a product or service is critical to your organisation’s performance, you may opt for a make decision

Risks

  • Is the external supplier reliable?
  • Will you be able to guarantee its quality?
  • Is the external supplier in an unstable political environment? Are there any environmental factors that present risk?

Economic factors

  • What’s the impact on capital if you decide to buy?
  • Are there any savings that could be achieved?
  • Consider the total cost i.e., shipping and handling, expanded inventories, admins expenses and quality control

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The arguments for and against make-or-buy

Deciding on whether to make or buy can be tricky. With the increase in global sourcing, it may seem easy to sway to a buy decision. Here are some for and against arguments to help you come up with your decision.

Arguments for buy:

  • Making a product in house is costly along with managing the whole supply chain
  • It may be more cost effective to have the product or service provided by a supplier, rather than made by your own organisation
  • The investment in equipment by your organisation may outweigh the cost compared to sourcing and manufacture by a third party

Arguments against buy:

  • Finding the right supplier can be difficult
  • If the product is critical to your business, making the product in house makes it easy to collaborate and maintain control and quality
 

What is procurement?

Procurement involves the buying of goods and services that enables an organisation to operate their supply chains, in a profitable and ethical manner. Explore deeper into how procurement is defined, the role it plays and a how a career in procurement can benefit you.

Procurement strategy key themes

Porters Five Forces Procurement New product development
Strategy development Strategy implementation

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