Make or Buy Decisions
Manufacture Internally or Outsource?
Companies frequently decide whether to manufacture a component internally or purchase it from an outside supplier. Only costs that change between the two options should be compared.
- Compare relevant manufacturing costs with purchase price.
- Ignore unavoidable fixed overhead.
- Include avoidable fixed costs.
- Consider quality, supplier reliability, and capacity.
Note
If freed production capacity can generate additional profits, include the opportunity benefit in the analysis.
Summary
Choose the option with the lower relevant cost while considering operational and strategic factors.