Skip to main content Accessibility help
×
Home
  • Print publication year: 2018
  • Online publication date: December 2018

11 - Make or Buy Decision

Summary

INTRODUCTION

Every business organization engaged in the manufacturing of tangible products faces the problem to decide whether it is more advantageous to make a particular item in-house, or to buy it from a supplier. The choice involves aspects which are both qualitative such as quality control, and quantitative such as the relative cost factors. In order to decide whether to make or buy a product, the company generally analyzes the capacity of its facilities and the cost at which the product can be bought. Subsequently, the option that involves the least cost is selected by the company. Buying option often appears to be feasible and beneficial for a company which manufactures low volumes of product. In situations where the total cost of buying a product is more than or equal to the total cost of making it, it is recommended to make the product within the company.

FEASIBLE ALTERNATIVES FOR LAUNCHING NEW PRODUCTS

It is a natural tendency of a business organization to thrive and grow in order to earn higher profits. Some of the most efficient ways in which this can be done include (i) backward integration and (ii) forward integration. In both these approaches new product(s) is introduced by the organization. To implement its new preposition, the company may adopt any one of the following strategies:

  • • Products may be manufactured in-house with the existing facility.
  • • Products may be purchased from external suppliers or vendors.
  • • A few components of the products may be made in-house, a few others may be bought from the outside vendors and finally the product may be assembled by the company.
  • Although the alternatives are limited in number and appear simple, but the decision is strategically critical because it has far-reaching effects on the ultimate success or failure of the new preposition. In case the company decides to make the product (entire product or part of it) in-house, it involves the following:

  • • Fresh investments in terms of new machines, construction of new buildings, jigs and fixtures, raw materials, and manpower.
  • • Involvement of more number of work hours of their existing machines, equipment, and manpower that may be critical to the company's existing product line.