What is a Make-or-Buy Analysis in Procurement?
A Manufacturing Factory made by AI, Midjourney (and me of course)
The Importance of the Make-or-Buy Decision in Procurement
When you’re in charge of Procurement, making good decisions about buying or making goods in-house is critical.
If you need to buy a new printer or upgrade your laptop, for example, it’s easy enough to go online and order one from Amazon. But what about more complex purchases – a factory machine or bespoke software?
In these cases, it’s crucial to weigh the pros and cons of making or buying the item internally vs externally before deciding who will be responsible for producing the goods or providing the service.
What is the make-or-buy decision in Procurement?
A make-or-buy decision is a choice that an organization needs to make when deciding whether to purchase something through an external supplier or produce it in-house. As the name suggests, “make” means creating something internally, while “buy” refers to buying something from an external supplier. The decision is essential whether it’s more cost-effective for your company to produce a product internally or buy it externally.
Deciding on whether to make or buy
Make or buy decisions are about sourcing. The question is whether you should produce something in-house or outsource it.
If a company can’t find anyone on their staff who will do the job, they should find someone outside their organization and put them on contract.
Make or buy decisions are about the best way to deliver a product or service.
Key factors to consider when weighing up make or buy
When weighing up the pros and cons of buying or making a product, it’s essential to consider all the factors. While there are no right or wrong answers, some considerations may be more critical than others, depending on your business needs.
The first step is to assess your costs.
How much will it cost to make or buy?
If you’re manufacturing in-house, this includes raw materials plus labour costs. If you’re buying externally (i.e., not manufactured by in-house teams), then all external costs, including delivery charges and taxes, if applicable.
Where is the Make-or-Buy Decision in the Procurement Process
A make-or-buy decision is a fundamental part of the procurement process.
It’s made at an early stage in the procurement process and determines whether to produce a product or service in-house or purchase it from an external supplier.
The decision is made to decide whether or not it’s more cost-effective and beneficial for your company to produce something internally or buy it externally. Consider whether creating a new product or service could be a future revenue generator due to Intellectual Property Rights or by selling a product in the market. This could prove to be an incredible product creation opportunity for you here.
To make this kind of decision, you need complex pricing data and cost analysis to compare internal costs with external costs.
Conclusion
Now you can make better procurement decisions and understand when it makes sense to buy or make goods and services. The key is to weigh up the cost of each option against the other, keeping in mind that making something may cost more upfront but could save money in the long run by reducing your reliance on outsourcing companies.