Make-Or-Buy Decision

AAA

DEFINITION of 'Make-Or-Buy Decision'

The act of choosing between manufacturing a product in-house or purchasing it from an external supplier. In a make-or-buy decision, the two most important factors to consider are cost and availability of production capacity.


An enterprise may decide to purchase the product rather than producing it, if is cheaper to buy than make or if it does not have sufficient production capacity to produce it in-house. With the phenomenal surge in global outsourcing over the past decades, the make-or-buy decision is one that managers have to grapple with very frequently.

INVESTOPEDIA EXPLAINS 'Make-Or-Buy Decision'

Factors that may influence a firm's decision to buy a part rather than produce it internally include lack of in-house expertise, small volume requirements, desire for multiple sourcing, and the fact that the item may not be critical to its strategy. Similarly, factors that may tilt a firm towards making an item in-house include existing idle production capacity, better quality control or proprietary technology that needs to be protected.

RELATED TERMS
  1. Economies Of Scale

    The cost advantage that arises with increased output of a product. ...
  2. Insourcing

    Assigning a project to a person or department within the company ...
  3. Outsourcing

    A practice used by different companies to reduce costs by transferring ...
  4. Production Efficiency

    1. An economic level at which the economy can no longer produce ...
  5. Minimum Efficient Scale

    The smallest amount of production a company can achieve while ...
  6. Assembly Line

    A production process that breaks the manufacture of a good into ...
Related Articles
  1. Globalization: Progress Or Profiteering?
    Economics

    Globalization: Progress Or Profiteering?

  2. Company Clone Cost Reveals True Value
    Markets

    Company Clone Cost Reveals True Value

  3. Vital Link: Manufacturing And Economic ...
    Fundamental Analysis

    Vital Link: Manufacturing And Economic ...

  4. Are Oil Prices Helping Or Affecting ...
    Economics

    Are Oil Prices Helping Or Affecting ...

Hot Definitions
  1. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  2. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  3. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  4. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  5. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  6. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
Trading Center