Make-Or-Buy Decision

Loading the player...

What is a 'Make-Or-Buy Decision'

A make-or-buy decision is 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.

BREAKING DOWN '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. In-House

    Conducting an activity or operation within a company, instead ...
  2. In-House Financing

    A type of seller financing in which a firm extends customers ...
  3. Capacity Requirements Planning ...

    An accounting method used to determine the available production ...
  4. Excess Capacity

    A situation in which actual production is less than what is achievable ...
  5. Capacity Management

    The management of the limits of an organization's resources, ...
  6. Aggregate Capacity Management

    The process of planning and managing the overall capacity of ...
Related Articles
  1. Economics

    What Happens in a Make-or-Buy Decision?

    A make-or-buy decision happens when a company must choose to either manufacture an item itself, or buy it premade from a supplier.
  2. Personal Finance

    Mutual Funds: Brand Names Vs. House Brands

    Find out whether an in-house fund will serve you better than a major company's fund offerings.
  3. Fundamental Analysis

    Calculating the Capacity Utilization Rate

    Capacity utilization rate is a ratio used to compare a current usage level against a maximum potential level.
  4. Term

    What is Capacity Utilization Rate?

    The capacity utilization rate shows how much a firm or economy is producing as a percentage of what it’s capable of producing.
  5. Economics

    Understanding Marginal Cost of Production

    Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit.
  6. Products and Investments

    How to Create a New Financial Product in 10 Steps

    The 10 steps outlined here are essential to the creation of a new financial product.
  7. Economics

    What Does Long Run Mean?

    A long run is a period of time in which all factors of a business’ production and costs are variable.
  8. Economics

    Introduction To Supply And Demand

    Find out all about supply and demand and how it relates to your daily purchases.
  9. Economics

    A Practical Look At Microeconomics

    Learn how individual decision-making turns the gears of our economy.
  10. Financial Advisors

    Is a Google Robo-Advisor on the Horizon?

    It's possible that Google is looking to get into the robo-advisor business, either as a new venture or as a way to provide more benefits to employees.
RELATED FAQS
  1. When is outsourcing a bad alternative to vertical integration?

    There are many things to examine when considering outsourcing versus vertical integration. One reason to not outsource is ... Read Answer >>
  2. Is there any way to reverse the law of diminishing marginal returns?

    Learn more about how consumer spending, supply and demand impact production decisions. Find out more about the law of diminishing ... Read Answer >>
  3. Do production costs include the marginal cost of production?

    Learn more about marginal costs of production and production costs. Find out how businesses can use marginal cost calculations ... Read Answer >>
  4. Does the law of diminishing marginal returns only apply to labor?

    Learn more about how the law of diminishing returns is used by economists and businesses. Find out more about the laws of ... Read Answer >>
  5. How can you calculate diminishing marginal returns in Excel?

    Learn more about production costs and applying the law of diminishing marginal returns using Excel. Find out more about how ... Read Answer >>
  6. Is there a benefit to outsourcing internationally over outsourcing within the country?

    Understand the benefits of outsourcing internationally and locally for business. Learn why many businesses choose to outsource ... Read Answer >>
Hot Definitions
  1. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  2. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  3. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  4. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  5. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  6. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
Trading Center