Make-Or-Buy Decision

A A A

DEFINITION

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

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. Economies ...
  2. Insourcing

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

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

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

    The smallest amount of production a company can achieve while still taking full ...
  6. Working Capital

    This ratio indicates whether a company has enough short term assets to cover ...
  7. Net Present Value - NPV

    The difference between the present value of cash inflows and the present value ...
  8. MINTs (Mexico, Indonesia, Nigeria, ...

    Investopedia explains: An acronym coined by major investment firm Fidelity in ...
  9. Factor Income

    Income received from the factors of production – land, labor, and capital.
  10. Balance Of Payments (BOP)

    A record of all transactions made between one particular country and all other ...
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. Nominal vs. Real GDP
    Economics

    Nominal vs. Real GDP

  5. What's the difference between housing ...
    Investing Basics

    What's the difference between housing ...

  6. Why You Should Invest In This Vibrant ...
    Stock Analysis

    Why You Should Invest In This Vibrant ...

  7. ChartAdvisor for Aug. 1, 2014
    Chart Advisor

    ChartAdvisor for Aug. 1, 2014

  8. ChartAdvisor for July 17, 2014
    Chart Advisor

    ChartAdvisor for July 17, 2014

  9. How Big Are Emerging Markets?
    Economics

    How Big Are Emerging Markets?

  10. How do you calculate working capital?
    Investing Basics

    How do you calculate working capital?

comments powered by Disqus
Hot Definitions
  1. Quanto Swap

    A swap with varying combinations of interest rate, currency and equity swap features, where payments are based on the movement of two different countries' interest rates. This is also referred to as a differential or "diff" swap.
  2. Genuine Progress Indicator - GPI

    A metric used to measure the economic growth of a country. It is often considered as a replacement to the more well known gross domestic product (GDP) economic indicator. The GPI indicator takes everything the GDP uses into account, but also adds other figures that represent the cost of the negative effects related to economic activity (such as the cost of crime, cost of ozone depletion and cost of resource depletion, among others).
  3. Accelerated Share Repurchase - ASR

    A specific method by which corporations can repurchase outstanding shares of their stock. The accelerated share repurchase (ASR) is usually accomplished by the corporation purchasing shares of its stock from an investment bank. The investment bank borrows the shares from clients or share lenders and sells them to the company.
  4. Microeconomic Pricing Model

    A model of the way prices are set within a market for a given good. According to this model, prices are set based on the balance of supply and demand in the market. In general, profit incentives are said to resemble an "invisible hand" that guides competing participants to an equilibrium price. The demand curve in this model is determined by consumers attempting to maximize their utility, given their budget.
  5. Centralized Market

    A financial market structure that consists of having all orders routed to one central exchange with no other competing market. The quoted prices of the various securities listed on the exchange represent the only price that is available to investors seeking to buy or sell the specific asset.
  6. Balanced Investment Strategy

    A portfolio allocation and management method aimed at balancing risk and return. Such portfolios are generally divided equally between equities and fixed-income securities.
Trading Center