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. Economics

    Globalization: Progress Or Profiteering?

    Proponents of globalization argue that it helps the economies of developing nations and makes goods cheaper, while critics say that globalization reduces domestic jobs and exploits foreign workers. ...
  2. Markets

    Company Clone Cost Reveals True Value

    Find out how calculating a reproduction cost for a company can beat out the dividend discount model.
  3. Fundamental Analysis

    Vital Link: Manufacturing And Economic Recovery

    Manufacturing output is one of the clearest signs that an economy is recovering from a recession.
  4. Investing Basics

    Economic Indicators for Germany

    Here is a list of the top macro-economic indicator data sources for Germany.
  5. Investing Basics

    France's Economy: Wobbly But Still Important

    Which are the top macro-economic data sources for France? Here is the list to track economic indicators of France.
  6. Investing Basics

    The Top Indicators for India's Economy

    Here are some of the top sources to get economic indicators and associated datasets for India, the breakout BRIC star.
  7. Economics

    Why is the Breadth Indicator useful for tracking the overall economy?

    See how analysts might use technical breadth indicators to judge the health of the economy as a whole, and learn why one tool is probably not enough.
  8. What does Scarcity Mean?
    Economics

    Scarcity

    Scarcity is the basic economic problem that arises because people have unlimited wants, but resources are limited. Because of scarcity, various economic decisions must be made to allocate resources ...
  9. The law of supply and demand is one of the most basic principles in economics.
    Economics

    What is Supply & Demand?

    The law of supply and demand is one of the most basic principles in economics. In simplest terms, the law of supply and demand states that when an item is scarce, but many people want it, the ...
  10. How does Outsourcing Work?
    Economics

    How does Outsourcing Work?

    Outsourcing is the business practice of hiring people outside a company to perform services that traditionally were performed within the company, by the business’s own employees. Companies typically ...

You May Also Like

Hot Definitions
  1. Christmas Island Dollar

    The former currency of Christmas Island, an Australian island in the Indian Ocean that was discovered on December 25, 1643. ...
  2. Santa Claus Rally

    A surge in the price of stocks that often occurs in the week between Christmas and New Year's Day. There are numerous explanations ...
  3. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  4. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  5. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  6. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
Trading Center