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. Production Efficiency

    1. An economic level at which the economy can no longer produce ...
  4. Outsourcing

    A practice used by different companies to reduce costs by transferring ...
  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. Economics

    What are some limitations of the consumer price index (CPI)?

    Explore some of the basic limitations of the widely used economic indicator, the consumer price index, or CPI, and examine the criticism of its accuracy.
  5. Economics

    Can the consumer price index (CPI) for individual areas be used to compare living cost among areas?

    Understand why the Consumer Price Index, or CPI, cannot appropriately be used for comparing the cost of living across different areas of the country.
  6. Economics

    Does the consumer price index (CPI) correlate with the change in price of goods and services?

    See why the consumer price index is a questionable proxy for inflation, and why it is unlikely to represent experiences with price changes accurately.
  7. Economics

    Is the consumer price index (CPI) a cost of living index?

    Explore the consumer price index (CPI) and understand why it is not an actual cost of living index although it is often identified as one.
  8. Investing

    What Are The Latest News On The Beer Industry?

    Beer isn’t a traditional commodity, as there are no futures markets associated with it, but it is considered an alternative investment.
  9. Economics

    How do debt issues affect governments' abilities to run fiscal deficits?

    Read about whether or not debt issues affect the federal government's ability to run fiscal deficits, and find out what those impacts are.
  10. Fundamental Analysis

    What's the difference between r-squared and adjusted r-squared?

    Learn how R-squared and adjusted R-squared values differ, how they are calculated, the relationship between them and how to use them to make accurate estimates.

You May Also Like

Hot Definitions
  1. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  2. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  3. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  4. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  5. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  6. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
Trading Center