Make-Or-Buy Decision

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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.

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.

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