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. Capital Expenditure (CAPEX)

    Funds used by a company to acquire or upgrade physical assets ...
RELATED FAQS
  1. What economic indicators are important to monitor when investing in the electronics ...

    The most important economic indicators to monitor when investing in the electronics sector are global gross domestic product ... Read Full Answer >>
  2. What is the relationship between the hurdle rate (MARR) and the Internal Rate of ...

    In capital budgeting, projects are often evaluated by comparing the internal rate of return, or IRR, on a project to the ... Read Full Answer >>
  3. What are some of the risks of holding liquid assets?

    Liquid assets, such as cash or highly marketable securities, tend to offer lower returns than illiquid assets. This leaves ... Read Full Answer >>
  4. What is the average annual return for the S&P 500?

    According to historical records, the average annual return for the S&P 500 since its inception in 1928 through 2014 is ... Read Full Answer >>
  5. How do command economies control surplus production and unemployment rates?

    Historically, command economies don't have the luxury of surplus production; chronic shortages are the norm. They have also ... Read Full Answer >>
  6. What does it signify if there is a large discrepancy between a nation's real and ...

    A large discrepancy between a nation's real and nominal GDP signifies inflationary or deflationary forces in the economy. ... Read Full Answer >>
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

    Will The US Economy Rebound In The 2nd Quarter?

    Most investors know that U.S. 1st quarter growth numbers aren’t pretty. Economic statistics have been missing expectations by the largest margin since 2009
  5. Economics

    Modified Internal Rate of Return (MIRR)

    Modified internal rate of return (MIRR) is a variant of the more traditional internal rate of return calculation.
  6. Economics

    The U.S. Economy May Be Stronger Than You Think

    While the economic performance in the U.S. broadly disappointed in the first quarter, temporary factors presented one-off events that depressed output.
  7. Economics

    How The GDP Of The US Is Calculated

    The US GDP may not be a perfect economic measure, but the ability to compare it to prior periods and other countries makes it the most applicable.
  8. Economics

    One Silver Lining Of Slower Global Growth

    Stocks struggled last week amid more evidence out of the world’s largest economies that global economic growth isn’t accelerating as expected.
  9. Investing

    Fundamentals Of How Canada Makes Its Money

    In terms of industry, Canada is best known for oil and gas production, but the second largest country in the world has quite the diversified economy.
  10. Economics

    How China's GDP Is Calculated

    China is the world’s second-largest economy based on its GDP figures. Investopedia explains the methodology behind China’s GDP calculation.

You May Also Like

Hot Definitions
  1. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  2. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  3. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  4. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
  5. Adverse Selection

    1. The tendency of those in dangerous jobs or high risk lifestyles to get life insurance. 2. A situation where sellers have ...
Trading Center