Make-or-buy analysis compares producing a product or service internally with purchasing it from an external supplier. It considers total cost, capacity, capability, risk and strategic importance.
Which costs should be compared?
Internal cost may include direct labor, materials, incremental overhead, equipment and opportunity cost. Buy cost may include supplier price, freight, duty, quality, management and transition costs.
Illustrative annual comparison
| Option | Fixed cost | Variable or purchase cost | Annual total |
|---|---|---|---|
| Make | $120,000 | $14 × 20,000 = $280,000 | $400,000 |
| Buy | $20,000 | $18 × 20,000 = $360,000 | $380,000 |
The buy option is $20,000 lower in this scenario, before qualitative risk and capacity effects.
What non-financial factors matter?
Consider intellectual property, quality control, speed, supply continuity, regulatory responsibility, flexibility and access to specialist capability.
What assumptions should be tested?
Test volume, utilization, wage, material, supplier price, exchange rate, lead time and transition scenarios.
How is the decision documented?
Keep the time horizon, alternatives, avoidable versus allocated costs, risks, approvals and review triggers.
