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Make-Or-Buy Decision

What is a 'Make-Or-Buy Decision'

A make-or-buy decision is the act of choosing between manufacturing a product in-house or purchasing it from an external supplier. In a make-or-buy decision, the most important factors to consider are part of quantitative analysis, such as the associated costs of production and whether the business has the capacity to produce at required levels.

Explaining 'Make-Or-Buy Decision'

Also referred to as the outsourcing decision, the make-or-buy decision compares the costs and benefits associated with producing a necessary good or service internally to the costs and benefits involved in hiring an outside supplier for the resources in question. To compare costs accurately, all aspects regarding the acquisition and storage of the items must be considered.

Make Costs

In regards to in-house production, a business must include expenses related to the purchase and maintenance of any production equipment as well as the cost of production materials. Further costs can include the additional labor required to produce the items, storage requirements within the facility or if additional storage space must be purchased, and the proper disposal of any remnants or byproducts from the production process.

Buy Costs

Costs relating to purchasing the products from an outside source must include the price of the good itself, any shipping or importing fees, and applicable sales tax charges. Additionally, the expenses relating to the storage of the incoming product and labor costs associated with receiving the products into inventory must be factored into the decision.

Decision-Making Points

The results of the quantitative analysis may be sufficient to make a determination based on the approach that is more cost-effective. At times, qualitative analysis addresses any concerns that cannot be measured specifically.


Further Reading


Complexity, flexibility, and the make-or-buy decision
pubs.aeaweb.org [PDF]
… This focus is motivated by a careful examination of procure- ment decisions in industry and has strong empirical content, since the exogenous shifter (complexity) seems easier to measure than specificity.1 I build on … Decision-making criteria in tactical make-or-buy issues: an …

The make-or-buy decision: lessons from empirical studiesThe make-or-buy decision: lessons from empirical studies
link.springer.com [PDF]
… This focus is motivated by a careful examination of procure- ment decisions in industry and has strong empirical content, since the exogenous shifter (complexity) seems easier to measure than specificity.1 I build on … Decision-making criteria in tactical make-or-buy issues: an …

A make‐or‐buy decision analysis involving imprecise dataA make‐or‐buy decision analysis involving imprecise data
www.emerald.com [PDF]
… This focus is motivated by a careful examination of procure- ment decisions in industry and has strong empirical content, since the exogenous shifter (complexity) seems easier to measure than specificity.1 I build on … Decision-making criteria in tactical make-or-buy issues: an …

The outsourcing dilemma: a composite approach to the make or buy decisionThe outsourcing dilemma: a composite approach to the make or buy decision
www.emerald.com [PDF]
… This focus is motivated by a careful examination of procure- ment decisions in industry and has strong empirical content, since the exogenous shifter (complexity) seems easier to measure than specificity.1 I build on … Decision-making criteria in tactical make-or-buy issues: an …

A strategic model for the formulation of an effective make or buy decisionA strategic model for the formulation of an effective make or buy decision
www.emerald.com [PDF]
… This focus is motivated by a careful examination of procure- ment decisions in industry and has strong empirical content, since the exogenous shifter (complexity) seems easier to measure than specificity.1 I build on … Decision-making criteria in tactical make-or-buy issues: an …

The make or buy decisionThe make or buy decision
journals.sagepub.com [PDF]
… This focus is motivated by a careful examination of procure- ment decisions in industry and has strong empirical content, since the exogenous shifter (complexity) seems easier to measure than specificity.1 I build on … Decision-making criteria in tactical make-or-buy issues: an …

The make or buy decision in the context of manufacturing strategy developmentThe make or buy decision in the context of manufacturing strategy development
journals.sagepub.com [PDF]
… This focus is motivated by a careful examination of procure- ment decisions in industry and has strong empirical content, since the exogenous shifter (complexity) seems easier to measure than specificity.1 I build on … Decision-making criteria in tactical make-or-buy issues: an …

Mandated access and the make-or-buy decision: the case of local telecommunications competitionMandated access and the make-or-buy decision: the case of local telecommunications competition
www.sciencedirect.com [PDF]
… This focus is motivated by a careful examination of procure- ment decisions in industry and has strong empirical content, since the exogenous shifter (complexity) seems easier to measure than specificity.1 I build on … Decision-making criteria in tactical make-or-buy issues: an …

Exposing and selling the use of web services—an option to be considered in make-or-buy decision-makingExposing and selling the use of web services—an option to be considered in make-or-buy decision-making
www.sciencedirect.com [PDF]
… This focus is motivated by a careful examination of procure- ment decisions in industry and has strong empirical content, since the exogenous shifter (complexity) seems easier to measure than specificity.1 I build on … Decision-making criteria in tactical make-or-buy issues: an …



Q&A About Make-Or-Buy Decision


What are some factors to consider when making a make-or-buy decision?

The associated costs of production and whether the business has the capacity to produce at required levels.

How do you include expenses related to purchase and maintenance of any production equipment as well as cost of production materials when making a make or buy decision?

You must include these expenses in your calculations for both options.

What is a make-or-buy decision?

A make-or-buy decision is the act of choosing between manufacturing a product in house or purchasing it from an external supplier.

What is the decision-making process?

The decision-making process is the psychological construct that imputes a commitment to action.

What does Simon say about rationality?

Simon claims that if a complete analysis is done, it will be immensely complex.

Who developed the idea of a rational economic actor?

Nobel laureate Herbert A. Simon developed the idea of rational economic actors in 1947 and 1957.

What other costs should be considered when making a make or buy decision?

Labor, storage requirements, disposal of remnants and byproducts from the process, shipping fees, sales tax charges and labor costs associated with receiving products into inventory.

How does he see people making decisions?

He sees people as vainly attempting to be rational.

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