Make-or-buy analysis is a tool that project managers and business owners use to decide whether to make goods or services in-house (make) or hire a third-party supplier (buy) to do the work (buy).
Most of the time, the analysis involves weighing the costs, risks, and benefits of each choice. In the analysis, the company’s core competencies, available resources, market demand, quality requirements, capacity, and expertise may all be taken into account.
In a make-or-buy analysis, the costs of making the goods or providing the services in-house are compared to the costs of sending the work to a third-party supplier. Some of the costs of making something in-house are raw materials, labour, equipment, and “overhead” costs. When you outsource, you may have to pay for things like purchasing, shipping, quality control, and other costs.
The analysis also takes into account the risks that come with each choice. For example, if a company makes its own products, there may be risks related to capacity, quality control, and technology becoming obsolete. Outsourcing could put the company at risk of problems with the supply chain, quality control, and theft of intellectual property.
Along with cost and risk, other things are taken into account, such as the company’s core competencies and expertise. For example, if the company’s main skill is making things, it may be cheaper to make the goods in-house than to buy them from someone else. If the company doesn’t have the skills or resources to make the goods or services, it may be cheaper to hire someone else to do it.
After looking at the costs, risks, and benefits of each choice, a decision is made about whether to make or buy. If the analysis shows that outsourcing is more cost-effective and less risky, the company may decide to buy the goods or services from a third-party supplier. If the analysis shows that making the goods or services in-house is cheaper and less risky, the company may decide to do so.
Overall, a make-or-buy analysis is an important tool for project managers and businesses to use when making decisions about how to produce goods or services in the most cost-effective and efficient way while minimising risk.
Usage
It is used in project planning
