Make or Buy Decision
MAKE OR BUY DECISION
Make or Buy Decisions is a determination
whether to produce a component internally or to buy it from an outside
supplier. The organization evaluate the costs and benefits of manufacturing a component
against the costs and benefits of purchasing that component and then select the
alternative which results in the lower cost. The decision involves both
qualitative and quantitative factors.
Criteria for make or buy
In this section the criteria for make or
buy are discussed.
Criteria for make
The
following are the criteria for make:
- 1. The finished product can be made cheaper by the firm than by outside suppliers.
- 2. The finished product is being manufactured only by a limited number of outside firms which are unable to meet the demand.
- 3. The part has an importance for the firm and requires extremely close quality control.
- 4. The part can be manufactured with the firm’s existing facilities and similar to other items in which the company has manufacturing experience.
Criteria for buy
The
following are the criteria for buy:
- 1. Requires high investments on facilities which are already available at suppliers plant.
- 2. The company does not have facilities to make it and there are more profitable opportunities for investing company’s capital.
- 3. Existing facilities of the company can be used more economically to make other parts.
- 4. The skill of personnel employed by the company is not readily adaptable to make the part.
- 5. Patent or other legal barriers prevent the company for making the part.
- 6. Demand for the part is either temporary or seasonal.
Approaches for make or buy decision
Types
of analysis followed in make or buy decision are as follows:
- 1. Simple cost analysis
- 2. Economic analysis
- 3. Break-even analysis
