Factors influencing make or buy decisions


Two primary factors which have a decisive influence on the choice of make or buy are the cost and availability of production capacity. Facilities are made available and other things being equal cost consideration assumes primacy. If the cost of making an item in-house is going to be higher than the cost of acquiring it from an outside supplier, the choice is to buy it. On the other hand, if the cost of making the item in one’s own plant is cheaper than buying it from the supplier, the choice is to make it. A good make-or-buy decision, nevertheless, requires the evaluation of several less tangible factors in addition to the two basics ones.

Considerations which favor making the parts are:

1. Cost considerations less expensive to make the part

2. Desire to integrate plan operations

3. Productive use of excess plant capacity to help absorb fixed overheads.

4. Needs to exert direct control over production and/or quality

5. Design secrecy.

6. Unreliable suppliers.

7. No suitable supplier quotation

8. Desire to maintain a stable workforce in periods of declining sales

Considerations which favor buying the part:

1. Cost considerations less expensive to buy the part

2. Supplier’s research and specialized know-how

3. Small volume requirements

4. Limited production facilities

5. Desire to maintain stable workforce in periods of rising sales.

6. Desire to maintain multiple source policy.

7. Government’s policy favoring ancillary industries.

8. Monopoly items which are rationed by the government and on which, the buyer has no option.

Other Factors

Some companies, by tradition, prefer to make almost every component of their products. Others prefer to buy as much as possible from outside suppliers. In general, an aggressive company in an industry that is expanding rapidly with many technological changes (e.g. electronics), will prefer to buy many of its components from outside suppliers. In such industries, the company has many opportunities to employ its capital profitably through horizontal diversification, expanding its line of finished products.

A company in a stable or declining industry, on the other hand, has fewer attractive opportunities to invest its capital in expanding sales of its end products. It will be attracted almost by default to integration making a bigger share of its sales dollar in its own manufacturing plants in order to boost profits.

Age of the industry is yet another factor. Historically, when new industries sprang up, the original units were usually small. This resulted in part, from uncertainties on the markets, the unwillingness to assume further risk; and lack of such essentials as financial strength or technical knowledge. As a rule, young industries should buy what they cannot make, although, this does not imply that old industries should not make what they can buy.

Closely related to the effect of age of industry on the make-or-buy investigation is the age of a particular business. Although, some businessmen do not seem to realize it, businesses age and get old, and this fact frequently, has some bearing upon the solution to specific make or buy problems to stay in the business environment.

It should be obvious here that ‘old’ does not refer alone to the number of years during which a company has been in business, but more specifically to the alertness of the managerial group to the adoption of new ideas. Many companies, old in years are young in progressiveness and others young in years, are not so young in their ideas.

  • Niki Kini