Make or Buy Decision

Posted in Finance, Accounting and Economics Terms, Total Reads: 261
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Definition: Make or Buy Decision

Make or buy decision is an option taken by the manager to decide whether to produce a product (or a part of the product) in house or outsource it from external suppliers.Make or buy decisions are generally taken with two objectives i.e. Operational and Strategic


Operationally managers see whether making the product is cheaper or outsourcing it.


At a strategic level, firms see their core competence, if the product (or the part of product) aligns with the area of expertise of the firm, they should make it in house because it will give them competitive advantage and if it doesn't than it should be outsourced.


Example

Let say a scooter manufacturing agency has to decide whether to make or outsource spark plugs.

The cost of production in house is ₹80and the same can be outsourced from an external supplier at ₹75, than the company should go for outsourcing.


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