A make-or-buy decision is an act of choosing between manufacturing a product in-house or purchasing it from an external supplier. A 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.
Strategic decisions regarding whether to produce in-house or procure externally,, are shaped by several key factors. These factors play a pivotal role in determining the most effective approach for meeting organizational needs. Firstly, the core abilities of the team or organization are considered, evaluating whether internal resources align with the requirements of the project or if external expertise is necessary.
Furthermore, the value delivered by potential vendors becomes a crucial aspect, as it directly influences the decision-making process. Vendors must be capable of meeting the specific needs and standards set by the buyer, ensuring that the collaboration enhances overall value. Evaluating the associated risks is another vital step, weighing potential challenges and uncertainties linked to both in-house production and external procurement.
Internal capabilities are compared with the capabilities present in the vendor community, helping organizations gauge the most efficient and effective way to achieve their objectives. Additionally, the decision is influenced by the availability and production capacity of potential suppliers. This consideration ensures that the chosen approach aligns with the timelines and scale required for successful project implementation.
In essence, make-or-buy decisions demand a comprehensive analysis of multiple factors, integrating both internal and external perspectives to make informed and strategic choices.
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The ‘Make’ Decision
- Less costly
- Easy fitment or integration in current systems
- Available suppliers are unreliable or unable to serve
- Utilize existing resources that have bandwidth available
- Maintain control over the solution and thus maintain confidentiality
- Intellectual Property
The ‘Buy’ Decision
- Less costly
- Suppliers have better skills than you do
- Get more than one vendor on-board
- Smaller volume required
- Reverse engineering opportunity
For PMP Exam
On the PMP Exam, questions about Make or Buy analysis will ask you about:
- You need to know that both direct and indirect costs are important in Make or Buy analysis.
- Don’t think about sunk costs when doing Make or Buy analysis.
- It happens during Procurement Management, so understand the process.
- Learn the definitions of Make or Buy Analysis and Make or Buy Decision.
- Know what factors to think about when deciding to make or buy something.
- Understand how this decision can affect the project’s overall procurement strategy.
Further Readings
https://www.projectmanagement.com/articles/275423/build-or-buy–how-do-you-decide-#=
https://www.investopedia.com/terms/m/make-or-buy-decision.asp
