Procurement Glossary
In-house production depth: definition, significance and strategic application in Procurement
November 19, 2025
The in-house production depth describes the proportion of value added that a company generates internally in relation to the total product value added. This strategic key figure has a significant influence on procurement decisions, supplier structures and the competitiveness of companies. Find out below what in-house production depth means, what methods exist for optimization and how current trends affect manufacturing strategy.
Key Facts
- In-house production depth measures the percentage share of internal value added in the total product
- High in-house production depth means more control, but also higher fixed costs and capital commitment
- Low in-house production depth enables flexibility and cost advantages through specialization
- The optimum vertical range of manufacture varies depending on the industry, product complexity and market requirements
- Strategic decisions on in-house production depth influence the corporate structure in the long term
Contents
Definition: In-house production depth
The in-house production depth quantifies the extent of a company's internal production and value creation. It is measured as the ratio between services produced in-house and the total value of the end product.
Key aspects of in-house production depth
The calculation is based on various key figures such as the share of internal performance in sales or the ratio between internal and external costs. Key factors include
- Vertical integration in production
- Development services and engineering
- Logistics and service functions
- Quality assurance and testing processes
In-house production depth vs. outsourcing
In contrast to outsourcing strategies, a high level of in-house production depth focuses on internal capacities. While insourcing describes the return of external services, in-house production depth defines the current status of value creation distribution.
Importance of in-house production depth in Procurement
For strategic Procurement , the in-house production depth determines the procurement volume and the supplier structure. It influences make-or-buy decisions and defines the framework for supplier partnerships and contract design.
Methods and procedures
Optimizing in-house production depth requires systematic analysis methods and structured decision-making processes. Various evaluation approaches support the strategic orientation.
Value added analysis and evaluation
The analysis begins with the detailed recording of all stages of the value chain and their cost assessment. Central methods include
- Value stream mapping for process visualization
- ABC analysis for cost driver identification
- Benchmarking with industry standards
Make-or-buy decision matrix
Structured decision-making is based on multidimensional evaluation matrices. These take into account strategic relevance, cost aspects and risk factors. Potential analyses identify suitable areas for changes in vertical integration.
Implementation strategies
The implementation of vertical integration adjustments requires structured project management. Transition processes ensure smooth transitions in the event of changes to the value creation structure.
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Important KPIs for in-house production depth
Key figures on in-house production depth enable objective evaluation and continuous optimization of the value creation structure. Various metrics shed light on different aspects of the manufacturing strategy.
Value added ratio and cost structure
The value added ratio measures the share of own work in total sales. Supplementary key figures include:
- Cost of materials as a percentage of sales
- Personnel cost intensity
- Plant utilization and productivity
Flexibility and responsiveness
Operational KPIs evaluate the adaptability of the selected vertical integration. Time-to-market, capacity flexibility and scalability show the strategic performance of the value creation structure.
Quality and risk indicators
Quality metrics and supplier risk indicators evaluate the stability of vertical integration. Ramp-up success rates and downtimes show the operational efficiency of various manufacturing strategies.
Risks, dependencies and countermeasures
Decisions on in-house production depth harbor various risks that can impair strategic flexibility and competitiveness. Systematic risk management minimizes negative effects.
Capacity and investment risks
High in-house production depth requires considerable capital investment in equipment and personnel. Fluctuations in demand result in overcapacity and high fixed costs. Flexible capacity planning and modular plant concepts reduce these risks.
Technology and innovation risks
Internal production can lead to technological isolation and reduce the speed of innovation. Cooperative development approaches combine internal control with external access to know-how.
Supplier dependencies
Low in-house production depth creates critical dependencies on key suppliers. System supplier concepts can reduce individual risks, but at the same time increase the complexity of supplier management.
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Practical example
An automotive supplier is analyzing its in-house production depth for electronic control units. Currently, 60% of the added value is created in-house, with PCB assembly and software development being carried out internally, while housings and sensors are bought in. The analysis shows: By increasing the in-house production depth to 75% through internal sensor production, costs can be reduced by 12% and delivery times shortened by 3 weeks.
- Detailed cost assessment of all stages of the value chain
- Investment calculation for additional production capacities
- Risk assessment of supplier dependencies
Current developments and effects
Modern technologies and changing market conditions influence strategic decisions regarding in-house production depth. Digitalization and automation are creating new opportunities to optimize value creation.
Digitalization and Industry 4.0
Intelligent manufacturing systems and networked production facilities are changing the cost structures of internal production. Artificial intelligence optimizes production planning and reduces complexity costs, making greater in-house production depth more economically attractive.
Flexible production concepts
Modular production approaches enable adaptive vertical integration depending on market requirements. Modular procurement strategies support flexible value creation models and reduce dependencies on individual suppliers.
Sustainability and supply chain transparency
Increasing requirements for sustainability and traceability promote greater in-house production depth. Companies are increasing internal control over environmental and social standards by producing more critical components in-house.
Conclusion
In-house production depth is a key strategic factor that has a significant influence on a company's cost structure, flexibility and competitiveness. Successful optimization requires systematic analysis, clear evaluation criteria and continuous adaptation to changing market conditions. Modern technologies such as AI and Industry 4.0 create new opportunities for efficient internal value creation. The right balance between internal control and external specialization is decisive for long-term corporate success.
FAQ
What is the optimum degree of in-house production depth?
The optimal in-house production depth varies depending on the industry, product complexity and corporate strategy. While capital-intensive industries often aim for 40-60%, technology companies can operate more efficiently with 20-30%. The decisive factors are strategic relevance, cost efficiency and risk minimization.
How do you calculate the in-house production depth?
The calculation is based on the ratio of internal value added to total value added: (sales - material costs - external services) / sales × 100. Alternative calculations use personnel costs or asset intensity as the basis for industry-specific comparisons.
What advantages does high in-house production depth offer?
High in-house production depth enables better quality control, reduced supplier dependencies and greater flexibility in the event of product changes. In addition, cost benefits arise from economies of scale and improved coordination between development and production.
When should the in-house production depth be reduced?
Reduction makes sense in the event of high fixed costs, insufficient capacity utilization or a lack of specialist expertise. If external providers offer clear cost advantages or technological superiority, outsourcing can improve competitiveness and free up capital for core competencies.
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