Procurement Glossary
Make-or-buy: Strategic decision between in-house production and external procurement
November 19, 2025
Make-or-buy decisions are one of the fundamental strategic considerations in procurement management. This analysis determines whether a company should manufacture certain products, components or services itself or purchase them from external suppliers. Find out below what make-or-buy means, what methods exist for making decisions and how you can successfully implement this strategic decision.
Key Facts
- Make-or-buy is a strategic decision between in-house production and external procurement
- Cost comparison, quality aspects and capacities are key evaluation criteria
- The decision influences the depth of added value and supplier dependencies in the long term
- Regular review of existing make-or-buy decisions is required
- Hybrid approaches combine in-house and external production for optimum flexibility
Contents
Definition: Make-or-buy
Make-or-buy refers to a company's strategic decision as to whether certain products, components or services should be produced internally or purchased from external suppliers.
Key aspects of the make-or-buy decision
The analysis comprises several dimensions that must be systematically evaluated:
- Cost comparison between internal production and external procurement
- Quality requirements and control capability
- Available capacities and resources
- Strategic importance for the core business
- Risk assessment and dependencies
Make-or-buy vs. outsourcing
While outsourcing describes the outsourcing of existing internal activities, make-or-buy considers both new and existing services. Insourcing is the counterpart to outsourcing and brings external services back into the company.
Importance of make-or-buy in Procurement
For Procurement , make-or-buy is a key control parameter that determines the depth of in-house production and therefore the entire procurement strategy. The decision has a lasting impact on the supplier portfolio, negotiating power and risk management.
Methods and procedures
Various analysis methods support the systematic evaluation of make-or-buy decisions and ensure well-founded strategic decisions.
Cost comparison calculation
The quantitative analysis forms the basis of every make-or-buy decision. All relevant costs of in-house production are compared with the procurement costs:
- Direct material costs and labor costs
- Indirect costs such as overhead and administration
- Investment costs for systems and tools
- Opportunity costs of alternative capacity utilization
Qualitative evaluation criteria
In addition to costs, strategic and operational factors play a decisive role. An outsourcing potential analysis helps with a systematic evaluation. Important criteria include quality control, flexibility, know-how protection and supplier availability.
Portfolio matrix approach
The evaluation is based on a two-dimensional matrix that weighs up strategic importance against cost benefits. Contract manufacturing often offers a flexible alternative to the classic make-or-buy decision.
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Important KPIs for make-or-buy
Key figures enable the objective evaluation and continuous monitoring of make-or-buy decisions.
Cost-based key figures
Total Cost of Ownership (TCO) forms the basis for cost comparisons and includes all direct and indirect costs over the entire life cycle:
- Unit costs make vs. buy
- Return on investment (ROI) for make investments
- Break-even quantities for in-house production decisions
- Cost flexibility for quantity changes
Quality and performance indicators
Quality metrics evaluate the performance of various procurement options. Error rates, delivery reliability and response times are key indicators. Series release processes define the quality standards for both options.
Strategic performance indicators
Long-term success is measured using strategic KPIs such as market response time, innovation speed and competitive position. The in-house production depth as a control parameter shows the balance between internal and external value creation.
Risks, dependencies and countermeasures
Make-or-buy decisions entail various risks that can be minimized through systematic management.
Dependency risks for buy decisions
External sourcing creates supplier dependencies that can become problematic for critical components. Delivery failures, quality problems or price increases jeopardize business continuity. Vendor Managed Inventory can help to reduce availability risks.
Capacity and investment risks for make decisions
In-house production requires considerable investment in equipment, personnel and know-how. Capacity utilization and technological developments can quickly make investments unprofitable. Ramp-up management is crucial for the successful development of internal capacities.
Strategic risk minimization
Hybrid approaches combine make and buy strategies to diversify risk. Dual sourcing, strategic partnerships and flexible contract design create options for action. Regular outsourcing transition evaluations enable timely strategy adjustments.
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Practical example
An automotive supplier is faced with the decision of manufacturing electronic control units in-house or sourcing them from a specialist. The cost analysis shows the advantages of in-house production for the planned annual production of 50,000 units. However, this requires an investment of 2 million euros and the development of special skills. External procurement, on the other hand, offers greater flexibility in the event of quantity changes and access to the latest technology.
- Decision in favor of hybrid model: 70% in-house production, 30% external procurement
- Reduction of investment risk while maintaining strategic control
- Setting up a backup solution for critical components
Current developments and effects
Digitalization and changing market conditions have a fundamental impact on make-or-buy decisions and require new valuation approaches.
Digitalization and AI integration
Artificial intelligence is revolutionizing make-or-buy analysis through more precise cost forecasts and risk assessments. Algorithms can simulate complex scenarios and make optimal decisions under uncertainty. This enables dynamic adjustments to the procurement strategy in real time.
Nearshoring and regionalization
Global supply chain disruptions are leading to a reassessment of make-or-buy decisions. Companies are increasingly favoring regional suppliers or insourcing strategies in order to reduce dependencies and ensure supply security.
Sustainability and ESG criteria
Environmental and social standards are becoming decisive factors in make-or-buy analyses. System suppliers are increasingly required to provide sustainability certifications, which adds ESG dimensions to the evaluation matrix.
Conclusion
Make-or-buy decisions are strategic decisions that go far beyond pure cost considerations. A systematic analysis that takes quantitative and qualitative factors into account forms the basis for successful decisions. The increasing complexity of global markets and technological developments requires flexible, hybrid approaches and regular strategy reviews. Companies that understand make-or-buy decisions as a continuous optimization process create sustainable competitive advantages.
FAQ
What is the difference between make-or-buy and outsourcing?
Make-or-buy is a fundamental decision on the type of service provision, while outsourcing describes the outsourcing of existing internal activities. Make-or-buy can be applied to both new and existing services and covers both directions of the decision.
Which factors are most important in make-or-buy decisions?
In addition to the obvious cost aspects, strategic importance, quality requirements, available capacities and risk assessment play key roles. The weighting varies depending on the industry and corporate strategy. Long-term flexibility and market developments should also be taken into account.
How often should make-or-buy decisions be reviewed?
A regular review every 2-3 years is recommended, or more frequently for critical components. Market changes, technological developments or changes in corporate strategy may necessitate an unscheduled reassessment. Continuous monitoring of the relevant KPIs supports the prompt identification of any need for action.
What role does digitalization play in make-or-buy decisions?
Digital tools enable more precise cost analyses, risk assessments and scenario simulations. AI-based algorithms can process complex decision parameters and suggest optimal solutions. At the same time, digitalization opens up new opportunities for hybrid procurement models and flexible supplier integration.
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