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In-house production depth: definition & important aspects for buyers
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In-house production depth in a nutshell:
The in-house production depth describes the percentage of added value that a company generates itself in relation to the total added value of a product. For purchasing, this is a key indicator for make-or-buy decisions and strategic supplier selection.
Example: A car manufacturer reduces its in-house production depth from 45% to 35% by outsourcing the production of door modules to specialized suppliers, thereby reducing unit costs by 12% and increasing flexibility in production.
Contents
Introduction to in-house production depth
What is the in-house production depth?
In-house production depth refers to the proportion of value added that a company generates itself through its own production processes instead of sourcing parts or services from external suppliers. It provides information on how much a company produces internally and how much it relies on external suppliers. A high in-house production depth means that many production steps take place in-house, while a low depth indicates greater outsourcing of processes.
Core elements of in-house production depth
Significance for purchasing
For purchasing, in-house production depth has a significant impact on procurement strategies and supplier relationships. A change in vertical integration requires adjustments in supplier selection, contract design and supply chain management. Buyers must weigh up which components are strategically important and whether in-house production or purchasing offers advantages.
Whitepaper: Optimal in-house production depth - Strategic decision-making aid for production companies
Application of in-house production depth in practice
The in-house production depth supports companies in making strategic decisions by showing the proportion of in-house value creation in overall production. This allows companies to evaluate which production steps should be carried out in-house or outsourced to suppliers.
Calculation example
Example:
An electronics company analyzes its production costs, which total €5,000,000. Of this, € 3,000,000 is attributable to in-house production and € 2,000,000 to purchased components.
Calculation of in-house production depth:
In-house production depth = (costs of in-house production / total production costs) × 100%
In-house production depth = (3,000,000 € / 5,000,000 €) × 100% = 60%
The company therefore manufactures 60% of its products itself and purchases 40% externally. Based on this analysis, the purchasing department can decide whether it makes economic sense to manufacture more components in-house or to outsource more parts in order to optimize costs and increase efficiency.
Evaluation and strategic findings
✓ Critical success factors
→ Core competence analysis: Precise identification of strategically important manufacturing processes for well-founded make-or-buy decisions
→ Cost management: detailed recording and evaluation of all direct and indirect costs of in-house production
→ Supplier management: building a robust supplier network for outsourced components
⚠ Challenges
→ Complexity management: coordination between in-house and external production requires sophisticated control mechanisms
→ Know-how protection: balance between outsourcing and protecting critical technologies
→ Flexibility requirements: Adaptability to fluctuating market demand despite fixed production structures
Future trends and strategic implications:
"The optimal vertical range of manufacture is increasingly determined by digitalization and global value creation networks."
→ Industry 4.0 integration: smart networking of in-house and external production
→ Dynamic vertical integration: flexible adjustment depending on market conditions
→ Sustainability aspects: Carbon footprint and ESG criteria as new decision-making factors
→ Regional value creation: nearshoring as an alternative to global supply chains
Conclusion on in-house production depth
In-house vertical integration is a key strategic tool for companies that determines the balance between internal production and external sourcing. Optimal vertical integration requires careful analysis of costs, core competencies and market requirements. While high in-house production depths offer more control and know-how protection, lower depths enable greater flexibility and cost savings. Success lies in the dynamic adaptation of vertical integration to changing market conditions and technological developments.
