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Make or buy analysis: definition & important aspects
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Make or buy in a nutshell:
The make-or-buy analysis is a systematic decision-making process for evaluating whether products/services should be manufactured in-house or sourced externally. For purchasing, this is a strategic tool for optimizing the company's vertical integration and cost structure.
Example: An automotive supplier evaluates the production of a component and determines through a make-or-buy analysis that in-house production with costs of €85/unit compared to external procurement for €72/unit with an annual production of 50,000 units leads to savings of €650,000 per year through outsourcing.
Contents
Introduction to make or buy analysis for buyers
What is a make or buy analysis?
The make or buy analysis is a systematic evaluation process in which companies decide whether they should manufacture certain products or services themselves (make) or purchase them from external providers (buy). This decision is based on a thorough analysis of various economic, strategic and operational factors.
Core components of the make or buy analysis:
- Cost analysis: Comparison of internal production costs with external procurement costs, including direct and indirect costs.
- Quality assessment: Assessment of the quality standards that can be achieved internally compared to external suppliers.
- Capacity check: Review of internal capacities and resources for the production of the product or service.
- Strategic importance: Assessment of the strategic importance of the product or service for the company.
- Risk assessment: Identification and assessment of potential risks in internal production or external procurement.
- Time factor: Analysis of the time required for internal production compared to rapid procurement from external suppliers.
Importance for buyers:
- Optimization of the procurement strategy: Support in selecting the most cost-efficient and highest-quality procurement option.
- Improving competitiveness: Companies can strengthen their market position by making well-founded decisions.
- Conservation of resources: Effective use of internal resources by focusing on core competencies.
- Risk minimization: Diversification of procurement sources and reduction of dependencies.
Carrying out a make or buy analysis:
- Identification of the products/services to be evaluated: Selection of the products or services to be subjected to a make or buy decision.
- Data collection and analysis: Collection of relevant data on costs, quality, capacities and other decision-relevant factors.
- Comparison and evaluation: Comparison of internal and external options based on the data collected.
- Decision-making: Selection of the optimal procurement option based on the results of the analysis.
- Implementation: Implementation of the decision made and adaptation of the processes accordingly.
Best Practices:
- Detailed cost analysis: Consideration of all relevant cost factors, including hidden and long-term costs.
- Holistic approach: Inclusion of not only financial, but also qualitative and strategic aspects.
- Regular review: Continuous updating of make or buy decisions based on market and company changes.
- Involvement of relevant stakeholders: Collaboration with various departments such as finance, production and quality management for a comprehensive basis for decision-making.
Application areas of the make or buy analysis
Make or buy analysis is used in various industries and sectors, especially where strategic decisions on procurement and production are of key importance. It is particularly relevant in the following areas:
- Manufacturing industry: Decision on the production of key components internally or the procurement of external suppliers.
- IT services: Evaluation of whether certain IT services should be performed internally or procured from external providers.
- Automotive industry: Decision on in-house production of components or cooperation with suppliers.
- Pharmaceutical industry: Decision on in-house production of active ingredients or procurement from external suppliers.
- Food industry: Decision on in-house production of ingredients or procurement from external suppliers.
- Textile industry: Evaluation of whether certain fabrics or components should be produced internally or sourced from external suppliers.
Strategies for the successful implementation of make or buy analysis:
- Data-driven decision making: Using accurate and up-to-date data to support analysis.
- Interdisciplinary cooperation: Involvement of various departments and experts for comprehensive evaluation of the options.
- Maintain flexibility: Willingness to adapt decisions and change strategies based on new information and market conditions.
- Technological support: Use of software tools and analysis systems to efficiently carry out the make or buy analysis.
- Long-term perspective: Consideration of long-term effects and strategic goals in decision-making.
Success factors:
- Clear objectives: Definition of clear objectives and criteria for the make or buy analysis.
- Data quality: Ensuring the accuracy and completeness of the data collected.
- Transparent communication: Open and clear communication of results and decisions within the company.
- Continuous improvement: Regular review and optimization of make or buy processes based on experience and new findings.
- Management commitment: Support and promotion of the make or buy analysis by the company management.
Make or buy analysis vs. other procurement strategies
In addition to the make or buy analysis, there are various other methods and strategies for optimizing procurement and production. A comparison of these methods helps buyers to select the appropriate strategy for their specific requirements.
Make or buy analysis:
- Advantages: Enables informed and comprehensive decision-making, taking into account a wide range of factors; supports the optimization of costs and resources.
- Disadvantages: Can be time and resource intensive; requires accurate and up-to-date data and technical expertise.
Single sourcing:
- Advantages: Stronger supplier loyalty, better negotiating position thanks to larger order quantities, simpler communication.
- Disadvantages: Greater dependence on one supplier, higher risk of supply bottlenecks or failures.
Multi Sourcing:
- Advantages: Risk diversification, greater flexibility and choice, stronger negotiating position through competition among suppliers.
- Disadvantages: Higher administrative costs, possible differences in quality between suppliers, more complex communication structures.
Dual Sourcing:
- Advantages: Balances the risk diversification of multi sourcing with the simplicity of single sourcing; enables a flexible and stable supply chain.
- Disadvantages: Higher administrative effort than with single sourcing; potential cost increase compared to single sourcing.
Decision-making factors for buyers:
- Strategic importance: Assessment of the strategic importance of the product or service for the company.
- Cost-benefit analysis: comparison of the costs and benefits of the various strategies.
- Risk assessment: analysis of the risks associated with each procurement strategy.
- Capacities and resources: Review of internal capacities and resources for implementing the strategy.
- Market dynamics: Consideration of the stability and predictability of the market in which the products or services are required.
The choice between make or buy analysis and other procurement strategies should be based on a thorough analysis of the company's specific needs and framework conditions in order to select the optimal procurement strategy.
Conclusion: Make or buy analysis as a strategic tool for efficient purchasing management
Make or buy analysis is an indispensable tool for buyers who want to make well-founded and strategic decisions in procurement management. By systematically evaluating internal production options against external sourcing options, make or buy analysis helps companies to optimize costs, minimize risks and make their supply chains more efficient. Although conducting a make or buy analysis involves a certain amount of effort and complex decision-making processes, the advantages clearly outweigh the disadvantages. With clearly defined goals, precise data and a structured approach, make or buy analysis can make a significant contribution to increasing competitiveness and achieving corporate goals. By integrating this analysis into comprehensive purchasing and supply chain management, companies can continuously optimize their procurement strategies and successfully assert themselves in a dynamic market environment. Overall, the Make or Buy analysis is a valuable tool in every buyer's toolbox and helps companies to use their resources more efficiently and ensure sustainable business success.
