MAKE OR BUY DECISION

MAKE OR BUY DECISION

A company can satisfy the
demand of customers either by
making the required products
using the facilities which are
available within the company or
buying them from a
subcontractor.

Criteria for make

1. Finished product can be made cheaper
by the firm than by the outside
suppliers.
2. Finished product is being manufactured
only by a limited number of outside firms
which are unable to meet the demand.
3. The part has an importance for the firm
and requires extremely strict quality
control.
4. The parts can be manufactured with the
firms existing facilities for other items
in which the company has manufacturing
experience.

Criteria to buy
1. High investments on facilities which are
already available at the suppliers plant.
2. The company does not have facilities to
make it.
3. Existing facilities can be used more
economically to make other part.
4. The skill of personnel employed by the
company can not be readily utilized to
make the part.
5. Patent or legal barriers prevent the
company from making the part.
6. Demand for the part is either temporary
or seasonal.

APPROACH FOR MAKE OR BUY

DECISION
1. Simple costs analysis.
2. Economic analysis.
3. Breakeven analysis.

1. Simple Cost Analysis

In this analysis, cost of making a product and
that of buying a product are calculated. Then,
the alternative which involves the minimum
cost is suggested for implementation.

2. Economic Analysis
The following inventory models are considered
for economic analysis.
(a) Manufacturing model
(b) Purchase Model

3. Break even Analysis

There are two major costs, namely, fixed and
variable cost is involved in the total cost of
product.