Procurement Management - Make or Buy Analysis for Project Managers

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"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."- Warren Buffett
"All models are wrong but some of them are useful" - George Box (Statistician)
Procurement Management

Make-or-Buy decisions happen when the company is going in for a new product line, or is running short of suppliers, or the capacity to produce is running down. The goal maybe to reach a global benchmark in product quality. So, make-or-buy analysis is made about whether internal production or external buying will help the company reach the goal. Manufacturing companies are very often encountered with a make-or-buy dilemma, but the same holds good for companies handling soft technologies such as software and customer service too.

The Make-or-Buy analysis is performed at two levels:

 - Strategic
 - Operational

The strategic angle is more long-term and broader than the operational angle. Factors such as competition, government regulations, core competencies, and current market scenario have an impact on the strategic make-or-buy decisions. Talking about core competencies, for example, a perfume manufacturer may buy the container, but has to make the perfume. If a company was buying all components, then it will be just assembling the components, and will not have a strong core competency.

At an operational level, lower cost, better quality, untrustworthy suppliers, or even pride may be the factors that are at play.  Cost cutting and cost saving is always a bottom line for Project Managers. So, invariably they will be analyzing areas, where cost and other factors come into play. Make-or-Buy analysis is one such evaluation performed by project managers.

For example, say the cost of producing one component/unit internally is $45. Sometimes the same component is available from an external vendor at the rate of $35 per unit. Then in the make-or-buy analysis, the obvious choice would be to buy the product.

Sometimes an item may be very difficult to manufacture or may need a lot of expertise to be created. Such items will not have a lot of suppliers. In such scenarios, it is best to make the item internally. At other times, your company's business and customer satisfaction maybe dependent on a single component. It is not advisable to buy such components.

There may be a special order and an item maybe needed only in small quantity. In such situations, instead of making the product, it is advisable to buy the product. 

Trade secrets and proprietary technology tilts the decision in favor of making internally. If the production capacity of a plant has not been fully utilized and the machines are idle, then a 'make' decision is natural.

Make-or-Buy analysis will be a key feature considered during procurement. So, the analysis becomes an important part of procurement management. The PMP Exam Prep Course deals with the concept of Make-or-Buy analysis.  

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