At present the company is making the product in house. The company wishes to evaluate the option of outsourcing the product. How should the company systematically carry out the make or buy analysis?

I. Defining the Scope & Requirements

The first step involves clearly defining the product, its specifications, and the quantity required. This includes detailed technical drawings, performance criteria, and quality standards. A precise understanding of the product’s complexity and the company’s internal capabilities is crucial.

II. Cost Analysis

A thorough cost analysis is the cornerstone of the ‘make or buy’ decision. This involves comparing the total cost of making the product in-house versus the total cost of buying it from an external supplier. Costs should be categorized as follows:

• Make Costs:
  • Direct Materials
  • Direct Labor
  • Variable Overhead (e.g., utilities, consumables)
  • Fixed Overhead (e.g., depreciation, rent, salaries) – allocate appropriately
  • Tooling & Equipment Costs
  • Research & Development Costs (if applicable)
• Buy Costs:
  • Purchase Price
  • Transportation Costs
  • Inspection Costs
  • Inventory Holding Costs
  • Administrative Costs (e.g., purchase orders, supplier management)
  • Potential Costs of Quality Issues (returns, rework)

III. Capacity Assessment

Evaluating internal capacity is critical. Can the company realistically meet the demand without compromising existing production schedules or requiring significant capital investment? Consider:

• Available Production Capacity
• Existing Equipment Utilization
• Workforce Skills and Availability
• Potential for Bottlenecks

IV. Qualitative Factors

Beyond cost, several qualitative factors influence the decision:

• Control: In-house production offers greater control over quality, delivery schedules, and intellectual property.
• Quality: Can external suppliers consistently meet the required quality standards?
• Reliability: Assess the supplier’s track record, financial stability, and supply chain resilience.
• Strategic Alignment: Does outsourcing align with the company’s long-term strategic goals? (e.g., focusing on core competencies)
• Flexibility: How easily can the company adjust production volumes or specifications in-house versus through outsourcing?
• Risk Assessment: Identify potential risks associated with both options (e.g., supplier bankruptcy, geopolitical instability, loss of control over IP).

V. Risk Mitigation & Contingency Planning

Regardless of the decision, a risk mitigation plan is essential. For outsourcing, this includes:

• Multiple Sourcing: Having backup suppliers reduces reliance on a single vendor.
• Contractual Agreements: Clearly defined contracts outlining quality standards, delivery schedules, and intellectual property protection.
• Supplier Audits: Regularly assess supplier performance and compliance.

VI. Decision Matrix & Recommendation

A decision matrix can help synthesize the quantitative and qualitative factors. Assign weights to each factor based on its importance to the company. Score each option (make vs. buy) for each factor. The option with the highest weighted score is generally the preferred choice.

Factor	Weight (%)	Make Score (1-5)	Buy Score (1-5)	Weighted Make Score	Weighted Buy Score
Cost	30	3	4	0.9	1.2
Quality Control	20	5	3	1.0	0.6
Capacity	15	2	5	0.3	0.75
Strategic Alignment	15	4	2	0.6	0.3
Risk	20	4	3	0.8	0.6
Total	100			3.6	3.45

Based on the above example, the 'make' option would be recommended.