# Make-or-Buy Decision Explained: How to Make Outsourcing Decisions

![Make-or-buy Decision: Choosing between manufacturing a product in-house or purchasing it from an external supplier.](https://www.investopedia.com/thmb/wIVEBlwlJAL8YC8_fB1izKiHTho=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/make-or-buy-decision.asp-final-113814fcf3274f009c4852fc16d8e557.png)

*— Investopedia / Zoe Hansen*

> **Definition**
>
> Make-or-buy decisions involve choosing between manufacturing a product in-house or buying it from an external supplier. This decision requires evaluating all associated costs, including labor, equipment, and storage, and comparing them to purchasing expenses like shipping and supplier contracts. Companies must weigh both quantitative analysis and qualitative factors such as expertise, capacity, and strategic goals to determine the most cost-efficient method.

## What Is a Make-or-Buy Decision?

A make-or-buy decision is the act of choosing between manufacturing a product in-house or purchasing it from an external supplier. Also referred to as an [outsourcing](https://www.investopedia.com/terms/o/outsourcing.asp) decision, a make-or-buy decision compares the costs and benefits associated with producing a necessary good internally to the costs and benefits of hiring an outside supplier to provide the resources in question.

To compare costs accurately, a company must consider all aspects of the acquisition and storage of the items versus creating them in-house, which may require the purchase of new equipment, as well as added labor costs.

### Key Takeaways

*   A make-or-buy decision involves evaluating whether to produce a product internally or purchase it from an external supplier.  
    
*   Companies must consider both quantitative and qualitative factors, such as costs, expertise, and strategic importance, in make-or-buy decisions.  
    
*   Shifts in market conditions or changes in supplier reliability can prompt reassessment of previous make-or-buy decisions.  
    
*   Outsourcing, insourcing, and reshoring are all strategic options businesses can explore based on various internal and external factors.

## Analyzing the Make-or-Buy Decision Process

In considering in-house production, a company must take into account any expenses related to the purchase and maintenance of new machinery or other equipment as well as the cost of the necessary raw materials. Making a product includes labor costs like wages and benefits, storage, [holding costs](https://www.investopedia.com/terms/h/holding-costs.asp), and disposing of leftovers. Still another consideration is whether the business can produce what it needs at the required levels.

Buying costs include the product's price, shipping, import fees, and sales taxes. Companies also need to consider storage and labor costs for incoming products. Another consideration involves the signing of contracts with suppliers that lock in the prices it must pay for a certain period of time, sometimes to the company's benefit and sometimes not.

In larger companies, these decisions are often rely heavily on the expertise of a chief procurement officer.

## Factors to Consider When Choosing to Make or Buy

The results of a quantitative analysis may be sufficient to make a determination as to which approach is more cost-effective. At times, a qualitative analysis is also necessary to address any concerns a company might have that it cannot measure specifically.

For example, factors that may influence a company's decision to buy a part rather than produce it internally include a lack of in-house expertise, small volume requirements, a desire for multiple sourcing, and the fact that the item may not be critical to the firm's strategy or its need to differentiate itself from competitors.

A company may give additional consideration to buying if it has the opportunity to work with a company that has previously provided outsourced services successfully and can sustain a long-term relationship.

Similarly, factors that may tilt a company toward making an item in-house include existing idle production capacity, the potential for better [quality control](https://www.investopedia.com/terms/q/quality-control.asp), or proprietary technology that needs to be protected. A company might also consider concerns regarding the reliability of the supplier, especially if the product in question is critical to normal business operations.

> **Fast Fact**
>
> If a company is going to buy or outsource, it's essential that it work with a supplier or multiple suppliers that it knows it can rely on for the long-term.

## Reassessing Make-or-Buy Decisions: When to Change Course

Sometimes, a situation might make a company rethink whether to [buy or make parts](https://www.investopedia.com/ask/answers/032415/when-outsourcing-preferable-vertical-integration.asp), no matter past choices.

Examples of these events could be a trusted supplier shutting down (or rumored to be on the verge of that), an increase or decrease in demand for the product, or a possible path for new opportunities. At these junctures, management will have to reconsider the advantages of either making or buying the product, which can also be outside of a cost-benefit analysis. Could one decision lead to cost savings, a new product line, or changes in the business?

Based on the business's [market](https://www.investopedia.com/terms/m/marketshare.asp) position, there are pros and cons to sticking with or changing the current strategy.

## What Is Procurement?

[Procurement](https://www.investopedia.com/terms/p/procurement.asp) refers to the obtaining of goods and services by a business or other large organization, such as the government, typically on a relatively large scale. Procurement is a strategic process involving a number of business-related decisions, whereas purchasing is the relative straightforward process of conducting a transaction, usually to meet an immediate need.

## What Is Outsourcing?

[Outsourcing](https://www.investopedia.com/terms/o/outsourcing.asp) is the hiring of another company to provide products or services that a company might otherwise produce with its own internal resources. In today's world, that often means working with a company in another country where, for example, production and labor costs may be considerably lower. This is sometimes referred to as [offshoring](https://www.investopedia.com/terms/o/offshore.asp), although that term also has broader meanings in a business and financial context.

## What Is Insourcing?

[Insourcing](https://www.investopedia.com/terms/i/insourcing.asp) is the opposite of outsourcing, in which companies do tasks internally that they might otherwise farm out to an outside supplier. A company might choose to insource because it believes it can perform a particular task better or because it wants to develop internal expertise in that area for long-term purposes, among other reasons.

## What Is Reshoring?

[Reshoring](https://www.investopedia.com/terms/r/reshoring.asp), also known as onshoring or inshoring, happens when a company brings certain tasks back to its native country that it had formerly outsourced to another country. It is sometimes motivated by rising labor costs overseas, resulting in less of an edge over domestic labor, or by a desire to have greater control over the company's [supply chain](https://www.investopedia.com/terms/s/supplychain.asp).

## The Bottom Line

  
Make-or-buy decisions are crucial for businesses as they determine whether to manufacture in-house or purchase from suppliers. These decisions involve carefully comparing the costs and benefits of each approach, accounting for quantitative and qualitative factors such as cost-efficiency, expertise, and supplier reliability. Companies should regularly reassess these decisions, as changes in business strategy, market conditions, or supplier relations can prompt a shift from making to buying, or vice versa. By staying adaptive, businesses can better optimize their operations and maintain competitive advantage, ensuring that past choices align with current needs.  

> **Article Sources**
>
> 1.  Strategy&. "[Make or Buy: Three Pillars of Sound Decision Making](https://www.strategyand.pwc.com/gx/en/insights/2002-2013/make-or-buy/strategyand-make-or-buy-sound-decision-making.pdf)."
>     
> 2.  Reshoring Initiative. "[Why Reshore?](https://reshorenow.org/why-reshore/)"