Make or Buy Analysis: The 5 Easy Steps Formula

Whether you are a new business owner or an established one, the “make or buy” question is one that all business owners face. The decision to make something internally or purchase it externally can be a difficult one. But the outcome of this decision could have huge implications on your company’s bottom line.

Here, we will navigate through the five easy steps for conducting a make-or-buy analysis and making an informed decision about whether to make or buy your product or service.

What is the “Make or Buy” decision?

The “make or buy” decision is a business decision that can have a huge impact on your business’ profitability. In the make-or-buy decision, you need to determine whether it is more profitable for your company to produce or purchase a product or service that you sell.

This type of decision is not always black and white. There are often pros and cons to both making and buying. However, by following these five easy steps, you can make an informed decision about which option is best for your business.

Step1: Review the existing skills

In the first step, you need to take a look at what skills and resources your company currently has. This will help you determine whether it is feasible for your company to produce the product or service in-house.

If your company does not have the necessary skills or resources to produce the product or service. Then you may need to consider buying it externally.

For example; if your company already has the necessary equipment to produce a product. But lacks the design skills required you may need to consider hiring an outside designer.

This step is important because it will help you determine whether your company has the ability to produce the product or service in-house.

Step2: Consider the costs

In this step, you need to consider all of the associated costs of both making and buying the product or service. This includes both up-front costs and ongoing costs.

For example; if you are considering buying a product, you need to consider the cost of the initial purchase, as well as any shipping or handling costs.

If you are considering making a product, you need to consider the cost of materials and labor, as well as any necessary equipment or facilities.

This step is important because it will help you determine whether your company will make a profit from either buying or making the product.

Step3: Consider your capacity for production

In this step, you need to consider whether your company can produce enough of the product or service in order to meet demand and prevent lost sales due to stock-outs.

For example; if you have a great idea that requires expensive machinery and equipment that you don’t currently have. Then your company might not be able to produce enough of the product internally.

This step is important because it will help determine whether there is a risk of lost revenue due to stock shortages or low production levels.

Step4: Consider the risks and opportunities

Next, you need to consider both the benefits as well as potential drawbacks of either making or buying a product. This includes intangible costs such as time, resources used for training employees, etc.

This step is important because it will help you make an informed decision. Whether there are any hidden risks or opportunities associated with either making or buying the product.

For example; if you are considering buying a product, it’s important to consider the potential for future price increases. If you are considering making a product, you need to consider the risk of market saturation.

Step5: Consider the long-term outlook

Finally, you need to consider your company’s long-term outlook. And whether it is feasible to produce the product in-house for an extended period of time.

This step is important because it will help you determine whether there is potential for expansion, or whether the product will be phased out.

For example; if you are considering buying a product that has low-profit margins but is popular with your customers. Then, this might not be an option for your company in the long term because of its lack of profitability.

Factors that influence the decision:

Make or buy analysis is an important factor in deciding whether to make or buy a product. However, there are other factors that also need to be considered such as:

Quantitative and Qualitative analysis:

This includes factors such as the number of products needed, the complexity of the product, the skills and resources required to make or buy it, etc.

Quantitative analysis will help you determine whether your company has the financial capacity to make or buy a product. Qualitative analysis is important for making an informed decision about which process would best suit your company’s needs and requirements.

Market forecasts:

This includes factors such as supply chain conditions, economic trends, environmental factors, etc. This might influence how much or how often your company will need to purchase or produce the product.

It’s important to have a good understanding of the market conditions before making a decision about whether to make or buy a product. This will help you avoid any potential risks or opportunities that might arise due to changes in the market.

Organizational strategy:

This includes factors such as the company’s overall strategy, its competitive landscape, and how the product or service fits into your overall business model.

The organizational strategy will help you determine whether it is more advantageous to make or buy a product. For example; if your company is looking to expand its product portfolio, then it might be more beneficial to make a product rather than buy it.

Relevant and Irrelevant expenses:

Expenses such as the initial investment required to make or buy a product, the recurring costs associated with making or buying it, etc.

It’s important to consider all relevant and irrelevant expenses when making a decision about whether to make or buy a product. This will help you determine which process is more financially feasible for your company.

Conclusion:

Now that you understand the five easy steps to making a decision about whether to make or buy a product, it’s important to remember that there is no one-size-fits-all answer. The best way to determine which process is right for your company is by doing a thorough analysis of the situation and considering all the factors involved.

Make or buy analysis is an important factor in deciding whether to make or buy a product. However, there are other factors that also need to be considered such as the number of products needed, the complexity of the product, and how it fits into your overall business model.

Share this post