Manufacturing, autos and logistics
Make-or-buy decision
Choosing whether to produce something in-house or buy it from a supplier.
Last reviewedWhat does Make-or-buy decision mean?
A make-or-buy decision compares making a part or service in-house with buying it from an outside supplier. On cost, compare the supplier's price with only the in-house costs that would go away if you stopped making it (the avoidable costs), not with the full cost including overheads that stay anyway. Example: making a part costs 50 per unit, of which 12 is fixed overhead that stays whatever you decide. A supplier offers 42. The avoidable cost of making is 38, which is below 42, so making is cheaper even though 50 looks higher. Then weigh strategy: whether the part is core to your advantage, protects know-how, or carries supply risk, and whether the freed capacity has a better use.
Where does it come up in case interview prep?
Related terms
- Opportunity costThe value of the best option you give up.
- Sunk costMoney already spent that cannot be recovered.
- Fixed costA cost that stays the same when volume changes, within a normal range.
- Vertical integrationOwning more stages of your own supply chain.
- OEM (original equipment manufacturer)In autos and machinery, the company that designs, assembles and brands the final product.
- Tier 1 supplierA supplier that sells complete parts or systems directly to the carmaker.
- Vehicle platformA shared set of engineering underpinnings used for many car models.
- Battery pack costThe cost of an electric vehicle's battery pack, usually quoted per kWh of capacity.