A make-or-buy decision refers to an act of using cost-benefit to make a strategic choice between manufacturing a product in-house or purchasing from an external supplier. It arises when a producing company faces a diminishing capacity, experiences problems with the current suppliers, or sees changing demand.
Why a bad decision is better than no decision?
Yes, even incorrect decisions. A person who makes a thousand wrong decisions is better off than a person who makes no decisions at all. Why? Because a person who has made a thousand wrong decisions has ruled out a thousand things that do not work for them.
What is a make-or-buy analysis?
A make-or-buy analysis is a general project management technique that is used to identify if a particular work can be accomplished by the project team or should just be purchased from external sources. In most cases, capabilities always exist within the organization that has already been committed to working on existing projects.
How to calculate make-or-buy decisions in Excel?
To calculate or evaluate the make-or-buy decision in Excel, you can do as following: Step 1: Prepare a table as the following screen shot shown, and enter your data into this table. Step 2: Calculate the making cost and total buying cost: (1) In Cell D3 enter =A3*C3+B3 , and drag the Fill Handle to the range you need.
Is a bad decision better than no decision?
Making decisions, while done daily, and often hourly, is difficult for many professionals. While not everyone endorses the following statement, I firmly adhere to it personally and professionally: "A bad decision is better than no decision." My rationale is that you learn from making decisions, good and bad.
What is an example of a make-or-buy decision?
Examples of a Make-or-Buy Decision ABC Manufacturing Company is contracted to supply 6,000 units of its MVP. This would also require 6,000 units of a component essential for the MVP. The estimated cost of manufacturing these 6,000 units of the necessary component is roughly 234,000 USD.
What factors are considered for make-or-buy decision?
Factors Influencing Make or Buy Decision:Volume of Production: ... Cost Analysis: ... Utilization of Production Capacity: ... Integration of Production System: ... Availability of Manpower: ... Secrecy or Protection of Patent Right: ... Fixed Cost: ... Availability of competent suppliers or vendors.More items...
What is a make-or-buy decision quizlet?
Make vs. Buy Decision. the act of deciding whether to produce an item internally or buy the item from an outside supplier. make. Producing (i.e., manufacturing) materials or products internally (i.e., in operations owned by the company).
Why make-or-buy decision is important?
Enabling or Improving Product Production In other cases, the make-or-buy decision can help companies with product designs and manufacturing efforts that they would not otherwise be capable of.
What are the three pillars of make-or-buy decision?
This report explores the dynamics of make-or-buy decisions and presents a framework to help companies make the right decisions. The framework is built on three key pillars — business strategy, risks, and economic factors.
What is the most accurate description of the make-or-buy decision?
Key Takeaways. A make-or-buy decision is an act of choosing between manufacturing a product in-house or purchasing it from an external supplier. Make-or-buy decisions, like outsourcing decisions, speak to a comparison of the costs and advantages of producing in-house versus buying it elsewhere.
Which of the following does not affect a make-or-buy decision?
Explanation: In a make-or-buy decision the company is deciding whether to manufacture a product or buy it from a supplier. They will look at the costs involved in each alternative. The revenue has nothing to due with the decision since the sales price will be the same whether they make or buy.
Which of the following is a step in the purchasing process?
The purchasing cycle consists of the following steps: (1) receiving purchase requisition, (2) selecting suppliers, (3) determining the right price, (4) issuing purchase orders, (5) ensuring delivery dates are met, (6) receiving goods and closing the order, and (7) approving suppliers' invoice for payment.
What is a make or buy decision?
A Make or Buy Decision is a decision made to either manufacture a product/ service in house or buy it from outside suppliers (outsourcing) based on cost-benefit analysis. A complete or accept decision can be made using quantitative or qualitative research and most of the time, the results of quantitative analysis (cost-benefit analysis) ...
What are the advantages of making a buy decision?
Some of the advantages of making or buy decisions are as follows: The finding helps choose the most efficient option to go about in-house production of outsourcing. The decision helps in the strategic maneuver of the business. The decision helps save the cost for many businesses.
What are the factors considered when deciding to buy the good or service from the outside supplier?
Environmental reasons. Political reasons. The following are the major factors considered while deciding to buy the good or service from the outside supplier. Lack of expertise. Research and specialized know-how of the supplier better than the buyer.
Why does Apple outsource its manufacturing to China?
The smartphone giant Apple Inc. outsources the manufacturing of all its devices to China because manufacturing is not its core competency. It is also significantly cheaper to assemble the tools in China due to substantially lower costs.
Can a company choose to manufacture in the house?
Considering the company has the idle capacity, and it is already incurring a large part of fixed expenses, it can choose to manufacture in the house if the marginal cost of manufacturing is less than what it will cost to buy from outside suppliers.
Should you make or buy?
The make or buy decision should be taken with utmost care keeping the long-term and short-term benefits into consideration. There are pros and cons to both make and purchase; however, generally, businesses tend to outsource function where they do not have a core competency or when the cost of procuring the components or services from outside suppliers is significantly cheaper.
What is the make or buy decision?
The make-or-buy decision compares the costs and benefits that accrue by producing a good or service internally against the costs and benefits that result from subcontracting. For an accurate comparison of costs and benefits, managers need to evaluate the benefits of purchasing expertise against the benefits of developing and nurturing the same expertise within the company.
What is the decision to make or buy?
A company’s decision on whether to make or buy is based on its core competence. The production cost and quality problems are the major triggers of a make-or-buy decision. Other factors are managerial decisions and a company’s long-term business strategy that dictate the current operations pattern.
What is transaction cost?
Transaction Costs Transaction costs are costs incurred that don’t accrue to any participant of the transaction. They are sunk costs resulting from economic trade in a market. In economics, the theory of transaction costs is based on the assumption that people are influenced by competitive self-interest.
Why is it important to make or buy decisions?
One of the most notable advantages that a company enjoys when embracing a make-or-buy decision approach is that it can lower costs and increase capital investments, regardless of whether it decides to make materials in-house or subcontract from an external vendor. 2.
What are the factors that determine outsourcing?
While cost remains the hallmark of any business decision, other factors such as strategic, technological, core competency, risks, and relationships , also constitute outsourcing decisions, not to mention factors involved in developing and introducing a new product.
Why is it important to set up a make or buy process?
It is partly due to companies’ distinct behavior patterns and the fact that businesses operate in different business environments that are unique to each business. However, cost accounting remains the primary dimension of the make-or-buy decision.
How do companies realize the benefits of their policies?
To realize the benefits, companies must consider the internal and external environment in which they operate. In particular, the culture in which such decisions are reached, and the agenda of the parties involved can influence the decisions and their implementation, as well as the sustainability of the policy.
What Does Make or Buy Decision Mean?
What is the definition of make-or-buy decision? The make vs buy decision traditionally relates to parts in a manufacturing process. If an organization finds that they can make one or more of the manufacturing inputs that they use in house, then the organization should evaluate the cost and compare it to the cost of purchasing those inputs elsewhere.
What is the definition of make or buy decision analysis?
Definition: The make or buy decision analysis is an evaluation of manufacturing something in-house versus buying that product from another seller.
What is the definition of "make or buy"?
Define Make or Buy Decision: Make-or-Buy Decision means an analysis by management on whether the company should produce a product or part or purchase it from a vendor.
Why do companies need to look outside of their business to purchase software?
For example, if an organization needs a certain type of software but does not have the IT resources necessary to build it in-house, then it makes sense for the business to look outside of the business to purchase this software.
WHAT IS MAKE-OR-BUY DECISION?
The make-or-buy decision is the action of deciding between manufacturing an item internally (or in-house) or buying it from an external supplier (also known as outsourcing). Such decisions are typically taken when a firm that has manufactured a part or product, or else considerably modified it, is having issues with current suppliers, or has reducing capacity or varying demand.
What is the meaning of "make or buy"?
Another way to define make-or-buy decision that is closely related to the first definition is this: a decision to perform one of the activities in the value chain in-house, instead of purchasing externally from a supplier. A value chain is the complete range of tasks – such as design, manufacture, marketing and distribution of a product / service that businesses must get done to take a service or product from conception to their customers.
Is bearing set aside?
In addition, the company is setting aside a part of its general operating expenses , for bearings. Any part of the general operating expenses that would be done away with if the bearings were bought instead of made would be pertinent in this analysis. However, the general operating expenses are possibly a common expense to all the company’s goods produced in the factory and which would continue without changes even if the bearings were bought from outside (is not relevant).
Is depreciation of bearings a sunken expense?
Keep in mind that depreciation of special equipment is mentioned as one of the expenses for manufacturing the bearings internally. Owing to the fact that the equipment has already been bought, this depreciation is a sunken expense and is, therefore, not applicable. If the equipment could be utilized to create another product, this may be a relevant expense as well. Still, we suppose that the equipment has no salvage value and no other use.
What is a make or buy cost analysis?
A make or buy cost analysis involves a determination and comparison of the cost to make the part and the cost to buy it. The final make or buy decision must be based on a careful weighing of the cost considerations and various quantitative considerations.
What to learn after reading Make or Buy Decision?
After reading this article you will learn about:- 1. Introduction to Make or Buy Decision 2. Factors Considered for Make or Buy Decision 3. Criteria 4. Analysis 5. Procedure and Personnel Involved 6. Checklist.
What do companies prefer to own?
Companies prefer own manufacturing and buying only raw material or semi-finished parts.
What is buy permits?
Buy permits specialisation, allows manufacture by most efficient equipment, lowers inventories, change of design without loss of investment in equipment or inventory, obtaining best price of product, and supplying more varied experience and encourages growth of ancillaries.
How to calculate total cost?
and Total cost = A × I + A × S/Q 1 + C (R – A) Q 1 /2R
How to calculate total cost of procurement?
and also we know total cost = Procurement cost/year + Inventory cost per year
Is it clear that the decision must be in favour of buying the part?
On the basis of above cost analysis it is quite clear that the decision must be in favour of buying the part.
Understanding Make-Or-Buy Decisions
- Regarding in-house production, a business must include expenses related to the purchase and maintenance of any production equipment and the cost of production materials. Costs to make the product can include the additional labor required to produce the items, which takes the form …
Make-Or-Buy Decision Triggers
Make-Or-Buy Decision Criteria
Benefits of A Make-Or-Buy Decision
Additional Resources
- A company’s decision on whether to make or buy is based on its core competence. The production cost and quality problems are the major triggers of a make-or-buy decision. Other factors are managerial decisions and a company’s long-term business strategy that dictate the current operations pattern. Historical policy decisions may also compel a compa...
Examples of A Make-Or-Buy Decision
- Setting up a standard make-or-buy process that applies to all companies is a complicated process. It is partly due to companies’ distinct behavior patterns and the fact that businesses operate in different business environments that are unique to each business. However, cost accounting remains the primary dimension of the make-or-buy decision. Companies evaluate ou…
Make-Or-Buy Decision Triggers
- A make-or-buy decision framework relates to autonomy, and a company selects from the many advanced options to account for various factors associated with outsourcing.
Make-Or-Buy Decision Criteria
- Thank you for reading CFI’s guide to Make-or-Buy Decision. To keep advancing your career, the additional CFI resources below will be useful: 1. Cost Allocation 2. Competitive Advantage 3. Research and Development (R&D) 4. Supply Chain
Summary
- Example#1
ABC Manufacturing Company is contracted to supply 6,000 units of its MVP. This would also require 6,000 units of a component essential for the MVP. The estimated cost of manufacturing these 6,000 units of the necessary component is roughly 234,000 USD. The direct material cost… - Example #2
Apple outsources some of its components and assembly from China. China handles the production and assembly of many components of Apple’s products due to lower prices. Apple designs its product lines in California, manufactures them in China, and transports them back to …