Make or Buy

What does “Make or Buy” mean?

“Make or Buy” is a business management term. Literally translated, it means “Make or Purchase.” It refers to the decision of whether a specific product or service should be produced in-house (Make) or procured externally (Buy) using third-party resources. 

Ultimately, this decision affects a company’s depth of production. A well-known example can be found in the automotive industry: Tesla, for instance, is one of the few manufacturers that produces its own car seats in-house. In Formula 1, Ferrari and Mercedes are among the teams that build their own engines, whereas competitors like Red Bull purchase their engines from other manufacturers. 

A Make-or-Buy decision depends on various criteria. It requires an assessment of costs, quality, flexibility, available capacities, risks, and potential dependencies. Another key question is how the decision affects the company’s core competencies. 

Criteria for a Make-or-Buy Decision:

• Quality: Can the supplier deliver the required quality? 

• Cost: Is outsourcing more cost-effective than in-house production? 

• Risks: Is the supplier reliable? 

• Core Competencies: Is the product part of the company’s core business? 

• Flexibility: Can the supplier better adapt to fluctuations in demand? 

• Capacity: Does the company have sufficient resources available?