Make or buy decision is a strategic decision that any organisation has to make, between producing an item internally and buying it externally.
With the changes in the approaches of contracts, the issues related to make or buy decisions have also started increasing. Make or buy decision is a fundamental issue to be addressed by any company. The competition is increasing globally; as a result the manufacturing companies are re-evaluating their existing processes, technologies, manufactured parts and services in order to focus on strategic activities.
There are finite resources in the company which makes the company incapable of affording all the activities in house. In the PMBoK, make-or-buy decision is an output of the plan procurement process which is then used as an input to the conduct procurement process. So the organisation must decide to make or buy the product or service which are cost effective. The decision can be made at the individual resource level, or for an entire deliverable or for the project itself. The last option is decided right at the conception stage of the project.
The cost evaluation technique used for the make or buy decision should be based on both direct and indirect costs. Direct costs include goods, materials, equipment, facilities and employee salaries. Indirect costs (some of which tend to get missed in the evaluation) include training costs, management costs, administrative overheads, and on going maintenance costs.
Even though cost evaluation is the fundamental issue, there are other considerations in make or buy decision which include:
- Capacity: Can the company take on a product or service of this scale?
- Skill level: Do the persons involved in the project posses the skills required or do they need any additional training based on the project?
- Trade secrets: The company should maintain the secrets of a magic formula for a product or service but if this is not disclosed, then the product or service cannot be outsourced.
- Staff availability and existing workload: If the staffs engaged in the project are already working on another priority project, then they cannot be available for this project.