MAKE OR BUY DECISION

A company can satisfy the demand of customers either by making the required products using the facilities which are available within the company or buying them from a subcontractor.

MAKE OR BUY DECISION

Criteria for make1. Finished product can be made cheaper by the firm than

by the outside suppliers.2. Finished product is being manufactured only by a

limited number of outside firms which are unable to meet the demand.

3. The part has an importance for the firm and requires extremely strict quality control.

4. The parts can be manufactured with the firm’s existing facilities for other items in which the company has manufacturing experience.

Criteria to buy1. High investments on facilities which are already

available at the supplier’s plant.2. The company does not have facilities to make it.3. Existing facilities can be used more economically to

make other part.4. The skill of personnel employed by the company can not

be readily utilized to make the part.5. Patent or legal barriers prevent the company from

making the part.6. Demand for the part is either temporary or seasonal.

APPROACH FOR MAKE OR BUY DECISION

1. Simple costs analysis.2. Economic analysis.3. Breakeven analysis.

1. Simple Cost AnalysisIn this analysis, cost of making a product and that of buying a product are calculated. Then, the alternative which involves the minimum cost is suggested for implementation.

2. Economic AnalysisThe following inventory models are considered for economic analysis.(a) Manufacturing model(b) Purchase Model

3. Break even AnalysisThere are two major costs, namely, fixed and variable cost is involved in the total cost of product.