What framework should be used for make-or-buy decisions?

• A. Compare external supplier costs only.
• B. Focus on capacity planning within the plant only.
• C. Compare in-house manufacturing vs outsourcing costs, considering capacity, core competencies, quality, lead times, and total cost of ownership.
• D. Choose the option with the cheaper unit price.

Answer: (C)

Evaluating make-or-buy decisions requires a holistic view of costs and strategic fit, not just a single number. The best approach is to compare the full costs of producing in-house versus outsourcing, taking into account capacity constraints, whether the activity leverages or builds core competencies, and the effects on quality and delivery reliability. In addition, consider lead times and all elements that drive total cost of ownership over the product’s life cycle, such as setup and changeover, transportation, inventory, obsolescence, and risks like supply disruption or intellectual property concerns. This comprehensive view helps reveal true trade-offs: a lower unit price from an external supplier might be offset by higher setup costs, longer lead times, poorer quality, or lost strategic flexibility, while in-house production might incur higher upfront capacity costs but deliver better long-run efficiency and control. The other approaches are too narrow: focusing only on external supplier costs misses internal financial impacts; concentrating solely on capacity planning ignores the outsourcing option; and chasing the cheapest unit price ignores broader cost and strategic implications.