Strategy

Make-or-buy: procurement's structural blind spot

Most organizations have no systematic framework for their highest-stakes sourcing decision. Ad-hoc comparisons default to whichever side builds the more persuasive spreadsheet — and 20–40% of decisions go the wrong way.
72%
Rely primarily on cost comparison alone
Strategic factors are systematically underweighted
20–40%
Decisions go the wrong way from flawed analysis
1 in 3 make-or-buy calls may be costing your company
2:1
Ratio of total cost to visible cost in most analyses
Hidden overhead, quality, and coordination costs double the real number
The analysis everyone gets wrong
Common Error
Compare internal incremental cost (materials + direct labor) against supplier's full price. Ignores allocated overhead, quality management, coordination time.
Insourcing wins the spreadsheet, loses in reality
Correct Approach
Total Cost of Ownership analysis: include quality oversight, engineering support, supply risk, switching costs, and capacity constraints.
Make-or-buy based on true economics
The three pillars of a real framework
01
Strategic alignment, not just cost. Is this capability core to your competitive advantage? Outsourcing it means a competitor can buy the same thing.
02
Supply market depth. How many qualified suppliers exist? If the answer is "one" or "two," you're not outsourcing — you're creating dependency.
03
Total cost, not incremental. Include quality oversight, coordination, engineering support, and switching costs. The visible price is typically half the real cost.
Risk
The reverse error is equally damaging. When evaluating outsourcing, teams often fail to strip out fixed costs that won't disappear — and end up paying the supplier PLUS the stranded internal overhead. You're paying twice.
Jargon Decoder
TCO Total Cost of Ownership — the full cost including purchase price, quality, maintenance, and risk over the entire lifecycle.
Incremental Cost Only the costs that change with the decision — like counting just the gas when comparing cars, ignoring insurance and maintenance.
Stranded Overhead Fixed costs (buildings, managers, systems) you still pay after outsourcing — like keeping the garage after selling the car.
Supply Market Depth How many real alternatives exist. A market of one supplier is not a market — it's a dependency dressed as a contract.
Sources: Industry benchmarks; Rzzro Commodity Intelligence; procurement strategy research
Rzzro
Procurement, quantified.