Education — Concept

Make vs. Buy Analysis: What It Actually Means and How to Run It

Most organizations get this decision wrong because they compare the wrong numbers — creating a 20–40% bias toward outsourcing before any calculation begins. A correct analysis compares full costs on both sides, treats non-cost factors as hard gates, and reviews the decision on a schedule, not a crisis.

20–40%

Bias toward outsourcing in typical analysis

Like comparing the price of flour to the price of a finished cake

3–5×

Rebuilding cost vs. original outsourcing savings

Undoing the decision costs more than you ever saved

2 years

Recommended review cycle for existing decisions

Like a dental checkup — don't wait for the pain

The Cost Comparison Problem

Common

Compare materials + direct labor only on the internal side against the supplier's full landed price (including their margin, freight, and overhead).

Outsourcing appears cheaper by 20–40%

Correct

Compare total cost on both sides: overhead allocation, working capital, quality costs, and management attention on internal; landed cost plus inspection and supplier management on external.

Decision reflects actual economics

Three Factors That Override Cost Every Time

Core competency. If customers choose you because of how this component performs, outsourcing hands your competitive advantage to a supplier — like giving away your secret recipe.

IP exposure. Sharing specs with a supplier creates permanent information leakage. They can serve your competitors with the same process knowledge — often with no restriction preventing it.

Reversibility cost. Once you dismantle internal capability — sell equipment, reassign people, lose know-how — rebuilding it costs 3–5× what outsourcing saved. Like tearing down a bridge: rebuilding costs far more than maintaining it.

The Silent Killer

Risk

Treating make-vs-buy as a one-time verdict. Decisions made five years ago under different volumes, prices, and technology persist — silently accumulating wrong calls. A component that made sense to outsource at 10,000 units/year may be 30% cheaper to produce internally at 50,000 units. Without scheduled reviews, these decisions decay like unmaintained machinery.

Correct Execution: 4 Disciplines

Standard template. Every analysis uses the same cost categories and methodology — preventing analysts from picking assumptions that favor their preferred outcome.

Non-cost hard gates. Core competency, IP exposure, and reversibility are binary yes/no checks — not vague considerations. A "no" on any gate overrides a cost advantage.

Multi-year, multi-volume modeling. Run the analysis at three volume levels (current, +50%, −30%) across a five-year horizon. A decision correct at one volume often flips at another.

Calendar-based reviews. Biennial scheduled reviews prevent decision decay. Event-triggered reviews — volume changes >30% or price changes >15% — catch shifts between cycles.

Jargon Decoder

Variable Cost Costs that rise and fall with production volume — like gas in your car. The more you produce, the more you spend.

Fixed Cost / Overhead Costs that stay the same regardless of output — like your car insurance. Same bill whether you make 10 units or 10,000.

Working Capital Cash tied up in inventory and operations before the product sells — like buying groceries for a dinner party: you pay now, recoup later.

Landed Cost The all-in price to get something to your door — purchase price + shipping + duties + inspection. Like sticker price vs. what you actually pay after tax and delivery.

Opportunity Cost What you give up by choosing one path — like using savings for a car means you can't use that same money for a house down payment.

Reversibility How expensive it is to undo a decision. Like tearing down a bridge — rebuilding costs far more than keeping it standing.

Analysis and intelligence from Rzzro

Rzzro

Procurement, quantified.