Make-or-buy: in-house production or outsourcing?

The make-or-buy decision is one of the central strategic cornerstones of a company. This raises the question: should a product or service be manufactured internally (in-house production) or procured externally (external procurement)? The decision not only influences the cost structure, but also quality, flexibility and competitiveness.

A well-founded make-or-buy analysis helps to objectively weigh up the opportunities and risks. This article highlights the most important decision-making factors, calculation methods and strategic considerations to help companies choose the optimal production strategy.

What is a make-or-buy decision?

A make-or-buy decision involves weighing up internal production (make) and external procurement (buy). Business, strategic and technological factors play a role here. The decision can concern individual components, entire production processes or even services.

In-house production (Make)

With in-house production, the company takes over the production of a product or service itself. This requires investment in machinery, personnel and know-how. Companies therefore have complete control over the manufacturing process, which enables smooth coordination with internal processes. The vertical range of manufacture also plays a decisive role: the more production steps are covered internally, the greater the influence on quality and processes.

External procurement (Buy)

With external procurement, the manufacture of a product or service is outsourced to external suppliers. Companies purchase finished components or complete end products instead of producing them themselves. This strategy can extend to individual components as well as entire production processes. The decisive factor here is the selection of suitable suppliers that meet the desired quality and cost requirements.

Advantages of in-house production

In-house production has several advantages:

• Quality control: the company can set and monitor its own standards.

• Flexibility: Quick adaptation to market changes and customer requirements.

• Long-term cost savings: Despite high initial investments, economies of scale can be utilized.

Advantages of external procurement

Outsourcing also has strategic and economic advantages:

• Cost efficiency: external providers benefit from economies of scale and lower fixed costs.

• Focus on core competencies: The company can concentrate on strategically important areas.

• Faster implementation: products or services are often available at short notice.

• Lower investment risk: No high initial costs for machinery or infrastructure.

Decision-making factors for make-or-buy

The make-or-buy analysis comprises various criteria that enable a well-founded decision to be made:

• Cost analysis: calculation of all costs incurred for in-house production vs. external procurement.

• Capacities: Availability of internal resources such as machinery, personnel and know-how.

• Quality requirements: Possibility of ensuring the desired quality.

• Strategic importance: Influence of the decision on competitiveness.

• Risk assessment: Possible dependencies on suppliers or technical challenges.

The make-or-buy calculation

The make-or-buy calculation provides a quantitative basis for decision-making. This involves determining the total fixed and variable costs for in-house production and external procurement. The formula for determining the critical production quantity is:

If the production quantity is above this limit, in-house production is worthwhile. If it is below this limit, it is more advantageous to outsource.

The Core Formula

The central formula in a make-or-buy analysis compares the total costs of both options at a given production volume. The point where both options are equally expensive is called the break-even quantity:

Break-even quantity = Fixed costs (Make) / (variable unit cost (Buy) – variable unit cost (Make))

Fixed costs of in-house production include investments in machinery, tooling, training, and facility costs. Variable unit costs cover materials, energy, labor, and maintenance per unit. With external sourcing, fixed costs typically don't apply — the supplier's unit price covers all costs.

Make-or-Buy Example: Practical Calculation

A mid-sized company needs 5,000 aluminum housing parts annually. Two options are available:

• Option Make: Fixed costs for a CNC milling machine: €80,000 (depreciated over 5 years = €16,000/year). Variable unit costs: €12 per part (material, energy, labor share).

• Option Buy: A Chinese supplier offers the parts at €18 per unit including delivery. No significant fixed costs.

Break-even calculation:

€16,000 / (€18 – €12) = €16,000 / €6 = 2,667 units

At an annual volume of 5,000 units, the company is well above the break-even point. In-house production would be economically advantageous — total costs amount to €76,000 (Make) versus €90,000 (Buy). That's a saving of roughly 15%.

However, the pure cost analysis is only part of the decision. Qualitative factors such as lead times, quality control, and strategic dependencies must also be factored into the evaluation.

When Does In-House Production Pay Off?

In-house production is generally advantageous when:

• Production volume consistently exceeds the break-even point.

• The company already has the necessary machinery and capacity.

• The product is a core component requiring strategic know-how.

• High quality requirements demand direct control over manufacturing.

• Short reaction times and rapid prototyping are important.

When Is External Sourcing the Better Choice?

External sourcing offers advantages when:

• The required quantity falls below the break-even point.

• Fixed costs for in-house production would be disproportionately high.

• Specialized suppliers can produce parts at higher quality or with more advanced technology.

• Fluctuating demand requires flexible procurement.

• The company wants to focus its resources on higher-value activities.

Many companies combine both approaches: core components are manufactured in-house, while standard parts and auxiliary products are sourced externally. This hybrid strategy — also known as selective outsourcing — combines cost efficiency with strategic control.

Strategic decision: Insourcing or outsourcing?

The choice of production strategy depends on various factors, including costs, flexibility and strategic orientation. Insourcing can make sense if companies have special requirements in terms of quality and expertise or want to control sensitive processes internally. Outsourcing, on the other hand, provides access to external expertise, increases efficiency and can help to optimize costs. It also offers companies the opportunity to focus more on their core competencies and react flexibly to market changes. Which strategy is the right one depends on the individual company goals and framework conditions.

Weiterführende Artikel: Sourcing-Methoden · Beschaffungsstrategien · Full-Service-Beschaffung

Regardless of the decision, all requirements should be documented in a requirements specification and functional specification.

For a well-founded make-or-buy decision, you should compare the total cost of ownership of both options.

Conclusion: Make or buy - what is the right choice?

The decision between in-house production and external procurement requires a thorough analysis. In addition to costs, factors such as quality, flexibility and strategic orientation play a decisive role. A make-or-buy analysis helps companies to find the most economically viable solution.

Companies wishing to optimize their manufacturing or procurement strategy benefit from professional advice and market expertise. Line Up supports companies in developing efficient production and procurement strategies in order to secure long-term competitive advantages. From supplier research to strategic purchasing advice, Line Up offers comprehensive solutions to find the optimal balance between in-house production and external procurement.

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