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What Is a Make-Or-Buy Decision?

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  • Written By: Esther Ejim
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 03 September 2016
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A make-or-buy decision is a concept that is related to the types of business decisions that various businesses must make in regard to the issue of producing something themselves. This concept is closely related to that of competitive advantage, which suggests that it is a form of strategic advantage for businesses to concentrate on the items they are best suited to produce. For instance, a company in Florida in the United States would be comparatively positioned to produce orange juice due to its close proximity to mass-produced oranges as well as the fact that it has developed competent methods for the extraction and production of the product over the years. Assuming a company that is located in an area that does not have the same advantages develops a unique recipe for making orange juice and decides to produce orange juice, it might outsource the production of the juice to a company in Florida, while it concentrates on the packaging and marketing of the finished product.

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In such a case, the company would have applied the make-or-buy decision to its dilemma regarding whether to produce or outsource. More directly, the concept of make-or-buy is related to items like products that may have been developed by the company in question. For instance, a company that specializes in the production of airplane parts might develop a new type of part that requires a specialized type of production process that might prove to be beyond the easy reach of the developing company. In this case, the company might weigh its options as part of a make-or-buy decision. The company may decide to outsource since it would be cheaper to have the part produced at another company that has the specialization to mass-produce the part more efficiently.

To determine if the make-or-buy decision would apply during cases regarding the production of new products, the company would have to decide if the product in question is one that entails the protection of a trade secret, in which case the company would have to produce it alone, regardless of any cost. Another factor that could affect the decision to outsource or to produce by itself would be the size of the order. If the size of the order is too small, it might be too hard or exorbitant for the company to find another company that would produce the product. A company might also decide to engage in the production of the product if it does not have a lot of confidence in the outcome of the product by another company, even if it will be cheaper to outsource the production.

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