Make or Buy Decision Making 

The 2 Biggest Considerations:
Cost and Capacity

Lean Manufacturing Cost Capacity: The 2 Biggest Considerations

Whilst there are a range of variables and considerations that may influence your decision to make or buy, ultimately there are 2 that are the most important. 

• Cost
• Available Capacity

Cost

Cost is a broad term and should in fact include a variety of obvious and not so obvious contributing expenditures. Additionally, cost incurred should be considered both in the short and long term. Again, based on work by Burt, Dobler and Starling, different types of costs for both ‘make’ and ‘buy’ include:

In-house ‘Make’ costs:

• Material costs (which may well fluctuate over time for most engineering materials)
• Labour costs (both production employees and management overhead)
• Factory overhead costs (including energy costs)
• Purchasing and administration costs
• Inventory / Work-in-progress costs
• Capital costs – can the capital outlay be justified in terms of payback if you decide to invest in equipment to produce something in-house?
• Potential quality resolution costs

Outsource ‘buy’ costs:

• Purchase price of the part
• Transportation costs
• Goods-in and inspection costs
• Purchasing and administration costs
• Potential quality resolution costs

Like all financial planning, try to quantify costs as best as you can, even if it means rough estimates.

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Available Capacity

Available production capacity only applies to the option of in-house manufacturing. On the face of it the question seems straightforward – ‘is there the internal capacity to make this in-house?’ However there are a few other factors that come into play. 

Before you can answer the question you need to understand what is currently making its way through the factory and what is planned in the short and medium term. Your production schedule should give you the ball-park answer.

Other considerations include the availability of skilled employees. Also:

• What is the right mix of skills you need?
• What about planned employee holidays, bank holidays, shut-downs and other absences of skilled staff?
• Also what about plant and equipment?
• Will all machines be available when you plan?
• Does this take into account maintenance schedules?
• What breakdown cover have you got in place for plant if the worst happens?
• See the section about ‘Total Productive Maintenance’ for more.

The first thing to do here is probably assembly those people in a position to know the answers within your business. Production supervisors and operations managers are often a good place to start.

Lean Manufacturing Cost Capacity

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Next... Make or Buy Decision Making: Broader Considerations

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Back to Supply Chains for Small Manufacturers or  Lean Manufacturing Essentials

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