Several product-based companies face capacity, supply, and market demand issues. If not dealt with satisfactorily, these can result in organizational decline and turnaround, supplier relationship management challenges, and diminished financial capacity. Choosing between making products in-house or outsourcing them is one of the strategic decisions companies can make to prevent the said issues from surfacing. To find the most cost-effective decision, they must run a make-or-buy analysis.
What’s Make-or-Buy Analysis?
A make-or-buy analysis is integral to a company’s strategic procurement planning. It primarily utilizes cost-benefit to determine whether in-house production or outsourcing is the best strategy for a company to stay profitable even during market demand uncertainty.
For example, a company has to decide between investing resources in developing its own product or purchasing an existing product. Another is when a company has to choose between employing an in-house worker to do a specific task or outsourcing the work to a third party.
In these examples, a company must always consider the cost of their choice and the potential financial rewards that come with it. The next to consider is the availability of materials, especially if they’re cost-prohibitive. To avoid costly mistakes in manufacturing products, expertise in these materials is also necessary.
Besides material costs, other overhead expenses must be factored in too. These include but aren’t limited to workforce, facilities, and equipment. In most cases, if companies decide to manufacture their products in-house, these resources need up-front purchase costs.
Besides costs, the make-or-buy decision is typically based on their unique core competence. Quality problems, long-term business strategies, and managerial decisions of a company may also matter.
Financing Make-or-Buy Decisions
The good news is that seeking business financing is no longer the main issue these days. The lending landscape is now more inclusive compared to the past, thanks to the increasing alternative financing solutions and FinTech democratizing finance.
Many FinTech companies nowadays are borrower-friendly as well. Take creditninja.com as an example. This company tailors loans based on an individual or company’s financial needs and capacity.
Many nonbank lenders also offer financing regardless of borrowers’ credit and business history. That means small and midsize enterprises (SMEs) and startups can take out loans to fund their in-house production or subcontracting despite unstable cash flow or lack of track record.
Nonetheless, fast credit accessibility can be a two-edged sword—convenient financing but with high fees. The last thing companies want is a death spiral in finances, so companies must still do number-crunching before moving forward.
Benefits of a Make-or-Buy Decision
A make-or-buy decision framework is associated with autonomy. As such, companies choose from the numerous advanced options to account for different factors associated with in-house production and outsourcing.
Below are the top advantages of a make-or-buy decision in business:
Lower Costs and Better Capital Investments
A make-or-buy decision approach helps businesses find the best strategy with the most advantages and, as much as possible, the most minor downsides. As a result, they get higher capital investments.
Solve Storage and Logistics Issues
Following the most cost-effective approach can eventually lead to solving issues related to inventory and logistics. For example, with a make-or-buy analysis, companies can opt for reliable suppliers, not only to save money but also time and effort.
Improve Strategic Planning
Since several business-related factors must be considered when running a make-or-buy analysis, companies end up investigating their business’s internal and external environments. The results from such decisions then shape their overall strategic maneuver.
For example, a make-or-buy approach enables companies to be aware of their capacities, preventing them from making unnecessary costly mistakes. It also helps them improve production they’re otherwise incapable of and opt for alternatives with acceptable profit margins.
Adjust to Meet New Demands
Most growing businesses face increasing product demand. While it’s a good sign of business growth, many companies suffer from it since it can overtake their labor force. A make-or-buy analysis is one of the ways to help them meet such overwhelming demand.
For example, a make-or-buy analysis helps companies realize that outsourcing the production of certain (not all) items can help them in many ways. It gives them more time to focus on items that must be made in-house, prevent delays, reduce costs, and generate higher returns.
Act as A Competitive Advantage Source
By opting for the most cost-efficient approach while staying productive, make-or-buy analysis helps companies gain a competitive advantage. It doesn’t only increase the value and improve the quality they deliver to their customers but also helps them weather market downturns.
Final Thoughts
The ever-changing markets and fluctuating costs are good reasons for running a make-or-buy analysis in a business. Although it doesn’t promise cost savings during bad economic times, it certainly helps companies move forward during lean times. Nevertheless, it’s critical to note that the best decision always depends on every company’s current circumstances. What’s suitable for one company may not be good for another business.
