Plain definition
A make-or-buy decision compares internal production with obtaining the same item or service from an external provider. The financial comparison uses costs that change with the choice, plus any value released by using capacity elsewhere. A supplier quote should not be compared blindly with a fully allocated internal cost: some internal costs may remain after outsourcing.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
Suppose making a component is reported to cost per unit: materials and processing, avoidable supervision, and allocated factory rent that will continue. A supplier quotes for the same specification, including delivery. There is no alternative use for the released capacity and no other cost difference.
Buying appears cheaper than the reported cost, but it saves only of internal spending and costs . Buying therefore increases cost by per unit. For 1,000 units, keeping production in-house is better on these assumptions.
| Delivered supplier price | |
|---|---|
| Avoidable internal cost | |
| Additional cost per unit |
Use comparable specifications and volumes. The example assumes supervision can genuinely be removed and excludes tax and financing differences.
Why it matters
A lower invoice price than the cost report does not guarantee savings. Outsourcing can move spending outside the factory while leaving the factory’s commitments intact. Equally, buying can make sense when it frees a scarce resource for more valuable work.
Practical consequence
Compare avoidable internal costs with the full delivered supplier cost, transition costs, and opportunity value of capacity. Test quality, delivery reliability, minimum orders, price changes, and the ability to return work in-house. Document what internal spending will actually stop and who will make that happen before claiming savings.