Make vs Buy Decision

How this works

Comparing labor and material cost to a supplier's price is the naive make-vs-buy check, and it is wrong whenever the plant is constrained. Making a part in-house consumes hours on whatever resource is the real bottleneck, and those hours have a value: what they would have earned making the next most profitable thing instead. This engine adds that opportunity cost, priced at the constraint value you supply, to direct labor and material before comparing the fully loaded make cost to the supplier's buy price.

A one-time switching cost, such as supplier qualification or tooling transfer, is checked separately. Buying can be cheaper per unit and still be a bad near-term decision if the switching cost does not pay back within the volume and horizon entered, so the engine reports the per-unit verdict and the investment payback verdict as two distinct results.

Assumptions

• Constraint value and unit costs are held constant across the volume and horizon modeled
• One supplier quote is compared, not a multi-bid negotiation
• Constraint hours freed by buying are assumed usable elsewhere at the same constraint value

Limitations

• Does not model multi-supplier bidding or quality risk differences between sources
• Does not model dual-sourcing or partial make/buy splits
• Does not model supplier price changes with volume

Sources

Capital and cost-screening logic follows Blank and Tarquin, Engineering Economy (8th edition), the same source as the platform's other cost-decision engines. Constraint opportunity costing follows the Theory of Constraints throughput-accounting method already sourced in Contribution Margin per Constraint Hour.

Worked example

Making a part takes 1 hour of labor at $25/hour plus $5 of material and $1 of overhead, for $31 direct cost. If that hour also occupies the plant's bottleneck, and the bottleneck earns $30/hour on its next best use, the fully loaded make cost is $61. A supplier quote of $35 is clearly cheaper, a 43% saving per unit. At 1,000 units a year that is $26,000 in annual savings, comfortably covering even a real switching cost as long as the horizon is long enough: a $200,000 one-time switch would need more than a single year to pay back at that volume, which is exactly the kind of gap the separate investment check exists to catch.

Common use cases

• Deciding whether to outsource a part when the shop is running near capacity
• Checking whether a supplier's quote actually beats fully loaded make cost
• Testing whether a switching investment (tooling, qualification) pays back fast enough
• Freeing bottleneck capacity for higher-value work by moving a low-margin part to buy