Sourcing

Outsource vs Expand Capacity

Compare outsourcing against expanding in-house capacity on total annual cost, including the expansion's annualized capital cost.

Annual volumeunits needed per yearOutsource cost per unit$ per unit from an outside supplier

Expand in-house

Capital cost$ upfrontUseful lifeyearsOperating cost per unit$ per unit produced in-house once expanded

Outsource$24,000 / year

Outsource annual cost$24,000

Expansion annualized capital$20,000

Expansion operating cost$12,000

Expansion total cost$32,000

Continue Analysis

Based on your results, these related decisions are available.

Demand Scenario Comparator stress test the chosen capacity strategy against demand scenarios

Resources

Guide Make, Buy, Outsource, or Expand Capacity Capacity strategy is a comparison of controllable cost, demand duration, and the risk of tying up capital too early.

How this works

In-house production almost always looks cheaper per unit than an outside supplier's price. But that comparison leaves out the capital it costs to add the capacity in the first place. This engine converts that capital cost into an annualized charge and adds it to the in-house operating cost, then compares the true total against outsourcing, so a low-volume case where the capital charge dominates does not get wrongly recommended toward expansion.

Key terms

Annualized capital cost: the expansion's upfront cost spread across its useful life as an equal yearly charge, using the capital recovery factor.
Expansion total annual cost: the annualized capital charge plus in-house operating cost times volume, the true cost to compare against outsourcing.

Assumptions

One uniform per-unit rate for outsourcing and for in-house operating cost
Volume stays constant across the expansion's useful life

Limitations

One outsource price against one expansion option, not a multi-vendor or multi-scale search
Does not model supplier price changes or expansion cost overruns

Sources

Standard make-or-buy capital-annualization treatment, the same mechanism Automation vs Labor Comparator applies to an automate-or-labor decision.

Worked example

At 2,000 units/year, outsourcing costs $12/unit ($24,000/year total) while expanding in-house would cost only $6/unit to operate ($12,000/year). A per-unit-only comparison picks expansion every time. But the $300,000 expansion, spread over a 15-year useful life, adds a $20,000/year annualized capital charge, expansion's real total cost is $32,000/year, above outsourcing's $24,000/year. At 8,000 units/year the same expansion's total cost is $68,000/year against outsourcing's $96,000/year, expansion wins once volume is high enough to earn back the capital.

Common use cases

Deciding whether demand is high enough to justify building in-house capacity
Checking a supplier's outsource quote against the cost of expanding instead
Screening make-or-buy candidates before a full capital-budgeting review