Make-or-Buy Analysis
Change demand, internal cost, supplier price, capacity and strategic-fit assumptions and observe how total Make cost, total Buy cost, break-even volume and the recommended sourcing direction respond.
Compare internal production with external sourcing using both economics and strategic fit.
The tool uses a representative annual sourcing decision. Internal production has a fixed-cost burden but a lower variable cost per unit; buying externally avoids much of the internal fixed cost but carries a higher supplier unit price and sourcing/contract-management cost.
Make-or-Buy Analysis — Step by Step
Eight locked stages move from the sourcing context through volume, Make economics, Buy economics, capacity, strategic fit, a supplier-price shock and a management recommendation.
Establish the Make-or-Buy Decision Context
Make vs Buy Decision Profile
Reveal the decision context to begin.
Use break-even economics as one input—not the whole decision.
Make cost
Modeled Make cost = internal fixed cost + internal variable cost × annual demand. If demand exceeds available capacity, this tool adds an illustrative expansion cost to show that feasibility matters.
Buy cost
Modeled Buy cost = annual sourcing/contract-management cost + supplier unit price × annual demand. The analysis should include relevant external management, logistics, quality or transition cost when material.
Break-even volume
Where supplier unit price exceeds internal variable cost, break-even volume is the point where the higher internal fixed-cost burden is exactly offset by the lower internal unit cost.
Strategic fit
High strategic importance can strengthen Make; strong supplier capability can strengthen Buy. Capacity, intellectual property, resilience, quality, speed and flexibility should be considered explicitly.
Make Cost= Internal Fixed Cost + (Internal Variable Cost × Demand) + Capacity Expansion Cost, if required.
Buy Cost= Annual Sourcing / Contract-Management Cost + (Supplier Unit Price × Demand).
Break-Even Volume= (Internal Fixed Cost − Buy Fixed Cost) ÷ (Supplier Unit Price − Internal Variable Cost), when the denominator is positive.
Important: this is an illustrative learning model. Real decisions require relevant-cost analysis, tax/accounting treatment, transition cost, quality, logistics, supplier risk and strategic considerations appropriate to the situation.
Build Your Own Make-or-Buy Scenario
Experiment Mode is isolated from the guided demonstration. Change all economic, capacity and strategic-fit assumptions freely.
Quick Knowledge Check
Make-or-Buy Decision Cues
Volume
Higher volume can favor Make when internal variable cost is below supplier price and fixed cost can be spread across more units.
Capacity
Make must be operationally feasible. Insufficient capacity can require expansion, split sourcing or a Buy decision.
Relevant Cost
Compare costs that actually change because of the decision. Avoid treating every allocated accounting cost as automatically relevant.
Supplier Price
Include relevant sourcing, logistics, inspection, contract-management and transition costs where material—not only quoted unit price.
Strategic Importance
Critical know-how, intellectual property, resilience or control can strengthen the case for Make.
Supplier Capability
A capable, competitive market can strengthen Buy; weak or concentrated supply can increase external dependency risk.
Use relevant economics to identify the break-even relationship, then test capacity, strategic importance, supplier capability, resilience and risk before committing to internal production or external sourcing.