Set one comparable decision contract
Record these assumptions before calculating
- One component specification, accepted quality level and comparable quantity. (not complete)
- Avoidable internal costs rather than every allocated overhead line. (not complete)
- A current supplier quote with freight, minimum order and lead-time terms. (not complete)
- The contribution from the best alternative use of internal capacity. (not complete)
- Inventory, disruption, inspection and transition assumptions. (not complete)
make-versus-buy difference = total relevant make cost - total relevant buy cost
- relevant make cost
- Avoidable material, labour, setup, quality and capacity-opportunity cost (CU for the selected quantity and period) — routing, cost record and labelled opportunity scenario
- relevant buy cost
- Quoted price, freight, duties, inspection, purchasing, inventory and expected disruption cost (CU for the same quantity and period) — supplier quote and business record
- difference
- Positive means buy is lower under the stated boundary; negative means make is lower (CU per comparison period) — derived
Keep one currency, indirect-tax basis, time horizon and cost boundary throughout. Scenario values below are invented currency units (CU), not benchmarks.
Worked example: Make vs Buy a Component
Invented 1,000-component comparison: make uses 7,200 CU avoidable resources plus 1,400 CU displaced contribution; buy costs 7,600 CU landed plus 650 CU purchasing, inspection and expected disruption.
| Line | Calculation | Result |
|---|---|---|
| Relevant make cost | 7,200 + 1,400 | 8,600 CU |
| Relevant buy cost | 7,600 + 650 | 8,250 CU |
| Buy advantage | 8,600 - 8,250 | 350 CU |
| Advantage per component | 350 ÷ 1,000 | 0.35 CU |
| Case | Changed input | Decision result |
|---|---|---|
| No capacity opportunity | Make cost 7,200 | Make lower by 1,050 CU |
| Base | Opportunity cost 1,400 | Buy lower by 350 CU |
| Supplier disruption +800 | Buy cost 9,050 | Make lower by 450 CU |
Turn the calculation into an operating decision
- Freeze specification, quantity, horizon and acceptance test.
- Separate avoidable from merely allocated internal cost.
- Calculate the best alternative use of constrained capacity.
- Build the complete landed and managed supplier cost.
- Stress supplier, demand, yield and capacity cases.
- Record the transition, review trigger and exit path.
- Comparing supplier price with fully allocated factory cost.
- Omitting internal purchasing, inspection and supplier-management work.
- Ignoring freed capacity or assuming it has value without an alternative use.
- Using different quantities, quality levels or horizons.
- Hiding switching and transition cost.
Questions to settle before acting
- Should fixed factory overhead be included?
- Include only the portion that changes because of the decision; show unavoidable overhead separately so it is not mistaken for a saving.
- How should supplier risk be priced?
- Use observable disruption scenarios and state probability or expected-cost assumptions explicitly rather than inventing a standard premium.
- Can a split-sourcing option be compared?
- Yes. Model it as a third case with its own minimums, setup, quality, coordination and capacity effects.
Sources and methodology
- Make vs Buy a Component: calculation boundary — Margin101: Formula, unit, assumption and limitation reference for the primary decision handoff.
- Supply-chain resources — NIST Manufacturing Extension Partnership: Authoritative supply-chain risk context; supplier prices and probabilities remain user evidence.