In procurement, a make or buy decision appears when an organization must decide whether to perform an activity internally or source it from an external supplier. This can relate to production, services, maintenance, logistics, IT, engineering support, or other business activities.

The decision is often presented as a cost question: is it cheaper to do this ourselves or to buy it from the market? In reality, a professional make or buy analysis is broader. It must consider strategy, risk, capability, capacity, cost, control, supplier market maturity, and long-term business impact.

For that reason, procurement should not only be involved after management has decided to outsource. A mature procurement function should help initiate, structure, challenge, and conduct the make or buy analysis before the decision is made.

LHTS framework connection

Role: Management
Supporting role: Tactical buyer / Category manager
Process: Category strategy, sourcing strategy, market analysis, business case preparation, RFQ preparation
Level: Advanced
Related course: Mastering Total Cost of Ownership

Quick answer: what is a make or buy decision?

A make or buy decision is the choice between performing an activity internally and buying the same product, service, or capability from an external supplier. In procurement, the decision should not be based only on purchase price or internal production cost. A professional analysis compares strategic importance, supplier market capability, risk, total cost of ownership, internal capacity, and long-term control.

Why make or buy decisions matter

Make or buy decisions influence more than cost. They shape what the organization controls, where competence is developed, how flexible the business can be, and how much dependency is created toward external suppliers.

A poor make or buy decision can create hidden cost, supplier lock-in, loss of internal competence, quality problems, delivery risk, or weak control over critical processes. A good decision can release capacity, reduce total cost, improve flexibility, access supplier innovation, and allow the organization to focus internal resources where they create the most value.

This is why make or buy should be treated as a structured business decision, not as a simple sourcing event.

Make or buy is not only an outsourcing question

Many organizations discuss make or buy only when someone wants to outsource an existing internal activity. That is too narrow.

A make or buy analysis can also be relevant when:

• a new product or service is introduced,
• demand increases and internal capacity is limited,
• an internal process becomes too expensive or inefficient,
• supplier technology develops faster than internal capability,
• risk exposure changes,
• a category strategy is updated,
• a supplier market becomes more mature,
• or a previously outsourced activity needs to be insourced again.

The decision can therefore lead to several outcomes. The organization may decide to continue making internally, buy from the market, use dual sourcing, outsource only part of the activity, build a strategic partnership, or bring a previously outsourced activity back in-house.

The three senior decision areas

A strong make or buy analysis should combine three perspectives: strategic fit, risk, and economics.

1. Strategic fit

The first question is not “what is cheapest?” but “what should we control?”

Procurement should help the business clarify whether the activity is core or non-core. A core activity is closely connected to competitive advantage, customer value, product performance, intellectual property, brand promise, or critical business knowledge. A non-core activity may still be important, but it does not directly define why customers choose the company.

If the activity differentiates the business, the organization may need to keep it internal or at least maintain strong control over the process, specification, competence, and supplier relationship. If the activity is standardized and the supplier market is mature, buying from the market may release internal resources and improve performance.

The senior procurement perspective is to challenge both assumptions: not everything internal is strategic, and not everything external is low risk.

2. Risk

A buy decision can reduce internal complexity, but it also creates dependency. Procurement should therefore assess supplier risk, market concentration, geopolitical exposure, quality risk, logistics risk, financial stability, cyber or data risk, sustainability risk, and the risk of losing internal know-how.

Risk is also present in a make decision. Internal production may depend on outdated equipment, limited competence, poor scalability, high fixed cost, or weak process discipline. Keeping an activity in-house can sometimes hide problems rather than solve them.

A professional buyer should therefore compare risk on both sides: the risk of buying and the risk of continuing to make.

3. Economics and total cost of ownership

The financial analysis must go beyond unit price.

For a make option, cost may include labor, material, equipment, maintenance, depreciation, tooling, quality cost, management time, facility cost, inventory, scrap, rework, training, and opportunity cost.

For a buy option, cost may include supplier price, logistics, duties, onboarding, qualification, contract management, quality assurance, supplier development, transition cost, inventory, minimum order quantities, currency exposure, switching cost, and exit cost.

This is where Total Cost of Ownership becomes essential. A buy option may look cheaper at price level but become more expensive once transition, risk, governance, quality, and long-term dependency are included. A make option may look expensive but still be the better choice if it protects strategic control or avoids unacceptable risk.

How procurement should initiate a make or buy analysis

A senior procurement function should not wait passively for a make or buy request. It should actively identify situations where the current setup deserves to be challenged.

Procurement can initiate the analysis through category strategy work, spend analysis, supplier market intelligence, benchmarking, risk reviews, contract renewal planning, cost reduction programs, or business transformation projects.

Typical trigger questions are:

• Are we using internal resources for activities that the market can perform better?
• Are we buying something externally that has become too critical to leave uncontrolled?
• Has supplier market capability changed?
• Has internal capacity become a bottleneck?
• Are we outsourcing because it is truly better, or because we avoid fixing an internal problem?
• Are we keeping work in-house because it is strategic, or because of habit and organizational resistance?

This is where senior procurement adds real value. The buyer brings external market facts into internal decision-making and creates a more objective comparison between internal performance and supplier capability.

How procurement should conduct the analysis

A structured make or buy analysis can follow seven steps.

Step 1: Define the scope

Start by defining exactly what is being analyzed. Is it a product, component, service, process, technology, competence, or full function? Clarify volume, specification, quality requirements, interfaces, assets, people, systems, and time horizon.

A vague scope creates a weak decision. Procurement should help turn the discussion into a clear decision object.

Step 2: Clarify business requirements

The organization must define what “good” means before comparing make and buy. This includes quality, lead time, flexibility, scalability, innovation, confidentiality, sustainability, compliance, service levels, and business continuity.

Without clear requirements, the analysis becomes a price comparison instead of a business decision.

Step 3: Assess internal capability and capacity

The make option must be assessed honestly. Procurement should work with operations, engineering, finance, quality, HR, and management to understand internal cost, competence, capacity, process performance, investment needs, and improvement potential.

This step should include an important question: can internal performance be improved to a competitive level, and what would that require?

Step 4: Conduct supplier market analysis

The buy option requires a realistic view of the external market. Procurement should identify available suppliers, technology maturity, supplier capacity, competitive landscape, cost drivers, geographic risk, innovation potential, switching barriers, and supplier willingness to take on the scope.

If the supplier market is weak, concentrated, unstable, or immature, the buy option may carry more risk than expected.

Step 5: Build the TCO comparison

Finance and procurement should create a total cost comparison for both options. The analysis should separate one-time cost, recurring cost, fixed cost, variable cost, risk cost, transition cost, and exit cost.

The comparison should also include scenario thinking. What happens if volume increases, demand drops, quality problems occur, supplier prices rise, exchange rates move, or the company needs to change direction?

Step 6: Evaluate risk and control

The team should assess what the organization loses or gains in control. This includes control over quality, technology, intellectual property, capacity allocation, customer responsiveness, data, and future flexibility.

A low-cost supplier solution may still be the wrong answer if it creates dependency in an area that is critical to business performance.

Step 7: Recommend and govern the decision

The final output should be a business recommendation, not only a procurement recommendation. It should explain the preferred option, the alternatives considered, the assumptions used, the financial impact, the key risks, and the implementation conditions.

If the decision is to buy, procurement should lead the sourcing, supplier qualification, RFQ, negotiation, contracting, transition, and supplier governance. If the decision is to make, procurement can still add value by benchmarking, supporting investment decisions, identifying suppliers for equipment or input material, and keeping market alternatives visible.

The professional buyer’s role in make or buy decisions

The professional buyer has a special position in a make or buy analysis. Procurement is close enough to the supplier market to understand external possibilities, but far enough from internal department ownership to challenge emotional or political assumptions.

This makes procurement a natural facilitator of right-sourcing decisions.

The buyer should bring:

• market intelligence,
• supplier capability insight,
• TCO methodology,
• commercial risk assessment,
• contractual thinking,
• benchmarking,
• sourcing process discipline,
• and negotiation realism.

However, procurement should not make the decision alone. Make or buy decisions affect operations, finance, engineering, quality, HR, legal, IT, sustainability, and business strategy. Procurement’s role is to create the fact base, challenge assumptions, structure the analysis, and help management make a balanced decision.

Senior reflection: procurement must challenge both “make” and “buy”

A senior procurement function should avoid becoming biased toward outsourcing. It is easy to assume that procurement’s role is to find an external supplier whenever a make or buy question appears. That is too narrow and can damage the business.

Professional procurement should instead defend the best business answer.

Sometimes the right decision is to buy because suppliers have better scale, technology, competence, flexibility, or cost structure. Sometimes the right decision is to make because the activity is too critical, too sensitive, too differentiated, or too risky to place outside the organization. Sometimes the best answer is a hybrid model, where the organization keeps strategic control internally but buys selected activities from specialist suppliers.

The senior buyer’s contribution is judgment. The buyer must understand when market competition creates value, when supplier dependency creates risk, when internal inefficiency should be improved rather than outsourced, and when internal pride hides a weak business case.

This is why make or buy analysis belongs on the procurement management agenda. It connects category strategy, business strategy, supplier market knowledge, and financial decision-making.

Common mistakes in make or buy analysis

One common mistake is to compare internal cost with supplier price. That ignores transition cost, governance cost, quality cost, risk, inventory, supplier management, and exit cost.

Another mistake is to treat core and non-core as fixed labels. What is core can change as technology, customer expectations, regulation, and business models change.

A third mistake is to involve procurement too late. If procurement is brought in only after management has decided to outsource, the organization loses the value of market intelligence and objective challenge.

A fourth mistake is to outsource a problem instead of solving it. If an internal process is inefficient, outsourcing may transfer the work but not remove the underlying complexity. In some cases, the better decision is to improve the internal process before deciding whether to make or buy.

A fifth mistake is to underestimate supplier dependency. A supplier can be excellent today and still become a risk tomorrow if the organization has no alternative, no exit plan, or no retained internal competence.

Practical checklist for buyers

Before recommending a make or buy decision, procurement should be able to answer:

• What exactly are we deciding?
• Why is this decision needed now?
• Is the activity strategically important?
• What internal capability and capacity do we have today?
• What would it cost to improve the internal option?
• What does the supplier market offer?
• How mature and competitive is the market?
• What is the full TCO of make versus buy?
• What risks are created or reduced by each option?
• What control do we lose or gain?
• What is the impact on people, systems, assets, quality, and customers?
• What implementation plan is required?
• What is the exit plan if the decision does not work?

Connection to the procurement process

A make or buy decision usually sits before or inside the sourcing process. It often starts in category strategy, market analysis, product strategy, or business planning.

If the decision is to buy, it continues into further supplier market analysis, supplier qualification, RFQ preparation, evaluation criteria, negotiation, contracting, implementation, and supplier management.

If the decision is to make, procurement still has a role. The buyer may support investment sourcing, benchmark external alternatives, negotiate input material, source equipment, and monitor supplier market development for future reassessment.

Related course

If you want to go deeper into the economic side of make or buy decisions, the Learn How to Source course Mastering Total Cost of Ownership gives you a structured foundation. TCO helps buyers look beyond price and understand the full cost impact of a sourcing decision over time.

FAQ

What is a make or buy decision in procurement?

It is the decision whether an organization should perform an activity internally or buy it from an external supplier. Procurement supports the decision by providing supplier market insight, cost analysis, risk assessment, and sourcing expertise.

Is make or buy only about cost?

No. Cost is important, but the decision should also include strategy, risk, capability, capacity, quality, control, flexibility, and long-term business impact.

Who should own the make or buy analysis?

Management should own the final decision, but procurement should often facilitate the analysis together with finance, operations, engineering, quality, legal, HR, and other affected functions.

When should procurement initiate a make or buy analysis?

Procurement should initiate the analysis when category strategy, market development, supplier innovation, cost pressure, capacity constraints, risk exposure, or business change suggests that the current setup may no longer be the best option.

What is the biggest mistake in make or buy decisions?

The biggest mistake is comparing internal cost with supplier price only. A professional decision must compare total cost, risk, strategic control, and long-term consequences.

Conclusion

A make or buy decision is one of the more senior decisions where procurement can create business value. The role of the buyer is not simply to find a supplier. The role is to help the organization decide what should be controlled internally, what can be sourced from the market, and how risk and value should be balanced.

Professional procurement brings structure, facts, market knowledge, and commercial judgment to the decision. When done well, make or buy analysis becomes a powerful tool for improving competitiveness, focusing internal resources, and building a stronger supply base.