Make-or-Buy Analysis
Make-or-buy analysis is a technique used to determine whether a particular product or service should be produced internally by the project team or purchased from an external source.
Explanation
Make-or-buy analysis compares the costs and benefits of producing a deliverable in-house versus acquiring it externally. Direct and indirect costs for both options are evaluated, including purchase price, management overhead, ongoing maintenance, and opportunity costs. The analysis also considers non-cost factors such as available capacity, expertise, schedule constraints, and strategic considerations.
For the "make" option, the organization retains full control over quality and intellectual property but bears all production risks and requires sufficient internal capability. For the "buy" option, the organization transfers some risk to the seller but introduces dependency on an external party and must invest in contract management.
This analysis is a key tool in Plan Procurement Management and directly influences procurement decisions. The results feed into the procurement management plan and may also affect the project scope baseline if work is outsourced.
Key Points
- •Compares total cost of internal production versus external purchase
- •Considers both financial and non-financial factors
- •A tool/technique of Plan Procurement Management
- •Results influence scope baseline and procurement management plan
Exam Tip
On the exam, make-or-buy analysis is a data analysis technique within Plan Procurement Management. Consider both direct costs (labor, materials) and indirect costs (management overhead, lost opportunity).
Frequently Asked Questions
Related Topics
Plan Procurement Management
Plan Procurement Management is the process of documenting project procurement decisions, specifying the approach, and identifying potential sellers.
Procurement Strategy
Procurement strategy defines the project delivery method, the type of legally binding agreement, and the approach for managing procurements throughout the project lifecycle.
Independent Estimates
Independent estimates are cost or price benchmarks developed by the buyer or a third party to serve as a check against seller-proposed pricing during procurement.
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