---
title: "Make vs Buy Decision: Analysis Framework, Formula and Example"
description: "A practical make vs buy framework: incremental make cost vs landed buy cost, break-even volume, a worked hydraulic cylinder example, non-cost factors and a…"
canonical: "https://www.auravms.com/blogs/make-vs-buy-decision-procurement-analysis-framework-2026"
author: "Dhrumil Barot"
author_bio: "Dhrumil is a procurement veteran. Dhrumil built AuraVMS to take the manual chasing out of RFQs, supplier quotes and purchase orders."
published: 2026-04-25
updated: 2026-10-29
image: "https://www.auravms.com/og.png"
---

# Make vs Buy Decision: Analysis Framework, Formula and Example

*By [Dhrumil Barot](https://www.auravms.com/about#founder) | Published April 25, 2026 | Updated October 29, 2026*

*How to decide whether to make or buy a component: the cost formulas, break-even volume, a worked example and a weighted decision matrix.*

> **TL;DR:** A practical make vs buy framework: incremental make cost vs landed buy cost, break-even volume, a worked hydraulic cylinder example, non-cost factors and a scored matrix.

The make vs buy decision is whether to produce a part or service in-house or source it from a supplier. Decide on two things: cost and fit. On cost, compare the **incremental** cost of making (only the costs that start or rise because you make it) with the full **landed** cost of buying, at the same volume over the same time horizon. On fit, check what the numbers miss: whether the part is core to your product, whether you can hit the quality spec, how much risk you carry and how much flexibility you lose.

**Make cost per unit = incremental variable cost + (new fixed costs per year ÷ annual volume)**

**Buy cost per unit = quoted price + freight + duties + inspection + inventory carrying + supplier management**

**Break-even volume = new fixed costs per year ÷ (buy cost per unit - incremental variable cost per unit)**

Above the break-even volume, making is cheaper on cost alone. Below it, buying is. The rest of this guide shows how to build each number, a worked example, and a scored matrix for the factors that are not cost.

## When to Run a Make vs Buy Analysis

Run one when a new component enters a design, when you hit a capacity limit, when a supplier keeps failing on quality or delivery, when a large price increase arrives, or when a technology change makes your current process obsolete. It applies to services and software too: an in-house logistics team versus a 3PL, a custom tool versus a licensed one.

## How to Run a Make vs Buy Analysis for a New Component

This is the sequence for a manufactured part. For a typical component it takes three to six weeks, most of it waiting for quotes and cost data.

1. **Define the scope (engineering and procurement, week 1).** Drawing and revision, material, tolerances, quality requirements, annual volume as a low, base and high case, and the horizon (usually three to five years, or the life of the product).
2. **Classify the part (operations lead, week 1).** Is it core to how you win, or a commodity? Is it complex (tight tolerances, special processes, many engineering changes expected) or simple? This decides how much weight the non-cost factors get later.
3. **Build the make cost (manufacturing engineering and finance, weeks 1 to 3).** Material, direct labor, scrap, incremental overhead, and any new equipment, tooling, floor space or staff. Leave out overhead that you pay either way.
4. **Get real buy prices (procurement, weeks 2 to 4).** Send the same drawing package to three to five suppliers. Ask for price breaks at your low, base and high volumes, tooling quoted separately with ownership stated, lead time, MOQ, payment terms and Incoterms.
5. **Convert quotes to landed cost (procurement, week 4).** Add freight, duties, incoming inspection, inventory carrying and the cost of managing the supplier.
6. **Run break-even and sensitivity (finance, week 5).** Recalculate at each volume case, with scrap or ramp-up losses, and with a supplier price increase.
7. **Score the non-cost factors (cross-functional team, week 5).** Use the weighted matrix below. Agree the weights before anyone scores.
8. **Decide and set a review trigger (sponsor, week 6).** Write down the assumptions and the condition that reopens the decision, for example volume passing break-even for two quarters in a row.

**For complex manufactured components, add these checks:** a design-for-manufacture review with the shortlisted suppliers, a process capability check (can your equipment or theirs hold the tolerance consistently?), first article inspection in the plan for both options, an estimate of ramp-up time and scrap while you learn the process, and how often engineering changes are likely. Frequent changes favor making, or a supplier you work with very closely.

## Which Costs to Include on Each Side

| Cost element | Make | Buy |
| --- | --- | --- |
| Material | Raw material and bought-in parts, plus scrap | In the unit price |
| Labor | Direct labor, plus any new hire or overtime | In the unit price |
| Overhead | Only the incremental part: utilities, maintenance, consumables that rise | Supplier management time, PO processing |
| Equipment and tooling | New equipment as depreciation per year, tooling, installation, training | Tooling charge if the supplier bills it; confirm who owns it |
| Space | Opportunity cost if the floor space would otherwise run something more valuable | Storage for safety stock |
| Logistics | Internal handling | Freight, duties, packaging |
| Quality | In-process inspection, rework | Incoming inspection, returns, supplier audits |
| Inventory | Work in progress | Safety stock and carrying cost, especially with long lead times |
| Risk | Ramp-up losses, stranded equipment if volume drops | Disruption contingency, price increases, currency |

Two rules keep the comparison honest. First, **ignore sunk costs**: equipment you already own and have paid for is not a cost of making, but its next best use (selling it or running other work on it) is. Second, **don't load allocated overhead onto the make side**. If the plant manager's salary and the building rent don't change, they don't belong in the comparison, even if your cost accounting system spreads them across every part.

## Worked Example: A Hydraulic Cylinder

*Illustrative example.* An industrial equipment maker buys 2,000 hydraulic cylinders a year and expects 3,500 a year within three years. Making them would need $450,000 of equipment.

Make inputs: material $85 per unit, direct labor $35 per unit, incremental overhead $25 per unit. Equipment depreciated straight-line over five years is $450,000 ÷ 5 = $90,000 a year.

Buy inputs: the lowest quote is $165 per unit, plus freight $8, incoming inspection $3, inventory carrying $5 and supplier management $2, so $183 landed.

| Per unit | Make at 2,000 a year | Make at 3,500 a year | Buy (lowest quote) |
| --- | --- | --- | --- |
| Material, labor, incremental overhead | $145.00 | $145.00 | - |
| Equipment ($90,000 a year ÷ volume) | $45.00 | $25.71 | - |
| Supplier price | - | - | $165.00 |
| Freight, inspection, carrying, management | - | - | $18.00 |
| **Total** | **$190.00** | **$170.71** | **$183.00** |

A common error is to compare $145 with $183 and conclude that making saves $38 a unit, or $76,000 a year. That leaves out the equipment. With it included:

- **Break-even volume** = $90,000 ÷ ($183 - $145) = 2,368 units a year.
- At today's 2,000 units, buying is cheaper by $7 a unit, or $14,000 a year.
- At 3,500 units, making is cheaper by $12.29 a unit, about $43,000 a year.
- If you also charge an 8% cost of capital on the $450,000 ($36,000 a year), break-even rises to ($90,000 + $36,000) ÷ $38 = 3,316 units, close to the top of the forecast.
- Ramp-up risk: a 15% chance of a $50,000 quality problem in the first year is an expected cost of $7,500, another $3.75 a unit at 2,000 units.

The cost case for making only works if the growth arrives, and even then the margin is thin. Add the non-cost facts: cylinders are not a core competency, the team has no cylinder expertise, the equipment vendor expects eight months to reach target quality, the floor space currently runs a higher-value assembly line, and two qualified suppliers have good track records. The decision is to buy, run a competitive RFQ to set the actual price, and reopen the decision if volume holds above about 3,300 units a year.

## Factors Beyond Cost: When to Make and When to Buy

| Factor | Points to make | Points to buy |
| --- | --- | --- |
| Strategic role | The part is how you differentiate | Commodity or non-core part |
| Capability | You already have the process and the people | Suppliers have scale or expertise you lack |
| Quality | The spec is hard to write down and needs tacit know-how | The spec is clear and suppliers can prove capability |
| Intellectual property | The design or process is a trade secret | Low IP content, or you can split work across suppliers |
| Capacity | You have idle equipment and people | You would need new capital and hiring |
| Demand | Stable, predictable volume above break-even | Uncertain or seasonal volume |
| Design change | Frequent iteration and fast engineering changes | Mature, stable design |
| Supply market | Few capable suppliers, or volume too low to interest them | Several qualified suppliers competing |
| Technology | You own a process advantage | The technology changes fast and suppliers keep up better |
| Risk you can absorb | Supplier failure would stop your line and you can't dual-source | Equipment breakdown or stranded assets would hurt more |

If you buy a part with real IP content, protect it in the contract: an NDA before the drawings go out, ownership of tooling and drawings stated in the PO terms, audit rights, and where possible splitting the design so no single supplier sees all of it.

## Make vs Buy Decision Matrix (Filled Example)

Set the weights before scoring, so nobody tunes them to reach the answer they wanted. Score each option 1 to 5. These scores are for the illustrative cylinder example at current volume.

| Factor | Weight | Make score | Buy score | Make weighted | Buy weighted |
| --- | --- | --- | --- | --- | --- |
| Total cost of ownership | 30% | 3 | 4 | 0.90 | 1.20 |
| Quality capability | 20% | 2 | 4 | 0.40 | 0.80 |
| Strategic fit | 15% | 2 | 4 | 0.30 | 0.60 |
| Flexibility | 15% | 2 | 4 | 0.30 | 0.60 |
| Risk | 10% | 2 | 3 | 0.20 | 0.30 |
| IP protection | 10% | 4 | 3 | 0.40 | 0.30 |
| **Total** | **100%** |  |  | **2.50** | **3.80** |

Weighted score = weight × score, summed. If the totals land close together, don't let a decimal point decide. Look at the highest-weighted factor, or consider a hybrid.

## Hybrid Approaches

Make vs buy is not always all or nothing:

- Make core components, buy commodity components
- Use internal production for base demand, suppliers for peak demand
- Maintain internal capability as backup to supplier production
- Partner with suppliers through joint ventures or strategic alliances
- Insource assembly, outsource component manufacturing

## Getting Real Numbers for the Buy Side

The buy case is only as good as the quotes behind it. Budget estimates and last year's price for a similar part are not enough. For a make vs buy RFQ:

- Send every supplier the same drawing package and revision.
- Ask for prices at your low, base and high volumes so you can run break-even at each.
- Ask for tooling as a separate line, with who owns it and what happens to it if you move the part.
- Ask for lead time, MOQ, payment terms, Incoterms and how long the quote is valid.
- State the quality requirements: inspection, certificates, first article.
- Quote at least three suppliers. Two quotes rarely show you the real market.

AuraVMS can handle this step: it sends RFQs to suppliers by email invite, lets you attach drawings to RFQ items (Medium plan), sends reminders to suppliers who haven't replied, and puts quotes side by side. The cost model and the decision matrix stay in your spreadsheet.

## Common Make vs Buy Mistakes and How to Fix Them

- **Comparing the quote with variable cost only.** Fix: add new equipment as depreciation and cost of capital, as in the example above, where it turned a $38 apparent saving into a $7 loss.
- **Loading allocated overhead onto the make side.** Fix: include only overhead that actually rises if you make the part.
- **Counting sunk costs.** Fix: equipment already paid for counts only at its next best use.
- **Running the numbers at one volume.** Fix: calculate at low, base and high volume and state the break-even volume in the decision.
- **Ignoring quality differences between quotes.** Fix: add expected defect cost. If each escaped defect costs $150 in rework, scrap and line stoppage (illustrative), a $10 part with a 2% defect rate costs $10 + (2% × $150) = $13.00, and a $12 part at 0.1% costs $12 + (0.1% × $150) = $12.15.
- **Forgetting ramp-up.** Fix: add months of lower yield and extra engineering time to the make case.
- **Quoting only two suppliers.** Fix: get at least three quotes on the same drawings before deciding the buy side is too expensive.
- **Deciding once and never revisiting.** Fix: write a review trigger into the decision, such as volume, a supplier price increase or a quality failure.

## Frequently Asked Questions

### What is the make vs buy decision in simple terms?

Choosing whether to produce something yourself or purchase it from an outside supplier. You compare what it would really cost you to make it with the full landed cost of buying it, then check strategic fit, quality, risk and flexibility.

### How do you calculate make vs buy?

Make cost per unit = incremental variable cost + new fixed costs per year ÷ annual volume. Buy cost per unit = price + freight + duties + inspection + inventory carrying + supplier management. Break-even volume = new fixed costs per year ÷ (buy cost per unit - incremental variable cost per unit). Above break-even, making is cheaper on cost.

### Should I make or buy a new component?

Buy by default unless the part is core to your product, you already have the process and spare capacity, volume is stable above break-even, or the supply market can't meet your spec. New components often have uncertain volume and frequent design changes, so check the break-even at your low-volume case before committing capital.

### How do I conduct a make vs buy analysis for complex manufactured components?

Use the eight steps above, plus a design-for-manufacture review with suppliers, a process capability check on the critical tolerances, first article inspection for both options, an estimate of ramp-up time and scrap, and an honest view of how often the design will change. For complex parts, quality capability and IP usually carry more weight in the matrix than for simple ones.

### Which costs should be left out of a make vs buy analysis?

Sunk costs (equipment already paid for) and allocated fixed overhead that doesn't change whether you make the part or not. Include the opportunity cost of capacity or floor space that would otherwise run more valuable work.

### Can you combine make and buy?

Yes. Common hybrids: make core parts and buy commodity ones, make the base volume and buy peaks, keep a small internal capability as backup to a supplier, or insource final assembly and outsource component manufacturing.

### How often should make vs buy decisions be reviewed?

When a trigger you set at decision time is hit: volume crossing break-even, a large supplier price increase, a quality failure, or a new technology. Without a trigger, review major categories every two to three years.

## Make vs Buy Checklist

1. Scope: drawing, revision, spec, volume cases and horizon agreed.
2. Make cost: incremental only, with equipment, tooling, ramp-up and scrap.
3. Buy cost: at least three quotes on the same package, converted to landed cost.
4. Break-even volume calculated and compared with the forecast range.
5. Non-cost factors scored with weights set in advance.
6. Decision, assumptions and review trigger written down.

Ready to execute buy decisions more efficiently? AuraVMS helps procurement teams collect supplier quotes, compare responses, and select the best vendors, all in one platform. Visit auravms.com to start your free trial.

## About the author

Written by [Dhrumil Barot](https://www.auravms.com/about#founder). Dhrumil is a procurement veteran. Dhrumil built AuraVMS to take the manual chasing out of RFQs, supplier quotes and purchase orders.

[LinkedIn](https://www.linkedin.com/in/bdhrumil) | [X](https://x.com/fyidhrumil)

## Continue this topic

- [Quotation comparison: definition and method](https://www.auravms.com/terms/quotation-comparison)
- [How L1, L2, and L3 price ranking works](https://www.auravms.com/terms/l1-l2-l3-price-ranking)
- [Collect comparable supplier quotations](https://www.auravms.com/supplier-quotation-collection-software)

Source: https://www.auravms.com/blogs/make-vs-buy-decision-procurement-analysis-framework-2026