The make or buy decision allows businesses to make an informed decision on whether to manufacture specific products in house, or to purchase them from external suppliers. Some common reasons a business may feel the need to carry out a make or buy assessment include changing demand, a diminishing capacity, or problems with current suppliers.
It can also be a useful tool to highlight areas of potential cost reductions and can be carried out as part of a wider project around internal cost reduction.
There are many factors that need to be considered in a make or buy decision, and often the focus is around costs – weighing up costs such as production, labour, storage and waste disposal on the ‘make' side against purchase price, sales tax, shipping and ordering costs on the ‘buy' side.
These cost implications are often complex and nuanced, and few businesses fully understand the ‘true' cost – particularly for the make element. Due to the complexity, it can often be that businesses carry out a make vs buy analysis, with the intention to drive down costs and miss key aspects that they may want to consider.
It's important not to overlook the non-financial factors that can have a big impact on your company's final decision.
While each business will be different in terms of the areas they need to consider, here are 3 non-financial factors we recommend taking into account in your make vs buy decision process.
Future threats and legislation
Depending on the industry you're in and the products you are offering, there will be a certain degree of legislation to consider, which may impact your make or buy decision.
Taking into account any current or future legislation is key. Manufacturing in-house will mean you have a greater amount of control and will be able to set your own standards for manufacturing, while outsourcing will mean that the burden of meeting legislation – and any additional testing, paperwork etc – falls mainly with the third-party manufacturer (though you will of course still have a responsibility to ensure this is being carried out).
As well as meeting legislation, it is important to consider if you or your manufacturer have the capacity to protect against any relevant threats – such as cyber security attacks and the protection of intellectual property. All of these things will add to the time and resources required if you are going to manufacture in-house and will also impact the third-party manufacturers you use, as you will need to find one that you trust to safeguard your manufacturing process.
Meeting industry standards
As well as ensuring that your products meet legal standards, you will also need to make sure they meet industry standards and therefore allow you to remain competitive in the market. Even a small slip in standards on a product can have a significant impact on your brand and reputation.
If you are thinking of making a change to your current manufacturing setup, you need to ensure that you can either maintain or improve upon current standards. Third-party manufacturers are likely to have extensive experience and rigorous testing processes when it comes to your products, while an in-house team may feel more personal responsibility to your end customers and have more motivation to exceed expectations when it comes to delivering high quality products.
ESG agenda and reputation
You'll need to consider the impact your decision will have on ESG factors and how that in turn will impact your existing relationships with suppliers and your customers, as well as on your wider reputation.
Depending on how your brand positions itself, the decision to change the manufacturing process could impact how your customers view you. Your manufacturing choices, as well as supporting your financial aims, should also tie into your brand ethos and support your other business goals, such as environmental targets.
In-house manufacturing, particularly using local suppliers, would support an eco-conscious brand image, for example, and could help support local jobs, building your business reputation in the local community.
However, suddenly moving away from small suppliers and manufacturers who rely on your business could reflect badly and make future suppliers reluctant to work with you.
If you're considering make vs buy, our consultants can help you to ensure you've carried out a thorough analysis and are making the best possible decision for your business. You can read more about how we support make vs buy decisions, or get in touch to find out more about we can help you here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.