- Why doesn’t the unit cost settle it?
- What a business I ran bought instead of made
- What are you actually comparing?
- From comparison to decision
- When should you make it?
- When should you buy it?
- When is the answer neither?
Hypothetical: $38. That is the quote that came back from the supplier, against a standard cost of $41 to make it yourself. Three dollars a unit, on twenty thousand units, and the decision looks like it has already been made for you.
It has not, because neither number describes what the choice actually costs you. The $41 contains overhead that will not leave the building if you stop making the part, and the $38 leaves out what buying it does to your lead time, your engineering attention, and your position with that customer. This is a three-way decision, and the third option is usually the one nobody puts on the table.
Why doesn’t the unit cost settle it?
Because standard cost includes allocated overhead that stays behind when the work leaves, and the supplier quote excludes the costs of managing a supplier. Compare those two figures directly and you will outsource work that was profitable and keep work that was not.
Run the $41 down to what actually disappears. Material and direct labor go, and some consumables and tooling go with them. The plant manager, the quality system, the building, and the ERP do not. If $26 of that $41 is truly avoidable, you are comparing $26 against $38, and the quote is no longer a bargain.
The quote has a symmetrical problem. It is the price of the part, not the cost of the arrangement, and the difference includes inbound freight, incoming inspection, the inventory you hold to cover their lead time, and the time somebody in your building spends managing the relationship. None of those appear on the quotation, and together they routinely account for several points of what looked like a saving.
You will object that the freed capacity has value, and it does, but only if something else uses it. If the machine was full and the hours go to a product with orders waiting, that value is real and often larger than the quote difference. If the machine was half empty, those hours go nowhere and you have bought a $12 increase per unit.
What a business I ran bought instead of made
Early in my time at Whirlpool I took over waste disposers and value dishwashers, a business of about $100 million that most ambitious people in the company treated as a place careers went to stall. The disposers were not made in house. They came from OEM suppliers, and the obvious read was that the business had given away its manufacturing and had little left to win with.
That read was wrong. Working with those suppliers to rebuild how the premium disposers were marketed, the premium waste management business grew 60 percent and added accounts including IKEA and HH Gregg. None of that growth came from the manufacturing decision. It came from the part of the business that was still ours: which products existed, how they were positioned, and which channels carried them.
That is the thing the unit-cost comparison cannot see. The right question is not where the part gets made. It is which parts of the value chain contain the advantage a customer can name, and whether making the item yourself is one of them. Where it is not, buying frees attention for the parts where it is.
What are you actually comparing?
Five things, not one. Avoidable cost, constraint hours, lead time and control, the engineering attention each option consumes, and what happens to your position if the supplier changes their mind. A make-or-buy that only compares the first is not a comparison.
| What you compare | Making it | Buying it |
|---|---|---|
| Cost that actually changes | Avoidable cost only, not standard cost | Quote plus freight, inspection, and supplier management |
| Constraint hours | Consumes them, at the cost of what they displace | Frees them, worth something only if demand is waiting |
| Lead time and control | Yours to shorten | Theirs to set, and to change |
| Engineering attention | Process work, tooling, yield | Qualification, specification, supplier development |
| Exposure | Capital and capacity tied up | Price increases, allocation, and exit by the supplier |
The last row is the one that gets treated as a remote risk and should not be. A supplier who becomes your only source for something your customers depend on now controls a piece of your business, and the time to price that risk is before the tooling leaves your building, not after their first increase.
From comparison to decision
The table tells you what to weigh. What follows is how the three verdicts actually get chosen, and each has a short test that settles most cases without a spreadsheet.
When should you make it?
Make it when the making is part of what customers can name as your advantage, or when control of lead time and quality is what you sell. If your advantage is that you deliver in days while the industry takes weeks, handing the part to a supplier hands away the advantage.
Make it too when the item carries knowledge you need for the rest of the line. Some parts teach you things, about a process, a material, or a tolerance, that show up in products well beyond the part itself. Outsourcing those is cheap for two years and expensive for ten, and no quote comparison will show it.
One caution against making everything. Filling constrained capacity with work a supplier would do adequately is a way of consuming the hours your best products need, and the argument for it is usually framed as absorbing overhead. Absorption is an accounting outcome. Displacement is a real one.
When should you buy it?
Buy it when the item sits outside the advantage, when the supplier is genuinely better at it, and when the hours you free have somewhere to go. All three conditions, not just the first two, because the freed capacity is where most of the benefit actually lives.
Buy it also when the work is eating engineering attention out of proportion to its value. Fussy, low-volume, tolerance-sensitive parts often consume more of your best people than the entire product line they belong to, and moving them to a supplier who specializes in exactly that is a reallocation of your scarcest resource.
Watch the volume threshold as well. A supplier quote at twenty thousand units a year may not hold at eight thousand, and businesses that outsource a part and then rationalize the line around it sometimes discover that their own decisions moved them into a worse tier of the same supplier’s price sheet.
Then manage what you bought. Qualify a second source, or at least know who it would be. Keep the drawings and the specification under your control. Put the price mechanism in writing rather than leaving it to an annual negotiation. A buy decision without those is not a purchase, it is a dependency.
When is the answer neither?
When the item does not earn its place at either cost. If making it consumes constraint hours worth more elsewhere, and buying it still leaves you with a product that barely covers what it costs to carry, you have been debating how to source something that should not exist.
This possibility almost never gets raised, because a make-or-buy question arrives already framed as two options and usually with a supplier quote attached. Someone has to ask the third question out loud, and the useful way to ask it is to check what the item earns per hour of the constraint it touches, using the screen in how to identify which SKUs to kill.
The answer also depends on who buys it, which is a separate piece of work: a low-earning part that your largest customers depend on is a keep, and the method for telling the difference is in the pillar guide on how to cut a product line without losing revenue.
One limitation of everything above, stated plainly. This framing assumes your cost system can separate avoidable cost from allocated overhead, and many cannot without a manual exercise. Where that is true, do the separation by hand for the specific part in question rather than trusting the standard cost, and accept that the number will be approximate. An approximate avoidable cost beats a precise standard cost that answers a different question.
About the Stagnation Assassin
Todd Hagopian is a Fortune 500 transformation executive who has generated $3B in shareholder value across Berkshire Hathaway, Illinois Tool Works, Whirlpool, and JBT Marel, where he serves as Global VP of Product Strategy and Marketing. Known as The Stagnation Assassin, he is the author of two published books: The Unfair Advantage: Weaponizing the Hypomanic Toolbox and Stagnation Assassin: The Anti-Consultant Manifesto. His blog is published in 15+ languages and read by operators worldwide. Bring him to your stage via his speaking page or connect with him on LinkedIn.
If make-or-buy questions keep arriving one part at a time, the portfolio decision behind them was never made. Request free Stagnation Genome scoring for your business and I will tell you where those questions are actually coming from.