The make or buy decision is between making a good or providing a service in-house, or buying the good or contracting for the service from external suppliers.  It precedes the procurement process and is a strategic decision that defines the boundary of the organisation.

 

When organisations understand their ‘core competence’ and know in which activities they have a relative competitive advantage over competitors, it makes strategic sense to undertake those activities internally.  For example, in running an airline, it is possible to ‘wet lease’ the aircraft and crew, buy-in the ground-handling and check-in services and contract out the sales and customer interface.  This is possible because these are mature supply markets, with competition, which might enable the virtual airline to obtain these services at a lower cost than if it sought to engage in these activities with its own resources. In this example, the core competence of the airline would be in planning a network, i.e. deciding where to fly to and from, obtaining the slots from the relevant airports, negotiating with governments, buying aviation fuel, and developing and promoting their brand.

 

In practice not all make or buy decisions or ‘do or contract’ decisions involve systematic cost comparisons, benchmarking external and internal costs, and the shape of some organisations owes as much to the legacy of historical choices as to current strategic opportunities.  See also Outsourcing and Transaction Cost Economics.