In short
Applies to: Engineering and fabrication business owners and accounts teams
- Compare costs that change between making and buying for the same requirement.
- Include avoidable fixed costs, relevant supplier charges and a genuine opportunity cost where applicable. Exclude costs that continue either way. Check capacity, quality, delivery and supplier dependence alongside the calculation.
A supplier quotes ₹85 for a component that your accounts show at ₹100. Outsourcing looks cheaper. But does the ₹100 include rent, an existing supervisor’s salary or machine depreciation that will continue even if production stops? A decision based only on the accounting cost per unit can point in the wrong direction.
Start with a comparable requirement
For an engineering unit in Ranipet or a fabricator serving customers around Chennai, write down the quantity, specifications, acceptable rejection level and delivery period first. A lower quote is useful only if it buys an equivalent usable component. Obtain freight, inspection, tooling and minimum-order terms before comparing prices.
Build two decision columns
For in-house production, include the variable costs of the required quantity and fixed spending that can genuinely be avoided during the decision period. If the same capacity could earn a contribution from another confirmed opportunity, include the contribution sacrificed. Do not invent an opportunity cost simply because a machine has a rated capacity.
For buying, include the supplier price and the additional costs caused by outsourcing. Keep costs that continue under both options outside the comparison. Check taxes separately on a consistent recoverability basis.
A worked example
Consider 1,000 components. In-house variable cost is ₹80 each and avoidable fixed spending is ₹10,000. Relevant making cost is therefore ₹90,000. Buying at ₹85 each, plus ₹3,000 of additional receiving and inspection costs, totals ₹88,000. Buying is lower by ₹2,000 under these assumptions. If no fixed spending can actually be avoided, making instead costs ₹80,000 and becomes the lower-cost option. This is an illustration, not a client result.
Record what the numbers leave out
Review supplier reliability, confidentiality of drawings, customer approvals, rework responsibility and whether restarting production later would be difficult. Compare an order-sized decision with the same period of costs; do not mix annual overhead with a single batch.
Before deciding, keep the supplier quotation, a short calculation of avoidable costs and the production manager’s capacity assessment together. Use the make-or-buy worksheet to document the assumptions. Where the result is close, test a change in rejection rates or delivery costs rather than treating a small calculated difference as a guaranteed saving.
தமிழ் சுருக்கம்
நிறுவனத்திலேயே உற்பத்தி செய்வதா அல்லது வெளியிலிருந்து வாங்குவதா? இரு முடிவுகளுக்கிடையே மாறும் செலவுகளை ஒப்பிடுங்கள். தவிர்க்கக்கூடிய நிலையான செலவுகளையும், உண்மையான மாற்றுப் பயன்பாட்டால் இழக்கும் பயனையும் சேர்த்துப் பாருங்கள். தரம், விநியோக நேரம் மற்றும் பயன்படுத்தக்கூடிய திறனையும் கவனிக்க வேண்டும்.
Practical next step
Download the working record — CSV and record the assumptions and follow-up actions.
Explore the engineering quotation decision room. Its examples are fictional and should be adapted to your own records.
Sources
This article is for general information only and does not constitute professional advice. Please consult a qualified professional before acting on it.
If you want this done for your business: Costing, Cost Audit & Profitability →
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