Make-or-Buy Analysis in Project Procurement Management

Make-or-Buy Analysis in Project Procurement Management

Description
Make-or-buy analysis is a key decision-making technique in project procurement management, used to determine whether it is more advantageous for a project team to produce a product or service internally (make) or to purchase it from an external supplier (buy). This analysis is typically conducted during the Plan Procurement Management process. It involves a comprehensive evaluation of various factors such as associated costs, capabilities, risks, and level of control, aiming to select the optimal acquisition strategy for the project.

Step-by-Step Explanation of the Problem-Solving Process

Step 1: Define the Analysis Subject and Requirements
First, you need to clearly define the subject of the analysis. This could be a specific component of the project, a specialized service (e.g., software module development, market research report), technical support, or a piece of equipment.

  • Key Questions: What exactly do we need? What are its detailed specifications, functional requirements, quality standards, and required quantity?
  • Example: Suppose a software development project requires a high-precision map navigation module. The analysis subject is this "map navigation module."

Step 2: Identify and List All Relevant Costs (Core Step)
This is the most challenging part of the analysis, requiring comprehensive consideration of all direct and indirect costs to avoid omissions.

  • Make Costs:

    • Direct Costs: Internal team labor costs (salaries, benefits), required material costs, procurement/licensing fees for specialized software or tools, directly related facility usage fees.
    • Indirect Costs: Project management overhead, additional administrative support, costs to train internal staff to acquire the necessary skills, equipment depreciation, opportunity costs from using resources that could have been allocated to other high-priority projects.
    • Example (Making the Map Module): Salaries for hiring or training GIS development engineers, annual fees for purchasing map API licenses, time costs for development and testing, additional effort from project management staff.

  • Buy Costs:

    • Direct Costs: Purchase price paid to the supplier.
    • Indirect Costs: Costs for finding and evaluating suppliers (e.g., market research, bidding process), contract management costs (e.g., negotiation, legal review, progress monitoring), transportation or logistics fees, potential integration costs (effort to integrate the purchased module into the in-house system), quality inspection costs, and communication/coordination costs with the supplier.
    • Example (Buying the Map Module): Annual service fee or one-time project fee paid to a professional map service provider, time for the legal department to review the contract, workload for the technical team to evaluate suppliers and perform system integration.

Step 3: Evaluate Non-Cost Factors (Qualitative Analysis)
Considering only costs is insufficient; qualitative factors must be integrated for a comprehensive judgment.

  • Core Competence and Strategic Focus:

    • Question: Is this work part of our core business or a core competency? Would making it internally divert our focus from primary strategic objectives?
    • Analysis: If the map module is not the company's core product (e.g., the company's main business is a social App), making it might divert the team. Conversely, if mapping capability is a core differentiator for the product (e.g., a ride-hailing app), making it internally might be necessary to control the technology and data.

  • Technical Control and Intellectual Property:

    • Question: Do we need full control over this technology or to retain intellectual property rights? Would buying introduce risks of technological dependency or leakage of core trade secrets?
    • Analysis: Making internally ensures technical autonomy and exclusive IP rights. Buying may subject you to the supplier's technological roadmap and terms.

  • Skill and Resource Availability:

    • Question: Do we possess, or can we easily obtain, the required skills and resources internally? Does the current team's workload allow for it?
    • Analysis: If the company lacks internal GIS experts and hiring is difficult, buying is a more realistic choice.

  • Risk Considerations:

    • Make Risks: Immature technology, development delays, cost overruns.
    • Buy Risks: Supplier delivers substandard quality, late delivery, supplier bankruptcy, information security risks.
    • Analysis: Compare the probability and potential impact of risks for both options.

  • Demand Flexibility and Confidentiality:

    • Question: Are requirements likely to change frequently in the future? Is the project content highly sensitive?
    • Analysis: Making internally typically offers more flexibility in responding to requirement changes. For highly confidential work, making internally offers greater control.

Step 4: Quantify and Compare Costs
Estimate and sum all quantifiable costs (including direct and indirect) identified in Step 2.

  • Action: Calculate the "Total Make Cost" and the "Total Buy Cost."
  • Tool: A simple comparison table can be used.
    Cost Item Make Cost Estimate Buy Cost Estimate
    Direct Costs (Labor/Purchase Price, etc.) X Yuan Y Yuan
    Indirect Costs (Management/Integration, etc.) A Yuan B Yuan
    Total Cost X+A Yuan Y+B Yuan

Step 5: Synthesize and Weigh Factors to Make a Decision
Combine the qualitative analysis from Step 3 with the quantitative cost comparison from Step 4.

  • Scenario 1: Significant Cost Difference, and No Strong Opposition from Qualitative Factors
    • If the total buy cost is significantly lower than the make cost, and there are no strong reasons for making (e.g., core competency, control), then choose to Buy.
    • If the total make cost is significantly lower than the buy cost, and internal capabilities exist, then choose to Make.
  • Scenario 2: Similar Costs, Qualitative Factors Become Decisive
    • In this case, the decision heavily depends on qualitative analysis. For example, even if buying is slightly cheaper, the need to control core technology and data might lead to choosing to make. Conversely, even if making is slightly cheaper, the desire to focus on the main business might lead to choosing to buy.

Step 6: Document the Decision Rationale and Proceed
The final decision should be clearly documented in the project's procurement management plan or related decision log.

  • Content: Includes the analysis subject, considered cost factors, evaluated non-cost factors, the final decision, and its rationale.
  • Purpose: Ensures the decision-making process is transparent and traceable, facilitates stakeholder understanding, and provides a basis for subsequent execution (e.g., initiating the procurement process or allocating internal tasks).

By following these six steps, you can systematically complete a comprehensive "Make-or-Buy Analysis," thereby making the most beneficial resource allocation decision for the project.