PMP Exam Technique: Make or Buy Analysis
While planning a project, you may discover some tasks or products can either be accomplished in-house or by a vendor. Make or Buy Analysis is a PMP exam technique that will help you decide which option is better.
PMP® Exam Formula Cheat Sheet
Learn how to successfully use project management formulas after reading this cheat sheet.
Make or Buy Analysis PMP Definition
A make or buy analysis typically occurs in the Plan Procurement Management stage of a project. There are two PMP exam definitions you should know:
- Make or Buy Analysis: The process of gathering and organizing data about product requirements and analyzing them against available alternatives, including the purchase or internal manufacture of the product
- Make or Buy Decisions: Decisions made regarding the external purchase or internal manufacture of a product
Even if your organization can perform work internally, some considerations may justify outsourcing some project components. Ensure you consider all your options to determine the right choice.
Factors to Consider for Make or Buy Decision
Your make or buy analysis should consider cost, time, quality, skill sets, necessary resources, and much more. Here are some factors that may help you decide if it’s better to make or buy.
Major Factors for making the good or service in-house:
- Cost Concerns: Does making the good or service in-house fit within your budget?
- Intellectual Property Concerns: Will a third-party contractor need to access your proprietary technology? Will you or your contractor legally own the product? Do you have to outsource work to a vendor who holds a patent for a particular good or service?
- Availability of Skills & Services: Do you have the in-house skills to accomplish the task? Would it benefit your company to have these skills available? It may be worthwhile to develop this expertise in-house for future projects.
- Quality Concerns: Third-party work specifications should be as detailed and accurate as possible to maintain a high standard of quality. Creating flawless specifications may ultimately take more time than performing the work and controlling the quality in-house.
- Unreliable Suppliers: Outsourcing some work to a vendor or supplier does not always mean they will be available to help you. Performing the work in-house may be a more reliable option for your time and budgetary constraints.
Major Factors for buying the product or service from a supplier:
- Lack of Expertise: It isn’t always worthwhile to develop the expertise for a project in-house!
- Cost Concerns: The direct and indirect costs of a “make” decision can add up quickly, and a “buy” decision may ultimately be more cost-efficient.
- Insufficient Manufacturing Capacity: A spike in demand beyond your manufacturing capacity may dictate you need outsourced help. While outsourcing takes some control away from you, it may also be your only option.[RG2]
- Quality Concerns: Vendors who do the type of work you’re looking for professionally may produce better-quality products than you could in-house.
- Low Volume Requirements: Investing in equipment, resources, team members, and other factors may not be worthwhile for low volume requirements.
- Reverse Engineering Opportunity: Buying from a supplier may allow you to learn from their work and make the product or service in-house next time.
How to Calculate Make or Buy Decisions
The Make or Buy Analysis PMP exam formula boils down to simple addition: what are all the costs of making a product or service in-house compared to buying from a supplier? You should not include sunk costs, or money you have already spent, in your considerations.
Direct and Indirect Costs
Direct costs include expenses related to making or acquiring a good or service and are usually billed directly to the project. Direct cost examples include the cost of materials or labor.
Indirect costs are support costs that can often benefit more than one project. For example, a software package you purchase for a project may benefit other ongoing or future projects.
Costs of producing in-house vs. an outside source
Producing something in-house can incur direct and indirect costs. In the example of the software package, you may also need to invest time and money into training your project team or updating the software.
If your company or project team cannot accomplish the work in-house, the cost of outsourcing the work to a reputable vendor may end up saving you time and money.
Cost of conformance vs. non-conformance
If the quality of the good or service produced does not conform to specifications, you will incur costs of non-conformance. Here are some examples of these costs:
- Preventing conformance issues through quality assurance
- Appraising deliverables to identify or fix errors
- Tossing or remaking non-conforming components
- Warranty, product liability, or legal claims
Costs of conformance and non-conformance are related to the cost of quality. To learn more about this PMP topic, review our Cost of Quality PMP resource.
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Example of a Make or Buy Decision
Let’s say your project requires manufacturing a unit with a 3D printer. Should you rent a 3D printer or contract a 3D printing service? Start your decision-making process with a cost head or cost-per-unit table.
Cost Head / Cost Per Unit Table
A cost head or cost per unit table describes the sum of your total fixed and variable costs divided by the total units produced.
In this 3D printing example, let’s say you wanted to compare a quote of $10 per unit from a 3D printing contractor to the cost of renting a 3D printer for one week, attending a 2-hour training session, and purchasing a 3D printer filament.
Assuming you need 1 roll of filament per 10 units, making the units in-house has the following fixed and variable costs:
- $200 for a one-week 3D printer rental
- $100 for 2-hour training
- $20 for 1 unit, $20 for 10 units, $100 for 50 units, and $200 for 100 units
With this information, you can create the following cost head table:
|Number of Units||Cost Head to MAKE||Cost Head to BUY|
|1 unit||$200+100+20 = $320||$10|
|10 units||$200+100+20 = $320||$100|
|50 units||$200+100+100 = $400||$500|
|100 units||$200+100+200 = $500||$1,000|
If you only need 1-10 units, buying the units from a vendor makes more sense. If you need 50 or more units, it’s better to make the units in-house.
What to Know for the PMP Exam
Make or buy analysis PMP questions on the PMP Exam will mainly require you to know the following:
- Both direct and indirect costs matter in a make or buy analysis
- Sunk costs should not be considered in a make or buy analysis
- Understand how the process works and that it occurs during Procurement Management
- Understand the Make or Buy Analysis and Make or Buy Decision definitions
- Know what to consider when making a make or buy decision
- Understand how this decision can impact the project’s overall procurement strategy
It is unlikely you will be asked to perform any calculations related to a make or buy analysis or decision on the PMP exam.
There are pros and cons of both make and buy decisions. It is crucial to have a process to help you make the right decision for each deliverable or project element. A make or buy analysis can help you be cost-efficient and consider potential future benefits for your project team or company.
Mastering this essential PMP exam concept will help you conquer the Exam and become a better project manager. If you have any more questions about the make or buy analysis PMP exam technique or any other part of the PMP exam, your Project Management Academy experts are here to help.
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