make-or-buy decisionthe strategic choice confronting the firm as to whether it purchases its raw materials and components requirements from outside suppliers or produces them for itself as part of a vertically-integrated operation (see VERTICAL INTEGRATION). The main factors influencing this decision are the relative costs and risks involved. The main advantage of outside suppliers who specialize in the production of an input and produce for a large number of customers (not just one as in the case of self supply), is that they are able to benefit from the lower costs associated with economies of large-scale operations (see ECONOMIES OF SCALE). Thus, it may be cheaper to a user to buy in the input rather than to produce it internally; the more so if the firm has access to a number of supply sources (both domestic and international) and can take full advantage of price competition between them. Set against this are the risks in certain cases of over-dependency on particular suppliers, leading to possible problems of overcharging and disruptions to the firm's production schedules arising from supply shortages, failure to meet delivery times, and inputs lacking the desired degree of quality or precision. See SOURCING, OUTSOURCING, INTERNATIONALIZATION, PURCHASING.
Collins Dictionary of Business, 3rd ed. © 2002, 2005 C Pass, B Lowes, A Pendleton, L Chadwick, D O’Reilly and M Afferson