Which factor should be considered when making a make or buy outsourcing decision?

When making a make or buy outsourcing decision, one of the crucial factors to consider is the opportunity costs of alternative uses of capacity. Opportunity cost refers to the potential benefits that are foregone when choosing one alternative over another. In the context of outsourcing, it involves assessing what other productive use could be made of resources (such as labor, machines, and facilities) if they are not utilized for production but instead allocated to making or buying a product or service.

For instance, if a company has the capacity to produce product A, but chooses to outsource manufacturing and instead produce product B, the income or benefits that could have been earned from producing product A represent the opportunity cost. Thus, evaluating opportunity costs helps in understanding the full economic implications of the decision and allows for a more informed choice that aligns with strategic financial goals and resource optimization.

This reasoning emphasizes the importance of looking beyond mere costs, such as just labor costs or the conditions of the market or historical sales data, to ensure that the decision supports both current operations and future profitability.