Make-or-Buy Decision for Manufactured Parts: In-House Production or Outsourcing?

In-house production or outsourcing? This question determines a company’s costs, capacity, delivery capabilities, and strategic level of vertical integration. In the mechanical engineering sector in particular, the “make-or-buy” decision is regaining importance: rising cost pressures, fluctuating capacity utilization, a shortage of skilled workers, and limited machine capacity are forcing many companies to regularly reevaluate whether they should manufacture individual components in-house.

Whereas in the past, decisions were often based on habit—“we’ve always done that ourselves”—today a structured make-or-buy analysis is required. Particularly when it comes to custom-designed parts, CNC-milled parts, CNC-turned parts, sheet metal parts, welded assemblies, or assembled subassemblies, the question arises: Is in-house production really the best solution, both economically and strategically? Or does it make more sense to source these parts from specialized manufacturing partners?

This guide explains how procurement and manufacturing managers can systematically make a make-or-buy decision: which criteria matter, what a sound process looks like, when in-house production remains the better option, when outsourcing is the better choice, and how a strategic assessment can be turned into a reliable cost estimate.

What does “make-or-buy” mean when it comes to manufactured parts?

“Make-or-Buy” refers to the decision between in-house production and outsourcing.

“Make ” means that a company manufactures a component, an assembly, or a service itself. To do so, it uses its own machinery, its own staff, its own expertise, and internal processes.

“Buy ” means that the same service is obtained from an external supplier or manufacturing partner. In other words, the company purchases not only materials, but also a finished component, a part based on a drawing, an assembly, or a complete manufacturing service.

In mechanical engineering, the make-or-buy decision primarily concerns manufactured parts and intermediate goods: CNC-milled parts, CNC-turned parts, sheet metal parts, welded assemblies, surface treatments, prototypes, small-batch production, repeat parts, and mass-produced parts.

The sum of these decisions determines a company’s vertical integration or depth of value creation. A high degree of vertical integration means greater control and more in-house expertise, but also higher fixed costs, more tied-up capital, and greater responsibility for personnel, machinery, and quality assurance.

A lower level of vertical integration creates flexibility, reduces the burden on in-house production, and can help avoid capital expenditures. At the same time, it increases dependence on suppliers and requires professional supplier management.

The make-or-buy decision is therefore not merely a question of cost. It is a strategic decision regarding the optimal allocation of value creation between in-house production and the external procurement market.

Why the Make-or-Buy Decision Is Gaining Importance Again in Mechanical Engineering

In the mechanical engineering sector, many companies are facing simultaneous pressure on costs, capacity, and margins. Material prices, energy costs, wages, investments in machinery, and financing costs all affect the profitability of in-house manufacturing. At the same time, the shortage of skilled workers makes it difficult to fill qualified positions in production, work planning, and quality assurance.

In addition, capacity utilization at many manufacturing facilities fluctuates more than it used to. Peaks in orders alternate with quieter periods. Companies must therefore decide whether to maintain machinery and staff to handle peak loads or to flexibly cover part of this capacity through external manufacturing partners.

This question is particularly relevant when it comes to manufactured parts. A company may be technically capable of producing a CNC-milled part on its own. Nevertheless, outsourcing may make more sense if it frees up the company’s own machine for strategically more important parts, if internal setup times are too long, or if external specialists can produce the part more cost-effectively.

Make-or-buy is therefore no longer a one-time strategic decision, but rather an ongoing management task. What is a sensible “make” item today may become a “buy” item in two years. Conversely, a critical purchased component can be brought back into in-house production if supply risks increase.

Make or Buy at a Glance

Make: In-house production	Buy: Purchase from an external source
High level of control over the process and quality	High flexibility in terms of capacity and processes
Know-how remains in-house	Leveraging the specialized expertise of external manufacturing partners
Useful for core components and IP-related components	Useful for non-core parts and fluctuating capacity utilization
Significant investment required for machinery, personnel, and tools	Lower investment requirements
High fixed costs	A More Variable Cost Structure
Direct Control of Production	Dependence on Suppliers
Good for stable, high volumes	Ideal for prototypes, small production runs, bottlenecks, and specialized processes
Risk of idle costs when capacity utilization is low	Risk of Dependence on Suppliers and Quality Variations

This comparison shows that neither “make” nor “buy” is inherently better. The key factor is which model best suits the specific part, the production volume, the capacity utilization, and the strategic importance.

Make-or-Buy Criteria: What Else Matters Besides the Unit Price?

The most common mistake in practice: The make-or-buy decision is reduced to a simple price comparison. The unit price of the purchased item is compared to the company’s own production costs—and whoever is cheaper wins. This calculation is often misleading because it fails to account for either the true full costs of in-house production or the strategic implications.

A thorough make-or-buy analysis is based on several criteria that are weighed against one another both quantitatively and qualitatively.

Criterion	What Matters
Costs and Full Costs	It is not just materials and labor costs that matter, but also the hourly machine rate, setup time, depreciation, overhead costs, inspection costs, and the opportunity costs of tied-up capacity.
Total Cost of Ownership	On the buy side, in addition to the quoted price, logistics, quality assurance, supplier management, rework, complaints, and inventory must also be taken into account.
Core Competence and IP	Is the component part of the product’s technological core? When know-how or intellectual property needs to be protected, there are many reasons to manufacture it in-house.
Capacity and Utilization	Are machines and personnel available? Underutilized production results in idle costs; overloaded production slows down the core business.
Quality and Verifiability	Can the required quality be reliably achieved internally? And can an external partner demonstrably deliver and document it?
Supply Capacity and Resilience	How critical is this component to our ability to deliver? Single-source dependencies are a real risk.
Procurement Market and Supplier Availability	Are there enough qualified suppliers for materials, processes, tolerances, surface finishes, and inspection requirements?
Need for Repetition and Scalability	Is it a one-off part, a recurring part, or a mass-produced part? The optimal supplier strategy and cost calculation vary depending on the specific needs.
Cash Flow and Investment	In-house production ties up capital in machinery, tools, and inventory. Outsourcing can help avoid capital expenditures and make fixed costs more flexible.

The unit price is important, but it is only one factor in the decision. Especially when it comes to manufactured parts, the decision is often not based on the lowest price, but rather on the best combination of cost, capacity, quality, delivery capability, and strategic risk.

Practical Tip: Realistically Track Full Costs
Many make-or-buy decisions fail due to overly optimistic internal cost estimates. Carefully verify that setup times, machine downtime, inspection costs, scrap, rework, overhead costs, and opportunity costs are fully accounted for.

Make-or-Buy Process: 7 Steps to Making a Decision

A make-or-buy decision should not be made on a gut feeling. Especially when it comes to manufactured parts, a structured process is recommended so that purchasing, production, quality assurance, and management can make decisions based on the same criteria.

1. Classify the component

First, the manufactured part is classified. Is it a strategic core part, a standard part, a bottleneck part, a drawing part, a repeat part, or an assembly?

The closer a task is to a company’s core competency, the more carefully outsourcing it should be evaluated. The more standardized and easily definable a task is, the more likely it is that outsourcing is a viable option.

Common Questions:

• Is this component technologically critical?
• Does it contain know-how that is worth protecting?
• Is it essential to the functionality of the final product?
• Are there comparable parts on the procurement market?
• Can the manufacturing process be clearly described using drawings, 3D models, and specifications?

2. Fully clarify the requirements

A make-or-buy analysis is only as good as the technical and business requirements. For manufactured parts, the following information, at a minimum, should be available:

• 2D drawing
• 3D model
• Material
• Tolerances
• Surface Requirements
• Quantity
• Retrieval Structure
• Delivery Date
• Test Requirements
• Documentation Requirements
• Packaging Requirements
• potential follow-up orders or repeat orders

Especially when it comes to parts based on drawings, incorrect decisions are often made because requirements are described incompletely or ambiguously.

3. Calculate internal make costs

On the make side, the total internal costs of in-house production are calculated. In doing so, it is important to consider more than just direct costs.

Make costs include, among other things:

• Cost of Materials
• Machine time
• Preparation time
• Programming
• Tooling Costs
• Devices
• Personnel Expenses
• Audit effort
• Committee
• Re-work
• internal logistics
• Overhead Costs
• Depreciation
• Opportunity Cost of Utilized Capacity

Opportunity costs, in particular, are often underestimated. If a simple purchased part blocks a bottleneck machine, indirect costs arise because more important orders cannot be processed until later.

4. Determine the purchase price and acquisition costs

On the buy side, a rough estimate is not enough. For a thorough make-or-buy analysis, specific quotes from qualified manufacturing partners should be obtained.

In addition to the unit price, the following factors are taken into account:

• Delivery Time
• Minimum quantity
• Setup costs
• Tooling Costs
• Shipping Costs
• Packaging
• Quality Control
• Test Reports
• Costs associated with customer complaints
• Terms of Payment
• Supplier Management
• Risk Premiums
• Inventory Costs

An automatically generated instant quote can be helpful as a starting point. However, for a reliable make-or-buy analysis, a realistically calculated purchase price based on the specific component requirements is more appropriate.

5. Assess Risks and Dependencies

The results are compiled into a matrix. This makes it clear whether a component should remain in-house or whether it makes more sense to source it externally.

6. Document the decision and review it regularly

The final decision should be documented in a transparent manner. It is also important not to view the make-or-buy decision as a permanent commitment. Prices, capacities, the supplier market, and strategic priorities are subject to change. Relevant manufactured parts should therefore be reevaluated on a regular basis.

Make-or-Buy Matrix: Which Parts Belong Where?

A simple make-or-buy matrix helps evaluate manufactured parts based on their strategic importance and economic viability.

Strategic Importance	Cost-Effectiveness of In-House Production	Typical recommendation
High	High	Make
High	Low	Review on a case-by-case basis
Low	High	Make or Buy Based on Capacity
Low	Low	Buy

It is even more helpful to consider strategic importance and supplier availability:

Strategic Importance of the Component	Supplier Availability	Recommendation
High	Low	In-house production preferred
High	High	Conduct a Detailed Make-or-Buy Analysis
Low	Low	Assess the risk; develop alternatives if necessary
Low	High	Purchasing from external sources is usually attractive

For manufactured parts, this means: Not every part that can be manufactured in-house should automatically be manufactured in-house. If a part is not strategic, external suppliers are available, and in-house capacity is limited, there are strong arguments in favor of purchasing it.

When is in-house production worthwhile?

In many cases, in-house production remains the right choice. It makes particular sense when control, expertise, and strategic independence are more important than short-term cost advantages.

• For core and differentiating strategic components: If a component sets the product apart from the competition from a technological standpoint or contains design know-how worthy of protection, control over the process and intellectual property often outweighs potential cost savings.
• When the required quality cannot be reliably obtained on the market: In cases involving extremely tight tolerances, specialty materials, specific testing requirements, or processes that only a few suppliers can handle, in-house manufacturing may be the safer option.
• With high, stable production volumes and existing capacity utilization: If machines, personnel, and processes are available and capacity utilization can be planned, the unit costs of in-house production may decrease as volume increases. Once a critical volume is reached, the balance may tip in favor of in-house production.
• If the supply chain were too vulnerable: In cases where outsourcing would create a critical dependency on a single supplier, in-house production may be a sensible way to ensure supply reliability.

The greatest risk of outsourcing is not always the price, but rather the gradual loss of know-how and the development of strategic dependence. If a supplier becomes the sole provider, price control slips out of your hands—and in the worst-case scenario, if that supplier fails, your own production comes to a standstill. These risks must be factored into any honest make-or-buy assessment.

Practical Tip: In many cases, in-house production remains the right choice. It makes particular sense when control, expertise, and strategic independence are more important than short-term cost advantages.

When is it worth buying from an outside source?

On the other hand, there are clear situations in which outsourcing is the better economic and strategic choice. Outsourcing is particularly worthwhile when a component is not part of the company’s core competencies, external suppliers are available, and the order would place an unnecessary burden on the company’s own production facilities.

• For non-core parts and standard components: Parts that do not contribute to technological differentiation are often good candidates for outsourcing. These include many parts produced from drawings, simple milled parts, turned parts, sheet metal parts, and brackets.
• When capacity utilization is fluctuating or low: If machines are kept on hand only for peak order volumes, idle costs are incurred during slower periods. Outsourcing helps convert fixed costs into variable costs.
• When there is a shortage of staff: If there is a shortage of qualified workers, purchasing finished parts can be a quick way to ensure capacity without having to hire new staff.
• For bottleneck machines: If a machine is regularly a bottleneck internally, parts of low strategic importance should be outsourced. This frees up capacity for more important components.
• For specialized processes: Some processes are not available in-house or are rarely requested. These may include certain surface treatments, sheet metal fabrication processes, welding methods, or complex 5-axis machining operations.
• For prototypes and small production runs: In-house manufacturing isn’t always cost-effective, especially for small quantities. External manufacturing partners can often produce prototypes and small production runs more flexibly and quickly.
• When cash flow matters: Some processes are not available in-house or are rarely requested. These may include certain surface treatments, sheet metal fabrication processes, welding methods, or complex 5-axis machining operations.

The prerequisite for these benefits to actually materialize is a reliable partner and a resilient purchase price. Neither of these can be taken for granted. This is precisely what determines whether a make-or-buy analysis proves valid or misleading.

Practical Tip: Comparing Quotes Correctly
When comparing supplier quotes, don’t just focus on the unit price. Check delivery times, minimum order quantities, quality assurance, packaging, payment terms, and any potential additional costs. A quote that seems inexpensive at first glance can quickly become more expensive due to hidden factors.

Pros and Cons of Make and Buy

Area	Make: Advantage	Make: Disadvantage	Buy: Advantage	Buy: Disadvantage
Costs	Potentially cost-effective at high utilization rates	High fixed costs and capital expenditures	Variable costs, no investment in machinery	The unit price may seem higher
Quality	Direct Control	Internal Audit Effort	Suppliers with specialized expertise may be available	Quality Risk Associated with Choosing the Wrong Supplier
Capacity	Direct Control	Possible bottlenecks and idle costs	Flexible Capacity	Dependence on Delivery Dates
Expertise	Knowledge remains internal	Expertise must be developed internally	Leveraging External Expertise	Possible loss of expertise
Cash Flow	Investments can have a long-term impact	Capital Commitment	Less capital tied up	Recurring procurement costs
Speed	Fast when capacity is available	Slow when overloaded	Quickly find the right suppliers	Risks Associated with Sorting and Transportation

This table is particularly well-suited for early discussions among purchasing, production, and management. It shows that the make-or-buy decision is not purely a business decision, but rather reflects several conflicting objectives.

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Case Study: Should You Manufacture a CNC-Milled Part Yourself or Buy It?

A mechanical engineering company regularly needs a CNC-milled aluminum part. The part is used in an assembly but is not a strategic core component. In-house production is technically feasible, but it ties up a machine that is frequently needed for short-notice customer projects.

In a simple unit-cost analysis, in-house production initially seems attractive: materials are available, machinery is on hand, and the production team is familiar with the component. However, a comprehensive make-or-buy analysis reveals additional factors: setup time, programming effort, testing effort, machine utilization, internal rework, overhead costs, and opportunity costs associated with tied-up capacity.

On the buy side, quotes are solicited from qualified manufacturing partners. The evaluation considers not only price and delivery time, but also repeatability, quality assurance, test reports, packaging, communication, and supplier risk.

The conclusion may be that, even though the part can be manufactured in-house, sourcing it externally makes more economic sense. The reason is not just the purchase price. The key factors are that in-house capacity is limited, the part is not strategic, and qualified suppliers are available on the market.

This example illustrates a key point: The question is not simply whether a company can manufacture a part itself. The more important question is whether in-house manufacturing is the best use of scarce resources for that purpose.

Make-or-Buy Analysis: How Strategy Becomes a Number

Every make-or-buy analysis culminates in a calculation. This calculation is only reliable if both sides are fully taken into account.

On the make side, the full costs of in-house production are often underestimated in practice. Setup times, depreciation, overhead costs, inspection costs, and opportunity costs associated with tied-up capacity are not always directly allocated to individual components, but they do affect actual profitability.

On the buy side, the analysis stands or falls on the reliability of the offer price. Anyone who uses only a rough estimate or a flat-rate immediate offer as the buy price may be basing their calculations on a figure that does not reflect the realistic market situation for that specific component.

A reliable make-or-buy analysis therefore requires realistic internal full costs and market-based purchase prices. Especially for CNC parts, sheet metal parts, and assemblies, it makes sense to obtain specific quotes from qualified manufacturing partners rather than relying solely on rough estimates.

Common Mistakes in Make-or-Buy Decisions

Many make-or-buy decisions seem logical at first glance but lead to problems later on. These mistakes are particularly common:

• Only the unit price is compared.
• Internal costs are underestimated.
• Setup time, testing costs, and overhead are not fully taken into account.
• The opportunity costs of bottleneck machines are ignored.
• Supplier risks are underestimated.
• Make-or-buy is treated as a one-time decision.
• Purchasing and Production evaluate the decision separately rather than jointly.

The most important point: Make-or-buy decisions should not be made for political reasons. A sound decision requires a shared factual basis involving purchasing, production, quality assurance, and management.

What role does purchasing play?

Make-or-buy is not just a production decision. Purchasing plays a central role because it is responsible for the “buy” side of the equation.

The purchasing department identifies suitable suppliers, solicits quotes, evaluates supplier capability, reviews procurement costs, monitors price trends, and develops alternatives. This role is particularly important for manufactured parts because the procurement market is very diverse. Not every supplier is a good fit for every part. Materials, processes, tolerances, surface finishes, quantities, and inspection requirements must align with the supplier’s manufacturing capabilities.

This transforms the procurement function from a mere order processor into a strategic partner. It provides the market perspective without which a make-or-buy decision remains incomplete.

Conclusion: Make-or-Buy as a Management Tool for Vertical Integration

The make-or-buy decision is a key factor influencing costs, capacity, and strategic vertical integration. Those who reduce it to a simple unit-price comparison often make the wrong decisions. Sometimes a part remains in-house, even though external partners could manufacture it more cost-effectively and flexibly. Other times, a part is outsourced, even though it would be strategically better served by in-house manufacturing.

The best practice is to conduct a structured make-or-buy analysis: classify the component, clarify the requirements, fully account for make costs, realistically determine buy prices, assess risks, and periodically review the decision.

This analysis is particularly worthwhile when it comes to manufactured parts such as CNC-machined parts, turned parts, sheet metal parts, welded assemblies, and assembled components. After all, it’s not just price that matters here, but the right manufacturing expertise.

Are you evaluating whether it makes sense to source certain manufactured parts externally? CNC24 supports you with reliable quotes from qualified manufacturing partners for CNC parts, sheet metal parts, and assemblies. This provides you with a realistic “buy” scenario for your make-or-buy analysis.