Standard cost and supplier price answer different questions. Standard cost spreads plant expenses across production. A customer-bid decision needs the material, labor, support, investment and capacity consequences of this order. The supplier side needs the complete landed offer, qualification work and exposure that the purchase creates.
The result may apply to one bid, one product family or a long-term sourcing strategy. State which decision you are making. Outsourcing one surge order does not mean the company should abandon the process. Building one first article inside does not mean internal capacity can support every production release.
Write the decision before you calculate it
Name the part, assembly or operation. Record the customer package and revision, order quantity, forecast releases, required delivery, manufacturing site and quality obligations. Define “make” and “buy” precisely. A make case might use the existing line on overtime, a new cell or a sister plant. A buy case might use a finished assembly, outside processing or a supplier that receives customer-owned material.
Set the time horizon. A single customer bid needs an order-specific answer and a way to reopen it if the scope changes. A product-family decision needs investment, ramp, learning, supplier-development and exit costs across several years. Mixing those horizons creates a spreadsheet that charges a one-time bid for a strategic factory decision or ignores an investment that only pays back over future orders.
The Defense Federal Acquisition Regulation guidance lists useful make-or-buy factors for complex programs: plant capacity, vertical integration, internal resources, product maturity, critical-path items, overhead effects, industrial-base capability, proprietary data, quality and schedule tolerance. An industrial OEM can use the same questions without copying the government process.
| Decision field | Customer-bid record | Why it matters |
|---|---|---|
| Work package | One complete drive cabinet to drawing DC-440 Rev D | Sets the technical boundary |
| Demand | One now; option for three within 12 months | Separates firm quantity from forecast |
| Required date | At final assembly in 14 weeks | Tests internal and supplier schedules |
| Make option | Existing electrical assembly cell on second shift | Names the route and capacity source |
| Buy option | Qualified panel builder supplies tested cabinet | Defines supplier scope and handoff |
| Decision horizon | Current bid with a 12-month option | Limits which investments belong in the case |
Separate relevant cost from allocated cost
Include a cost when the choice changes it. Direct material consumed by the internal build belongs in the make case. A supervisor salary that continues under either option does not. A dedicated inspector hired only for the internal build belongs. Existing depreciation that remains regardless of the choice does not decide this order.
OpenStax’s make-or-buy treatment uses the same relevant-cost rule: avoidable costs differ between the alternatives, while unavoidable fixed costs remain. The distinction matters because a fully absorbed unit cost can make buying look attractive even when the plant will still pay the allocated factory expense after the work leaves.
Do not remove a fixed cost just because the routing assigns it to the part. Finance must identify the real action that avoids it. Closing a shift, releasing leased space or cancelling a dedicated service can create an avoidable cost. Reallocating the same building and salaried staff across fewer internal hours cannot.
| Internal cost | Amount | Relevant to this bid? | Reason |
|---|---|---|---|
| Purchased electrical components | $18,200 | Yes | The order consumes them only under make |
| Direct assembly labor | $4,704 | Yes | 112 incremental hours at the current labor cost |
| Variable supplies and test power | $2,100 | Yes | Usage follows the build and test |
| Incremental inspection | $1,200 | Yes | Quality assigns added review to this cabinet |
| Allocated plant and salaried support | $8,396 | No | The expense remains under buy |
| Reported full cost | $34,600 | Decision cost: $26,204 | Remove only the unavoidable allocation |
Price the internal route from current facts
Use the current BOM, routing, labor grade, setup, expected yield and inspection plan. Record the source and effective date for each major amount. Historical actuals can support the estimate when they match the cabinet, site and route. Explain differences in configuration, wage, material, learning and batch size.
Split recurring work from one-time engineering, programming, fixture and qualification effort. If the customer pays for a reusable test fixture, state who owns it and how future releases use it. If the company already owns a fixture, include maintenance or modification that this order triggers. Do not charge its original purchase again.
The Manufacturing.gov cost summary includes quality, direct and indirect labor, maintenance, support and overhead in manufacturing cost. For the bid decision, classify those costs by behavior. The broad cost category tells you where to look; the relevant-cost test tells you what changes.
| Make input | Basis | Bid treatment | Reopen when |
|---|---|---|---|
| Components | Released BOM and current purchase cost | Recurring direct material | Design, source or quantity changes |
| Assembly labor | 112 hours at current labor cost | Recurring direct labor | Routing or shift changes |
| Functional test | 16 technician hours plus test supplies | Recurring test cost | Test specification changes |
| Engineering support | 12 hours for first build | One-time unless configuration repeats | Customer requests another variant |
| Fixture modification | $2,400 for customer terminal layout | One-time bid cost | Layout or ownership changes |
| Scrap and rework | Current actual for similar cabinets | Expected recurring cost | New evidence changes the rate |
Use the supplier’s landed and qualified cost
Start with a technically accepted supplier response. Add tooling, non-recurring engineering, qualification, first article, inspection, freight, duty, packaging, supplier-management work and any customer-furnished material. Apply the quoted quantity, currency, delivery point, payment and validity.
A supplier price that omits a required test or assumes a larger production release does not compete with the internal route. Normalize the response before it enters the make-or-buy case. The subcontractor quote comparison gives the detailed method for scope, landed cost and schedule normalization.
Use a specific action for risk. Add incoming inspection because quality requires it. Add dual-source tooling because the program needs recovery. Record an open material escalation clause. A general “supplier risk percentage” hides the decision and makes the case hard to update.
| Buy input | Amount | Basis |
|---|---|---|
| Supplier cabinet price | $31,600 | One complete cabinet at drawing Rev D |
| First-order programming and NRE | $1,500 | Supplier quote line 20 |
| Freight and protective packaging | $900 | Delivered to OEM receiving dock |
| Qualification and incoming inspection | $800 | Quality plan for first order |
| OEM-furnished parts handling | $0 | Supplier price includes all released components |
| First-order buy cost | $34,800 | Recurring plus current one-time work |
Treat constrained capacity as a real cost
When the internal route uses an open cell with no competing work, the relevant make cost may stop at incremental cash. When it uses a bottleneck, calculate what the company gives up. Rank the work by contribution per constrained hour, then identify the order or production that this build would displace.
OpenStax’s constrained-resource guidance recommends contribution margin per unit of the constrained resource. That is the right comparison for a busy assembly cell. Total contribution per cabinet can mislead when one job uses twice the scarce hours of another.
Use a supported displacement case. The plant should name the constrained resource, available hours, affected work and contribution at risk. Do not add a theoretical opportunity cost when the schedule has room. Do not ignore it because the displaced order belongs to another sales team.
| Capacity fact | Current bid case |
|---|---|
| Constrained resource | Certified electrical assembly and test cell |
| Hours required by make option | 96 bottleneck hours |
| Available hours before customer date | 24 hours |
| Work displaced | Two retrofit upgrade cabinets |
| Contribution per constrained hour | $115 |
| Opportunity cost | 96 × $115 = $11,040 |
| Economic make cost | $26,204 cash + $11,040 capacity = $37,244 |
Build both schedules from the same required date
Translate each option into a calendar plan. The make schedule should include engineering release, material availability, cell slot, assembly, inspection, test and integration. The buy schedule should include supplier clarification, purchase release, supplier material, first article or qualification, production, transit and incoming acceptance.
Check the start event behind every lead time. A supplier’s ten weeks may begin after approved drawings and deposit. The internal route may appear to start today even though engineering will not release the cabinet for three weeks. Use the same customer-required plant date and work backward.
Identify the critical path and recovery action. The make option may save days if engineering can release long-lead components early. The buy option may reserve a supplier slot while the customer decides. Price overtime or expedite only when the responsible owner confirms it.
| Schedule step | Make | Buy |
|---|---|---|
| Engineering release | Week 2 | RFQ basis accepted at bid; final release week 2 |
| Long-lead component ready | Week 8 | Supplier commits week 7 |
| Production slot | Cell available week 10 | Supplier slot reserved week 8 |
| Assembly and test complete | Week 13 | Week 11 |
| Receiving or internal handoff | Direct to integration | Delivered and accepted week 12 |
| Customer need | Integration starts week 12 | Integration starts week 12 |
| Schedule result | Misses without displacement or overtime | Meets with qualification complete |
Gate the choice on quality and technical control
List the product and process knowledge the company must control. Include safety, regulatory, export, cybersecurity, customer confidentiality, proprietary design, special processes, field performance and the ability to diagnose failures. Decide whether a contract and data package give enough control or whether the work must stay inside.
The American Society for Quality describes quality, cost and delivery as core supplier measures and points to sample and validation testing when the product requires it. A supplier’s general approval does not prove capability for this work package. Use process, site, equipment and evidence that match the bid.
Define the release condition for a new supplier. It may require a process audit, first article, sample test, source inspection or customer approval. If the condition cannot close before the required date, the buy option fails the current bid even when its long-term economics look better.
| Control question | Make evidence | Buy evidence | Gate |
|---|---|---|---|
| Can the route meet the released design? | Current work instruction and trained cell | Supplier manufacturability review | Engineering acceptance |
| Can the process meet quality requirements? | Internal test history | Audit, sample report and calibration | Quality approval |
| Can the company protect customer data? | Existing access controls | Contract, access and data-transfer review | Security and legal approval |
| Can the source recover a failure? | Internal rework and engineering access | Repair plan, spares and alternate capacity | Program approval |
| Does the customer restrict subcontracting? | No subcontract | Written consent if required | Contract review |
Separate one-order economics from strategic capability
The customer bid needs a decision now. The company may also care about preserving a process, developing a supplier, freeing capital or entering a new product line. Record those strategic aims, but do not force an order-specific spreadsheet to justify them with an unexplained multiplier.
A strategic make case should include investment, ramp, hiring, training, maintenance, utilization, technology life and exit value over a stated horizon. A strategic buy case should include supplier development, contracting, transition, inventory, switching cost, dual-source work and the cost to bring production back if needed.
NIST’s reshoring guidance expands total cost beyond purchase price to shipping, currency, quality, intellectual property, supply-chain complexity and other factors. Use that wider lens for the strategic decision. For the bid, include the parts that change this order or its supported follow-on releases.
| Question | Current bid | Strategic review |
|---|---|---|
| Volume | One firm cabinet plus priced option | Expected family demand over several years |
| Capacity | Hours before the customer date | Cell, labor and network capacity by scenario |
| Investment | Only work triggered by this bid | Equipment, space, people and ramp |
| Supplier position | Current qualified response | Development, dual source and exit plan |
| Knowledge | Data needed to deliver and support this order | Capability the company plans to own |
| Decision owner | Bid and operations leadership | Product, manufacturing and executive leadership |
Show the breakpoints instead of one verdict
Calculate the input value that makes the options equal. Useful breakpoints include quantity, bottleneck opportunity per hour, supplier price, internal yield, investment, freight and delivery. The team can then see which assumption controls the decision and reopen the case when the customer changes it.
In this example, the buy option costs $34,800. The make option uses $28,604 of incremental cash, including the customer-specific fixture change, and 96 constrained hours. Buy becomes cheaper when the displaced contribution exceeds $6,196, or $64.54 per constrained hour. The current contribution is $115 per hour, so buy saves $4,844 on the economic case.
If the cell has room and displaces no work, make costs $28,604 and saves $6,196. The decision therefore depends on actual capacity before the customer date. This breakpoint gives operations a concrete fact to approve instead of a vague statement that the plant feels busy.
| Scenario | Make cost | Buy cost | Economic result |
|---|---|---|---|
| Cell constrained at $115 contribution/hour | $39,644 | $34,800 | Buy saves $4,844 |
| Cell unconstrained | $28,604 | $34,800 | Make saves $6,196 |
| Constraint at break-even $64.54/hour | $34,800 | $34,800 | Cost tie; use schedule and control |
| Supplier price rises 8% | $39,644 | $37,328 | Buy still saves $2,316 |
| Make requires $6,000 overtime | $45,644 | $34,800 | Buy saves $10,844 |
| Customer orders three and supplier NRE stays once | Recalculate by release and capacity | Recalculate recurring and NRE | Do not multiply first-order totals blindly |
Worked example: one drive cabinet for a customer bid
Sales needs a price and delivery plan for an engineered drive cabinet. The released electrical design uses standard internal architecture with a customer-specific terminal layout. The company can build it in the certified electrical cell. A qualified panel builder can deliver a complete, tested cabinet to the assembly plant.
The ERP shows a $34,600 absorbed internal cost. Purchasing receives a $31,600 supplier price. That first view favors buy by $3,000. The relevant-cost review removes $8,396 of plant and salaried support that continues under either option, then adds $2,400 of internal fixture work. The internal cash case becomes $28,604 when the fixture belongs in the bid.
The supplier’s first-order total becomes $34,800 after NRE, freight and qualification. The internal route uses 96 hours on the cell that must complete retrofit cabinets for another signed order. Those hours carry $11,040 of displaced contribution. The economic make case becomes $39,644 including the fixture. Buy saves $4,844 and reaches integration one week earlier.
Operations still records the unconstrained case: make would cost $28,604 and save $6,196 if the retrofit work moves without cost or delay. The award therefore depends on the approved cell plan. The bid leader chooses buy after operations confirms the constraint and quality closes the supplier qualification. The customer proposal carries the supplier validity date and the qualification condition.
| Decision line | Make | Buy |
|---|---|---|
| Recurring cash cost | $26,204 | $32,500 including freight |
| One-time cost | $2,400 fixture change | $2,300 programming and qualification |
| Capacity consequence | $11,040 displaced contribution | Internal cell remains on signed retrofit work |
| Economic first-order cost | $39,644 | $34,800 |
| Schedule | Integration week 13 without recovery | Integration week 12 |
| Quality condition | Current internal process | Supplier audit and sample report before release |
| Bid decision | Fallback if capacity opens | Selected for current customer bid |
Choose a hybrid option when it solves the actual constraint
The answer does not have to move the whole assembly inside or outside. The OEM can buy a fabricated enclosure and complete controls inside, outsource wire preparation, use a supplier for surge capacity, build the first article internally and transfer production, or retain final test and customer acceptance.
Define the boundary and price each handoff. A hybrid route adds coordination, transport and defect ownership. It may also protect product knowledge while releasing the exact constrained hours. Compare it as a third option with its own BOM, routing, supplier package, schedule and quality plan.
For the drive cabinet, buying the enclosure and pre-cut wire set would release only 22 cell hours. The remaining assembly still conflicts with the retrofit order, so that hybrid does not solve the current constraint. Buying the complete cabinet does. A different order with open test capacity could produce the opposite answer.
| Hybrid option | Hours released | Control retained | New handoff risk |
|---|---|---|---|
| Buy enclosure only | 8 | All electrical build and test | Enclosure fit and damage |
| Buy enclosure and wire kit | 22 | Assembly, software and final test | Kit accuracy and revision control |
| Supplier assembles; OEM tests | 72 | Software, final acceptance and diagnosis | Defects found after transport |
| Supplier delivers tested cabinet | 96 | Design authority and integration acceptance | Supplier qualification and change control |
| Make first article, buy production | Varies by release | Learning and initial process proof | Transfer and repeatability |
Assign every assumption to an owner
Finance owns cost behavior and the approved treatment of cash timing. Operations owns routing, labor, capacity and displacement. Purchasing owns the supplier response and commercial terms. Engineering owns technical scope and design control. Quality owns qualification and inspection. The program lead owns the customer date and the combined recommendation.
An assumption should state its source, date, owner and trigger for review. “Capacity available” is too weak. “Electrical cell has 24 free hours before 12 November; retrofit order R-118 uses the remaining 96 hours; plant manager approved the plan on 18 September” can support a decision.
Use disagreement as a signal to fix the case. If finance and operations disagree about avoidable overhead, identify the expense and the action that removes it. If purchasing and quality disagree about supplier readiness, name the missing evidence and due date. Do not average two incompatible positions.
| Assumption | Owner | Evidence | Reopen trigger |
|---|---|---|---|
| Internal routing and 112 labor hours | Operations | Current route and similar-job actuals | Design or shift plan changes |
| $115 contribution per cell hour | Finance and sales operations | Signed displaced-order contribution | Order or mix changes |
| $34,800 first-order supplier cost | Purchasing | Accepted quote Rev 2 and freight basis | Quote expires or scope changes |
| Supplier ready by week 8 | Quality and purchasing | Audit plan and reserved slot | Qualification misses milestone |
| Customer integration starts week 12 | Program lead | Bid schedule Rev 4 | Customer changes required date |
Carry the choice into price, schedule and execution
Map the selected cost to the customer estimate and the selected route to the proposal schedule. Record one-time and recurring cost separately. Include the supplier quote validity, internal capacity assumption, qualification condition and any customer consent the route requires.
If the customer changes quantity, design or date, reopen the affected inputs. A larger release can improve the supplier price and absorb NRE, but it may also justify an internal cell investment. An earlier date can invalidate both routes. The decision record should show which facts changed and who must reapprove them.
After the customer order, purchasing and operations need the same approved option. Do not let order entry choose a different route because the estimate only stored a cost. The build or purchase order, supplier package, quality plan and engineering handoff should all point to the accepted case.
| Approved fact | Customer bid | Execution record |
|---|---|---|
| Buy complete cabinet | Subcontract cost and delivery basis | Purchase order and supplier package |
| Supplier NRE | One-time engineering line or margin basis | PO non-recurring line |
| Week 12 integration arrival | Proposal schedule | Supplier milestone and project plan |
| Qualification before release | Bid risk condition | Quality task and PO release gate |
| Quote validity date | Price exposure note | Refresh task before expiry |
| Internal fallback route | Contingency if disclosed | Capacity check and released internal route |
Review the decision after the order
Compare the approved assumptions with the result. For make, review actual material, labor, yield, rework, bottleneck use and completion. For buy, review final landed cost, supplier changes, incoming quality, delivery and internal management time. Capture the customer and margin effect of any miss.
Do not judge the original decision with information the team could not have known. Separate estimate error, execution variance and a real change in scope or market. The next case needs a better input, not a blanket rule that the company should always make or always buy.
Review whether the chosen route produced the promised capacity result. If outsourcing freed the cell but the plant did not complete the displaced retrofit work, the opportunity benefit never arrived. That finding may change the next breakpoint even if the supplier performed well.
| Measure | Approved basis | Actual to capture | Use in next case |
|---|---|---|---|
| First-order cost | $34,800 buy | Final PO, freight and internal qualification | Update supplier and management cost |
| Plant arrival | Week 12 | Receipt and acceptance date | Update lead-time confidence |
| Incoming quality | Qualification complete; no major defects | Defects, rework and test result | Set future inspection and source status |
| Capacity released | 96 cell hours | Hours used by signed retrofit work | Validate opportunity cost |
| Customer margin | Approved bid contribution | Revenue and final cost | Explain decision and execution variance |
| Change count | Rev D basis | Customer and supplier changes after decision | Improve triggers and package control |
How Bourne runs a make-or-buy case
Bourne assembles the customer scope, internal BOM and routing, current cost, available capacity, historical job performance and accepted supplier responses in one case. It separates cost that changes from allocation that remains, shows constrained hours and calculates the quantity or capacity breakpoint that flips the answer.
Operations, finance, engineering, quality and purchasing review the inputs they own. Bourne records the source, date, approval and reopen trigger for each one. The selected route, cost, lead time and conditions then move into the customer estimate and the work that follows the order.
The case sits inside the supplier RFQ and make-or-buy workflow. A customer revision can reopen the affected supplier response, internal route or capacity plan. The team updates the decision from current evidence instead of rebuilding a detached spreadsheet.
Arda Bulut
Arda Bulut is the co-founder and CTO of Bourne and HockeyStack. He leads engineering at Bourne, building the platform people use to create AI products, agents and automations.