Make or buy decision flowchart (decision tree)
Make or buy decision flowchart: a decision tree on core capability, capacity, fully loaded cost, IP risk and supply market, ending at five named outcomes.
How it works
Name the decision-makers, not the departments
The four lanes are decision rights: Business owner answers what is core and what risk is tolerable, Operations answers capacity, Finance answers cost and investment, Procurement answers the market. Replace them with the roles that actually hold those answers in your organisation, and merge lanes rather than inventing them. If nobody owns a lane, the questions in it get answered by whoever argues hardest.
Write down what counts as core
Fill in the note on "Core to competitive advantage?" with your own test. Common criteria are that the capability differentiates the product, is hard for a competitor to copy, or carries intellectual property the organisation sells. Performing something well is not the same as it being core, and that confusion is the most common reason a capability stays in-house long after it should have moved.
Agree the cost basis before any numbers arrive
Both sides of "Internal cost below the quote?" have to be built on the same basis. The internal estimate should carry direct labour and materials, absorbed overhead, tooling and capital depreciation, scrap and quality cost and the cost of capital. The quote should be taken at landed cost, including freight, duty, inventory held to cover lead time and the effort of managing the supplier. Agree the band inside which the two count as equal, so the Too close branch is defined in advance rather than argued afterwards.
Set the capacity and market tests
Capacity means free hours, qualified people and available tooling within the required lead time, without displacing work already committed to customers. Say that on the step, so "we could fit it in" is not accepted as evidence. For "Supply market competitive?", record how many qualified suppliers must be able to meet the specification, and what switching would cost once re-qualification, tooling transfer and first-article approval are priced.
Fix the tooling payback rule
"Volume stable enough for tooling?" needs a rule, not a judgement call. Use the payback period or hurdle rate your finance function already applies to capital, and require a demand forecast that holds for longer than it. Where the forecast moves more than the payback can absorb, the Volatile branch is the honest answer and the hybrid outcome keeps that capacity variable.
Record the outcome and re-test it at renewal
Capture the chosen outcome with the evidence behind each answer, the date, and who approved it. Where you operate a quality management system, outsourcing does not transfer responsibility for conformity: ISO 9001 clause 8.4 expects the organisation to determine criteria for evaluating, selecting, monitoring and re-evaluating external providers, and to retain records of those activities. Keep the approved version of the chart under version control and run the questions again at contract renewal.
Frequently asked questions
What is a make or buy decision flowchart?
It is a decision tree that takes a defined requirement through a fixed sequence of tests - is the capability core, is the internal capacity there, is the fully loaded internal cost below the quote, is the IP or quality risk tolerable to outsource, is the supply market competitive, is the volume stable enough to justify tooling - and ends each path at a named outcome. In this template the outcomes are make in-house, buy from the open market, buy under a strategic partnership, make core and buy components, or defer pending a cost study. The value is in the order: the strategic screen comes before the pricing, so a capability the organisation competes on is not traded away for a unit-cost saving.
What costs belong in a make-or-buy comparison?
Everything that changes with the decision, on both sides. The internal figure needs direct labour and materials plus absorbed overhead, tooling and capital depreciation, scrap and rework, quality and inspection cost, and the cost of capital tied up in the capacity. The external figure needs the landed price: unit price, freight, duty, packaging, inbound inspection, the inventory carried to cover a longer lead time, and the internal effort of managing the supplier. Comparing a marginal internal cost with a fully landed external price is the classic error, and it always favours making. If the two land inside your estimating error, the chart routes to "Defer pending a cost study" rather than pretending there is a winner.
Should a core capability ever be bought?
Sometimes, which is why the chart puts a second question after the core screen rather than ending there. "IP or quality risk acceptable?" asks whether the design, process know-how or regulated quality record can genuinely be protected by contract, audit and access rights. Where it can, a core requirement is still allowed into the market test, and it often ends at a strategic partnership rather than an arm's-length purchase. Where it cannot, the Too high branch sends the requirement into the internal capacity assessment and the question becomes how to make it, not whether to.
How is this different from the procurement process flowchart?
They answer different questions. This chart is a decision tree: which option do we choose, and who is entitled to decide each test. Its paths end at five distinct outcomes and it stops the moment the choice is made. The Procurement process flowchart is a cross-functional process map: what happens next and who does it, from need and specification through funding, route to market, tender, award, contract, delivery and supplier review. Make or buy is one node inside that process. Use this page to reach the decision and that one to execute it.
What is the hybrid outcome and when does it apply?
"Make core, buy components" keeps the work that carries the differentiation or the intellectual property inside the organisation and sources the rest externally: final assembly, test and calibration in-house, for example, with machined parts bought in. In this chart it is reached when the capability is core but the volume is not stable enough to justify tooling and dedicated capacity, so committing capital would lock fixed cost against an uncertain forecast. It is a deliberate outcome with its own boundary and interface to define, not a compromise between the make and buy paths.