If you run in Maker circles, you’ve probably heard the phrase “buy versus DIY.” Basically, should you buy something or figure out how to make it yourself? (Spoiler alert: usually making it yourself is the preferred choice!) The 4 main reasons to DIY for consumer goods are:
- It’s cheaper (sometimes)
- You learn something
- You can customize the item exactly how you want
- It’s more fun!
Buy versus DIY in action
When we apply this concept to a business deciding whether to buy versus DIY somewhat surprisingly, most of the same considerations still apply!
An industry study from Karlsruhe University of Applied Sciences found that, contrary to current management trends, companies that choose to INsource their manufacturing experience most of these same benefits! (They did not quantify the “fun,” unfortunately.)
Let’s take some fictional examples to see how these play out both for individuals and companies.
Leo works in finance for his day job.
Evenings and weekends, he makes homemade lamps in his garage.
Princess Capybara is a serial entrepreneur. Her latest product is called Plant Places™.
If Leo wants to buy a basic lamp from a big box store, that will almost certainly be less expensive than making one of that same item himself. (The main reason for that is economies of scale.) But if he’s interested in a high-end product from a designer furniture showroom, he may find it cost-effective to make his own using wood, paint, and inexpensive components from a hardware store.
Princess Capybara faces a similar decision when deciding whether or not to outsource the manufacturing of her Plant Places™. She estimates her costs to set up space, purchase equipment and materials, and hire employees. Then she takes her prototype to several contract manufacturers and gets estimates on the cost to manufacture the same product.
Watch out for this common trap!
On paper, it looks like it will be less expensive to have Precision Plastic Producers make her Plant Places ™. But she hasn’t factored in what Bharat Moorthy, COO of the medical device company Optimum Imaging Diagnostics, in his interview, calls Total Cost of Ownership, or TCO. In the above-mentioned Karlsruhe study, they mention “neglected factors like sub-par product variant.” In plain English?
This ends up costing Capybara Entreprises more in the long run. She has to scrap a large number or Plant Places™ and she also loses customers because some are accidentally sent bad Plant Places™!
Challenge for this week:
See if this rings true to you: do companies that do their own manufacturing have strategic advantages overall? (If you’re wondering where to find good business stories, try the podcast How I Built This, the T.V. show Shark Tank, or reading stories in Kickstarter’s hardware products section!)