HKSM

A structured evaluation to decide whether to produce a product or service in-house or procure it from an external supplier. It balances cost, schedule, capability, risk, and strategic fit to select the option that delivers the best value.

Key Points

• Focuses on total cost of ownership over the life cycle, not just purchase price.
• Considers cost, schedule, quality, capacity, skills, risk, intellectual property, and compliance.
• Combines quantitative tools (TCO, break-even, NPV, sensitivity) with qualitative factors.
• Drives procurement strategy, contract type recommendations, and resource planning.
• Document the decision, assumptions, constraints, and triggers for re-evaluation.
• Revisit when scope, volume, market conditions, or organizational capacity changes.

Purpose of Analysis

• Select the option that delivers required outcomes at acceptable risk and cost.
• Ensure schedule feasibility when internal capacity is limited or lead times are long.
• Align the approach with strategic priorities, core competencies, and IP protection.
• Enable informed procurement planning and negotiation with suppliers.
• Support transparent decision-making and stakeholder buy-in.

Method Steps

• Clarify scope, performance requirements, acceptance criteria, and volumes.
• Define feasible make and buy options, including hybrids (e.g., assemble in-house, buy subcomponents).
• Estimate in-house costs: labor, materials, tooling, overhead, learning curve, integration, and opportunity cost.
• Estimate external costs: unit price, setup fees, shipping/tax, integration, vendor onboarding, and contract administration.
• Assess schedule and capacity constraints, lead times, and impact on the critical path.
• Evaluate risks (quality, supply, IP, security, compliance) and potential mitigations.
• Compare options using TCO, break-even, and, where relevant, discounted cash flow and sensitivity analysis.
• Consider qualitative factors: strategic fit, flexibility, vendor reliability, and knowledge retention.
• Select the preferred option, document rationale, assumptions, and re-evaluation triggers.
• Obtain approvals and update procurement, resource, schedule, and cost plans.

Inputs Needed

• Requirements, scope, WBS, and technical specifications.
• Cost estimates, budget limits, and funding model.
• Schedule, key milestones, and lead time constraints.
• Resource availability, skills inventory, and capacity data.
• Market research, supplier lists, and price quotations.
• Organizational policies, procurement thresholds, and standards.
• Risk register, assumptions, and constraints.
• Quality criteria, regulatory and compliance requirements.
• Historical data and lessons learned.

Outputs Produced

• Make-or-buy decision statement with documented rationale.
• Total cost of ownership and financial models used in the analysis.
• Risk responses, risk allocation, and contingency or reserves.
• Procurement strategy and contract type recommendations (if buying).
• Updates to the project management plan and baselines as needed.
• Draft statement of work or internal work package definition.

Interpretation Tips

• Do not prioritize lowest price over total value; include transition, integration, and maintenance costs.
• If schedule is critical and capacity is constrained, buying is often preferred even if unit cost is higher.
• If IP, security, or core capability is strategic, making may be favored despite higher near-term cost.
• Use sensitivity analysis to test key assumptions such as volume, labor rates, and lead times.
• When options are close, consider risk exposure and flexibility to pivot later.

Example

A project needs a component. In-house: setup cost 80,000 plus 200 per unit. Vendor: setup 5,000 plus 320 per unit. Break-even is where costs are equal:

80,000 + 200x = 5,000 + 320x → 75,000 = 120x → x = 625 units.

• If you need 1,000 units: Make cost = 280,000; Buy cost = 325,000. Making is cheaper if capability and schedule permit.
• If you need 200 units: Make cost = 120,000; Buy cost = 69,000. Buying is cheaper and likely faster.
• Adjust for risks, lead times, quality needs, and strategic factors before finalizing.

Pitfalls

• Ignoring overhead, transition, and life-cycle costs such as support and disposal.
• Underestimating lead times, onboarding, and contract administration effort.
• Overlooking quality, compliance, IP, or security considerations.
• Basing decisions on optimistic quotes without defined scope or terms.
• Bias toward in-house capability or a preferred vendor without evidence.
• Failing to document assumptions and triggers for re-evaluation.

PMP Example Question

A project has a regulatory deadline in 10 weeks. The internal team can deliver the component in 14 weeks at a lower total cost, while a qualified supplier can deliver in 6 weeks at a higher price. What should the project manager do?

1. Choose make to minimize cost and add overtime.
2. Choose buy to meet the schedule and update the procurement plan.
3. Delay the milestone until internal resources are available.
4. Start in-house now and outsource later if needed.

Correct Answer: B — Choose buy to meet the schedule and update the procurement plan.

Explanation: The decision should align with project objectives and constraints. With a hard deadline and internal capacity shortfall, buying is the option that protects schedule and value.