Sourcing Math

How to Calculate Make vs Buy, Landed Cost, and Insourcing Payback

The core formulas behind sourcing and network decisions, worked through with real units and numbers so you can run make vs buy, landed cost, breakeven, and payback yourself.

Make-vs-buy math starts with a fully loaded internal cost, not a variable rate. The Make vs Buy Cost formula is annual volume times internal unit cost times utilization, plus tooling, divided by volume. Take 25,000 parts per year at $14.50 per part variable, 100 percent utilization, and $60,000 of tooling. The variable spend is 25,000 times $14.50 equals $362,500. Add $60,000 tooling for $422,500 total, then divide by 25,000 to get $16.90 per part. That $16.90, not the $14.50, is the number the supplier quote must beat. Pull volume from the annual demand plan, unit cost from your standard cost sheet, and tooling from the capital request.

Watch the units. Internal unit cost is dollars per part covering material, direct labor, and variable overhead only, because tooling enters separately as a lump sum in dollars. Double-counting tooling inside the unit cost and again in the tooling field is the single most common arithmetic error and it inflates the per-part figure by the full tooling adder. Here that adder is $60,000 over 25,000 parts, or $2.40 per part. Double the volume to 50,000 and the same tooling spreads to $1.20 per part, dropping the loaded cost to $15.70. Volume is the lever that dilutes fixed tooling.

Breakeven volume tells you where make and buy cross. Set loaded make cost equal to loaded buy cost and solve for quantity. With fixed tooling F of $60,000, internal variable cost v of $14.50, and a delivered buy price p of $18.00, breakeven volume equals F divided by (p minus v), or $60,000 divided by $3.50, which is 17,143 parts per year. Below that volume the tooling cannot be diluted enough and buying wins. Above it, making wins. The Make-Buy Breakeven Volume calculator runs this crossover directly. The critical input is p as a delivered price, not ex-works, so freight and duty belong in p.

Total landed cost converts a quoted price into a delivered one so overseas and domestic sources compare fairly. The Total Landed Cost formula is units times landed cost per unit times an inclusion percentage, plus fixed brokerage and clearance fees, divided by units. Take 10,000 units at $23.75 per unit fully loaded, 100 percent inclusion, and $4,800 of customs brokerage. Variable is 10,000 times $23.75 equals $237,500. Add $4,800 for $242,300 total, divide by 10,000 to get $24.23 per piece. The $0.48 gap over $23.75 is the fixed fee spread across the shipment. Ship 1,000 units instead and that same $4,800 becomes $4.80 per piece.

Nearshore comparisons need the shift share and qualification cost baked in, because you rarely move all volume at once. The Nearshore vs Domestic Cost formula is annual volume times nearshore unit cost times shift share, plus qualification and transfer cost, divided by full volume. Take 50,000 units per year at $11.25, shifting 75 percent, with $85,000 to qualify the supplier. Variable is 50,000 times $11.25 times 0.75 equals $421,875. Add $85,000 for $506,875, divide by the full 50,000 to get $10.14 per unit blended. It sits below $11.25 because 25 percent of volume stays domestic while the qualification cost spreads over every unit.

Insourcing payback answers how fast bringing work back in-house repays the capital. Net the per-unit saving against the supplier, multiply by volume for annual savings, then divide the investment by that. If insourcing saves $2.10 per part on 40,000 parts per year, annual savings are $84,000. Against a $210,000 equipment and ramp investment, Insourcing Payback returns $210,000 divided by $84,000, or 2.5 years. Outsourcing ROI runs the mirror image: gross annual savings of $18,000 minus $2,500 of vendor management support gives $15,500 net, and a $25,000 transition cost pays back in $25,000 divided by $15,500, about 1.61 years.

Supplier network cost sizes the overhead of managing vendors, separate from part price. The Supplier Network Cost formula is supplier count times cost per supplier times managed share, plus fixed platform and audit fees, divided by count. Take 40 suppliers at $6,200 each, 70 percent actively managed, plus $35,000 in platform and audit fees. Variable is 40 times $6,200 times 0.70 equals $173,600. Add $35,000 for $208,600 total, divide by 40 for $5,215 per supplier per year. Consolidation only cuts the variable line, so dropping to 25 suppliers takes variable to $108,500 while the $35,000 fixed fee holds.

Production Footprint Comparison applies the same weighted structure to plants. Multiply site count by annual operating cost per site, scale by load factor, and add a one-time transition cost. Three sites at $1.85 million each running at 80 percent load gives 3 times $1.85 million times 0.80 equals $4.44 million variable, plus $250,000 transition, for $4.69 million, or about $1.563 million per site. The load factor weights scenarios consistently rather than reflecting true fixed-cost behavior, so treat every result here as a deterministic single-year figure. For a defensible decision, amortize tooling and transition costs across their real life instead of expensing them in year one.

Published 2026-07-01.