Sourcing Cost

What Drives Make vs Buy Cost Per Unit and How to Quote It

A money-focused breakdown of what drives delivered cost per unit in sourcing and network decisions, how to build a defensible quote, and the hidden costs that sink estimates.

A defensible make-vs-buy quote starts by stacking cost drivers, not comparing sticker prices. On a typical machined part, material runs 40 to 55 percent of cost, direct labor 15 to 25 percent, machine time and consumables 10 to 20 percent, scrap 2 to 6 percent, and overhead absorption the remainder. A supplier quoting $18.00 ex-works may look cheaper than your $16.90 loaded make cost until you add the buy-side drivers everyone forgets: freight, duty, inbound inventory, and quality fallout. Total Landed Cost exists to add those back, and it routinely lifts a low ex-works quote by 8 to 25 percent once freight and clearance land.

Freight and duty are the drivers that flip offshore quotes. A part at $11.00 FOB Asia can carry $1.50 to $3.00 per unit in ocean freight and drayage plus 2.5 to 25 percent duty depending on HTS classification, pushing delivered cost past a $13.50 domestic source. On a 10,000-unit shipment, a flat $4,800 brokerage and clearance fee adds $0.48 per piece, but on a 1,000-unit trial lot it adds $4.80. Estimators who spread fixed clearance over an optimistic full-container quantity understate cost per unit badly when the real shipping pattern is smaller, more frequent lots.

Inventory carrying cost is the silent driver in any distance decision. Carrying cost typically runs 18 to 28 percent of inventory value per year covering capital, storage, insurance, and obsolescence. An offshore lane with 8 weeks of transit plus a 4-week safety buffer ties up 12 weeks of demand versus 2 weeks domestic. On $2 million of annual purchases at 22 percent carrying, that extra 10 weeks of pipeline stock costs roughly $85,000 a year that never appears on the unit price. Nearshore vs Domestic Cost and Network Inventory Impact are where this gets priced instead of ignored.

Overhead absorption is where internal make quotes distort. If you load a part at a blanket plant rate of 180 percent of direct labor, a labor-light but machine-heavy part gets undercharged and a labor-heavy part gets overcharged. Use a machine-hour rate for equipment-intensive work, commonly $45 to $120 per spindle hour depending on machine class, rather than a single burden percentage. Getting absorption wrong is why a part that looks profitable to make in-house quietly loses money: the quote charged 180 percent of a small labor base while the real driver, expensive machine time, went underabsorbed.

The one-time transition cost is the driver that decides direction, and it is chronically underestimated. Qualifying a new supplier runs first-article and PPAP, tooling transfer or duplication, validation runs, and dual-running overlap. Budget $50,000 to $150,000 for a moderate machined family, more with dedicated tooling. Outsourcing ROI subtracts ongoing vendor management support, typically $2,000 to $8,000 per supplier per year, from gross savings before computing payback, which is why a deal projecting $18,000 of gross savings only nets $15,500. Leaving qualification and support out is the fastest way to quote a payback that never materializes.

Building a defensible quote means separating variable from fixed and stating your assumptions. On the make side, list material, labor, machine time, scrap, and variable overhead as dollars per unit, then show tooling and setup as a lump sum amortized over expected volume. On the buy side, start from delivered landed cost per Total Landed Cost, add carrying cost, and add a quality reserve. A quote that shows $16.90 loaded make versus $18.20 landed buy is defensible; one that shows $14.50 versus $18.00 FOB is comparing a variable cost to a partial price and will be wrong.

Where estimates go wrong most often is scrap and quality risk on the buy side. A supplier at 2,500 PPM defect rate on a $20 part shipping 40,000 units a year generates 100 defective parts, and if each costs $60 in return, rework, and line disruption, that is $6,000 plus expedite freight. Outsource Quality Risk prices this fallout so it does not get buried. A cheaper unit price from a supplier at 5,000 PPM can easily cost more all-in than a domestic source at 500 PPM once containment, sorting, and lost-line time are counted.

Volume sensitivity is the last thing a quote must show, because a single number hides the crossover. Rerun the make cost at 50 percent and 150 percent of forecast volume: tooling of $60,000 that adds $2.40 per part at 25,000 units adds $4.80 at 12,500 and $1.60 at 37,500. Contract Manufacturing Comparison and Make-Buy Breakeven Volume let you show a buyer the volume band where each option wins rather than a fragile point estimate. A quote that says make wins above 17,000 parts and buy wins below survives a demand swing that a single $16.90 figure would not.

Published 2026-07-01.