Make vs. outsource? A shortcut for deciding

Jul 16, 2020, 6:38 AM

The decision to outsource a product or make it in-house is an important one for any food business. Sometimes the decision is easy to make; Can’t find what you’re looking for? Make it. Don’t know how to make it? Outsource it.

Most of the time, the decision is harder to make. Of course, to make the right decision, it is best to do a complete costing of a recipe (including wages) and compare to it to a similar product that could be bought in. But this means you need to invest time into creating and costing a recipe that you might not use. For a busy food business operator, we need a way to make a quick decision. Here’s a shortcut to deciding if outsourcing or producing is more cost effective.

Let’s use a muffin for an example which we intend to sell (RRP) for $6.90. Set up a simple table like the one below in Excel (or get in touch and we’ll send it to you).

‘Make’ column:

COGS - estimate the cost-of-goods (COGS) using a rule-of-thumb of 30% (e.g. 0.3x$6.90=$2.07).

Labour cost - per unit labour cost can be calculated by estimating how many muffins that could be produced (on average) in 1 hour by an employee (including cleaning up but excluding cooking time). Here we have an employee being paid $27 per hour and can produce 36 muffins per hour (i.e. $27/36=$0.75).

Other - includes the extra costs associated with producing the muffins in-house (e.g. the extra electricity or gas used to cook the muffins).

Margin - is the difference between the retail price and the costs (i.e. Margin=RRP-COGS-Labour cost-Other). Margin % = Margin/RRP (e.g. $3.94/$6.90=0.57).

‘Outsource’ column:

RRP - is the same (i.e. $6.90)

COGS - is the wholesale cost of the product you intend to buy (including delivery costs). It is expected that the wholesale cost is higher than the cost to make because you’re essentially ‘importing’ the labour cost from someone else.

Since there are no additional labour costs and other costs associated with buying a product in, we set these to nil. Margin and Margin % are calculated as above.

Decision: Choose the method which gives the highest Margin %. In this case, we would buy the muffin from a supplier. Once this table is set up, it will take 5mins to quickly assess whether to make a product or buy it in.