CSM Forum Banner

Make or Buy Analysis

Discuss PMP doubts, tips and lesson learned. iZenBridge makes PMP® Certification easy
santanuded
Beginner
Beginner
Posts: 37
Joined: Fri Aug 21, 2015 7:08 am

Make or Buy Analysis

Postby santanuded Thu Aug 24, 2017 8:16 am

A project manager is faced with a make or buy decision.A certain software module would cost $50000 to develop in house and $30000 a month to maintain.A vendor can offer at a charge of $50 per user and company expects 1000 users per month.In addition the vendor will charge maintenance fee of $1500 per month.WHEN WILL A BUY DECISION BE MORE ADVANTAGEOUS THAN MAKE DECISION? (no choices given)
nirajsys@gmail.com
Participant
Participant
Posts: 70
Joined: Tue Jul 11, 2017 9:28 am

Re: Make or Buy Analysis

Postby nirajsys@gmail.com Thu Aug 24, 2017 12:56 pm

Make scenario cost wud be Month 1 =5000+30000=80000, similarly m2=110000,m3=140000

Buy scenario wud be Month 1=(50*1000)+1500=51500
Similarly m2=51500+(50*1000)+1500=103000,m3=154500

So,if u see cost of buy >cost of make in m3.hence buying decision would cease to be more advantageous than making the product in house from 3rd month.

Hope this clarifies.
komal
Participant
Participant
Posts: 67
Joined: Wed May 31, 2017 4:34 pm

Re: Make or Buy Analysis

Postby komal Thu Aug 24, 2017 4:42 pm

Buy>Make then to be cost effective we should go make make in house.

Correct me if i am wrong.
pmp_learner
Participant
Participant
Posts: 79
Joined: Fri Dec 02, 2016 10:18 pm

Re: Make or Buy Analysis

Postby pmp_learner Thu Aug 24, 2017 8:22 pm

To me the following question:
"A project manager is faced with a make or buy decision. A certain software module would cost $50000 to develop in house and $30000 a month to maintain. A vendor can offer at a charge of $50 per user and company expects 1000 users per month. In addition the vendor will charge maintenance fee of $1500 per month. WHEN WILL A BUY DECISION BE MORE ADVANTAGEOUS THAN MAKE DECISION? (no choices given)"

doesn't provide enough information. Where did you get this question from?

Just looking at the information provided, I think the time information atleast should have been provide, ie, how long the company intends to use this software..
Anyways.. Based on the available information, if PM needs to use the software only for two months, then using Vendor will be cheaper, and can be considered to go for vendor instead of making. However, if PM needs to use the software for 3 or more months, Making will be a better choice if cost is the key factor to make decision for Make or Buy. Please find the calculations below:

Scenario1 : In House Development & Maintenance
Cost for 1st Month (Development + Maintenance): $50,000 + $30,000 = 80,000
Cost for 2nd month (Maintenance) : 30,000 ( total spend at the end of 2nd Month = 1,10,000 )
Cost for 3nd month (Maintenance) : 30,000 ( total spend at the end of third months = 1,40,000 )

Scenario2 : Buy service from Vendor
Cost for 1st month = ($50*$1000 ) + $1500 = $51500 (Total cost for buying is cheaper than making)
Total Cost at the end of 2nd month = $51500 + $51500 = 1,03,000 (Total cost for buying is cheaper than making)
Total Cost at the end of 3rd month = 1,03,000 + $51500 = 1,54,500 (Total cost for buying Cost MORE than making. Hence Making will be a better choice)

+++++++++++++++++++++
Manish/Saket : Can you please provide your inputs.

Thanks
Kavita
manishpn
Expert
Expert
Posts: 2158
Joined: Sat Jan 04, 2014 3:55 pm

Re: Make or Buy Analysis

Postby manishpn Fri Aug 25, 2017 5:01 pm

santanuded wrote:A project manager is faced with a make or buy decision.A certain software module would cost $50000 to develop in house and $30000 a month to maintain.A vendor can offer at a charge of $50 per user and company expects 1000 users per month.In addition the vendor will charge maintenance fee of $1500 per month.WHEN WILL A BUY DECISION BE MORE ADVANTAGEOUS THAN MAKE DECISION? (no choices given)


we need to understand here the difference between one time cost (CAPEX) and mtc cost which is (OPEX)
capital expenditure and operational expenditure

Make - CAPECX = 50000
OPEX = 30000/month

BUY = 50 per user, for 1000 users = 50000 , this can be opex or capex its not defined here and therefore I cannot comment, usually per user fee is opex and can be monthly or yearly. if $50 per user is one time cost then it makes to buy from day one as it will save us money if we dont reach 1000 users and mtc cost/month is also low.

OPEX = 1500/month


Based on information given i cannot conclude for sure as there is confusion on $50/user is capex or opex
Br,
Manish P
PMP, PMI - ACP, SAFe Agilist
http://www.izenbridge.com/blog/7-effect ... ification/
pmp_learner
Participant
Participant
Posts: 79
Joined: Fri Dec 02, 2016 10:18 pm

Re: Make or Buy Analysis

Postby pmp_learner Fri Aug 25, 2017 5:16 pm

Hi Manish,
Thanks for your feedback. Could you please throw a bit more light on CAPEX and OPEX.. Or reference if I can find that in PMBOK or Rita.. sorry as I don't go thru book line by line, so I might have missed it.
My approach is more of watching the videos and then skim through the topic in book to understand the concept, So its easy to miss something.

Also do we need to know capex or opex important for PMP exam, can we expect questions like the one mentioned in the post?

Thanks & Regards
Kavita
nazrulq
Contributor
Contributor
Posts: 233
Joined: Sun Feb 26, 2017 6:06 am

Re: Make or Buy Analysis

Postby nazrulq Fri Aug 25, 2017 6:53 pm

Let me explain if I have understood the question clearly

Option 1 (To Make)

To make in house , cost of making the module is =$ 50000
Cost of Maintainance is 30000/Month

Option2 (To Buy)

$50/Month , No of people expected =1500/Month
Maintainance =1500/Month

let the number of months = M

When make and buy should be equal.

50000 + 30000 M = 50 x 1000 M + 1500M
50000 = 51500M -30000M
21500M = 50000
M = 50000/21500 = 2.32

After 2.32 Months buying option would be profitable!

Hopefully, it helps!
manishpn
Expert
Expert
Posts: 2158
Joined: Sat Jan 04, 2014 3:55 pm

Re: Make or Buy Analysis

Postby manishpn Sat Aug 26, 2017 3:39 pm

nazrulq wrote:Let me explain if I have understood the question clearly

Option 1 (To Make)

To make in house , cost of making the module is =$ 50000
Cost of Maintainance is 30000/Month

Option2 (To Buy)

$50/Month , No of people expected =1500/Month
Maintainance =1500/Month

The question does not mention that cost of per user is per month thats why I cannot calculate :)

let the number of months = M

When make and buy should be equal.

50000 + 30000 M = 50 x 1000 M + 1500M
50000 = 51500M -30000M
21500M = 50000
M = 50000/21500 = 2.32

After 2.32 Months buying option would be profitable!

Hopefully, it helps!

But if we assume it is per month then I would never buy as making in house is cheaper as 50K is just onetime cost of development
Br,
Manish P
PMP, PMI - ACP, SAFe Agilist
http://www.izenbridge.com/blog/7-effect ... ification/
manishpn
Expert
Expert
Posts: 2158
Joined: Sat Jan 04, 2014 3:55 pm

Re: Make or Buy Analysis

Postby manishpn Sat Aug 26, 2017 3:40 pm

pmp_learner wrote:Hi Manish,
Thanks for your feedback. Could you please throw a bit more light on CAPEX and OPEX.. Or reference if I can find that in PMBOK or Rita.. sorry as I don't go thru book line by line, so I might have missed it.
My approach is more of watching the videos and then skim through the topic in book to understand the concept, So its easy to miss something.

Its just a concept, you may not need to know for exam.
however it is simple to remember -
Capex is one time investment that you need to do
OPEX - is the cost of running the operations once the product/services that are developed by project goes live into production

Also do we need to know capex or opex important for PMP exam, can we expect questions like the one mentioned in the post?

Thanks & Regards
Kavita
Br,
Manish P
PMP, PMI - ACP, SAFe Agilist
http://www.izenbridge.com/blog/7-effect ... ification/
nazrulq
Contributor
Contributor
Posts: 233
Joined: Sun Feb 26, 2017 6:06 am

Re: Make or Buy Analysis

Postby nazrulq Sat Aug 26, 2017 11:27 pm

Question mentioned $50 per month and expecting 1000 users per month.
My answer after 2.3 month make decision ( My mistake Sorry! ) would be fruitfull.

Thank You Manish for catching my mistake.
manishpn
Expert
Expert
Posts: 2158
Joined: Sat Jan 04, 2014 3:55 pm

Re: Make or Buy Analysis

Postby manishpn Sun Aug 27, 2017 5:48 pm

to clarify

the questions statement

A vendor can offer at a charge of $50 per user and company expects 1000 users per month

this cannot be assumed as per month per user fee.
Br,
Manish P
PMP, PMI - ACP, SAFe Agilist
http://www.izenbridge.com/blog/7-effect ... ification/
nazrulq
Contributor
Contributor
Posts: 233
Joined: Sun Feb 26, 2017 6:06 am

Re: Make or Buy Analysis

Postby nazrulq Mon Aug 28, 2017 1:01 am

Cleared thanks!

Return to “PMP® Open Forum”

Who is online

Users browsing this forum: No registered users and 5 guests