A Monte Carlo model of the make or buy decision

The make or buy decision problem is one that confronts all firms at one time or another. The problem involves making the decision as to whether is more feasible to manufacture an item or to purchase the item from the vendor. It is a difficult problem to solve and one in which mistakes are costly. Management needs to have at its disposal tools to help them solve the problem intelligently. Make or buy models fail to consider the important dimension of uncertainty which is an integral part of the problem. The proposed Monte Carlo Decision Model gives management a useful comprehensive tool for analyzing the make or buy problem. The method involves using a simulation technique to determine the probabilistic property of the make or buy variables by the use of random sampling. It is simple to used and understand, incorporates the concept of uncertainty, extracts the maximum value from the data and provides a comprehensive and meaningful output which can be evaluated in the light of the Company objectives.