A carmaker is deciding whether to keep making a key component in-house or buy it from a supplier. How would you approach it?

Two questions first. What's prompting this now, a supplier's offer or an investment the plant needs? And which component is it? I'd work through four questions in order. First, strategy. Is this part something they should own? Second, the cost. I'd compare the cost of making it with the supplier's price. The trap is setting the supplier's price against their full unit cost. What matters is which costs stop if they buy. Third, risk. I'd look at quality and at how reliable the supplier is. Can they meet the spec, and what happens if they can't deliver? Fourth, what happens to what's freed up. The floor space, the machines and the people don't disappear. Then I'd put the four answers together and make a recommendation. I'd start with their cost of making the part.

Two questions first. What's prompting this now, a supplier's offer or an investment the plant needs? And which component is it? I'll assume it's a transmission, made in a plant that needs $200 million of new equipment, and a supplier has quoted 10% below their unit cost. I'd work through four questions in order. First, strategy. Is this part something they should own? If it's what makes their cars different, or the know-how matters for future models, buying it hands that to a supplier who also sells to rivals. For a transmission I'd ask what happens to it as the range goes electric. Second, the cost. I'd compare the cost of making it with the supplier's price. The trap is setting the supplier's price against their full unit cost. What matters is which costs stop if they buy. Materials go away, and direct labor only if the people do. Plant overhead mostly stays, and depreciation on machines they own is sunk. Buying also adds freight and inspection, and it avoids the $200 million. Third, risk. I'd look at quality and at how reliable the supplier is. Can they meet the spec, and what happens if they can't deliver? A missing transmission stops the assembly line. Once the plant closes, the supplier knows they can't go back, so the price in year five may not be today's quote. Fourth, what happens to what's freed up. The floor space, the machines and the people don't disappear. If the space can build something worth more, that's a gain. If it means severance and an empty building, that's a cost against the saving. My hypothesis is that the 10% gap shrinks a lot once I count only the costs that stop. Then the decision rests on the $200 million and on where the part is headed. I'd start with their unit cost, split into what goes away and what stays. Can we get that?