Tool up or keep paying the supplier?
Tooling up looks obviously cheaper until you price the chance the tool needs a second iteration. The tree puts the supplier price rise you have already accepted on the same footing as the qualification risk you are being asked to take.
Operations Intermediate Decision Tree Pro engine
After you install, this is the model to open.
Make It or Buy It?
- In your spreadsheet, click the Sortia icon in the strip of icons down the right-hand edge. No strip? Click the arrow at the bottom-right to open it. You can also use Extensions, then Sortia, then Open Sortia.
- Click Start from a template and put that name in the search box.
- Pick the card with that name and click Load this template. It arrives on a new tab with real numbers already in it.
This one runs on a Pro engine, and every free install includes five full-quality runs on your own numbers, shared across all five Pro engines rather than five for each. After that, Pro is $199/year.
The answer
- Make it
- $1,046K expected five-year cost
- Buy it
- $1,095K keep the supplier
- Making saves
- $48,750 4.5% of the commitment
- The hinge
- 51.5% first-time qualification odds where the answer flips
A part you buy for $1.40 and could make for about 67 cents, 140,000 a year, five years, and $420,000 of tooling standing between the two. Every value on the tree is a five year total cost in thousands of dollars, so it is solved to minimize and the lowest number wins. Open the Decision Tree tool and click Run. Making it comes back at $1,046,000 and buying it at $1,094,750, so making wins by about $48,750 across five years, which is 4.5% of the commitment.
Before you act on that, read the risk profile, because it says something the expected value does not. Buying has a worst case of $1,230,000 and making has a worst case of $1,280,000, and the making path lands there in 35 of every 100 runs. So making is not the safe option and buying is not the safe option: the supplier price is a risk you have already accepted without pricing it, and the tooling risk is one you are being asked to accept in a meeting.
The tree puts them on the same scale, which is the only thing it is for. Now the number worth arguing about. Everything turns on the 65% chance that the tooling qualifies first time, and that is a number the toolmaker has, from their last five programs, and nobody has asked for. Change it and watch: at 55% the expected cost of making rises to $1,082,000, still ahead; at 51.5% the two options are exactly level; below that, buying wins.
So the decision is not really about the 67 cents or the $1.40. It is about whether the qualification probability is above or below about half, and that is one phone call. Two things the tree does not price. It has no capacity cost, so if the line running this part could have run something more profitable the making branch is worse than it looks, and Addressing Tradeoffs is the tool that prices that properly.
And it has no strategic value for owning the process, which is real and is not a number. To make it yours, replace the six end values with your own five year totals, keeping every one of them net of tooling and freight, and put the toolmaker's own first-time qualification rate on the qualifies first time branch.
The model
It arrives on a tab called Template: Make It or Buy It, carrying these columns:
- ID
- Parent
- Type
- Label
- Probability
- Value ($k)
Once it is in your sheet
- The model arrives with real numbers in it and runs as it stands, so you can press the button first and understand it second.
- Change the numbers to yours. The sheet marks which cells are inputs and which hold formulas, and most labels carry a note explaining the row.
- Press the run button at the bottom of the panel. It is labeled for the tool you are in, and the result lands on its own tab, with a written reading of it beside the figures.
Never used Google Sheets? Start here goes the whole way, in seven steps, and assumes nothing.
Next question
- Is the round your driver does now the shortest?Which Order of Stops Makes the Shortest Delivery Round?
- How much does it cost to pull the event now?What If It Has to Be Cancelled?
- Will the new store pay for its fit-out?Is the New Store Worth Opening?
- How many stores does your pilot really need?How Big Does the Pilot Have to Be?
- Should you drop the slow line?Should We Drop This Line?
- Is a random draw a fair way to split the weekends?Assign the Shifts Without Arguing
Every model like this one, and the method behind them: Decision trees.