The Enhanced Make-or-Buy Decision: The Fallacy of Traditional Cost Accounting and the Theory of Constraints

We present a model for finite capacity scheduling in situations where the market demand exceeds the company's manufacturing capacity. Subcontracting to fill in the gap between the market demand and production capacity is an excellent tool to elevate the manufacturing constraint in the short term. Our model prescribes a simple ratio rating a product's priority for the constrained manufacturing resource. The ratio, developed from a linear programming analysis, enhances the Theory of Constraints (TOC) for the make-or-buy situation. We use a well known TOC example to illustrate fallacies of the TOC when outsourcing is possible.