The Theory of Constraints and the Make‐or‐Buy Decision: An Update and Review

Abstract

SUMMARY The make‐or‐buy decision has traditionally been made using standard cost accounting methods. In this Journal, Gardiner and Blackstone (1991) made a strong case for incorporating the bottleneck capacity into the decision. However, their method did not guarantee the best solution for the more complicated make‐or‐buy problem. Additionally, their approach in some cases allowed organizations to forego opportunities for profit improvement. Since the publication of the Gardiner and Blackstone research, spreadsheets with in‐built Linear Programming (LP) based optimizers allow for quick “what‐if” analyses that encourage efforts toward optimal solutions for complicated problems. This article is a review and update of the Gardiner and Blackstone methodology based on spreadsheet LP that provides enhanced solutions in complex environments with multiple products and bottleneck situations. Specific managerial implications are offered.

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