The defence ministry had been told to develop plans for a "modest military industrial complex," the president, who came to power in May, said
Nigeria has been battling the militant Islamist group Boko Haram for the last six years.
The US has refused to sell arms to Nigeria citing human rights abuses.
President Buhari told a gathering of newly graduated military officers that Nigeria "must evolve viable mechanisms for near-self-sufficiency" in defence equipment that it usually imports.
On a visit to Washington last month, Mr Buhari said that the US had "aided and abetted" Boko Haram in the past by refusing to sell weapons to Nigeria.
A US law prevents the government from selling arms to countries which fail to tackle human rights abuses.
On Tuesday, a group of visiting US Congress members said Washington could lift its ban on shipping arms to Nigeria's military if the country improved its human rights record.
The US's stance has effectively stopped other Western countries from selling sophisticated military hardware to the country, the BBC's Bashir Sa'ad Abdullahi reports from the capital, Abuja.
Nigeria's only weapons factory in the northern city of Kaduna mainly produces rifles and civilian tools, Mr Buhari's spokesman Garba Shehu told the Reuters news agency.
He said that defence chiefs had now been asked to "re-engineer" it.
Boko Haram has killed some 10,000 people since 2009 and has also kidnapped hundreds of girls and women.
Last month, human rights group Amnesty International said that some 8,000 men and boys had died in Nigerian military custody after being detained as suspected militants.
The military rejected this allegation and Mr Buhari promised an investigation, although there have been no further details.
Why Boko Haram remains a threat
Who are Boko Haram?

Amarjeet Singh-Bhakar, 37, died after a disturbance on Prince Edward Avenue, Rhyl, at about 03:00 BST.
The 15 and 16-year-old, who cannot be named for legal reasons, were remanded in custody until a hearing at Mold Crown Court on Thursday.
Wrexham Magistrates' Court heard one of the youths was also charged with wounding another man.
Four other men - Mr Singh's cousin, Amar Singh, 28, and younger brother, Mohanjeet Singh, 18, Ameer Hamza Wahid, 24, and Sanah Ullah, 30, all from Greater Manchester - have been remanded in custody until 2 June, charged with violent disorder.
A 15-year-old youth, also from Greater Manchester, was charged with violent disorder and remanded in youth detention until 2 June.
In a statement released by North Wales Police, Mr Singh-Bhakar's wife, Sushi, said her shopkeeper husband had been a "real family man".
"He was so caring and everything he did was for his family and his two children," she said.
"He was my soul mate and everyone loved him to bits. We will miss his smile and the way he lit up a room when he walked in."

The Beast Race featured 20 obstacles - many of them involving cold water and mud.
Entrants could complete the event near Inverness solo or as part of a team.
Nigeria is going to establish a domestic weapons factory in an effort to cut its dependence on imported arms, President Muhammadu Buhari has said.
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Two youths have appeared in court charged with murder following a stabbing in Denbighshire on Sunday.
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A 10km obstacle race was held at Aldourie at Loch Ness at the weekend.