Scott’s Miracle-Gro has a plant in Temecula, CA that produces seed spreaders. Management is deciding if it should keep the Temecula plant open or if it should outsource manufacturing either to mainland China or offshore China. Before Miracle-Gro became Scott’s Miracle-Gro, they outsourced to contract manufacturers for production. Scotts manufactured their spreaders since it acquired Republic Tool and Manufacturing. Scott’s Miracle-Gro manufacturing facilities have a plant in Temecula, CA. The Temecula plant improved productivity, efficiencies, and also different innovations including a new assembly process for their hand spreader. Also, they invented an in-mold labeling process that produced a label that did not fade, scratch, or peel off. Despite what the Temecula plant had done, management was looking to see if they could save money by outsourcing the full operation. The plant manager wanted to keep the Temecula plant open and felt that if the production was moved to China that there would be quality problems along with high shipping costs, and extra administrative costs could erase any economic benefit from outsourcing to China. Another alternative to outsourcing to China was building a Scotts-owned facility plant in China. This option would help keep the proprietary processes in the hands of Scott’s Miracle-G ro. However, the disadvantages associated with moving to China stated above (poorer quality, high shipping costs), would still be a negative. The problem is what should Scott’s Miracle-Gro do. We did a NPV analysis focusing on the 4 Cost drivers for the Temecula plants which are raw materials, labor costs, electricity costs, and overhead costs and compared them to what it would cost in China. The NPV for the Temecula plant is $94,826,678 (screenshot of spreadsheet in appendix). The NPV for China mainland (offshore NPV would be close to mainland China except for initial start-up costs, etc..) is $90,070,804 (screenshot of spreadsheet in appendix). We analyzed the data by using the numbers provided in the case. For example, for analyzing the Temecula plant, we used the information in Exhibit 4. However, some of the data (number of employees in China) we based the information on what the Temecula plant was using. Based just on the NPV, it seems that closing the Temecula plant and moving to China would be the best option. However, important the potential cost savings (in labor and energy costs) might be, it is also necessary to look at other factors. Some of the other factors would include the production quality, control over their own products, proprietary rights, longer lead times, having to carry safety stock, and their image to stakeholders and employees. Also, management needs to look at problems that might arise if China’s government changes laws, problems in cases of ports closing, and the training and productivity of new employees. Next, we will analyze the 4 cost drivers more in depth.
There were four main cost drivers examined in this case: Raw Materials, Labor, Electricity (Energy), and Overhead. Scott’s must evaluate these cost drivers to determine whether outsourcing the manufacturing of their spreader will improve the company’s profitability and/or operational efficiency. Although, in some instances the decision to outsource can be very clear based on the numbers alone, there are also other not so quantitative risks such as loss of control, loss of inventory flexibility, and loss of one’s competitive advantage. Raw Materials
Plastic resin is the main component in the manufacturing of the spreader bucket, and the costs are comparable whether it’s purchased in China or in the US. However, the Temecula plant did invest in a re-grind process which saves them an additional $100,000 per year. However, this savings has little impact on the overall operating expenses at the Temecula plant. Labor Costs
Labor rates are one of the main driving forces in...