Scotts Miracle-Gro Company
Scott’s Case Study
Synopsis of the Case:
This case follows the outsourcing decisions of the Scotts Miracle-Gro company in June 2007. The company’s main production facility, located in Temecula, CA, produces all of the company’s domestic lawn seed and fertilizer spreaders. This facility was acquired after Scotts merged three fertilizer spreader production factories from the acquisition of Republic Tool & Manufacturing Company in 1992. A fifteen year lease was signed in 2001 on the current Temecula facility. Although this lease is noted as a 15-year contract, the Scotts company believes that they could terminate it early. This is important because they believe that the $3 million annual fee for the facility and other factory costs are …show more content…
This is due to rising labor costs, electricity costs, freight costs, and even inventory costs. Labor costs in 2005 increased an average of 10% in China which could be highly significant if that rate continued for the next few years. Electricity costs are also estimated to increase by 20% over the next decade which is may still be a low estimate due to environmental regulation pressures. Freight costs are expected to be around $7 million a year after being offset by components already sourced by China and are expected to increase by 3% each year. Also, inventory costs will increase dramatically due to an increase in lead time which will definitely result in the turnover ratio of the company to …show more content…
In the short run, your company will be burdened with multiple setup costs and shutdown costs along with low morale workers. This would hurt your company’s reputation dramatically and it would not get better since the quality of your fertilizer spreaders would decrease as well. Although costs will seem low and income may seem to increase in the beginning, time could create a disaster. Almost every cost driver in the new factory has an increasing rate that is higher than the rate that the Temecula plant faces. The only rate that is increasing at a higher rate in the Temecula plant are electricity costs, but the rate that is projected in China is expected to be greater than projected. Freight costs will also be much higher than current freight costs due to overseas shipping. Therefore, in the long run, once setup costs and shutdown costs have diluted, the cost of running the plant could almost match Temecula’s production costs. Also, Temecula’s net income has risen at a rate of 62% over the past 4 years. This is partially due to innovations and procedure improvements increasing productivity at a rate of 6% each year for the past 5 years. If the plant were to be outsourced, these innovations could not be created due to the lack of the in-house production capabilities that the Temecula plant has. In the end, the
Synopsis of the Case:
This case follows the outsourcing decisions of the Scotts Miracle-Gro company in June 2007. The company’s main production facility, located in Temecula, CA, produces all of the company’s domestic lawn seed and fertilizer spreaders. This facility was acquired after Scotts merged three fertilizer spreader production factories from the acquisition of Republic Tool & Manufacturing Company in 1992. A fifteen year lease was signed in 2001 on the current Temecula facility. Although this lease is noted as a 15-year contract, the Scotts company believes that they could terminate it early. This is important because they believe that the $3 million annual fee for the facility and other factory costs are …show more content…
This is due to rising labor costs, electricity costs, freight costs, and even inventory costs. Labor costs in 2005 increased an average of 10% in China which could be highly significant if that rate continued for the next few years. Electricity costs are also estimated to increase by 20% over the next decade which is may still be a low estimate due to environmental regulation pressures. Freight costs are expected to be around $7 million a year after being offset by components already sourced by China and are expected to increase by 3% each year. Also, inventory costs will increase dramatically due to an increase in lead time which will definitely result in the turnover ratio of the company to …show more content…
In the short run, your company will be burdened with multiple setup costs and shutdown costs along with low morale workers. This would hurt your company’s reputation dramatically and it would not get better since the quality of your fertilizer spreaders would decrease as well. Although costs will seem low and income may seem to increase in the beginning, time could create a disaster. Almost every cost driver in the new factory has an increasing rate that is higher than the rate that the Temecula plant faces. The only rate that is increasing at a higher rate in the Temecula plant are electricity costs, but the rate that is projected in China is expected to be greater than projected. Freight costs will also be much higher than current freight costs due to overseas shipping. Therefore, in the long run, once setup costs and shutdown costs have diluted, the cost of running the plant could almost match Temecula’s production costs. Also, Temecula’s net income has risen at a rate of 62% over the past 4 years. This is partially due to innovations and procedure improvements increasing productivity at a rate of 6% each year for the past 5 years. If the plant were to be outsourced, these innovations could not be created due to the lack of the in-house production capabilities that the Temecula plant has. In the end, the