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I am writing you in advance of your meeting with the Scotts-Miracle Gro executive team. I understand that you face the possibility of shutting down operations in Temecula and I want to lend some help and financial expertise.
After much deliberation, I believe it is the best decision to keep the Temecula plant open and not outsource to China. There are many costs associated with outsourcing to China and I do not believe the positive aspects of outsourcing outweigh the increase in costs.
Cost Analysis
Labor Costs
Labor is by far the most important factor in this decision. One of the biggest draws to China is their cheap labor. The relevant labor cost in China right now is $0.91 per hour with an expected increase of 40% in the next 10 years. In comparison, relevant labor cost in Temecula right now is $16.25 with an expected increase of 3% per year (Exhibit 4). Assuming each of Temecula’s 195 employees works 40 hours per week and 50 weeks per year, that totals a labor cost for this year of $6,337,500 compared to $354,900 in China for the same amount of employees.
I understand that the cost differential is staggering. However, I would like to point out that there are many ways to offset these costs without outsourcing to China. One huge factor in this is worker productivity. Workers are much more productive in the United States and perform tasks at a more efficient rate than in China. The new hand spreader used to require six people to assemble it and we have redesigned the components so that only four people need to work on it. With more advancements like this and making your Temecula plant as automated as possible, you can cut costs in Temecula by the hundreds of thousands of dollars.
By hiring an outside labor force in China, you would be lengthening the company’s information gap. It might take Scotts-Miracle Gro one day to figure out a problem in Temecula or perform certain testing, when it could take up to two weeks to have that done in China.
After much deliberation, I believe it is the best decision to keep the Temecula plant open and not outsource to China. There are many costs associated with outsourcing to China and I do not believe the positive aspects of outsourcing outweigh the increase in costs.
Cost Analysis
Labor Costs
Labor is by far the most important factor in this decision. One of the biggest draws to China is their cheap labor. The relevant labor cost in China right now is $0.91 per hour with an expected increase of 40% in the next 10 years. In comparison, relevant labor cost in Temecula right now is $16.25 with an expected increase of 3% per year (Exhibit 4). Assuming each of Temecula’s 195 employees works 40 hours per week and 50 weeks per year, that totals a labor cost for this year of $6,337,500 compared to $354,900 in China for the same amount of employees.
I understand that the cost differential is staggering. However, I would like to point out that there are many ways to offset these costs without outsourcing to China. One huge factor in this is worker productivity. Workers are much more productive in the United States and perform tasks at a more efficient rate than in China. The new hand spreader used to require six people to assemble it and we have redesigned the components so that only four people need to work on it. With more advancements like this and making your Temecula plant as automated as possible, you can cut costs in Temecula by the hundreds of thousands of dollars.
By hiring an outside labor force in China, you would be lengthening the company’s information gap. It might take Scotts-Miracle Gro one day to figure out a problem in Temecula or perform certain testing, when it could take up to two weeks to have that done in China.