RUNNING HEAD: Case 7 Case 26, Scotts Miracle-Gro: The Spreader Sourcing Decision
Unit 7 Scotts Miracle-Gro Case Study Analysis
School of Business and Management
MT460 Management Policy and Strategy
The Scotts Miracle-Gro Company based in Marysville, Ohio began in 1868 as the Scotts Company until 1995 when a merger between The Scotts Company, known for its weed free seeds and Miracle-Gro occurred. While Miracle-Gro historically outsourced all production to contract manufacturers, most of which are in China, Scotts had been manufacturing its spreaders since its 1992 acquisition of Republic Tool & ...view middle of the document...
However, it may be those high shipping costs and other costs and disadvantages associated with outsourcing or off shoring will effectively negate the apparent benefits of shutting down Temecula and moving to a low-cost location. The core problem thus involves deciding where to optimally locate the spreader production in order to best serve Scotts’ interests and the interests of its key stakeholders.
Define the Problem
Although upper management is keying in on the potential cost advantages of closing down the Temecula plant and moving manufacturing to China, there are many other variables to consider besides immediate cost savings. Those variables to consider include quality control over manufacturing, the need to carry a safety inventory because of long shipping times, responsiveness to market, and impact on existing Scott’s employees and customers, and company image.
There are significant differences between the estimated first year costs at a Chinese contract manufacturer versus the Temecula plant. The Chinese building cost of $200,000, is close to 6.6% of the $3,000,000 annual lease on the Temecula facility. The current Chinese cost is approximately 6.5 cents per kilowatt verse the California rate of 16 cents per kilowatt.
Actual numbers concerning savings are not available due to the information given in our reading, but it is most likely that the Chinese plant will be less energy efficient than the California plant, which will inevitably decrease those savings to some degree (Gray, Leiblein, 2008).
The biggest difference in cost from what I have read will be direct labor costs. The Temecula plant employs 195 workers earning $16.25 and 16 salaried employees averaging $125,000 annually. Chinese wages are roughly 91 cents an hour with an expected 40% increase over 10 years (Gray, Leiblein, 2008). Again lower Chinese production rates will offset this savings some, and Scotts will most likely have to hire additional management to oversee operations in China decreasing those savings further.
Scotts lead time would increase and therefore they would have to maintain an additional 8 weeks of safety stock margin costing $460,000 and the cost of ten new molds for the in-mold labeling were added to the total additional costs for the Chinese operation. On top of these costs there will be transition costs, contracting costs and travel costs. Foreign currency exchange risk is another concern for Mr. Bawcombe (Gray, Leiblein, 2008).
Keep production at Temecula. This would avoid all the risks associated with off shoring or outsourcing and would maintain the quality and productivity advantages at the Temecula plant. Despite projected productivity improvements over the next five years, it will not keep costs down.
Outsource to a Chinese Manufacturer. This will probably save costs versus keeping manufacturing at Temecula, although...