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The purpose of this article is to determine whether staying at the Temecula plant or outsourcing to China is the best option for Scotts Miracle-Gro. A cost analysis will be used to determine which option will give Scotts Miracle-Gro the best opportunity for long-term growth and profit.
It has been determined that staying in the United States at the Temecula plant in California will be the best decision for Scotts Miracle-Gro financially and with regards to their image and product quality. However, in order to remain competitive, costs must be lowered to keep profits up to par with where they would be had the company decided to outsource. ...view middle of the document...
An analysis of the costs between manufacturing in Temecula, CA and in China show that Scotts Miracle-Gro can save between $4.6 million and $4.8 million per year by using a contract manufacturer. See Exhibit 1 Cost Analysis. However, the Temecula plant is currently innovating more efficient strategies for obtaining energy and increasing manufacturing productivity. These ongoing improvements will reduce labor and overhead costs per unit while maintaining control of quality and processes in Temecula.
As of 2007, a goal was set in place to automate the Temecula, CA plant as much as possible. This kind of plant improvement would increase production and quality control far above that of a contract manufacturer who has little incentive to invest in such technologies. Increased quality control and productivity leads to lower costs and tighter cash flows.
Maintaining manufacturing in-house also retains the relationship that Scotts Miracle-Gro has between its manufacturing and R&D departments. This relationship allows the company to have collaboration between the two areas of expertise which leads to more cost effective methods of designing products for manufacture.
The savings on Chinese labor and electricity are great, but the additional $8 million in transportation costs and $460,000 in required yearly safety stock inventory carrying costs quickly diminish the benefits. The left over savings do not offset the risks or sacrifices mentioned above. Therefore, Scotts Miracle-Gro should stay in the United States at the Temecula plant and should strive to cut costs to stay competitive, below is a list of ways this can be achieved.
Reducing Production Costs
Through research, it has been determined that the location of the Temecula plant in California would be an ideal location for solar panels technology for the following reasons:
* Temecula gets on average only 6 inches of rain per year (versus the US average of 37 inches per year),
* Temecula gets an average of 0 inches of snow per year (versus the US average of 25 inches per year), and
* On average, Temecula gets over 276sunny days per year.
This technology has the potential to offset from 100% to 1% of the annual electricity usage. A cost analysis has been performed for Scotts Miracle-Gro using the location of Temecula, CA and the estimated usage of 8,000,000 kWh’s of electricity per year.
It has been determined that by implementing solar energy panels to offset 50% of the plants annual electricity usage, this will provide the company with the following incentives (please refer to Exhibit 2 for the full cost analysis):
* An average monthly savings of $559,600,
* An average 25 year savings of $279,660,603.33,
* A ROI of 215.82%,
* Only a 14.58 breakeven point,
* 30% Annual Federal Tax Credit, and
* The peace of mind knowing that the company is helping...