1. Major issues （□drawbacks √advantages）
Issues with Temecula Operations * High costs ( labor cost, overhead cost, raw material cost, energy cost) but were being improved * Redundant and labor-intensive process, low efficiency lay-out, but were being improved * In-mold labeling -- high quality (Hot stamping -- low quality)
Issues with outsourcing to China * Scotts has to either provide the know-how of “in-mold labeling” or drop this feature. * Labor cost was low (√) but was expected to increase at 40% in the next decade. * Electricity cost was low (√) but was expected to increase at 20% in next decade. * Freight cost was USD 8 million and was increasing at 3% per year. * It had to keep safety stock of 8 weeks inventory ($460,000) to balance the increased lead time. * Contract manufacturer would take an 8% profit margin above costs. * Scotts also has to pay transaction cost and managing cost. * There would be a time-lag for quality reassurance in US due to the batch nature of suppliers. * Chinese government policy on Yuan remained uncertain. * Provisional agriculture product tariff-free policy existed (√) but later it might change.
It seems that risks outweigh benefits. Analysis is provided below. This plan is NOT advisable to be taken. 2. Alternative solutions * Setting up a new plant in China ( mentioned in the article ) * Initial cost would be USD 8 Million and taking one year. * Benefits would be low cost and direct control over process and quality. * Staying at Temecula in US ( in line with the director’s wish ) * Costs would still remain high in the short term * Relationship with local upstream suppliers and product design innovation could also lower raw material cost. * Local R&D collaborators better incorporated manufacture into design, ”design for manufacture” * Automation could result in decrease of both overhead cost and labor cost as well as increase of production efficiency. * Increasing quality control and productivity with expertise could also lead to low cost. 3. Analysis to solutions Cost-driver Analysis(USD) | Outsourcing/New plant in CN | US | China | Difference/unit | Difference(predicted) | | Labor cost( /h) | 16.25 (3%,10yrs) = 21.8 | 0.91 (40%) = 1.3 | 20.5 | 200ppl, 40h/week,50week/yr-8,200,000 | | Electricity cost( /kilo-watt) | 0.16 | 0.065 (40%) = 0.091 | 0.095 | 8,000,000 kilo-watt hours/yr-760,000 | | Stay in-house | US | | | Raw Material | 105,800,000 in 2006 ( extracted from balance sheet ) | -100,000 annually | | Overhead | Lease 3,000,000 | Corporate OH1,000,000 | Other OH30%(DL8,720,000+E1,280,000)=3,000,000 | 0( Total: 7,000,000 ) |
It can be deduced from the cost-driver analysis that total saved cost is approximately 8,060,000 if it operated in China. However the cost-cutting of raw material purchase might not be realized as much as it did in US, thus the amount of saved cost decreases to 7,060,000 or 7M USD. Comparing to the additional cost for operation in China, which is 8M shipping cost plus 0.46M extra inventory, it doesn’t seem a big advantage there. Moreover, it has to drift apart from its original indigenous resources that were part of the keys to its competitiveness. In conclusion, it’s firmly recommended that Scotts keep Temecula and focus on the improvement of the existing operating ecosystem.