Case study Report - Scotts Miracle – Gro: The spreader sourcing

decision
Executive Summary:
The Scotts Miracle – Gro is a company in the US producing and supplying lawn and garden
care products. Their spreader production and assembly plant is in leased facility at Temecula,
California. The Scotts management are under intense pressure to reduce increased
production cost due to high labor and utility cost. Therefore, the management want to close
down the Temecula plant and outsource this production operation to China because of cheap
labor and utility cost to increase the profit margin. Upon analysis of the risk/benefits and
financial cost, it is recommended that the plant remains to operate from their current facility
at Temecula, California to maintain its critical capability of product and process capability in-
house and to avoid financial risk likely to result from yuan fluctuation in the future.
Introduction:
The Scott Miracle – Gro Company (Scotts) is a leading supplier and marketer of consumer
products for do-it-yourself lawn and garden care, headquartered at Marysille, Ohio. This
company was formed in 1995 by a merger of Miracle-Gro and The Scotts Company and
reported net sales of $2.7 billion in 2007. From 1992, Scotts operated manufacturing plant in
a three building of Carlsbad, California for spreader production. By 2000, the management
realised the cost and inefficiencies associated with managing production across three
independent building and decided to find alternative. In 2001, the management decided to
move from Carlsbad and leased a 412,000-square foot facility in Temecula for 15 years at an
annual cost of $3 million.
Bob Bawcombe was the Director of operations of Scotts Temecula plant who was in-charge
since 2002. In the past five years from 2002 – 2007, Bob and his team greatly improved
productivity through continuous investment in product and process innovation. The
development of a new hand spreader assembly process which automated the assembly line
and further reduced the man power is one example of process innovation achieved at
Temecula plant. Another innovation of Temecula plant is the use of “in-mold labelling” for
large product which only few facilities in the world known to have such capability. Despite
these innovations, the management of Scotts was under intense cost pressure because of
comparatively high plant and labor cost at Temecula. Raw materials, labor, electricity and
overhead (including building lease) are identified as the major cost drivers of the Temecula
plant. Therefore, the management of Scotts is contemplating the option of
outsourcing/offshoring production of its spreaders to China to increase the profit margin.
Outsourcing to China:
The option to move the production plant to China has its own benefits and risks associated
with it. It is therefore necessary for the Scotts management to evaluate and understand
risk/benefits and financial gain of staying in the US or moving to China before taking any major
decision.
Benefits of outsourcing to China:

 Cheap labor ($0.91 per hour compared to $16.25 per hour in the US)
 Cheap electricity ($0.065 per KW/hour in China, $0.16 per KW/hour in the US)
Upon reviewing the risks, benefits involved in outsourcing to China is overshadowed by the
below list of risk which include but are not limited to:

 Loss of quality – The customers of Scotts products who are using made in US product
could become apprehensive about the quality of the product made in China. This may
also result Scotts losing some of their customers in outsourcing/offshoring process.
 Loss of product innovation – The product innovation requires production capability to
be in-house. Product and process innovation is one key area which places Scott ahead
of its competitors and to provide competitive price to its customers. Temecula plant
workers have been trained in lean management techniques which helped to identify
number of workforce-driven improvement projects. When spreader production is
moved to China, Scotts might lose its capability of product and process innovations.
 In – mold labelling – If Scotts decides to outsource the production to China, it either
needs to provide the vendor with equipment and train the workers on how to use this
technology or remove this feature from its products. In- mold labelling is a unique part
of marketing campaign Scotts spreader product. When Scotts decides to share the
knowledge with the vendors, there is a high chance for vendor to copy this technology
and share it with their other costumers.
 Lead time – When Scotts decides to outsource, the lead time of Scotts supply would
increase and this requires Scotts to maintain a safety stock to offset this lead time
differential. Also, the defective batch will be detected only when it reaches the US. In
case of any defect, the entire batch needs to be rejected or reworked which may also
contribute to further increase in lead time.
 Government policies – At present spreaders are considered as agricultural product
and therefore Scotts does not pay any duties and taxes while importing them. In the
event of any policy changes, Scott might have to account for duties and taxes in their
financial analysis.
 Labor and other utility cost – One reason Scott find outsourcing to China as a viable
options is due to cheap labor and utility cost. However, from the historical data, it is
clearly evident that the cost of labor and utility increased higher than the expected
rise. There is chance for this trend to repeat itself in the future when Scotts decides to
Outsource.
 Currency exchange – In the past, Chinese government had undervalued the yuan to
the US dollar which avoided high fluctuations in the yuan-US dollar exchange rates.
However, this policy is controversial and if Chinese government decided to trade yuan
more freely, Scotts would end up under-estimating its financial analysis with respect
to outsourcing and end up spending more than the actual estimate.

Recommendation:
The Scott management should decide to continue its operations in Temecula plant. The
financial cost analysis in Annex shows that Scott can make a considerable savings from moving
to China its production operation. However, we notice that the cost analysis only accounted
for only fixed increase in the labor and utility cost which are likely to increase higher than the
estimate in the future. The management also need to factor in the risk of cost increase when
the yuan is traded freely and possible import duty and tax imposition due to policy changes.
In addition, the Scott will have to spend money and resources on training the workers in China
related to the spreader manufacturing process. It might also take some time for Scott to figure
out ways to improve the productivity of workers in China. It is also necessary to consider the
cultural difference of workers in the China and the management in the US which can further
affect the productivity when moved to China. Also, moving to China will hamper the process
and product innovation which Temecula plant which is critical for their business. This
innovation is giving Scott business competitive advantage over its competitors which is very
critical for their business.
It is therefore recommended that Scott Management continue to operate in Temecula to
avoid risks associated with the moving production plant to China. The Scott can consider other
options to reduce the operating cost in Temecula. They can reduce the labor cost by
automating their production process. The management can evaluate the feasibility of using
solar power to generate electricity to reduce the energy cost. They can also focus on
identifying the alternative raw material to plastic resin which can also contribute in cost
savings.
The justification for outsourcing production to China is very appealing from the cost analysis,
but the management needs to find the balance between cost reduction and address other
risks that can arise from their decision.

References:

 "Scotts Miracle-Gro: The Spreader Sourcing Decision." Supply Chain Management. McGraw-
Hill, 2010. 149-59.
 Oshri, I., Kotlarsky, J., & Willcocks, L. (2011). The Handbook of Global Outsourcing and
Offshoring , Basingstoke, Hampshire ; New York : Palgrave Macmillan.
Annex:

Assumptions:
 All cost is calculated in US dollars and assumed exchange rate of 7.65 yuan/US for 10 years.
 Number of workers is calculated based on productivity increase of 6% per year for US and 2%
for China.
 Since the productivity is lower in China, we are including 20 more workers in addition to 195
workers in the US to compensate the productivity loss.
 Labor working hours are assumed as 5-day work week, 8 hours/day and 50 week/year for both
China and the US plant.
 General administration cost in China is assumed to be $500,000 per year
 All the other cost is calculated with fixed increase as mentioned in the article, not considering
the yuan currency fluctuations.
 Electricity consumption in China and the US is assumed to be the same and fixed for 10 years.
 For offshore cost analysis, 2008 cost is assumed to be of the total cost of production in
Temecula plant in 2008 since plant need 1 year to be operational and the cost of subsequent
years is assumed to be same as outsourcing cost excluding the profit margin.
 Cost of plant closing in Temecula is unknown and hence not included in the analysis.