Case Name Scotts Miracle-Gro The Scotts Company has been around since 1868. Ever since, they have been supplying many families with weed-free seeds. Throughout the years, Scotts has distributed many supplies such as fertilizers, seeds, soil, spreaders, and more. They were the first to introduce Turf Builder and they began spreader business with drop spreaders (Scotts Miracle-Gro). The company started expanding with mail order distribution channel, then to retail channel distribution. Miracle-Gro was founded in 1951, where all productions were outsourced with no internal production.
When both companies united in 1995, Scotts Miracle-Gro became the number one company. It is one of the largest lawn and garden industry in North America. Also, making them the leading supplier and marketer of consumer products for do it yourself lawn and garden care (Scotts Miracle-Gro). In 2001, Scotts Company moved to a 412,000 square foot facility in Temecula, California. Having three different buildings in Carlsbad, California from Republic Tool & Manufacturing Company for spreader, production was becoming inefficient and costly which created concerns for the company. The only efficient solution was to relocate.
This was to create improvement and to reduce cost for the company. Regardless of the move, to keep the company open in California was costing them with high plant and labor costs. A fifteen year lease was signed in 2001 on the current Temecula facility. Even though the lease is a 15-year contract, the Scotts Company believes that they could terminate it earlier. However, the $3 million annual fee for the facility and other factory costs are creating a large amount of cost pressure. Bob Bawcombe, the director of operations at the Temecula plant, has been under a lot of pressure to contain and lower high plant and labor costs.
While he has been achieving a significant productivity improvement, he has been trying his best to fight off the corporate plans to outsource the factory’s production to a possibly cheaper facility in China. Bawcombe has improved production six percent each year, over several years and he believes that the trend is to continue for another five years. The company has over 190 line workers over lean management techniques, which have improved the workforce to have better projects. The plant has built a general manufacturing skill (Scotts Miracle-Gro).
By having those skills, it has helped the company in important process innovations. One of these innovations was the development of new hand spreader assembly process. Instead of using six people to put a product together, like before, it now takes four persons to do the job. Even though the company has had great improvements Bod, is still looking for greater cost reductions. The Temecula plant also had the ability of doing “in-mold labeling. ” The “in-mold labeling”, mainly, allowed them to put their label on the spreaders hopper so it wouldn’t fade, scratch, or peel over time.
This new method took place of the older method, “Hot stamping of the labels”, which was low in quality resulted the labels to fade and peel. But, some were opposed and believed that this had no value, in the end, customer. However, the in-molding was the key that was used to write messages on the spreader to drive higher fertilizer and seed usage. Bod ensured those working in the plant would not be fired, because he strongly believes his team having such manufacturing skills improved the product and process innovation and such skills should be kept.
Instead of firing those skilled, workers they hired temporary workers for labor. The main expenditures of this plant were raw material, labor, electricity, and overhead. Another huge expense the company had was all the improvements they were making. It would cost the company about $500,000 per year, since they did not use a contract manufacturer. They estimated they lost a total of $200,000 per year. Because of all the costs, Scotts is experiencing difficulties at the Temecula plant. They are considering the possibility of completely outsourcing the spreaders manufacturing and assembly to China to save costs.
Scotts Miracle-Gro already has experience in outsourcing. They have already outsourced the most complex components of the spreaders to China. They are considering completely outsourcing the company in hopes that they will profit from the move. In doing so, they would have to shut down the Temecula plant and, by closing the plant, Bob Bawcombe, will lose all the skilled laborers he has trained and his efforts to keep them by hiring temporary workers, will have gone to waste. Another issue to complete outsourcing is there “in-molding labeling” technology.
If Scotts decides to outsource, it needs to provide the contract manufacturer with the equipment and the know-how to perform “in-molding labeling”, if not, they must remove the feature from its spreaders. An additional concern with this plan is if they do offer the training and equipment, it is questionable that the manufacturer will be able to use the current mold from Temecula. They would need 10 molds at $40,000 each and each mold lasts approximately five years. At Temecula they have used roughly half the life. Bob doubts that outsourcing is the right way to go if they are seeking to save costs.
He sees flaws in the outsourcing process. Bod Bawcombe sees that that company has not taken into consideration the in-mold labeling equipment loss or the loss of the skilled workers. Another issue that might arise is China’s current labor cost is rising at a fast pace. Currently the labor cost in China is at $0. 91 per hour and is expected to increase 40 percent over the next 10 years. It can only mean over that time span it would be approximately 1. 28 per hour for labor. Also the Chinese workers have a somewhat lower efficiency then U. S. orkers. At this time electricity was at $0. 0065 per kilo watt hour it has been predicted with the increase in coal the price will rise roughly 20 percent over the next 10 years. This is a low estimate. The lease space it is estimated at $200,000 annual. Since they plan to outsource they will have to bring the spreaders back for sale estimate on the freight cost at the same volume is about $8 million and anticipated to increase 3 percent annual. Nonetheless about $1 million of that will be offset because the current component that is outsourced.
Being that freight isn’t time they would have to hold an additional safety stock for eight weeks estimated at $460,000 to offset the lead time. Since spreaders are an agriculture item there are no duties and taxes on importing them for now. Furthermore, setting up the plant would cost Scotts about $8 million and take a time frame of a year to get it started. Furthermore, Scotts Miracle-Gro Company will have to face certain issues with suppliers. There will be many disadvantages if Scotts Miracle-Gro outsources overseas because firms might not be living up to expectations.
Such lead time and defected items are a main issue. Many problems won’t be detected until the materials are back to the USA. Until it arrives to the States the company will already be losing money. Yeah there’s cost advantage if we outsource to China but we’ll also be experiencing problems. However, if we make our own materials in-house we are able to protect proprietary technology, have no competent supplier by making an item at home, have better quality control, and use existing idle capacity. Also we are able to control the lead-time, transportation, and warehousing cost.
Even though some raw materials will have to be transported from nearby, but by doing this we are able to minimize the holding cost and lower our cost (Leong, 2012). Works Cited Scotts Miracle-Gro:The Spreader Sourcing Decision. (2008). Retrieved October 24, 2012, from cb. hbsp. harvard. edu/cb/web/he/product_view. seam? R=908M78-PDF-ENG&T=EDC&C=PURCHASED_MATERIALS&CD=16096679&CS=f293f183b5968d1954553801cb51f507 Leong, W. T. (2012). Principles of Supply Chain Management . Mason OH Page 54, 112-113.