Scotts Spreader Sourcing Decision

Scotts Spreader
Sourcing Decision
- Business Opportunity
  - Move Production to China
- Alternatives
  - Remain in the US
    - Was the right decision in 2000
    - Productivity improvements 6% cost reductions
    - Productivity improvements 6% reductions over next 5 years
    - 190 employees
      - Trained in lean management
        
        Workforce-driven improvement projects
      - Being trained as machine technicians
      - Significant general/manufacturing Skill
      - Quality Manager = Design Engineer
      - Carefully managed impressions/attitudes
    - Automation efforts in progress
      - Cut landed costs
        
        Comparable to China
    - Higher Electricity Costs
      - Offset by shipping costs
    - In-mold Labeling
      - Key part of planned marketing campaign
      - Opportunity to apply to other Scotts products
  - Outsource to China
    - Already outsource complex components
    - Injection moulding = easy
      - Many suppliers
    - In Mold Labeling
      - Would require technology transfer
      - Would require Scotts to provide machinery
      - Would require new molds
      - $400K In new molds if moving to China
    - Labor Rates
      - $0.91/Hr
      - Increasing 40% (or more) or next 5 years
    - Productivity
      - Somewhat Lower
    - Freight Costs
      - $8 Million Annually
        
        Less a percentage of the $1M current
      - Increasing at 3% rate
    - Lead time
      - 8 weeks of inventory stockpile
    - Transition costs
    - Travel costs/ management time
    - Weekly Conference calls w/suppliers
    - Delayed detection of quality issues
    - Currency Risk
    - Political Risk
  - Direct investment in China
    - $8 Million Costs
    - One Year to accomplish
    - Offered direct control
    - Currency Risk
- Benefits
- Costs
- Financial Analysis
  - Discount rate 15%
  - Capital improvements investment $500K Annually (US Plant)
  - Capital improvements investment $300K Annually (China Plant)
  - $400K In new molds if moving to China
  - $460K increased inventory to offset lead time
  - Plastic Resin - same cost world over
    - Regrind process savings $100K annually
  - Us Production Facility
    - Labour Costs
      - 195 X 2080 * 16.25
      - 16 X $125,000
      - Increasing at 3% annually
        
        Offset by production improvements for the next 15+ years
    - Electricity Costs
      - 8M Kilo-watt Hrs
        
        $0.16/Kilo-watt hr
        
        $0.025 surcharge per hour for 3 years
      - Costs expected to increase 50% by 2017
        
        Partially offset by process improvements
        
        Net increase 25% over 10 years
    - Overhead costs
      - $1 Million
        
        Would revert back to corporate
      - 30% of manufacturing costs (direct labor/electricity)
- Assumptions
- Sensitivity Analysis
- Project Description
- Implementation Plan
- Recommendation