Scott Case Analysis
Autor: kusumo18 • October 3, 2016 • Case Study • 591 Words (3 Pages) • 896 Views
Scott’s Miracle-Gro Case
- Risk of outsource :
- Freight cost from China (not to mention quality control and inventory risk of being lost, broken, and tampered)
- Exposure of the know-how of “in-mold labeling” to the supplier in China
- Losing the ability of innovation process
- Increase reliance on supplier
- Natural disaster risk : earthquake, tsunami (during shipping), etc.
Benefit of outsource :
- Low Production cost : labor, electricity, overhead
- Increase the labor flexibility
- Financial analysis 10 year projection (last page)
- What Should Scott do?
Scott should keep the manufacturing plant in Temecula. Based on cost analysis, Scott could save around $8.6 million if he finally decided to open a plant in China. But in 2007, a goal already set in Temecula to make this plant as automate as possible, which will increase the quality and productivity rate. These benefits will be cheaper and more beneficial for company rather than maintaining quality control and process in China, which is far away from US. The savings on Chinese labor and electricity are great, but $8million transportation cost and $460k safety stock are not great anymore. Also the risk during transportation is very high. Not to mention, Chinese labor has lower productivity level comparing to US labor. Also there will be a communication issue between R&D and Chinese labor which is crucial and additional training cost for Chinese labor which makes holding Temecula plant is much better than outsource it. McGrath, Martin, and Kukla (1981) talking about agency theory research is focusing on information systems, outcome uncertainty, and risk because it is important for researchers to focus on these things before moving into innovation, strategic alliances, and vertical integration. Also Williamson (1991) talks a lot about whether the risk is worth it or not comparing to the benefit from the cost.
Several ways that scott can do to make Temecula plant more budget-friendly are :
- Find ways to reduce material input without jeopardizing the output quality,
- Excess plastic resin should be recycle back into the production line to reduce cost and disposal cost of waste
- Making a long term contract with plastic injection molding vendors
Initial outlay | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Year 8 | Year 9 | Year 10 | |
Go to China Costs | |||||||||||
Molds | ($40,000) | $0 | $0 | $0 | $0 | $40,000 | $0 | $0 | $0 | $0 | |
Transportation | $8,000,000 | $8,240,000 | $8,487,200 | $8,741,816 | $9,004,070 | $9,274,193 | $9,552,418 | $9,838,991 | $10,134,161 | $10,438,185 | |
Lease | ($8,000,000) | $200,000 | $200,000 | $200,000 | $200,000 | $200,000 | $200,000 | $200,000 | $200,000 | $200,000 | $200,000 |
Labor | |||||||||||
Production | $369,096 | $383,860 | $399,214 | $415,183 | $431,790 | $449,062 | $467,024 | $485,705 | $505,133 | $525,339 | |
Admin | $30,285 | $31,799 | $33,389 | $35,058 | $36,811 | $38,652 | $40,585 | $42,614 | $44,744 | $46,982 | |
Raw materials | $100,000 | $100,000 | $100,000 | $100,000 | $100,000 | $100,000 | $100,000 | $100,000 | $100,000 | $100,000 | |
Energy | $520,000 | $530,400 | $541,008 | $551,828 | $562,865 | $574,122 | $585,604 | $597,317 | $609,263 | $621,448 | |
Increased inventory costs | $460,000 | $460,000 | $460,000 | $460,000 | $460,000 | $460,000 | $460,000 | $460,000 | $460,000 | $460,000 | |
Overhead costs | $0 | ||||||||||
Capital improvements |
| $300,000 | $300,000 | $300,000 | $300,000 | $300,000 | $300,000 | $300,000 | $300,000 | $300,000 | $300,000 |
Total: | ($8,040,000) | $9,979,381 | $10,246,06 | $10,520,81 | $10,803,89 | $11,095,54 | $11,436,028 | $11,705,63 | $12,024,626 | $12,353,301 | $12,691,954 |
Stay in US Costs | |||||||||||
Molds | $0 | $0 | $40,000 | $0 | $0 | $0 | $0 | $40,000 | $0 | $0 | |
Transportation | $0 | $0 | $0 | $0 | $0 | $0 | $0 | $40,000 | $0 | $0 | |
Lease | $3,000,000 | $3,000,000 | $3,000,000 | $3,000,000 | $3,000,000 | $3,000,000 | $3,000,000 | $3,000,000 | $3,000,000 | $3,000,000 | |
Labor | |||||||||||
Production | $6,591,000 | $6,788,730 | $6,992,392 | $7,202,164 | $7,418,229 | $7,640,775 | $7,640,775 | $7,640,775 | $7,640,775 | $7,640,775 | |
Admin | $2,000,000 | $2,060,000 | $2,121,800 | $2,185,454 | $2,251,018 | $2,318,548 | $2,388,105 | $2,459,748 | $2,533,540 | $2,609,546 | |
Raw materials | |||||||||||
Energy | $1,480,000 | $1,598,400 | $1,600,000 | $2,000,000 | $2,500,000 | $3,125,000 | $3,906,250 | $4,882,813 | $6,103,516 | $7,629,395 | |
Overhead costs | $2,421,300 | $2,516,139 | $2,577,718 | $2,760,649 | $2,975,469 | $3,229,733 | $3,464,108 | $3,757,076 | $4,123,287 | $4,581,051 | |
Capital improvements |
| $500,000 | $500,000 | $500,000 | $500,000 | $500,000 | $500,000 | $500,000 | $500,000 | $500,000 | $500,000 |
Total: | $15,992,300 | $16,463,27 | $16,831,91 | $17,648,27 | $18,644,72 | $19,814,056 | $20,899,24 | $22,320,412 | $23,901,119 | $25,960,767 | |
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows Difference | ($8,040,000) | $6,012,919 | $6,217,210 | $6,311,098 | $6,844,381 | $7,549,178 | $8,378,028 | $9,193,606 | $10,295,786 | $11,547,817 | $13,268,813 |
NPV= |
| $26,706,426.42 |
...