In today’s globalized business environment, outsourcing is increasingly becoming a critical strategic decision. Many organizations have been as a result put under much pressure to achieve greater efficiencies and reduce their costs in order to develop and leverage the capabilities needed to compete in today’s global business environment (MClvor, 2008). In reference to this fact, the authors, in this case, seek to bring out the various considerations needed and their impacts on decisions to outsource or make
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Synopsis of the Situation
Scotts Miracle-Gro, the company which is the subject of this case is a world market leader in the consumer loan and garden products and to some extent professional horticultural products (Pearce & Robinson, 2010). The case retraces the company’s long history to its current glory. As of now, the company faces a major test to make a difficult decision crucial to its survival and bottom-line going forward. It’s a classic illustrative application of trade-offs and buy-ins between operations, finance and strategy in make-buy decisions faced by many manufacturing firms today.
The key issues the case seeks to illustrate are the globalization of the business environment and its relation to cost reduction, efficiency, and business strategy.
Define the Problem
Occasioned by high costs and inefficiencies in managing production across three independent locations in the year 2000, the Scotts management decided that a move to have everything under one roof in Temecula was the most efficient solution that would have rationalized production. Since then and under a five-year leadership from 2002-to 2007 of Bawcombe as director of operations, the efforts employed to improve productivity through innovations in process and product have been largely successful (Pearce & Robinson, 2010). This is however as far as the Temecula facility alone is considered. Mr. Bawcombe is yet again presented with another daunting test in justifying why the facility should continue to run and not outsource manufacturing to China where seemingly the company would greatly benefit from very cheap labor and modern efficient technologies. If such a scenario was to be, however, it would definitely mean an end just like the rest of the earlier facilities of Temecula (Pearce & Robinson, 2010). As the leading figure in Temecula, Mr. Bawcombe has to put up a very convincing case of why the facility should be spared and left to stay.
There are three alternative solutions to this problem. First, Bawcombe could just throw up the towel and give in to the fact that it is simply not possible to beat the many advantages that outsourcing to China has to offer and therefore give up everything on its own production. The second alternative would be to start a Scotts-owned offshore company in China which will enable the company to achieve the many advantages associated with production in China without losing grip and control of its production. Third and finally, Mr. Bawcombe could come up with a very convincing case and argue that production in America is as good as in China and avoid the many uncertainties involved in relocating production to China.
Selected Solution to the Problem
From the costs involved as well as disruptions in the supply chain, Scott should continue with the Temecula facility and instead focus on shipping components from China. There are of course many reasons for doing this. Firstly, despite labor and electricity costs being slightly high in Temecula, they don’t to a much extent make a considerable portion of the overall costs involved. Secondly, their a lot of indication that while these two items are costly, trends suggest that they will overly be declining as productivity and efficiency continues to be enhanced. Contrary to this, the costs of these two key inputs are currently low in China but are generally expected to go up. Thirdly, knowledge and technology are regarded as very vital assets to an organization’s innovative capacity and this will be lost with outsourcing not to mention the many other additional costs both administrative and logistics that would have to be incurred if outsourcing was opted for.
The selected solution requires minimal adjustments in terms of the current activities and operations. What needs to be emphasized though is the adoption of energy-efficient measures to save on electricity costs as well as focus on staff development to enhance productivity.
I would recommend that the company should look into possibly how it could outsource more none core activities to China and focus on the core activities. For instance, it could outsource the production of more components and assembly activities to China. This would mean that it would instead have to ship to China the core components therefore not having to lose its gained technology and knowledge while at the same time taking advantage of cheap labor and low energy costs in China.
In contemplating outsourcing or off-shoring it is not just enough to look at costs only. It is important not only to view such a decision from the transaction cost perspective but also from a resource-based perspective. Technology and knowledge are very essential in today’s rapidly innovative environment.
MClvor, R. (2008). What is the right outsourcing strategy for your process? European Management Journal, 26:24-34
Pearce, J.A. & Robinson, R.B. (2010). Strategic management 12th edition. Irwin/McGraw- Hill-United States