SMG

Influential Factors in the Outsourcing Decision
Increased manufacturing and operating costs of spreader production at the Temecula plant have
influenced the decision to consider relocating production to China to increase profit margin. After
thoroughly analyzing the present and future logistical and financial risks of both the Temecula and
China plants, the team determined that Scotts Miracle-Gro should maintain spreader operations at the
Temecula plant. The following quantitative and qualitative analyses support the teams conclusion.
Quantitative Factors & Sensitivity Analysis

When evaluating the decision to outsource production, the team analyzed the total quantitative
costs of the supply chain (Figure 1). Production, SG&A, and initial investment costs have a significant
impact on the decision to outsource the Scotts Miracle Grow spreader from Temecula to China.
Quantitative factors evaluated in the analysis include total costs for transportation, labor, raw materials,
electricity, management, overhead (startup, molds), and the initial investment. Detailed Net Present
Value (NPV) analyses are shown in Figure 2 for Temecula and Figure 3 for China. Upon conducting
the impact of the ten-year analysis, the quantitative factors that have the most significant impact on total
cost between operations in China and Temecula are transportation and labor costs.
Raw materials and electricity costs both have minor impacts on total cost of operations in both
China and Temecula. The estimated $1.4 million in savings (figure 3) at the Temecula plant has a
minimal impact on total cost of operations. The same applies to the effect of electricity costs on the total
cost of operations in both China and Temecula. The Temecula plant would cost an estimated $9 million
(figure 3) more for electricity operations and thus, along with raw material costs, both factors do not
make a significant impact.
Management, overhead, and investment costs mildly affected the decision for operations and
averaged around $15 million. Both overhead and management costs favored operations in China (figure
3), while investment costs were cheaper in Temecula due to the established operations. Lastly, labor
costs had the third largest impact on total cost favoring operations in China by almost $55 million. With
1
the number of workers remaining the same in both operations, it is evident that the cheaper labor rates
(18 times less than Temecula) in China are a significant advantage.
There are inherent risks and uncertainties in some of the factors that financially impact the
decision to outsource to China. Changes in Transportation and Labor costs can affect the total landed
costs of the product. Figure 4 and Figure 5 illustrates that an increase in transportation costs from 3% to
9.4% per year, shifts the financial drivers to favor Temecula over China. A detailed transportation cost
sensitivity analysis is graphically illustrated in Figure 6.
On the other hand, productivity at the
Temecula plant needs to increase by 16.2% annually as shown in Figure 7 and Figure 8 and hourly labor
cost in China requires an unprecedented increase of 39.5% annually to financially prefer Temecula over
China (Figure 9 and Figure 10). Transportation costs had the most significant impact on maintaining
operations at the Temecula facility. Freight charges accounted for over $90 million in additional
charges by outsourcing production to China. This expense is almost double the benefit of labor costs
and thus plays an instrumental part in maintaining production in the Temecula facility.
Qualitative Factors Influencing the Outsourcing Decision

Although many of Scotts outsourcing analysis factors are highly measurable in nature, some are
harder to quantify than others. According to Chopras review of Supplier Scoring and Assessment (p.
428), replenishment lead time greatly affects the amount of safety stock held in inventory to account for
potential deviations in the supply chain. Scotts option to source the spreader to China increases lead
time an additional eight weeks, which generates not only $460,000 in safety stock, but also leads to a
continuum of other challenges. Increased lead time translates to greater potential for delayed shipments,
which damages the suppliers on-time performance ratings and consequently causes Scotts to hold even
more safety stock while accruing holding costs.
Supply inflexibility is another consideration in the Chinese outsourcing option. Chinese suppliers
would likely impose a minimum batch size requirement, which leaves little room to respond to intense
swings in demand with smaller, more frequent deliveries. Larger batches also greatly increase cycle
2
inventory, associated holding costs, and risk. Given larger lot sizes, the potential for poor quality
production tremendously increases costs from replacement orders coupled with long lead time, rework,
and finally customer dissatisfaction in the form of missed sales. Supplier viability depends on
sustainability in the form of quality and reliability, thus an accepted level of quality deterioration for
cost savings tradeoff may eventually inhibit the suppliers sustainability.
The most visible tradeoff with the China option is decreased manufacturing and labor costs
versus increased inbound transportation costs at Temecula. However, the lack of information
coordination capabilities expressed by Chinese manufacturers accentuates freight costs associated with
lack of visibility and the bullwhip effect, which minimizes the optimism outlook. Lastly, if the Chinese
government allows the Yuan to float or begins charging taxes and duties on agricultural products, costs
in China would soar. Heavy financial hedging would protect Scott from general fluctuations but would
not be a sufficient strategy to evade the inevitable.
Outline & Recommendations

The team recommends that Scotts should not outsource the manufacturing capabilities to a
contractor in China. Scotts would offer up a core piece of the business (as well as all of the technical
knowledge and possibly even the In Mold machinery) to a contracted source. Labor rate forecasts in
China are on the rise for the next decade. The potential exists that once the operation is fully functional,
the cost of labor may no longer be a significant advantage and the unpredictability of the Chinese laws
can still result in a disadvantage to Scotts. Output from the Chinese facility predictions are lower than in
Temecula, as the employees in China would experience a learning curve coupled with low productivity
rates. As previously mentioned, Scotts will make the tradeoff of responsiveness for cost-savings, which
consequently increases safety stock and working capital costs.
In conclusion, the justification for outsourcing production to China looks very appealing in the
analysis, but there needs to be a balance between cost reduction and the other challenges that arise from
using overseas contract manufacturers.
3
Figure 1 Summary Sheet
COMPARISON OF NET PRESENT VALUES

Temecula Analysis
YEAR 0
YEAR 1
YEAR2
YEAR 3
YEAR 4
YEAR 5
YEAR 6
YEAR 7
YEAR 8
YEAR 9
YEAR 10
Total
Total Cost
$17,562,750 $17,288,907 $17,026,784 $16,531,368 $16,296,679 $16,072,730 $16,075,843 $16,082,082 $16,091,420 $16,103,832 $16,119,297 $181,251,691
15% Discount Rate
1.0000
0.8696
0.7561
0.6575
0.5718
0.4972
0.4323
0.3759
0.3269
0.2843
0.2472
NPV
$17,562,750 $15,033,832 $12,874,695 $10,869,643 $9,317,679 $7,990,987 $6,950,031 $6,045,850 $5,260,314 $4,577,714 $3,984,444 $100,467,939
Total NPV
$100,467,939
China Analysis
Total Cost
$19,466,742 $12,340,613 $12,624,736 $12,919,439 $13,225,061 $13,941,953 $13,870,484 $14,211,035 $14,564,005 $14,929,806 $15,708,870 $157,802,744
15% Discount Rate
1.0000
0.8696
0.7561
0.6575
0.5718
0.4972
0.4323
0.3759
0.3269
0.2843
0.2472
NPV
$19,466,742 $10,730,967 $9,546,115 $8,494,741 $7,561,471 $6,931,615 $5,996,593 $5,342,454 $4,760,999 $4,243,983 $3,882,992 $86,958,673
Total NPV
$86,958,673
SPECIFIC COST BREAKDOWN OVER THE TEN YEAR PERIOD

Raw Material
Labor
Electricity
Lease
Temecula ($1,420,679) $62,014,061 $16,100,688 $33,000,000
China
$0
$3,896,102 $7,387,529 $2,200,000
Difference* $1,420,679 ($58,117,959) ($8,713,159) ($30,800,000)
* Note: Black indicates money saved by staying in Temecula
Management
$18,815,401
$4,515,696
($14,299,705)
Overhead
Freight Safety Stock
$34,434,425 $12,807,796
$0
$14,387,997 $102,462,366 $5,060,000
($20,046,428) $89,654,570 $5,060,000
Investment
$5,500,000
$17,893,054
$12,393,054
TOTAL COST COMPARISON OVER THE 10 YEAR PERIOD

Temecula
China
Cost of Goods
$109,694,070 $13,483,631
S,G and A Cost
$66,057,621 $126,426,059
Investment Cost
$5,500,000 $17,893,054
Total
$181,251,691 $157,802,744
* Note: Black indicates money saved by staying in Temecula
Difference*
($96,210,439)
$60,368,437
$12,393,054
($23,448,948)
4
Figure 2 - Cash Flow and NPV Calculations for Temecula

Year:
10
PRODUCTION COSTS
Raw Materials
Current savings from use of regrind
($100,000)
Annual increase in savings due to regrind usage

Cost savings from use of regrind
Hourly Labor Costs
($100,000)
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
($105,000)
($110,250)
($115,763)
($121,551)
($127,628)
($134,010)
($140,710)
($147,746)
($155,133)
($162,889)
Only hourly w age employees counted (i.e. direct labor personal and temporary w orkers)
$16.25
Current Avg. hourly rate

Annual increase %
Avg. hourly labor rate
$16.25
Current no. of w orkers
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
$16.74
$17.24
$17.76
$18.29
$18.84
$19.40
$19.99
$20.59
$21.20
$21.84
6%
6%
6%
6%
3%
3%
3%
3%
3%
195
Annual productivity increase
6%
Number of hourly w orkers

Total annual hourly labor cost
195
183
$6,337,500
$6,135,968
(Productivity assumed to increase at 6% for the first 5 years and then at 3% for the last 5 years)
172
162
152
143
139
135
131
$5,940,844
$5,751,925
$5,569,014
$5,391,919
$5,387,066
$5,382,218
127
123
$5,377,374
$5,372,534
$5,367,699
$0.2368
(Assuming a 5 day w ork w eek, 8 hours/day and a 50 w eek year)

Electricity Costs
4.00% <--annual grow th rate

$0.1664
$0.1731
Avg. Kw H rate
$0.1600
Surcharge (per Kw H)
Annual pow er usage (Kw H)
Total annual electricity cost
$0.1800
$0.1872
$0.1947
$0.2025
$0.2105
$0.2190
$0.2277
$0.025
$0.025
$0.025
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
8,000,000
7,840,000
$1,500,576
7,683,200
$1,521,704
7,529,536
$1,355,153
7,378,945
$1,381,172
7,231,366
$1,407,690
7,086,739
$1,434,718
6,945,004
$1,462,264
6,806,104
$1,490,340
6,669,982
$1,518,954
6,536,582
$1,548,118
$1,480,000
Lease
TOTAL PRODUCTION COSTS
$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
$3,000,000
$10,717,500
$10,531,544
$10,352,298
$9,991,315
$9,828,635
$9,671,981
$9,687,774
$9,703,772
$9,719,968
$9,736,356
$9,752,928
SG&A COSTS
Management Costs
Current Average annual rate
$125,000
Annual increase %
Avg. annual pay labor rate
Current no. of w orkers
0%
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
$125,000
$128,750
$132,613
$136,591
$140,689
$144,909
$149,257
$153,734
$158,346
$163,097
$167,990
6%
6%
6%
6%
3%
3%
3%
3%
3%
14
13
12
12
11
10
10
$1,495,257
$1,447,707
16

Number of salaried managers
Total annual management labor cost
6%
16
15
$2,000,000
$1,936,400
$1,874,822
$1,815,203
$1,757,480
$1,701,592
$1,647,481
$1,595,091
$1,544,367
Overhead Costs
Corporate Allocation
30% allocation of direct costs
CM Profit
Total annual OH costs
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$2,345,250
$2,290,963
$2,238,764
$2,132,123
$2,085,056
$2,039,883
$2,046,535
$2,053,345
$2,060,314
$2,067,447
$2,074,745
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$3,345,250
$3,290,963
$3,238,764
$3,132,123
$3,085,056
$3,039,883
$3,046,535
$3,053,345
$3,060,314
$3,067,447
$3,074,745
Freight Rate %
Freight
Safety Stock
TOTAL SG&A COSTS
0.03
$1,000,000
$1,030,000
$1,060,900
$1,092,727
$1,125,509
$1,159,274
$1,194,052
$1,229,874
$1,266,770
$1,304,773
$1,343,916
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$6,345,250
$6,257,363
$6,174,487
$6,040,053
$5,968,044
$5,900,749
$5,888,069
$5,878,310
$5,871,452
$5,867,476
$5,866,369
$500,000
INVESTMENTS
Annual Capital Outlays
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Additional Scott People To Manage CM
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Additional Scott Travel
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Molds
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$16,531,368
$16,296,679
$16,072,730
$16,075,843
$16,082,082
$16,091,420
$16,103,832
$16,119,297
Start Up Costs
TOTAL INVESTMENTS
Total Costs
Discout Factor @ 15%
NPV
$17,562,750
1.0
$17,562,750
$17,288,907
0.8696
$15,033,832
$17,026,784
0.7561
$12,874,695
0.6575
$10,869,643
0.5718
$9,317,679
0.4972
$7,990,987
0.4323
$6,950,031
0.3759
$6,045,850
0.3269
$5,260,314
0.2843
$4,577,714
10 YR NPV
0.2472
$3,984,444
$100,467,939
Figure 3 - Cash Flow and NPV Calculations for China

Year:
10
PRODUCTION COSTS
Raw Materials
$0

$0
Hourly Labor Costs

Annual increase %
Current no. of workers
Number of hourly workers
Electricity Costs
Avg. KwH rate
Surcharge (per KwH)
Annual power usage (KwH)

SG&A COSTS
Management Costs
Annual increase %
5%
$0
5%
$0
5%
$0
5%
$0
5%
$0
5%
$0
5%
$0
2%
$1.05
2%
$1.07
2%
$1.09
2%
$1.11
2%
2%
2%
2%
169
$353,907
166
$353,766
163
$353,624
159
$353,483
$0.0717
$0.000
8,000,000
$573,300
$0.0752
$0.000
8,000,000
$601,965
$0.0790
$0.000
8,000,000
$632,063
$0.0830
$0.000
8,000,000
$663,666
$0.0871
$0.000
8,000,000
$696,850
$0.0915
$0.000
8,000,000
$731,692
$0.0960
$0.000
8,000,000
$768,277
$0.1008
$0.000
8,000,000
$806,691
$0.1059
$0.000
8,000,000
$847,025
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$1,074,900
$1,100,758
$1,127,916
$1,156,439
$1,186,396
$1,217,857
$1,250,899
$1,285,600
$1,322,043
$1,360,315
$1,400,508
3%
$30,900
3%
$31,827
3%
$32,782
3%
$33,765
3%
$34,778
3%
$35,822
3%
$36,896
3%
$38,003
3%
$39,143
3%
$40,317
6%
6%
6%
6%
3%
3%
14
13
12
12
11
10
$449,957
$435,649
$421,795
$408,382
$395,395
$382,822
3%
3%
3%
10
$370,648
9
$358,862
9
$347,450
0%
$30,000
16
6%
Overhead Costs
CM Profit 8%
16
$480,000
15
$464,736
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$177,450
$177,379
$177,308
$177,237
$177,166
$177,095
$177,025
$176,954
$176,883
$176,812
$176,741
$124,392
$1,301,842
$125,240
$1,302,619
$126,230
$1,303,538
$127,367
$1,304,604
$128,655
$1,305,822
$130,099
$1,307,195
$131,704
$1,308,728
$133,474
$1,310,427
$135,415
$1,312,298
$137,534
$1,314,346
$139,837
$1,316,578
$8,000,000
$460,000
0.03
$8,240,000
$460,000
$8,487,200
$460,000
$8,741,816
$460,000
$9,004,070
$460,000
$9,274,193
$460,000
$9,552,418
$460,000
$9,838,991
$460,000
$10,134,161
$460,000
$10,438,185
$460,000
$10,751,331
$460,000
$10,241,842
$10,467,355
$10,700,695
$10,942,069
$11,191,687
$11,449,769
$11,716,542
$11,992,240
$12,277,107
$12,571,393
$12,875,359
$300,000
$1,000,000
$250,000
$200,000
$400,000
$6,000,000
$300,000
$0
$262,500
$210,000
$0
$300,000
$0
$275,625
$220,500
$0
$300,000
$0
$289,406
$231,525
$0
$300,000
$0
$303,877
$243,101
$0
$300,000
$0
$319,070
$255,256
$400,000
$300,000
$0
$335,024
$268,019
$0
$300,000
$0
$351,775
$281,420
$0
$300,000
$0
$369,364
$295,491
$0
$300,000
$0
$387,832
$310,266
$0
$300,000
$0
$407,224
$325,779
$400,000
$8,150,000
$772,500
$796,125
$820,931
$846,978
$1,274,327
$903,043
$933,195
$964,855
$998,098
$1,433,003
$19,466,742
$12,340,613
$12,624,736
$12,919,439
$13,225,061
$13,941,953
$13,870,484
$14,211,035
$14,564,005
$14,929,806
$15,708,870
1.00
$19,466,742
0.8696
$10,730,967
0.7561
$9,546,115
0.6575
$8,494,741
0.5718
$7,561,471
0.4972
$6,931,615
0.4323
$5,996,593
0.3759
$5,342,454
0.3269
$4,760,999
0.2843
$4,243,983
0.2472
$3,882,992
$86,958,673
Freight Rate %
Freight
Safety Stock
TOTAL SG&A COSTS
INVESTMENTS
Start Up Costs
Molds
Buyback Lease Option
Discount Rate @ 15%

NPV
5%
$0
$30,000

Total Costs
5%
$0
Only hourly wage employees counted (i.e. direct labor personal and temporary workers)
$0.91
0%
2%
2%
2%
2%
2%
2%
$0.91
$0.93
$0.95
$0.97
$0.99
$1.00
$1.02
195
2%
2%
2%
2%
2%
2%
(Productivity assumed to increase at 2% annually.)
195
191
187
184
180
176
173
$354,900
$354,758
$354,616
$354,474
$354,333
$354,191
$354,049
(Assuming a 5 day work week, 8 hours/day and a 50 week year)
5.00% <--annual growth rate
$0.0650
$0.0683
$0.000
$0.000
8,000,000
8,000,000
$520,000
$546,000
Lease
TOTAL INVESTMENTS
5%
$0
10 YR NPV
Figure 4 NPV Calculations for Temecula with Transportation Cost Annual Increase of 9.4%
Year:
10
PRODUCTION COSTS
Raw Materials
($100,000)

Hourly Labor Costs
($100,000)
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
($105,000)
($110,250)
($115,763)
($121,551)
($127,628)
($134,010)
($140,710)
($147,746)
($155,133)
($162,889)
$16.25

Annual increase %
$16.25
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
$16.74
$17.24
$17.76
$18.29
$18.84
$19.40
$19.99
$20.59
$21.20
$21.84
6%
6%
6%
6%
3%
3%
3%
3%
3%
172
162
152
143
139
135
131
127
123
$5,377,374
$5,372,534
$5,367,699
195
6%

195
183
$6,337,500
$6,135,968
$5,940,844
$5,751,925
$5,569,014
$5,391,919
$5,387,066
$5,382,218

Electricity Costs

$0.1664
Avg. KwH rate
$0.1600
Surcharge (per KwH)

$0.1800
$0.1872
$0.1947
$0.2025
$0.2105
$0.2190
$0.2277
$0.2368
$0.025
$0.025
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
7,840,000
$1,500,576
7,683,200
$1,521,704
7,529,536
$1,355,153
7,378,945
$1,381,172
7,231,366
$1,407,690
7,086,739
$1,434,718
6,945,004
$1,462,264
6,806,104
$1,490,340
6,669,982
$1,518,954
6,536,582
$1,548,118
$1,480,000
Lease
$0.1731
$0.025
8,000,000
$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
$3,000,000
$3,000,000
$10,717,500
$10,531,544
$10,352,298
$9,991,315
$9,828,635
$9,671,981
$9,687,774
$9,703,772
$9,719,968
$9,736,356
$9,752,928
SG&A COSTS
Management Costs
$125,000
Annual increase %
0%
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
$125,000
$128,750
$132,613
$136,591
$140,689
$144,909
$149,257
$153,734
$158,346
$163,097
$167,990
6%
6%
6%
6%
3%
3%
3%
3%
3%
16
6%

16
15
$2,000,000
$1,936,400
14
13
12
12
11
10
$1,874,822
$1,815,203
$1,757,480
$1,701,592
$1,647,481
$1,595,091
10
$1,544,367
$1,495,257
$1,447,707
Overhead Costs
CM Profit
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$2,345,250
$2,290,963
$2,238,764
$2,132,123
$2,085,056
$2,039,883
$2,046,535
$2,053,345
$2,060,314
$2,067,447
$2,074,745
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$3,345,250
$3,290,963
$3,238,764
$3,132,123
$3,085,056
$3,039,883
$3,046,535
$3,053,345
$3,060,314
$3,067,447
$3,074,745
$1,000,000
$1,094,000
$1,196,836
$1,309,339
$1,432,416
$1,567,064
$1,714,368
$1,875,518
$2,051,817
$2,244,688
$2,455,688
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$6,345,250
$6,321,363
$6,310,423
$6,256,665
$6,274,952
$6,308,538
$6,408,384
$6,523,954
$6,656,498
$6,807,391
$6,978,141
$500,000
Freight Rate %
Freight
Safety Stock
TOTAL SG&A COSTS
0.03
INVESTMENTS
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Molds
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$17,562,750
$17,352,907
$17,162,720
$16,747,980
$16,603,586
$16,480,519
$16,596,158
$16,727,726
$16,876,466
$17,043,746
$17,231,069
1.0
0.8696
0.7561
0.6575
0.5718
0.4972
0.4323
0.3759
0.3269
0.2843
Start Up Costs
TOTAL INVESTMENTS
Total Costs
NPV
$17,562,750
$15,089,484
$12,977,482
$11,012,069
$9,493,154
$8,193,731
$7,174,977
$6,288,572
$5,516,947
$4,844,896
10 YR NPV
0.2472
$4,259,257
$102,413,319
Figure 5 NPV Calculations for China with Transportation Cost Annual Increase of 9.4%
Year:
10
PRODUCTION COSTS
Raw Materials
$0

$0
Hourly Labor Costs

Annual increase %
Electricity Costs
Avg. KwH rate
Surcharge (per KwH)

SG&A COSTS
Management Costs
Annual increase %
5%
$0
5%
$0
5%
$0
$0.0717
$0.000
8,000,000
$573,300
$0.0752
$0.000
8,000,000
$601,965
$0.0790
$0.000
8,000,000
$632,063
$0.0830
$0.000
8,000,000
$663,666
$0.0871
$0.000
8,000,000
$696,850
5%
$0
5%
$0
5%
$0
5%
$0
2%
$1.05
2%
$1.07
2%
$1.09
2%
$1.11
2%
2%
2%
2%
169
$353,907
166
$353,766
163
$353,624
159
$353,483
$0.0915
$0.000
8,000,000
$731,692
$0.0960
$0.000
8,000,000
$768,277
$0.1008
$0.000
8,000,000
$806,691
$0.1059
$0.000
8,000,000
$847,025
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$1,074,900
$1,100,758
$1,127,916
$1,156,439
$1,186,396
$1,217,857
$1,250,899
$1,285,600
$1,322,043
$1,360,315
$1,400,508
3%
$30,900
3%
$31,827
3%
$32,782
3%
$33,765
3%
$34,778
3%
$35,822
3%
$36,896
3%
$38,003
3%
$39,143
3%
$40,317
6%
6%
6%
6%
3%
3%
14
13
12
12
11
10
$449,957
$435,649
$421,795
$408,382
$395,395
$382,822
3%
3%
3%
10
$370,648
9
$358,862
9
$347,450
0%
$30,000
16
6%
Overhead Costs
CM Profit 8%
16
$480,000
15
$464,736
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$177,450
$177,379
$177,308
$177,237
$177,166
$177,095
$177,025
$176,954
$176,883
$176,812
$176,741
$124,392
$1,301,842
$125,240
$1,302,619
$126,230
$1,303,538
$127,367
$1,304,604
$128,655
$1,305,822
$130,099
$1,307,195
$131,704
$1,308,728
$133,474
$1,310,427
$135,415
$1,312,298
$137,534
$1,314,346
$139,837
$1,316,578
$8,000,000
0.03
$8,752,000
$9,574,688
$10,474,709
$11,459,331
$12,536,508
$13,714,940
$15,004,145
$16,414,534
$17,957,500
$19,645,505
$460,000
$460,000
$460,000
$460,000
$460,000
$460,000
$460,000
$460,000
$460,000
$460,000
$460,000
$10,241,842
$10,979,355
$11,788,183
$12,674,962
$13,646,948
$14,712,085
$15,879,064
$17,157,394
$18,557,481
$20,090,708
$21,769,533
$300,000
$1,000,000
$250,000
$200,000
$400,000
$6,000,000
$300,000
$0
$262,500
$210,000
$0
$300,000
$0
$275,625
$220,500
$0
$300,000
$0
$289,406
$231,525
$0
$300,000
$0
$303,877
$243,101
$0
$300,000
$0
$319,070
$255,256
$400,000
$300,000
$0
$335,024
$268,019
$0
$300,000
$0
$351,775
$281,420
$0
$300,000
$0
$369,364
$295,491
$0
$300,000
$0
$387,832
$310,266
$0
$300,000
$0
$407,224
$325,779
$400,000
$8,150,000
$772,500
$796,125
$820,931
$846,978
$1,274,327
$903,043
$933,195
$964,855
$998,098
$1,433,003
$19,466,742
$12,852,613
$13,712,224
$14,652,332
$15,680,321
$17,204,269
$18,033,006
$19,376,189
$20,844,378
$22,449,121
$24,603,044
1.00
$19,466,742
0.8696
$11,176,185
0.7561
$10,368,412
0.6575
$9,634,146
0.5718
$8,965,275
0.4972
$8,553,562
0.4323
$7,796,166
0.3759
$7,284,227
0.3269
$6,814,064
0.2843
$6,381,441
0.2472
$6,081,496
$102,521,717
Freight Rate %
Freight
Safety Stock
TOTAL SG&A COSTS
INVESTMENTS
Start Up Costs
Molds
Discount Rate @ 15%

NPV
5%
$0
$30,000

Total Costs
5%
$0
$0.91
0%
2%
2%
2%
2%
2%
2%
$0.91
$0.93
$0.95
$0.97
$0.99
$1.00
$1.02
195
2%
2%
2%
2%
2%
2%
195
191
187
184
180
176
173
$354,900
$354,758
$354,616
$354,474
$354,333
$354,191
$354,049
$0.0650
$0.0683
$0.000
$0.000
8,000,000
8,000,000
$520,000
$546,000
Lease
TOTAL INVESTMENTS
5%
$0
10 YR NPV
Figure 6 Transportation Costs Sensitivity (Graph)
10 YR NPV
Freight Cost Change (%)

-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
TEMECULA
98,782,957
98,958,251
99,142,553
99,336,371
99,540,239
99,754,719
99,980,407
100,217,927
100,467,939
100,731,137
101,008,253
101,300,058
101,607,360
101,931,015
102,271,918
102,631,014
103,009,296
103,407,805
103,827,640
104,269,952
104,735,951
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$140,000,000
CHINA
73,478,821
74,881,169
76,355,588
77,906,131
79,537,073
81,252,918
83,058,417
84,958,577
86,958,673
89,064,260
91,281,190
93,615,625
96,074,048
98,663,283
101,390,510
104,263,279
107,289,529
110,477,607
113,836,284
117,374,778
121,102,769
Transportation Cost Sensitivity Analysis
$120,000,000
$100,000,000
$80,000,000
9.4% Freight increase per year
10 YR NPV TEMECULA
10 YR NPV CHINA
$60,000,000
$40,000,000
$20,000,000
10 YR NPV
$-5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15%
Freight Cost Change
Figure 7 NPV Calculations for Temecula with Productivity Annual Increase of 16.2%
Year:
10
PRODUCTION COSTS
Raw Materials
($100,000)

Hourly Labor Costs
($100,000)
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
($105,000)
($110,250)
($115,763)
($121,551)
($127,628)
($134,010)
($140,710)
($147,746)
($155,133)
($162,889)
$16.25

Annual increase %
$16.25
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
$16.74
$17.24
$17.76
$18.29
$18.84
$19.40
$19.99
$20.59
$21.20
$21.84
16.2%
16.2%
16.2%
16.2%
16.2%
16.2%
16.2%
16.2%
16.2%
195
16.2%

195
163
$6,337,500
$5,470,150
137
115
96
81
68
57
47
$4,721,505
$4,075,320
$3,517,572
$3,036,157
$2,620,628
$2,261,969
40
33
$1,952,396
$1,685,191
$1,454,556
$0.2368

Electricity Costs

$0.1600
$0.1664
$0.1731
Avg. KwH rate

Surcharge (per KwH)
$0.1800
$0.1872
$0.1947
$0.2025
$0.2105
$0.2190
$0.2277
$0.025
$0.025
$0.025
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
8,000,000
7,683,200
$1,521,704
7,529,536
$1,355,153
7,378,945
$1,381,172
7,231,366
$1,407,690
7,086,739
$1,434,718
6,945,004
$1,462,264
6,806,104
$1,490,340
6,669,982
$1,518,954
6,536,582
$1,548,118
$1,480,000
7,840,000
$1,500,576
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
$3,000,000
$10,717,500
$9,865,726
$9,132,959
$8,314,710
$7,777,193
$7,316,219
$6,921,336
$6,583,523
$6,294,990
$6,049,013
$5,839,785

SG&A COSTS
Management Costs
$125,000
Annual increase %
0%
3%
3%
3%
3%
3%
3%
3%
3%
3%
3%
$125,000
$128,750
$132,613
$136,591
$140,689
$144,909
$149,257
$153,734
$158,346
$163,097
$167,990
6%
6%
6%
6%
3%
3%
3%
3%
3%
14
13
12
12
11
10
10
$1,544,367
$1,495,257
$1,447,707
16

6%
16
15
$2,000,000
$1,936,400
$1,874,822
$1,815,203
$1,757,480
$1,701,592
$1,647,481
$1,595,091
Overhead Costs
CM Profit
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$2,345,250
$2,091,218
$1,872,963
$1,629,142
$1,469,623
$1,333,154
$1,216,604
$1,117,270
$1,032,821
$961,244
$900,802
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$3,345,250
$3,091,218
$2,872,963
$2,629,142
$2,469,623
$2,333,154
$2,216,604
$2,117,270
$2,032,821
$1,961,244
$1,900,802
$1,000,000
$1,030,000
$1,060,900
$1,092,727
$1,125,509
$1,159,274
$1,194,052
$1,229,874
$1,266,770
$1,304,773
$1,343,916
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$6,345,250
$6,057,618
$5,808,685
$5,537,072
$5,352,611
$5,194,020
$5,058,137
$4,942,235
$4,843,958
$4,761,273
$4,692,426
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Molds
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$500,000
$17,562,750
$16,423,343
$15,441,644
$14,351,782
$13,629,804
$13,010,239
$12,479,474
$12,025,759
$11,638,948
$11,310,286
$11,032,211
1.0
0.8696
0.7561
0.6575
0.5718
0.4972
0.4323
0.3759
0.3269
0.2843

Freight Rate %
Freight
Safety Stock
TOTAL SG&A COSTS
0.03
INVESTMENTS
Start Up Costs
TOTAL INVESTMENTS
Total Costs
NPV
$17,562,750
$14,281,168
$11,676,101
$9,436,530
$7,792,885
$6,468,388
$5,395,221
$4,520,928
$3,804,793
$3,215,089
10 YR NPV
0.2472
$2,726,994
$86,880,847
10
Figure 8 Temecula Productivity Sensitivity (Graph)

Temecula Annual Productivity Change (%)
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
10 YR NPV
TEMECULA
CHINA
$ 110,721,881 $ 86,958,673
$ 108,601,919 $ 86,958,673
$ 106,590,968 $ 86,958,673
$ 104,683,104 $ 86,958,673
$ 102,872,716 $ 86,958,673
$ 101,154,487 $ 86,958,673
$ 99,523,383 $ 86,958,673
$ 97,974,636 $ 86,958,673
$ 96,503,733 $ 86,958,673
$ 95,106,404 $ 86,958,673
$ 93,778,607 $ 86,958,673
$ 92,516,520 $ 86,958,673
$ 91,316,530 $ 86,958,673
$ 90,175,219 $ 86,958,673
$ 89,089,357 $ 86,958,673
$ 88,055,891 $ 86,958,673
$ 87,071,938 $ 86,958,673
$ 86,134,774 $ 86,958,673
$ 85,241,827 $ 86,958,673
$ 84,390,667 $ 86,958,673
$ 83,579,002 $ 86,958,673
$120,000,000
Temecula Productivity Sensitivity Analysis
$100,000,000
$80,000,000
16.2% Productivity increase per year

$60,000,000
10 YR NPV TEMECULA
10 YR NPV CHINA
$40,000,000
$20,000,000
10 YR NPV
$0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
Temecula Productivity Change
11
Figure 9 NPV Calculations for China with Hourly Labor Cost Annual Increase of 39.5%
Year:
10
PRODUCTION COSTS
Raw Materials
$0

$0
Hourly Labor Costs

Annual increase %
Electricity Costs
Avg. KwH rate
Surcharge (per KwH)

SG&A COSTS
Management Costs
Annual increase %
5%
$0
5%
$0
5%
$0
$0.0717
$0.000
8,000,000
$573,300
$0.0752
$0.000
8,000,000
$601,965
$0.0790
$0.000
8,000,000
$632,063
$0.0830
$0.000
8,000,000
$663,666
$0.0871
$0.000
8,000,000
$696,850
5%
$0
5%
$0
5%
$0
5%
$0
39.5%
$9.36
39.5%
$13.05
39.5%
$18.21
39.5%
$25.40
2%
2%
2%
2%
169
$3,167,437
166
$4,330,203
163
$5,919,821
159
$8,092,987
$0.0915
$0.000
8,000,000
$731,692
$0.0960
$0.000
8,000,000
$768,277
$0.1008
$0.000
8,000,000
$806,691
$0.1059
$0.000
8,000,000
$847,025
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$200,000
$1,074,900
$1,231,184
$1,436,595
$1,708,755
$2,071,736
$2,558,423
$3,213,752
$4,099,129
$5,298,480
$6,926,511
$9,140,012
3%
$30,900
3%
$31,827
3%
$32,782
3%
$33,765
3%
$34,778
3%
$35,822
3%
$36,896
3%
$38,003
3%
$39,143
3%
$40,317
6%
6%
6%
6%
3%
3%
14
13
12
12
11
10
$449,957
$435,649
$421,795
$408,382
$395,395
$382,822
3%
3%
3%
10
$370,648
9
$358,862
9
$347,450
0%
$30,000
16
6%
Overhead Costs
CM Profit 8%
16
$480,000
15
$464,736
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$177,450
$242,592
$331,647
$453,395
$619,836
$847,378
$1,158,451
$1,583,718
$2,165,102
$2,959,910
$4,046,493
$124,392
$1,301,842
$135,674
$1,378,265
$150,924
$1,482,572
$171,552
$1,624,947
$199,483
$1,819,319
$237,344
$2,084,723
$288,732
$2,447,183
$358,556
$2,942,275
$453,530
$3,618,632
$582,830
$4,542,740
$758,997
$5,805,490
$8,000,000
$460,000
0.03
$8,240,000
$460,000
$8,487,200
$460,000
$8,741,816
$460,000
$9,004,070
$460,000
$9,274,193
$460,000
$9,552,418
$460,000
$9,838,991
$460,000
$10,134,161
$460,000
$10,438,185
$460,000
$10,751,331
$460,000
$10,241,842
$10,543,001
$10,879,729
$11,262,412
$11,705,185
$12,227,298
$12,854,997
$13,624,087
$14,583,441
$15,799,787
$17,364,271
$300,000
$1,000,000
$250,000
$200,000
$400,000
$6,000,000
$300,000
$0
$262,500
$210,000
$0
$300,000
$0
$275,625
$220,500
$0
$300,000
$0
$289,406
$231,525
$0
$300,000
$0
$303,877
$243,101
$0
$300,000
$0
$319,070
$255,256
$400,000
$300,000
$0
$335,024
$268,019
$0
$300,000
$0
$351,775
$281,420
$0
$300,000
$0
$369,364
$295,491
$0
$300,000
$0
$387,832
$310,266
$0
$300,000
$0
$407,224
$325,779
$400,000
Freight Rate %
Freight
Safety Stock
TOTAL SG&A COSTS
INVESTMENTS
Start Up Costs
Molds
Discount Rate @ 15%

NPV
5%
$0
$30,000

TOTAL INVESTMENTS
5%
$0
$0.91
0%
39.5%
39.5%
39.5%
39.5%
39.5%
39.5%
$0.91
$1.27
$1.77
$2.47
$3.45
$4.81
$6.71
195
2%
2%
2%
2%
2%
2%
195
191
187
184
180
176
173
$354,900
$485,184
$663,295
$906,790
$1,239,673
$1,694,757
$2,316,902
$0.0650
$0.0683
$0.000
$0.000
8,000,000
8,000,000
$520,000
$546,000
Lease
Total Costs
5%
$0
$8,150,000
$772,500
$796,125
$820,931
$846,978
$1,274,327
$903,043
$933,195
$964,855
$998,098
$1,433,003
$19,466,742
$12,546,685
$13,112,449
$13,792,099
$14,623,899
$16,060,048
$16,971,792
$18,656,412
$20,846,775
$23,724,396
$27,937,286
1.00
$19,466,742
0.8696
$10,910,161
0.7561
$9,914,895
0.6575
$9,068,529
0.5718
$8,361,262
0.4972
$7,984,682
0.4323
$7,337,374
0.3759
$7,013,636
0.3269
$6,814,848
0.2843
$6,743,954
0.2472
$6,905,670
$100,521,752
10 YR NPV
12
Figure 10 China Hourly Labor Cost Sensitivity (Graph)
China Hourly Labor Cost Change (%)

0%
3%
6%
9%
12%
15%
18%
21%
24%
27%
30%
33%
36%
39%
42%
45%
48%
51%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
10 YR NPV
TEMECULA
CHINA
100,467,939 $
86,729,016
100,467,939 $
87,082,378
100,467,939 $
87,493,006
100,467,939 $
87,970,776
100,467,939 $
88,527,175
100,467,939 $
89,175,540
100,467,939 $
89,931,321
100,467,939 $
90,812,373
100,467,939 $
91,839,289
100,467,939 $
93,035,768
100,467,939 $
94,429,021
100,467,939 $
96,050,229
100,467,939 $
97,935,046
100,467,939 $
100,124,153
100,467,939 $
102,663,878
100,467,939 $
105,606,869
100,467,939 $
109,012,846
100,467,939 $
112,949,412
$120,000,000
China Labor Cost Sensitivity Analysis
$100,000,000
$80,000,000
39.5% Labor cost increase per year
$60,000,000
10 YR NPV TEMECULA
10 YR NPV CHINA
$40,000,000
$20,000,000
10 YR NPV
$0% 3% 6% 9% 12% 15% 18% 21% 24% 27% 30% 33% 36% 39% 42% 45% 48% 51%
China Hourly Labor Cost Change
13

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Influential Factors in the Outsourcing Decision

Quantitative Factors & Sensitivity Analysis

On the other hand, productivity at the

Qualitative Factors Influencing the Outsourcing Decision

Outline & Recommendations

Figure 1 Summary Sheet

COMPARISON OF NET PRESENT VALUES

SPECIFIC COST BREAKDOWN OVER THE TEN YEAR PERIOD

TOTAL COST COMPARISON OVER THE 10 YEAR PERIOD

Figure 2 - Cash Flow and NPV Calculations for Temecula

Annual increase in savings due to regrind usage

Current Avg. hourly rate

Current no. of w orkers

Annual productivity increase

Number of hourly w orkers

(Assuming a 5 day w ork w eek, 8 hours/day and a 50 w eek year)

4.00% <--annual grow th rate

Annual productivity increase

Additional Scott People To Manage CM

Additional Scott Travel

Figure 3 - Cash Flow and NPV Calculations for China

Annual increase in savings due to regrind usage

Hourly Labor Costs

TOTAL PRODUCTION COSTS

Discount Rate @ 15%

Number of salaried managers

Annual increase in savings due to regrind usage

Current Avg. hourly rate

Current no. of workers

Annual productivity increase

Number of hourly workers

(Assuming a 5 day work week, 8 hours/day and a 50 week year)

4.00% <--annual growth rate

Avg. KwH rate

Surcharge (per KwH)

TOTAL PRODUCTION COSTS

Annual productivity increase

Number of salaried managers

Additional Scott People To Manage CM

Additional Scott Travel

Annual increase in savings due to regrind usage

Hourly Labor Costs

TOTAL PRODUCTION COSTS

Discount Rate @ 15%

Number of salaried managers

Figure 6 Transportation Costs Sensitivity (Graph)

Freight Cost Change (%)

Transportation Cost Sensitivity Analysis

9.4% Freight increase per year

Annual increase in savings due to regrind usage

Current Avg. hourly rate

Current no. of workers

Annual productivity increase

Number of hourly workers

(Assuming a 5 day work week, 8 hours/day and a 50 week year)

4.00% <--annual growth rate

Avg. KwH rate

Total annual electricity cost

TOTAL PRODUCTION COSTS

Annual productivity increase

Additional Scott People To Manage CM

Additional Scott Travel

Total annual OH costs