Offshoring is the most expensive of the three options in the next five years, because of the high cost of constructing the facility. Choosing this option would be on a strategic basis only. After five years, the trend is for Temecula to become more affordable than China. However, estimates beyond five years are difficult to make with any accuracy. For example, the terms of the next Temecula lease are an unknown but significant factor five years out. Strategic Concerns

Outsourcing production has several ramifications. The first is that the company risks losing technological competitive advantage, including key members of the manufacturing staff. Offshoring would allow the company to retain better control over production, but at a higher initial cost than outsourcing. The company needs to consider these options on the basis of its future direction. The spreaders are a functional product. This places the emphasis on lower production cost and larger shipment sizes. Indeed, the increase in inventory is immaterial to the final calculation. However, the manufacturing strength at Temecula means that production innovation is a key source of value for the company. They could move those workers to other plants, but it is not reasonable that many workers would move from southern California to Ohio just to stay with the company.

Recommendations

It is recommended that Scotts retain the Temecula plant. There are two key reasons. One is that the cost...

While China is cheaper now, it is not expected to be so in the long run. Furthermore, China's cost estimates are more volatile, so that option could be more expensive than Temecula in less than five years. This is especially if the yuan appreciates rapidly, which is presently expected by economists. While China appears cheaper today, it may not be so for very long, even though it will always maintain a competitive advantage in wage and energy costs.
Strategically, Scotts is in a business where low cost production matters. They have an opportunity if they leverage the knowledge base at the Temecula plant to lower the cost of production at their other facilities as well. Innovation in production can also lead to new product opportunities. Furthermore, Scotts will lose control over its product with outsourcing, which could hurt them competitively. Offshoring or outsourcing may be a viable option in the short-term, but in the long-term China is not the country for this, and the strategic losses will in all likelihood outweigh the cost savings.

If Scotts moves ahead with my recommendation, it runs a few potential risks. The first risk is that they are unable to continue to reduce costs at Temecula. If this occurs, that plant may not ever be cheaper than China. If the market for spreaders places increased emphasis on low price over quality, then Scotts could lose substantial market share in the near-term.