Please answer the following questions in your memo: 1. Utilize NPV as one of the tools to assist in the decision to “stay in the US” or “outsource to China.” Calculate Scotts’ NPV for each of the fo

SCM 850

Scotts Miracle-Gro Case

Make vs. Outsource Decision Version 01-23-2023.

I. Assignment Objectives:

1. Utilize NPV to evaluate the inflows and outflows of cash for this case. This tool will assist in comparing various network design alternatives. Some form of this approach is used by almost all major companies and was a “way of life” for most of my professional career.

2. Utilizing various frameworks, evaluate and quantify (where possible) many of the process and risk factors in a Make vs. Outsource decision.

3. Create a three-page professional business memo, which forces teams to be succinct and concise. Some supervisors will not read beyond the first paragraph.

II. Assignment Overview:

Our approach will expand the NPV analysis to sensitize various variables to see its impact on your recommendation. This practitioner approach is common in many organizations.

Please note that the parts of the assignment variables have been changed. Please account for these changes when you complete the assignment. Also, use my formats for Excel--headings, subheadings, etc. DO NOT USE the ones from previous courses or your work environment.

You are to write a three-page (double-spaced) professional business memo that summarizes your recommendation and evaluation of this case. Please note--no Power Point Slides are required for this assignment.

Since there is not much space—use it wisely! You need to employ professional language, grammar, and appropriate paragraph structure, etc. If the memo is greater than 3 pages, you will have points deducted. You can have multiple appendices (inserts); a minimum of four are required.

You are to assume that you are working for a consulting firm and the “C” Suite executives at Scotts’ will evaluate this memo. Please assume you are competing against all other teams in the class for Scotts’ business.

Consequently, the information submitted to us needs to be compiled in a professional, well-analyzed, and thoughtful manner. Additionally, please make sure you format all items professionally; for example, all Excel tables should print out in a landscape mode on an 8 ½ by 11 pages, all items must have titles, etc. You are competing for the Scotts’ business against the other teams in the class!

The MEMO: The first paragraph should only contain the following items: A statement of the problem, goal, or objective. The second sentence or so should contain your team’s recommendation (only one recommendation and be specific) including a brief phrase or two concerning the financial impact. The final sentence of the paragraph should be a transition statement like (but do not copy this) “the remainder of this memo will help to support and discuss our recommendation.”

We are structuring the first paragraph in this fashion because many supervisors will not read beyond this item, so we need to make an impact! The next set of paragraphs in the memo should support your recommendation, why it is the optimal recommendation. It should also include a review of the risks and ways to mitigate them. If you have room for additional information, “alternatives considered and rejected” may be useful. Obviously, you can mix and match these ideas in a way that fits your team—this approach is just a suggestion. Please try and incorporate/blend the answers to the questions listed below into this memo!

The final summary paragraph should not only have the traditional summary information, but also some sort of an actionable sentence in it… that tries to move the process forward…. what are the “Next Steps”.

Although professional memos normally start with a To, From, Subject, and Date lines--please forego these items and use the space for your analysis.

Please do not use internal headings within the memo; consequently, only text should be found in the body of your report. Use the space for your analysis.

Because the memo is only three-pages of text, you can utilize as many appendices (inserts) as needed (within reason)! You must also refer to all appendices within the text of the memo--no appendices unless they are mentioned in the text. All appendices must be labeled as Appendix #1, #2, etc. plus a title for each one. For example: “Appendix #1: Net Present Value Calculation for Temecula Option.”

III. Assignment Formatting: (Please print before you submit to make sure it is formatted correctly.)

1. Do not use any pdf type files in your submittals---Word or Excel only.

2. You will have a least two documents downloaded to the drop box:

   1. The actual report document and appendices in a “Word” type file extension.

   2. An Excel Workbook showing your financial calculations.

3. The report must be formatted for single-sided printing (no double-sided reports). Please print before you submit to make sure it is formatted correctly.

4. All Excel spreadsheets must fit on one page and be in landscape mode.

5. All appendices must be numbered and have a title. You cannot have more than one appendix per page. You can only use one side of the paper.

6. The First Appendix must be a Summary Sheet (see attached example sheet for format). This appendix should include all the items on the example sheet including the comparison of the present value calculations for the two options from year 0 through year 10. (Per instructions in class.)

7. The Second Appendix should be ONE Excel spreadsheet that should show the cash flow and NPV calculations for the Temecula Option from year 0 through year 10. Please include totals for all information and especially the NPV!

8. The Third Appendix should be ONE Excel spreadsheet that should show the cash flow and NPV calculations for the China Option from year 0 through year 10. Please include totals for all information and especially the NPV!

9. Utilize other appendices as needed.

10. In addition to the Excel spreadsheet listed above, (and included in the report as a document), we also require a working copy of all your actual spreadsheets submitted in the drop box on Canvas.

11. Add a sensitivity analysis summary sheet.

12. Sensitivity analysis is that tool that looks at some important variable associated with the case (such as electricity costs) and increases and decreases it (maybe a 5% increase and maybe a 5% decrease) and assesses its impact on your evaluation. It creates a bracket or range around that variable.

Note 1: One item you cannot sensitize for this assignment is the exchange rates (Yuan vs. Dollar).

Note 2: Do not use Goal Seek for our sensitivity analysis.

1. Did you use the memo space wisely to explain your analysis?

2. Please make sure you cite your references in the text as you explain your analysis.

3. No internal headers in the report. All graphs, tables, etc. should be placed in the appendices.

4. Points will be deducted for not following formatting directions!

5. All work must be completed in a professional manner.

6. Please note: We do not have pre-grading of any of the assignments.

IV. Helpful Hints: This information may override information from the case itself.

A. General Impacts:

• No depreciation, taxes, or working capital to consider.

• Since we are looking entirely at costs, we do not include sales revenues in the NPV calculation. Also, because of only evaluating costs, the lowest Net Present Value is best! Utilize a 15% discount rate.

• When calculating the NPV, Year 0 will have a discount factor of 1.0.

• When calculating NPV, do not use the Excel NPV function. It has a few quirks associated with it. Use the NPV Table and Factors given in Module 2 Lesson 3…much easier to use and understand.

• No offshoring considered for this problem.

B. Temecula Analysis

COGS Impacts (Costs)

• Raw Materials--$100,000 savings in year 0 with 5% savings every year after

• Labor—Start with 195 hourly employees in year 0 with a 6% productivity improvement from year 1 through year 5—years 6-10—use only a 3% improvement per year. Annual pay increases of 3% starting in year 1. Starting labor costs with full benefits is $16.25/hour. Assume 40 hours a week and 50 weeks per year production schedule.

• Electricity—Start with a consumption of 8,000,000 KwHrs in year 0 with a 2% annual decrease in KwHrs due to efficiency improvements. The average KwHr rate is $ .16 in year 0 with a 4% annual increase. Do not forget surcharge in year 0, 1, and 2 only!

• Lease--$3,000,000 per year starting in year 0.

SG&A Impacts (Costs)

• Management Costs—Assume 16 employees in year 0 with $125,000 in salary and benefits per management employee. Productivity is assumed to increase at 6% for the first 5 years and then at 3% for the last 5 years. The annual salary increase is 3% starting in year 1.

• Overhead

  • Corporate--$1,000,000 per year

  • Plant Allocation—30% of direct labor and electricity

• Shipping/Freight--$1,000,000 starting in year 0 with annual 3% increases.

• Safety stock—None

Investment Impacts (Costs)

• Annual Capital Outlays--$400,000 per year (Note… we changed this item from the actual $500,000 stated in in the actual case.)

• Start Up Costs--None

• Additional “Scotts” People to Manage CM--None

• Additional “Scotts” Travel Expenses--None

• Replacement Molds—None here!

C. China Analysis:

COGS Impacts (Costs)

• Raw Materials--None

• Labor—The base starts with 195 hourly employees in year 0 with a 2% productivity improvement annually. Annual pay increases of 2% starting in year 1. Starting labor costs with full benefits are $0.91/hour. Assume 40 hours a week 50 weeks per year production schedule.

• Electricity—Start with a consumption of 8,000,000 KwHrs annually. The average KwHr rate is $ 0.065 in year 0 with a 5% annual increase.

• Lease--$200,000 per year starting in year 0.

SG&A Impacts (Costs)

• Management Costs—Assume 16 employees in year 0 with $30,000 in salary and full benefits per management employee. Productivity is assumed to increase at 6% for the first 5 years and then at 3% for the last 5 years. The annual salary increase is 3% starting in year 1.

• Overhead

  • Corporate--$1,000,000 per year

  • Plant Allocation—50% of direct labor Note: No % of electricity cost for the allocation.

  • CM Profit margin is 8% of total production costs and annual management labor costs.

• Freight--$8,000,000 starting in year 0 with annual 3% increases.

• Safety stock—$460,000 per year

Investment Impacts (Costs)

• Annual Capital Outlays--$300,000 per year

• Start Up Costs--$4,000,000 in year 0 only (Note… we changed this item from the actual $1,000,000 stated in in the actual case.)

• Two additional Scott managers to oversee CM—$125, 000 each---two with benefits and an increase of 5% per year.

• Additional “Scotts” Travel Expenses for those two employees---$100,000 per employee with increases of 5% per year

• Replacement Molds—$400,000 in year 0, 5, and 10--10 molds at $40,000/ mold.

• Assume that currently Scotts is leasing their manufacturing facility. They have a long-term lease. To extricate themselves from the lease it has a “buyback provision. The Buyback lease fee is ---$14,000,000 (Normally lease contracts have a provision to “get out of them” if you pay a certain fee--the buy-back amount is this number!) You will need to consider this item in the calculation in Year 0. Please note…this item is an outflow of dollars.

V. Summary Sheet:

Please note that the Excel version of this sheet is provided in Module 2 Lesson 3 under the section titled “Additional Reference Materials”. Note, the Tables listed as “Specific Cost Breakdown Over the Ten-Year Period” and “The Total Cost Comparison Over The 10 Year Period” deal with straight costs…no use of NPV here.

VI. Assignment Questions:

Please answer the following questions in your memo:

1. Utilize NPV as one of the tools to assist in the decision to “stay in the US” or “outsource to China.” Calculate Scotts’ NPV for each of the following two options--continue production at Temecula or outsource to China! Please note--follow the helpful hints below because some of the inputs to the problem are different from the actual case.

2. List and rank the factors that you can quantify which would most affect the project's outcome. Complete a sensitivity analysis (+ and -) on at least ONE of these factors for each scenario, Temecula, and China. For example:

• Transportation cost projections

• Labor cost projections

• Safety stock implications

• Electrical cost assumptions

• Impact of a 10-year analysis

• Many other items! (Note: You cannot use exchange rate fluctuations of the Yuan and the dollar).

3. Assess qualitative factors that can also impact your decision utilizing one of the frameworks listed below: You must indicate which framework you have chosen.

• “Strategic Sourcing from Periphery to Core,” Gottfredson, etc. approach

• “Why Outsource?” Lynch approach

• “Sourcing Decisions in a Supply Chain," Chopra approach

• Make vs. Buy Analysis Matrix presented by Fine in Clockspeed (from SCM 800)

• Some other frameworks you prefer—this item must be preapproved by me prior to submittal.

1. Based upon Questions 1-3 above, carefully explain and outline your team’s recommendation and evaluation.

VII. Grading Criteria: (Total Points 200)

(Please note: The instructor reserves the right to change the rubric at his discretion)

Writing assignments stress organizing thoughts in the appropriate hierarchy and sequence, selecting words for their power and expressiveness, using technical terms in appropriate contexts, and representing complex data and symbols precisely in prose. Writing assignments require the use of appropriate business language--do not use slang, unprofessional language, colloquialisms, etc.

Content: Approximately _______________Out of 120 Points Total for Both Recommended Action and Analysis

1. Recommended Action:

1. Are the criteria for selected recommendations stated?

2. Is the plan integrated in a logical manner and linked to the analysis?

3. Is the action plan specific and complete?

1. Analysis:

1. Does the paper contain analysis of the major issues?

2. Does the analysis incorporate concepts/techniques from the readings?

3. Does the analysis effectively incorporate information from the case?

4. Does the analysis show relationships among important factors?

5. Are assumptions explicitly stated?

6. Does the analysis isolate fundamental causes of the problems?

7. Does the analysis contain enough detail to support recommendations, causes and effects, etc.?

8. When the analysis is undertaken, does it use the information at its disposal correctly, thereby leading to correct answers?

9. Did the paper correctly incorporate sensitivity analysis into it, and were the appropriate items sensitized?

Quality of Report/Writing Style: Approximately _______________Out of 60 Points

1. Memo is logically organized:

   1. Problem, recommendation, and transition in first paragraph.

   2. Body supports recommendation.

   3. Body explains alternatives considered and rejected.

   4. Summary paragraph leads to action or implementation suggestions; therefore, please include “next steps” in this location.

2. The memo is readable and flows with continuity.

3. Rules of grammar, punctuation, spelling, sentence construction, paragraph construction, upper/lower case usage, etc. are followed.

4. Exhibits:

1. 1. Do the exhibits support and amplify/clarify the text?

   2. Do the exhibits add new information that explains new ideas?

   3. Do the exhibits represent correct information?

1. Is the memo concise and succinct?

2. Does the memo target the audience correctly?

Overall Criteria: Approximately _______________Out of 20 Points

1. Is the memo logically consistent and effectively structured so it sells its recommendations?

2. Is there a high likelihood that the recommendations will achieve their intended results?

3. Does the memo adequately and correctly address risks associated with the options?

Checklist