smg

Influential Factors in the Outsourcing DecisionIncreased 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 team’s conclusion.

Quantitative Factors & Sensitivity AnalysisWhen 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 DecisionAlthough many of Scotts’ outsourcing analysis factors are highly measurable in nature, some are

harder to quantify than others. According to Chopra’s 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 supplier’s 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 supplier’s 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

Temecula AnalysisYEAR 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 $181,251,69115% Discount Rate 1.0000 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323 0.3759 0.3269 0.2843 0.2472NPV $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 $100,467,939Total NPV $100,467,939

China AnalysisTotal 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 0.2472NPV $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

Raw Material Labor Electricity Lease Management Overhead Freight Safety Stock InvestmentTemecula ($1,420,679) $62,014,061 $16,100,688 $33,000,000 $18,815,401 $34,434,425 $12,807,796 $0 $5,500,000

China $0 $3,896,102 $7,387,529 $2,200,000 $4,515,696 $14,387,997 $102,462,366 $5,060,000 $17,893,054Difference* $1,420,679 ($58,117,959) ($8,713,159) ($30,800,000) ($14,299,705) ($20,046,428) $89,654,570 $5,060,000 $12,393,054

* Note: Black indicates money saved by staying in Temecula

Temecula China$109,694,070 $13,483,631$66,057,621 $126,426,059$5,500,000 $17,893,054

$181,251,691 $157,802,744* Note: Black indicates money saved by staying in Temecula

S,G and A Cost $60,368,437Investment Cost $12,393,054

Total ($23,448,948)

COMPARISON OF NET PRESENT VALUES

SPECIFIC COST BREAKDOWN OVER THE TEN YEAR PERIOD

TOTAL COST COMPARISON OVER THE 10 YEAR PERIODDifference*

Cost of Goods ($96,210,439)

4

Figure 2 - Cash Flow and NPV Calculations for Temecula

Year: 0 1 2 3 4 5 6 7 8 9 10

PRODUCTION COSTS

Raw Materials

Current savings from use of regrind ($100,000)

Annual increase in savings due to regrind usage 5% 5% 5% 5% 5% 5% 5% 5% 5% 5%

Cost savings from use of regrind ($100,000) ($105,000) ($110,250) ($115,763) ($121,551) ($127,628) ($134,010) ($140,710) ($147,746) ($155,133) ($162,889)

Hourly Labor Costs

Current Avg. hourly rate $16.25

Annual increase % 3% 3% 3% 3% 3% 3% 3% 3% 3% 3%

Avg. hourly labor rate $16.25 $16.74 $17.24 $17.76 $18.29 $18.84 $19.40 $19.99 $20.59 $21.20 $21.84

Current no. of workers 195

Annual productivity increase 6% 6% 6% 6% 6% 3% 3% 3% 3% 3%

Number of hourly workers 195 183 172 162 152 143 139 135 131 127 123

Total annual hourly labor cost $6,337,500 $6,135,968 $5,940,844 $5,751,925 $5,569,014 $5,391,919 $5,387,066 $5,382,218 $5,377,374 $5,372,534 $5,367,699

Electricity Costs 4.00% <--annual growth rate

Avg. KwH rate $0.1600 $0.1664 $0.1731 $0.1800 $0.1872 $0.1947 $0.2025 $0.2105 $0.2190 $0.2277 $0.2368

Surcharge (per KwH) $0.025 $0.025 $0.025 $0.000 $0.000 $0.000 $0.000 $0.000 $0.000 $0.000 $0.000

Annual power usage (KwH) 8,000,000 7,840,000 7,683,200 7,529,536 7,378,945 7,231,366 7,086,739 6,945,004 6,806,104 6,669,982 6,536,582

Total annual electricity cost $1,480,000 $1,500,576 $1,521,704 $1,355,153 $1,381,172 $1,407,690 $1,434,718 $1,462,264 $1,490,340 $1,518,954 $1,548,118

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

TOTAL PRODUCTION COSTS $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 % 0% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3%

Avg. annual pay labor rate $125,000 $128,750 $132,613 $136,591 $140,689 $144,909 $149,257 $153,734 $158,346 $163,097 $167,990



Number of salaried managers 16 15 14 13 12 12 11 10 10 9 9

Total annual management labor cost $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 $1,495,257 $1,447,707

Overhead Costs

Corporate Allocation $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

30% allocation of direct costs $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

CM Profit $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Total annual OH costs $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 % 0.03

Freight $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

Safety Stock $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

TOTAL SG&A COSTS $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

INVESTMENTS

Annual Capital Outlays $500,000 $500,000 $500,000 $500,000 $500,000 $500,000 $500,000 $500,000 $500,000 $500,000 $500,000

Start Up Costs $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

TOTAL INVESTMENTS $500,000 $500,000 $500,000 $500,000 $500,000 $500,000 $500,000 $500,000 $500,000 $500,000 $500,000

Total Costs $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 $16,119,297Discout Factor @ 15% 1.0 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 $3,984,44410 YR NPV $100,467,939

Only hourly wage employees counted (i.e. direct labor personal and temporary workers)

(Productivity assumed to increase at 6% for the first 5 years and then at 3% for the last 5 years)

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


5

Figure 3 - Cash Flow and NPV Calculations for ChinaYear: 0 1 2 3 4 5 6 7 8 9 10

PRODUCTION COSTS

Raw Materials

Current savings from use of regrind $0


Cost savings from use of regrind $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Hourly Labor Costs


Annual increase % 0% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2%





Total annual hourly labor cost $354,900 $354,758 $354,616 $354,474 $354,333 $354,191 $354,049 $353,907 $353,766 $353,624 $353,483


Avg. KwH rate $0.0650 $0.0683 $0.0717 $0.0752 $0.0790 $0.0830 $0.0871 $0.0915 $0.0960 $0.1008 $0.1059



Total annual electricity cost $520,000 $546,000 $573,300 $601,965 $632,063 $663,666 $696,850 $731,692 $768,277 $806,691 $847,025

Lease $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000


SG&A COSTS

Management Costs


Annual increase % 0% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3%





Total annual management labor cost $480,000 $464,736 $449,957 $435,649 $421,795 $408,382 $395,395 $382,822 $370,648 $358,862 $347,450

Overhead Costs


50% allocation of direct costs $177,450 $177,379 $177,308 $177,237 $177,166 $177,095 $177,025 $176,954 $176,883 $176,812 $176,741

CM Profit 8% $124,392 $125,240 $126,230 $127,367 $128,655 $130,099 $131,704 $133,474 $135,415 $137,534 $139,837


Freight Rate % 0.03

Freight $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 $10,751,331

Safety Stock $460,000 $460,000 $460,000 $460,000 $460,000 $460,000 $460,000 $460,000 $460,000 $460,000 $460,000

TOTAL SG&A COSTS $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

INVESTMENTS


Start Up Costs $1,000,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Additional Scott People To Manage CM $250,000 $262,500 $275,625 $289,406 $303,877 $319,070 $335,024 $351,775 $369,364 $387,832 $407,224

Additional Scott Travel $200,000 $210,000 $220,500 $231,525 $243,101 $255,256 $268,019 $281,420 $295,491 $310,266 $325,779

Molds $400,000 $0 $0 $0 $0 $400,000 $0 $0 $0 $0 $400,000

Buyback Lease Option $6,000,000

TOTAL INVESTMENTS $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

Total Costs $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 $15,708,870Discount Rate @ 15% 1.00 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323 0.3759 0.3269 0.2843 0.2472NPV $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

10 YR NPV $86,958,673



(Productivity assumed to increase at 2% annually.)


6

Figure 4 – NPV Calculations for Temecula with Transportation Cost Annual Increase of 9.4%Year: 0 1 2 3 4 5 6 7 8 9 10

PRODUCTION COSTS

Raw Materials




Hourly Labor Costs


Annual increase % 3% 3% 3% 3% 3% 3% 3% 3% 3% 3%







Avg. KwH rate $0.1600 $0.1664 $0.1731 $0.1800 $0.1872 $0.1947 $0.2025 $0.2105 $0.2190 $0.2277 $0.2368




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


SG&A COSTS

Management Costs


Annual increase % 0% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3%






Overhead Costs


30% allocation of direct costs $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

CM Profit $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0


Freight Rate % 0.03

Freight $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

Safety Stock $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

TOTAL SG&A COSTS $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

INVESTMENTS


Start Up Costs $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0



Molds $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0


Total Costs $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 $17,231,069Discout Factor @ 15% 1.0 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323 0.3759 0.3269 0.2843 0.2472NPV $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 $4,259,257

10 YR NPV $102,413,319





7

Figure 5 – NPV Calculations for China with Transportation Cost Annual Increase of 9.4%

Year: 0 1 2 3 4 5 6 7 8 9 10

PRODUCTION COSTS

Raw Materials




Hourly Labor Costs


Annual increase % 0% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2%





Total annual hourly labor cost $354,900 $354,758 $354,616 $354,474 $354,333 $354,191 $354,049 $353,907 $353,766 $353,624 $353,483


Avg. KwH rate $0.0650 $0.0683 $0.0717 $0.0752 $0.0790 $0.0830 $0.0871 $0.0915 $0.0960 $0.1008 $0.1059




Lease $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000


SG&A COSTS

Management Costs


Annual increase % 0% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3%






Overhead Costs


50% allocation of direct costs $177,450 $177,379 $177,308 $177,237 $177,166 $177,095 $177,025 $176,954 $176,883 $176,812 $176,741

CM Profit 8% $124,392 $125,240 $126,230 $127,367 $128,655 $130,099 $131,704 $133,474 $135,415 $137,534 $139,837


Freight Rate % 0.03Freight $8,000,000 $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

Safety Stock $460,000 $460,000 $460,000 $460,000 $460,000 $460,000 $460,000 $460,000 $460,000 $460,000 $460,000

TOTAL SG&A COSTS $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

INVESTMENTS


Start Up Costs $1,000,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0



Molds $400,000 $0 $0 $0 $0 $400,000 $0 $0 $0 $0 $400,000




10 YR NPV $102,521,717





8

Figure 6 –Transportation Costs Sensitivity (Graph)

TEMECULA CHINA-5% 98,782,957$ 73,478,821$ -4% 98,958,251$ 74,881,169$ -3% 99,142,553$ 76,355,588$ -2% 99,336,371$ 77,906,131$ -1% 99,540,239$ 79,537,073$ 0% 99,754,719$ 81,252,918$ 1% 99,980,407$ 83,058,417$ 2% 100,217,927$ 84,958,577$ 3% 100,467,939$ 86,958,673$ 4% 100,731,137$ 89,064,260$ 5% 101,008,253$ 91,281,190$ 6% 101,300,058$ 93,615,625$ 7% 101,607,360$ 96,074,048$ 8% 101,931,015$ 98,663,283$ 9% 102,271,918$ 101,390,510$

10% 102,631,014$ 104,263,279$ 11% 103,009,296$ 107,289,529$ 12% 103,407,805$ 110,477,607$ 13% 103,827,640$ 113,836,284$ 14% 104,269,952$ 117,374,778$ 15% 104,735,951$ 121,102,769$

10 YR NPVFreight Cost Change (%)

$-

$20,000,000

$40,000,000

$60,000,000

$80,000,000

$100,000,000

$120,000,000

$140,000,000

-5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15%

10 YR NPV

Freight Cost Change

Transportation Cost Sensitivity Analysis

10 YR NPV TEMECULA

10 YR NPV CHINA

9.4% Freight increase per year

9

Figure 7 NPV Calculations for Temecula with Productivity Annual Increase of 16.2%Year: 0 1 2 3 4 5 6 7 8 9 10

PRODUCTION COSTS

Raw Materials




Hourly Labor Costs


Annual increase % 3% 3% 3% 3% 3% 3% 3% 3% 3% 3%



Annual productivity increase 16.2% 16.2% 16.2% 16.2% 16.2% 16.2% 16.2% 16.2% 16.2% 16.2%




Avg. KwH rate $0.1600 $0.1664 $0.1731 $0.1800 $0.1872 $0.1947 $0.2025 $0.2105 $0.2190 $0.2277 $0.2368




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


SG&A COSTS

Management Costs


Annual increase % 0% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3%






Overhead Costs


30% allocation of direct costs $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

CM Profit $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0


Freight Rate % 0.03

Freight $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

Safety Stock $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

TOTAL SG&A COSTS $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

INVESTMENTS


Start Up Costs $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0



Molds $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0


Total Costs $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 $11,032,211Discout Factor @ 15% 1.0 0.8696 0.7561 0.6575 0.5718 0.4972 0.4323 0.3759 0.3269 0.2843 0.2472

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 $2,726,99410 YR NPV $86,880,847





10

Figure 8 –Temecula Productivity Sensitivity (Graph)

TEMECULA CHINA0% 110,721,881$ 86,958,673$ 1% 108,601,919$ 86,958,673$ 2% 106,590,968$ 86,958,673$ 3% 104,683,104$ 86,958,673$ 4% 102,872,716$ 86,958,673$ 5% 101,154,487$ 86,958,673$ 6% 99,523,383$ 86,958,673$ 7% 97,974,636$ 86,958,673$ 8% 96,503,733$ 86,958,673$ 9% 95,106,404$ 86,958,673$

10% 93,778,607$ 86,958,673$ 11% 92,516,520$ 86,958,673$ 12% 91,316,530$ 86,958,673$ 13% 90,175,219$ 86,958,673$ 14% 89,089,357$ 86,958,673$ 15% 88,055,891$ 86,958,673$ 16% 87,071,938$ 86,958,673$ 17% 86,134,774$ 86,958,673$ 18% 85,241,827$ 86,958,673$ 19% 84,390,667$ 86,958,673$ 20% 83,579,002$ 86,958,673$

10 YR NPVTemecula Annual Productivity Change (%)

$-

$20,000,000

$40,000,000

$60,000,000

$80,000,000

$100,000,000

$120,000,000

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 Productivity Change

Temecula Productivity Sensitivity Analysis

10 YR NPV TEMECULA

10 YR NPV CHINA

16.2% Productivity increase per year

11

Figure 9 NPV Calculations for China with Hourly Labor Cost Annual Increase of 39.5%Year: 0 1 2 3 4 5 6 7 8 9 10

PRODUCTION COSTS

Raw Materials




Hourly Labor Costs


Annual increase % 0% 39.5% 39.5% 39.5% 39.5% 39.5% 39.5% 39.5% 39.5% 39.5% 39.5%





Total annual hourly labor cost $354,900 $485,184 $663,295 $906,790 $1,239,673 $1,694,757 $2,316,902 $3,167,437 $4,330,203 $5,919,821 $8,092,987


Avg. KwH rate $0.0650 $0.0683 $0.0717 $0.0752 $0.0790 $0.0830 $0.0871 $0.0915 $0.0960 $0.1008 $0.1059




Lease $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000 $200,000


SG&A COSTS

Management Costs


Annual increase % 0% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3%






Overhead Costs


50% allocation of direct costs $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

CM Profit 8% $124,392 $135,674 $150,924 $171,552 $199,483 $237,344 $288,732 $358,556 $453,530 $582,830 $758,997


Freight Rate % 0.03

Freight $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 $10,751,331

Safety Stock $460,000 $460,000 $460,000 $460,000 $460,000 $460,000 $460,000 $460,000 $460,000 $460,000 $460,000

TOTAL SG&A COSTS $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

INVESTMENTS


Start Up Costs $1,000,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0



Molds $400,000 $0 $0 $0 $0 $400,000 $0 $0 $0 $0 $400,000




10 YR NPV $100,521,752





12

Figure 10 – China Hourly Labor Cost Sensitivity (Graph)

TEMECULA CHINA0% 100,467,939$ 86,729,016$ 3% 100,467,939$ 87,082,378$ 6% 100,467,939$ 87,493,006$ 9% 100,467,939$ 87,970,776$

12% 100,467,939$ 88,527,175$ 15% 100,467,939$ 89,175,540$ 18% 100,467,939$ 89,931,321$ 21% 100,467,939$ 90,812,373$ 24% 100,467,939$ 91,839,289$ 27% 100,467,939$ 93,035,768$ 30% 100,467,939$ 94,429,021$ 33% 100,467,939$ 96,050,229$ 36% 100,467,939$ 97,935,046$ 39% 100,467,939$ 100,124,153$ 42% 100,467,939$ 102,663,878$ 45% 100,467,939$ 105,606,869$ 48% 100,467,939$ 109,012,846$ 51% 100,467,939$ 112,949,412$

China Hourly Labor Cost Change (%) 10 YR NPV

$-

$20,000,000

$40,000,000

$60,000,000

$80,000,000

$100,000,000

$120,000,000

0% 3% 6% 9% 12% 15% 18% 21% 24% 27% 30% 33% 36% 39% 42% 45% 48% 51%

10 YR NPV

China Hourly Labor Cost Change

China Labor Cost Sensitivity Analysis

10 YR NPV TEMECULA

10 YR NPV CHINA

39.5% Labor cost increase per year

13