TOD 522- Supply Chain & Logistics

Management

Assignment 1: - Case Analysis

Bergerac Systems: The Challenge of Backward
Integration

Submitted to: Prof. Aravind Panikar

Date: 04th February, 2020

Submitted by: - Group 1

Name Enrolment No.
Karan Trivedi AU1814018
Shruti Vyas AU/HLIC/BCOM/15-18/593
Arnav Godha AU1713005
Masumi Manish Shah AU1713056
Dishita Sheth AU1613011

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Situation Analysis
Bergerac is a company which manufactures equipments, that are used for testing pet patients
in the veterinarian clinics. Since 2007, the company was growing fast with an average growth
of 17% annually, but still it was a small player with limited resources in a competitive market.
Omnivue is one of the most successful equipments produced by the company, and their core
competency lies in this product. The equipment is priced at a competitive rate to attract lower-
and middle-sized veterinarians. In 2010, veterinary spending in Unites States was expected
around $13 Billion, with growth of 7-8% per year over the prior decade. This increasing trend
in expenditure was due to the increase in pet ownership in the United States. The production
of Omnivue involves the use of plastics and chemical reagents supplied by two major suppliers,
GenieTech and Elsinore. The management of Bergerac is planning to externally acquired one
of its suppliers to reduce the production fluctuation and overhead costs of the firm, thereby
improving the supply chain issues related to it. There are two strategic alternatives for the
company to implement its future plans. It can either venture into “Buying” out its supplier,
GenieTech, thus integrating backwards or by manufacturing the plastic components in-house
in their plant. The decision making was critically important for CEO Ian Wyckoff who was
determined to avoid the costly mistake.

Challenges Faced by Bergerac Systems

•Supply issues & Production Delays: Third Party suppliers like GenieTech & Elsinore
plastics were irregular in supply of injection moulding parts, which led to temporary stock-out
of final product at the distributor’s end.

•Capacity Constraint: Bergerac was working with capacity constraints having limited
resources and fragile market with too many competitors and thus unexpected demand spikes
create production delays.

•Uncertain economic environment: Suppliers having low margin and dependency on

petrochemical industry which too was volatile and vulnerable to oil prices.

•Demand Forecasting: The financial crisis of 2008 and the volatile prices of many of its raw
materials created significant challenges for the industry.

•Stiff Competition: Idexx Laboratories, Abaxis Inc. and Heska corporation were the brand
names in the market and provided high competition to Bergerac systems.

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•Maintaining its growth Trajectory was important to build credibility among its customers and
retaining them.

Options
• “Buy” Option: Purchase Price would be $5.75 million dollar. 8 moulding presses each
equipped with 10 cavity models. Operating cycle is 75 seconds. Experienced labour
forces would come with acquisition. 90% uptime over 3-shifts and a 5-day working
week, 4 moulding press will meet the current need of Cartridge parts for Bergerac.
Acquisition will help to reduce overheads by 26 cents per unit. The payback period
would be nearly 5 years.

• “Build” Option”: Requirement of 4 moulding press. New machinery operating cycle

will be 70 seconds. Uptime of 95% and efficient use of raw materials. Set up also
require time for installation and testing of equipment and hiring and training staff.
Reduce the overheads by 57 cents per unit. The payback period is approximately 16
months.

Sr no Items Buy In house

1 Number of moulds 8 4
2 Parts per mould 10 10
3 Cycle time 75 Seconds 70 Seconds
4 Cycle/shift 384 411
5 Parts/shift 30720 16440
6 Cartridge/shift 15360 8220
7 Uptime 90% 95%
8 Cartridge/shift 13,824 7809
9 Annual capacity 10,36,800 58,61,500
10 % utilization 46 81

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Buy-
• 75 seconds – 1 cycle
86400 seconds (24 hrs*60 mins*60 sec) – (?)
Number of Cycles per day will be 1152.
3-shifts are there, so Cycle/shift: - 1152/3 = 384

• Parts/shift
Number of moulds*parts per mould*cycle/shift
=8*10*384
=30,720.

• Cartridge/shift
Since, Bergerac cartridge needs is satisfied by 4 moulds,
= 4*10 (Parts per mould) *384 (Cycle/shift)
= 15,360

• Annual Capacity
Total annual Capacity = (1152 cycles per day*5 days per week*50 week in a year)
*90% of utilization = 2,88,000*90% = 2,59,200 per machine production

In-house

• 70 seconds – 1 cycle
86400 seconds (24 hrs*60 mins*60 sec) – (?)
Number of Cycles per day will be 1234.
3-shifts are there, so Cycle/shift: - 1234/3 = 411

• Parts/shift
Number of moulds*parts per mould*cycle/shift
=4*10*411
=16,440.

• Cartridge/shift
= 2*10 (Parts per mould) *411 (Cycle/shift)
= 8220

• Annual Capacity

Total annual Capacity = (1234 cycles per day*5 days a week*50 week in a year)
*95% of capacity utilization = 3,08,500*95%
= 2,93,075 units per machine.
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Cartridges Demand for future

Revenue of Cartridges

No. of Veterinary 30,000

Current Market Share (No. of
Analyzer) 7,500
Required Cartridge Annually @ 2.5
per Day (Exhibit-4) 46,87,500

Cost @$ 2.39 1,12,03,125

Selling Price @ $ 9.25 10,36,28,906

Gross Profit ($) (S.P-Cost) 9,24,25,781

Working Details:

Buy In house
Installed base 7500 7500
Test/day 2.5 2.5
Working day/year 250 250
Total Cartridge (Exhibit-4) 46,87,500 46,87,500
Cost 1,19,53,125 (@$2.55) 1,12,03,125 (@$2.39)
Selling price ($9.25) 433,59,375 433,59,375
Revenue 314,06,250 321,56,250

Industry analyst projected 8 to 10% annual growth rate Below table shows estimated demand
for cartridge in next 5 years:

Growth Rate 2010 2011 2012 2013 2014 2015

Demand@ 8% 46,87,500 50,62,500 54,67,500 59,04,900 63,77,292 68,87,475
Demand@ 9% 46,87,500 51,09,375 55,69,218 60,70,447 66,16,787 72,12,297
Demand@ 10% 46,87,500 51,56,250 56,71,875 62,39,062 68,62,968 75,49,264

Considering above forecasted demand, the option of buying looks more suited as it could be
satisfied with acquisition. On the other hand, if company opted for in house then it has to
undergo multiple stages of expansion to meet the demand.

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 Capacity of In-house Production vis-à-vis GenieTech
# of
Units Per
Per Per Per Machine No. of Total Current Capacity
Sec Hr Days Weeks Min Hour Utilization Cycle Production Machines Capacity Required Utilization

Buy 75 24 5 50 0.8 48 90% 5 2,59,200 8 1,03,68,000 45.21%

In
House 70 24 5 50 0.857 51.429 95% 5 2,93,075 4 58,61,500 46,87,500 79.95%

Buy: -
Total annual Capacity = (1152 cycles per day*5 days per week*50 week in a year) *90% of
utilization = 2,88,000*90% = 2,59,200 per machine production
In-House: -

Total annual Capacity = (1234 cycles per day*5 days a week*50 week in a year) *95% of
capacity utilization = 3,08,500*95%= 2,93,075 units per machine.

Financial Aspect

Cartridge Business
Option Inhouse Buy
Profit Margins High High
ROI Medium Medium
Financial Continuous Revenue Yes Yes
Financial Risk High High
Overall Good Good

Both the decisions look equal when we take into account the financial except that profit margins
are a little higher for In-house as delivery costs are exempted. As per exhibit-4, annual savings
in Buying GenieTech is $1,204,688 and that in in-house is $2,673,819. So, we can attain yearly
savings of $1,469,131 more by going in-house.

Yes, it makes financial sense to build In-House production capacity because: (As per Exhibit-
4)

• Total labour cost is lower than what we would incur if we choose genie tech
• Raw material cost is low.
• Our total overhead cost is low.
• We can make more profit as it would cost us lower than genie tech.

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 • More savings are done.
• Although we have to incur lot of capital requirement but it costs us much lower than
genie tech.
• Also, our payback period is very low if we take in house production.

Strategic Aspect

Cartridge Business
Options Inhouse Buy
Core Competency / Focus Not Available Acquired
Core Problem of Redesign Supply Not Solved Not Solved
Strategic Sunk Cost (Retreat from Decision Cost) High Medium
Competitors Reaction High Medium
Managerial Risk Increased Reduced
Overall No May Be Yes

The biggest advantage of buying is the technical know-how of cartridge manufacturing process.
Bergerac could leverage the R&D to keep itself updated with the trends in technology.
Cartridge manufacturing is also not a core competency of Bergerac and an in-house
manufacturing would force it divert its attention and focus.

From In-house strategic perspective, it is not recommended strategically since its core
competency doesn’t lies in cartridges. Also, relation with suppliers getting spoiled is also at
risk. Management risk also increases within-house facility since, with growing demand and
managing parallel production lines, it becomes difficult for the company to cope up which is
growing and still has limited resources at their ends.

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Recommendation

In-house decision: Inexperience with the process and industry could lead to lower productivity
and technological innovation could take time and finally to set up a standardized process with
sufficient quality checks would only take more time.

Buy Decision: The lock-in period is too high and Bergerac could miss out on the opportunities
to invest elsewhere. Integration of the new company could be a challenge due to potential
conflicts between the old and new staff.

Though both the decisions have their merits & de-merits, Bergerac should buy GenieTech as
the growth prospects of the industry seem strong and Bergerac cannot afford to lose its focus
from its core competency. The competition in the market is also high and Bergerac does not
have time to set up the in house and stabilize the process till its smooth and consistent. Also,
with limited resources, it would require high investment on technological front to set up in-
house and could miss out on an opportunity in tug-of-war between cartridges and analyser.

Other reasons for acquiring GenieTech are as follows: -

• 50% of GenieTech revenue is from Bergerac and the rest 50% is from outside business.
This 50% revenue from outside business increased the annual savings hence reducing
the payback period to 1.03 years which is lesser than the payback period (1.35 years)
of in-house production.
• GenieTech has the technical expertise, managerial resources and capabilities to handle
the current production and their future plan of production of small cartridges for
OmniVue mobile starting from 2013.
• From Supply chain point of view, Bergerac can make use of Distribution network and
sales force already existing with GenieTech and can act quickly to increase the market
share.
• In the long term, Bergerac can pass the cost reduction benefits to the customers giving
them an edge over the competitors resulting in the increase in market share.

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Exhibits: -

Exhibit-1

Exhibit-2

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Exhibit-3

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Exhibit-4

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