BERGERAC SYSTEMS: THE CHALLENGE OF BACKWARD INTEGRATION Q1. Operational Challenges •
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Supply issues: The company company has been facing supply issues due to projected projected increase increase in demand between 8 to 10% annual growth Production delays: Production delays were frequent frequent as the supply of Injection Injection moulding moulding parts parts was sporadic
•
Capacity Constraint: Constraint: Bergerac was capacity capacity constraints constraints due to the increase increase in demand for its products which was growing continuously. Looking for expansion
•
Unreliability of Suppliers: The simultaneous simultaneous delays delays from from both plastic parts suppliers suppliers led to a shortage of final product
•
Demand Forecasting: Demand Forecasting became increasingly difficult following following the financial financial crisis of 2008 and the volatile prices of many of its raw materials
Business Challenges •
•
•
The market market was very competitive competitive for for veterinary diagnostic instruments market and and faced stiff competition from Idexx Laboratories, Abaxis Inc. and Heska corporation corporation The company company remained remained a small small player and hence hence was looking for for opportunities to capture a wider share of market Although Bergerac was growing growing fast fast averaging averaging 17% 17% annually, annually, to maintain its growth growth Trajectory Trajectory it was important to build credibility among its consumers
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Bergerac needed to revamp its supply chain strategy strategy in order to improvise improvise its entire supply chain
Q2. Genietech
Remarks
Labor- cartridge
Supervision
$
2,36,500.00 2,36,500.00
Production foremen
Direct/Indirect labour
$
2,60,700.00 2,60,700.00
12 machine operators @$22K
benefits and taxes
$
6,46,400.00 6,46,400.00
Total
$
11,43,600.00
RM costs - cartridge
Cost per pound, delivered
$
Yield (RM pounds per 1000 units)
320
2.45
co-ordinator,
3
Total cartridge (units)
9375000
Pounds per annual demand
3000000
Total
$
Considering 8 presses are in operation
73,50,000.00 73,50,000.00
Labor and RM - reagents
Avg cost per cartridge
$
1.15
Total cartridges cartridge s (units)
9375000
Total
$ 1,07,81,250.00 1,07,81,250.00
Considering 8 presses are in operation
Overhead
Rent/floor space
$
2,55,000.00
Depreciation
$
3,15,400.00 3,15,400.00
Utilities
$
4,82,400.00 4,82,400.00
Insurance (equipment)
$
54,900.00
Repairs & maintenance
$
2,13,200.00
Maintenance, repair & Ops supplies
$
1,08,900.00 1,08,900.00
Variable overhead
$
3,29,700.00 3,29,700.00
Total
$
17,59,500.00
Contingency
$
-
Annual operating cost
$ 2,10,34,350.00
Cost per unit
$
2.2437
transportation + fuel charges
$
0.15
Total
$
2.394
Current cost per unit
$
2.96
Savings per unit
$
0.57
Annual savings @ current production
$
53,09,400.00 53,09,400.00
Capital requirements
$
57,50,000.00 57,50,000.00
break even volume
10152983
Annual production volume
9375000
Payback period (years)
1.08
In-house
Remarks
Labor- cartridge
Supervision
$
2,42,100.00 2,42,100.00
Direct/Indirect labour
$
2,30,500.00 2,30,500.00
benefits and taxes
$
6,14,400.00 6,14,400.00
Total
$ 10,87,000.00
RM costs - cartridge
Cost per pound, delivered
$
Yield (RM pounds per 1000 units)
310
Total cartridge (units)
4687500
Pounds per annual demand
1453125
2.45
Total
$ 35,60,156.25
Labor and RM - reagents
Avg cost per cartridge
$
1.15
Total cartridges cartridge s (units)
4687500
Total
$ 53,90,625.00
Overhead
Rent/floor space
$
1,47,900.00
Depreciation
$
3,78,800.00 3,78,800.00
Utilities
$
4,11,100.00 4,11,100.00
Insurance (equipment)
$
32,800.00 32,800.00
Repairs & maintenance
$
57,100.00
Maintenance, repair & Ops supplies
$
45,700.00 45,700.00
Variable overhead
$
Total
$ 10,73,400.00
Contingency
$
Annual operating cost
$ 1,12,01,181.25
Cost per unit
$
transportation + fuel charges
$
Total
$
2.390
Current cost per unit
$
2.96
Savings per unit
$
0.57
Annual savings @ current production
$
26,73,818.75 26,73,818.75
Capital requirements
$
36,07,000.00 36,07,000.00
break even volume
6323470
Annual production volume
4687500
Payback period (years)
1.35
90,000.00 2.3896 -
The error in the analysis of buying is that McCarthy did not consider the revenue, or the annual savings generated from the other 4 moulding presses that could e used for outside business. Hence taking this into consideration, the production volume goes up by 100% and the payback period comes down to 1.03 years which is less than that of the t he In-house production proposal.
Q4.
Our recommendation is to buy Genietech instead of starting in-house production of cartridges for the following reasons
50% of Genietech revenue is from Bergerac and the rest 50% is from outside business. This 50% revenue from outside business increased i ncreased 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 Omnivalue mobile starting from 2013
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
