Bergerac Systems- The challenge of backward integration

Group-6
Sec-C
1. Describe the business and operational challenges facing Bergerac Systems.

Business Challenges

Competition:

Bergerac faced stiff competition in the market of veterinary diagnostic instruments against Idexx
Laboratories which was industry leader and had the highest brand equity and Abaxis directly, on cost
effectiveness and ease of use. There was a challenge of strong penetration in this market
environment.

Success of Launching of New product concept:

The new product concept of portable omnivue mobile requires cartridges. The success of this
product depends of ready availability of cartridges for use.

Increase in demand reduces the bargaining power:

It is difficult to negotiate with our 2 sole plastic suppliers (for making cartridge component) to
respond to the rising demand in the market.

Supplier Relationship:

Stable Relationship with our suppliers is needed in the uncertain economic environment to ensure
that we are their top priority when it comes to supply in the hour of need. (Genietech’s 50 % of the
revenue comes from Bergerac supply too)

Operational Challenges

Unreliability of Suppliers:

Production delays at the suppliers of injection moulded plastic parts led to a shortage of final product.
The production delays at suppliers are because of volatility in petrochemical pricing, little buying
power and very low margins of suppliers.

Over dependency on 2 suppliers:

Only two suppliers for injection moulded plastic parts is a bottleneck for the company. Because
product (cartridge) requires stable supply but the raw materials like plastic supply is very volatile and
depends on the capacity of 2 sole suppliers.

Difficulty to optimize cartridge production:

Unreliable supply of plastic made Bergerac to carry more inventory of parts and finished goods
Challenge of responding to the increase in demand in near future:

In 2013, plan to launch new product which use smaller cartridges that leads to increase in demand of
cartridges (Looking for expansion)

Market demand: There is 8% to 10% of annual growth of in-house diagnostics market and company is
fast growing with double growth rate of industry average (17%)

2.Should Bergerac systems integrate backward into the manufacturing of injection-molded parts
for its cartridges? if so how?

Preference should be given to partner with other suppliers of plastics as well. If other reliable
suppliers are not available, then we can go for “Buy” option.

2.a) What are the advantages and disadvantages of acquisition vs developing in-house
capabilities?

Advantages of Acquisition

Capital requirements comparatively less

The capital required for acquisition is $5,750,000 and for developing in house facility is $3,607,000.
The capital requirement is high for acquisition. But through acquisition we get 8 molding machines,
skilled labour & long-term customers, while in-house facility will have only 4 molding machines.

More skilled Labour at less salary

The total labour cost is $1,143,600 in acquisition and $1,087,000 in In-house facility. In acquisition
we get skilled labour while the in-house facility may require training for the new employees.
Through acquisition we get skilled production coordinator, 3 foremen and 12 machine operators
whose salary is $22k. But in house facility will have only production supervisor,2 foremen and 6
machine operators whose salary is $30k plus profit sharing

Opportunity cost is comparatively less

It may take some time for building in-house facility, during which our production may be affected by
poor supply of plastics. This leads to unhappy customers and loss of business. Acquiring Genietech
will have little to no disruption in our activities. If needed, the company may use the 8 molding
machines worked by temporary workers, to produce necessary plastics to fulfil back orders.

Opportunity for diversification

Acquiring will also provide the company with long-term customers of Genietech. The company can
provide service to these customers.

Opportunity to create barriers of entry

By acquiring a plastic company, Bergerac can create barriers of entry to new entrants or can create
disruption for its competitors, if they are buying plastics from Genietech.

Ability to meet increase in demand in the future

The industry as well as the company is expanding.4 machines in in-house facility may not be able to
satisfy the increase in demand in the future. By acquiring Genietech, the company will get 8
machines and more labourers which gives the company the ability to meet increase in the demand.
Disadvantages of acquisition

Payback period is comparatively high

Payback period of acquisition is 4.8 years while payback period of developing in-house facility is 1.3
years.

Comparatively old -less efficient machines

Genietech has older machines with less efficiency compared to the newer machines that the
company will buy for its in-house facility.

Newer machines have shorter 70-second cycle times while Genietech machines have 75 second
cycle time

Machine uptime is 95% in in-house facility while Genietech has machines with 90% uptime

Per unit overhead cost is comparatively high

While developing in-house facility, reduces per unit (cartridge) cost by 57 cents, Acquiring reduces it
only by 26 cents.

2.b) What quantitative evidence supports your recommendations?

SecC_Group06_Ber
gerac.xlsx

3.What other advice would you offer Ian Wyckoff about his manufacturing operations?

Injection Moulding is not the competency of Bergerac. Ian Wyckoff should try to find new reliable
suppliers of cartridges. Since the supply is fluctuating, he should have more than 2 suppliers.

Ian Wyckoff should try to understand the problems faced by his suppliers and provide financial,
administrative or technical assistance if required.

Ian Wyckoff should consider the change in the requirement of the cartridges for new product
OmniVue Mobile. If this product becomes the preferred product, then the requirement of cartridges
will change. He should ensure that the suppliers can produce different variety of cartridges.

He should invest in R & D to provide other options like testing multiple samples at the same time.