BERGERAC SYSTEMS: THE CHALLENGE OF BACKWARD INTEGRATION

Q1.
Operational Challenges

• Supply issues: The company has been facing supply issues due to projected increase in
demand between 8 to 10% annual growth

• Production delays: Production delays were frequent as the supply of Injection moulding parts
was sporadic

• Capacity Constraint: Bergerac was capacity constraints due to the increase in demand for its
products which was growing continuously. Looking for expansion

• Unreliability of Suppliers: The simultaneous delays from both plastic parts suppliers led to a
shortage of final product

• Demand Forecasting: Demand Forecasting became increasingly difficult following the financial
crisis of 2008 and the volatile prices of many of its raw materials

Business Challenges

• The market was very competitive for veterinary diagnostic instruments market and faced stiff
competition from Idexx Laboratories, Abaxis Inc. and Heska corporation

• The company remained a small player and hence was looking for opportunities to capture a
wider share of market

• Although Bergerac was growing fast averaging 17% annually, to maintain its growth Trajectory
it was important to build credibility among its consumers

• Bergerac needed to revamp its supply chain strategy in order to improvise its entire supply
chain

Q2.

Genietech
Labor- cartridge Remarks
Production co-ordinator, 3
Supervision $ 2,36,500.00
foremen
Direct/Indirect labour $ 2,60,700.00 12 machine operators @$22K
benefits and taxes $ 6,46,400.00
Total $ 11,43,600.00
RM costs - cartridge
Cost per pound, delivered $ 2.45
Yield (RM pounds per 1000 units) 320
 Considering 8 presses are in
Total cartridge (units) 9375000
operation
Pounds per annual demand 3000000
Total $ 73,50,000.00
Labor and RM - reagents
Avg cost per cartridge $ 1.15
Considering 8 presses are in
Total cartridges (units) 9375000
operation
Total $ 1,07,81,250.00
Overhead
Rent/floor space $ 2,55,000.00
Depreciation $ 3,15,400.00
Utilities $ 4,82,400.00
Insurance (equipment) $ 54,900.00
Repairs & maintenance $ 2,13,200.00
Maintenance, repair & Ops supplies $ 1,08,900.00
Variable overhead $ 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
Capital requirements $ 57,50,000.00
break even volume 10152983
Annual production volume 9375000
Payback period (years) 1.08

In-house
Labor- cartridge Remarks
Supervision $ 2,42,100.00
Direct/Indirect labour $ 2,30,500.00
benefits and taxes $ 6,14,400.00
Total $ 10,87,000.00
RM costs - cartridge
Cost per pound, delivered $ 2.45
Yield (RM pounds per 1000 units) 310
Total cartridge (units) 4687500
Pounds per annual demand 1453125
 Total $ 35,60,156.25
Labor and RM - reagents
Avg cost per cartridge $ 1.15
Total cartridges (units) 4687500
Total $ 53,90,625.00
Overhead
Rent/floor space $ 1,47,900.00
Depreciation $ 3,78,800.00
Utilities $ 4,11,100.00
Insurance (equipment) $ 32,800.00
Repairs & maintenance $ 57,100.00
Maintenance, repair & Ops supplies $ 45,700.00
Variable overhead $ -
Total $ 10,73,400.00
Contingency $ 90,000.00
Annual operating cost $ 1,12,01,181.25
Cost per unit $ 2.3896
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
Capital requirements $ 36,07,000.00
break even volume 6323470
Annual production volume 4687500
Payback period (years) 1.35

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 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 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