BERGEssssssRAC d3d3d3SYSTEMS: THE CHALLENGE OF BACKWARD

INTEGRATION
Q1.
Operational Challeng33ddes

• Supply issaaaaa saaaaaaaaaaaa a d

3d3d3d3ues: The company has been facing supply issues due to projected increase in
demand between 8 to 10% annual growth

• dProductiod3d3dd3n delays: Production delays were frequent as the supply of Injection

mdoulding parts was sporadic

• Capdacity Cd3d3donstraint: Bergerac was capacity constraints due to the increase in

demand for itds products wwwxwxsachich was growing continuously. Looking for expansion

• Unrelidability of Suppliers: The simultaneous delays from both plastic parts suppliers led to a
shortagddde of final prodddduct

• Demand Fodrecasting: Demand Forecasting became increasingly difficult following the

financial crisisd of 2008 and the volatile prices of many of its raw materials

Bdusiness Challenges

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

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

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

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

Qddd2.

 D Genietech
Ladbor- 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
$ 53,09,400.00  
production
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
$ 26,73,818.75  
production
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.dwdwdwdwdwddwdwdwdwdwdwdwdwdw
Our recommendation is to buy Genietech instead of starting in-house production of cartridges for
the following reasons

 50% of Gdwdwdwdwdwdwenietech 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
currendwdwdwdwdwdwdwdt production and their future plan of production of small
cartridges for Omnivalue mobile starting from 2013
 In the long term, dwdwdwdwdwBergerac can pass the cost reduction benefits to the
customers giving them an edge over the competitors resulting in the increase in market
share

Bergerac systems :

Bob Mccarthy is the director of planning .he suggest to