Strategic Sourcing Management

ASSIGNMENT - 02

Bergerac Systems: Cost Analysis |Group – 3 |

 Bergerac Systems: The Challenge of Backward Integration – Case
Summary

In July 2010, Ian Wyckoff, CEO of Bergerac Systems, must make a critical decision.
Bergerac Systems is a modest but quickly rising participant in the veterinary diagnostic
equipment market. They produce the OmniVue system, which needs proprietary cartridges
for testing. The main problem is ensuring a consistent supply of these cartridges. GenieTech
and Elsinore Plastics are the company's two external suppliers, and their supply has been
uneven. The decision becomes critical since a contract renewal with Elsinore Plastics is due
in three weeks.
The case examines Ian Wyckoff, CEO of Bergerac Systems,' strategic decision to seek
backward integration by manufacturing cartridge components in-house or acquiring one of
its current cartridge suppliers, GenieTech. Bergerac Systems created in-house diagnostic
equipment for veterinary treatment, such as the OmniVue system, which used proprietary
cartridges to perform tests. The firm was facing supply challenges owing to the instability
of its external cartridge suppliers and desired greater control over this important aspect of
its manufacturing process.
The case presented two main options:
Bergerac might purchase GenieTech, one of its existing cartridge suppliers, in a "buy"
transaction. GenieTech possessed eight moulding presses capable of producing cartridge
bases and covers, and the acquisition would include an experienced workforce. With a
payback period of roughly five years, this alternative was predicted to cut overhead and
lower expenses.

"Build" Opportunity: Bergerac might also invest in its own cartridge production
capabilities at its Parsippany location. With this alternative, the corporation would only
require four moulding presses and could obtain newer, more efficient technology with
lower cycle times. This alternative was estimated to save 57 cents per cartridge unit over
the present system, with a payback period of around 16 months.
Bergerac's supplier network, manufacturing costs, and general company strategy were all
affected by the decision. Wyckoff had to examine the benefits and drawbacks of both
possibilities, as well as consider the company's long-term development potential and
whether they had the management skills and ability to undertake such a strategic shift.

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 Cost Analysis of Backward Integration:
From the Exhibit 4 given in the case we can infer the following and choose the better
integration option between In-house production or acquisition of Genie Technologies.

Exhibit 4 Genie Tech In-House

Labour 11,43,600.00 10,87,000.00
Raw Materials 36,75,000.00 35,60,156.00
Reagents Costs 53,90,625.00 53,90,625.00
Overhead 17,59,500.00 10,73,400.00
Contingency - 90,000.00
Annual Operating Cost $ 1,19,68,725.00 $ 1,12,01,181.00
Annual Production of Cartridges 46,87,500.00 46,87,500.00
Cost per Unit 2.553328 2.38958528
Current cost per Unit 2.960 2.96
Cost per unit including delivery 2.703 2.39
Saving per Unit 0.257 0.570
Annual Saving $ 12,04,687.50 $ 26,71,875.00
Total Capital requirement $ 57,50,000.00 $ 36,07,000.00
Payback Period in years 4.8 1.3

– On an annual basis, we save around 1.2 million dollars and 2.67 million dollars
for Genie Tech and In-House manufacturing, respectively, although we save 1.47
million dollars more when producing In-House. Which is in favour of in-house
manufacture.

– Our annual operating cost for in-house production is lower than that of Genie
Tech, owing to higher overhead costs. As a result, we may save around 7 lakh
rupees on this.

- Even the initial investment and payback term differences between the two options favour in-house
manufacturing. Whereas the capital need is 36,07,000 dollars, the capital requirement is 57,50,000
dollars. With a payback period of 1.3 years, the corporation may quickly generate a substantial
profit after this period, rather than waiting 4.8 years.
Thus, In-house production is the best option for Backward Integration.

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