BERGERAC SYSTEMS: THE CHALLENGE OF
BACKWARD INTEGRATION
SUBMITTED BY:
GROUP 02, SECTION - C
1) Describe the business and operational challenges facing Bergerac Systems.
Following are the Business and Operational challenges being faced by Bergerac Systems-
(i) Business Challenges- The company was small player as compared to its competitors, despite
growing fast with average annual growth of 17 % since 2007, and was seeking opportunities both in
growing and capturing market share. The resources were limited in such a competitive market and
as it was a small player, so it was important for Bergerac to build credibility and loyalty relationships
with its customers.
The business environment (market) was very competitive with three major competitors-
Idexx Laboratories Inc.- They were the market leaders with largest product line, a strong
brand name and best-established distribution network and salesforce.
Abaxis Inc.- Their products delivered the comparable results like of Indexx Lab. With more
cost effectiveness and were considered easier to use. For their product VetScan VS2 there
was no need for a trained technician to operate it.
Heska Corporation- Offered similar set of products but were generally considered lower-
end in quality and less innovative than its competitors.
The market grew by 7-8 % per year over the prior decade with factors like steady increase in pet
ownership, increased willingness to pay of owners and increase in sophistication and availability of
better veterinary care supporting the growth. There was a shift in the with more Veterinarians
adopting for in-house lab equipment and Industry analysts supporting the shift by projecting 8-10 %
annual growth for the in-house diagnostics market. In terms of sales representatives, Bergerac had a
small direct sales force with only 20 reps with market leaders like Indexx having well established
distribution network as well as salesforce.
(ii) Operational challenges- Bergerac systems were relied on single-source suppliers, for instrument
production, which was problematic for them as in case of sudden demand or delays in supplies the
company won’t be able react on time and this will lead to backlogs and if there is any problem at
suppliers end it will synonymously lead to problems in company’s production and with growing
market and demand, the supplier issue will have a magnified effect in future. Production also
operated on a single shift.
Suppliers had little buying power and they were dependent on petrochemicals as a key input. This
meant that they were highly depended on supply and prices of oil and with volatility and
unprecedented spikes in the petrochemical prices over the past three years the suppliers were
highly vulnerable to these external factors. Moreover, due to 2008 economic crisis the demand
forecasting had been difficult for suppliers (plastic) and its customers.
Due to the high unreliability of suppliers, Bergerac systems had to carry more inventories of parts
and finished goods which resulted in high inventory holding cost. Also, there were capacity
constraints at suppliers’ end which made it difficult to respond to unexpected demand spikes. This
all led to production delays at time.
2) Should Bergerac Systems integrate backward into the manufacturing of injection-
molded parts for its cartridges? If so, how?
(a) What are the advantages and disadvantages of acquisition vs. developing in-house
capabilities?
(b) What quantitative evidence supports your recommendations?
Yes, Bergerac should integrate backwards. By buying GenieTech since they are other added
advantages of lesser pay back period along with the trained staff obtained from GenieTech and
hence the time and efforts saved due to this. Also, GenieTech has more capacity, which would help
in easier availability of materials, if and when required due to future growth.
GenieTech In-House
Cycle time (s) 75 70
Hours 24 24
Days 5 5
Weeks 50 50
Uptime 90% 95%
No. of units per cycle 5 5
Number of molding presses 8 4
Total Annual capacity 10368000 5862857
a) The uncertain economic environment, less buying power, and vulnerability to oil prices and
supplies had made it difficult for GenieTech and Elsinore to meet the demands of Bergerac.
Further, both had capacity constraints that made difficult for them to respond to
unexpected demand spikes. This led to Bergerac holding more inventory than feasible.
Backward integration would allow Bergerac to control the supply of plastic components.
The overall cost of will reduce as it will lead to lesser overhead cost and eliminate the third
party. It’ll also make the supply chain more flexible to the needs of Bergerac. Therefore,
Bergerac should integrate backwards.
Advantages Disadvantages
Lower the costs by 26 cents per Efforts needed to generate
unit outside business (apart from
Infrastructure and machinery what GenieTech already had on
Acquisition
already set up long-term contract)
Experienced labor force would Variable overhead cost involved
come along with acquisition
Lower the costs by 57 cents per Initial set-up and installation
unit would need investment of time
Buy the number of machines and money
exactly required Need to hire additional staff and
Newer machines could be bought cost of training them
In-house
that had better efficiency –
Developmen
increased production and
t
reduction in wastage
No need for delivery of the units
produced
Lesser payback period (16
months in comparison to 5 years)
b)
GenieTech In-house
Total cartridges produced 9375000 4687500
Labour - cartridge $ 11,43,600.00 $ 10,87,000.00
Raw material costs - cartridge
Cost per lb , delivered $ 2.45 $ 2.45
Yield (RM lbs per 1000) 320 310
Total RM required 3000000 1453125
Total RM costs $ 73,50,000.00 $ 35,60,156.25
Labour and RM cost - reagents
( @ $1.15/cartridge) $ 1,07,81,250.00 $ 53,90,625.00
Total Overhead $ 17,59,000.00 $ 10,73,400.00
Contingency $ - $ 90,000.00
Total operating costs $ 2,10,33,850.00 $ 1,12,01,181.25
Cost per unit $ 2.24 $ 2.39
Delivery cost / cartridge $ 0.15 $ -
Total costs till it reaches Bergerac $ 2.39 $ 2.39
Current cost to Bergerac $ 2.96 $ 2.96
Savings per unit $ 0.57 $ 0.57
Total annual savings $ 26,54,950.00 $ 26,73,818.75
Revenues from the remaining
units $ 26,54,950.00 $ -
Total benefits $ 53,09,900.00 $ 26,73,818.75
Capex $ 57,50,000.00 $ 36,07,000.00
Payback period (in years) 1.08 1.35
Buying from GenieTech would help in more revenues and hence a lesser payback period as
compared to in-house building. Also, GenieTech capacity is higher than building in house, which
would help for future growth requirements too.
3). What other advice would you offer Ian Wyckoff about his manufacturing operations?
Following advice can be offered to Ian Wyckoff related to manufacturing operations:
1. He should encourage cross collaboration of research and development team and the
manufacturing team to ensure that the finished products are in sync with the product concept or the
prototype.
2. Adequate training should be given to the employees to increase their productivity and efficiency.
3. The assembly line for the production of instruments can be automated to some extent to ensure a
consistent standard and quality of the instrument produced. This would bring down the time
required for quality testing of each finished unit.
4. The manufacturing capacity can be scaled up owing to the fact that market for inhouse diagnostic
equipment was expanding and there was a rapid growth for Bergerac Systems over the past few
years. Over a period of time, this would also help in achieving economies of scale.
5. The manufacturing process and production planning should be carried out by taking into account
the sales projections for the upcoming period. This would ensure that there are no stockout
situations at the distributors end and the supply of finished products is consistent with market
demand.
6. The top management should ensure that Vendor Relationship Management is in place so that the
manufacturing process and plant operations are not hampered because of irregularity in supply of
key component. This would also keep the lead times in check.
7. A robust information technology should be present for proper communication and flow of
information between different areas engaged in manufacturing. It would also help to improve the
process efficiency by keeping track of any production glitches and removing them.
8. Periodic maintenance and upkeep of critical production machinery and equipment should be
carried out.
