Bergerac Systems: The Challenge of Backward Integration

Bergerac Systems:
The Challenge of
Backward Integration
(Case Solution)
SEPTEMBER 10
Group 7
Sec A
1
1. Describe the business and operational challenges facing Bergerac Systems.
Operational Issues –
 Unreliability of suppliers – both the suppliers (GenieTech, Elsinore Plastics) delayed
the suppling of raw materials, thus leading to delay in production of final product.
 Issue relating to suppliers – sudden increase of projected demand (8-10%) made it
difficult for the company to respond effectively.
 Productions delays – delayed supplying or raw materials lead to delay in production.
 Capacity constraints – sudden increased in projected demand coupled with increasing
actual demand for their products made them consider expanding
 Demand forecasting – the volatile prices of raw materials along with financial crisis of
2008 made demand forecasting difficult.
Business Issues –
 Bergerac faced a high competition from its competitors namely Idexx lab Inc., Abaxis
Inc. and Heska Corporations.
 The company remained a small player despite performing well and thus were looking
for expansion as the market is growing at the rate of 8.5%.
 Bergerac faced the decision to either buy one of its suppliers (GenieTech) or to make
a manufacturing unit of its own for backward integration to meet the demand
uncertainly and capitalize the growth in market capacity.
 Upcoming renewal of contract with cartridge supplier, Elsinore Plastics, which instils
urgency of decision making.
 Considering growth in future demand, they should increase the production capacity to
satisfy future demand.
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?
A)
Advantage of acquisition of Disadvantage of acquisition
GenieTech GenieTech
 Additional source of income and  Restricted working capital
commanding bargaining power in  4.8 years pay back period as
a growing market compared to 1.3 for in house
 Disintermediation and better 
control over the supply chain
 Regularity of supply
 Availability of trained staff
 Eliminating supply side
uncertainty
2

Reduced inventory holding cost
due to reduced lead time due to
improved serviceability.
Cost Advantage
excess production capacity can
be utilised to cater to competitors
Advantage of developing in house Disadvantage of developing inhouse
 Reduced cycle time and  Unavailability of trained staff
increased uptime of machine –  Reduced flexibility to respond to
increased flexibility increased demand
 Reducing supply side uncertainty
 Reduced inventory holding cost Cost Disadvantage
 Less initial investment  90,000 – allowance for consulting
Cost Advantage engineers
 114,844 – saving from cost of
cartridges
 56600 – saving in labour cost
 686,100 – saving from
B)
Buying Genie Tech
Specifics Remarks
Total Labour Cost 1143600 12 Machines in operation
Raw Material Cost
Cost per Lb, delivered 2.45
Yield (Rm lbs per 1000
units) 320
No of units will be doubled as we operate 8
Total Cartridges 9375000 presses
Annual Demand 3000000
Raw Material cost will increase as no of units
Raw Material Cost 7350000 doubled
RM Cost Cartridges
Avg. Cost per Cartridges 1.15
Total Cartridges 9375000
Regent Cost increased as no of units
Labour and RM regent 10781250 decreased
Total Over Head 1759500
Annual operating Cost

Labour 1143600
am Material Cost 7350000
3
Regent Cost 10781250
Overhead Cost 1759500
Annual Operatin Cost 21034350
Cost per Unit 2.243664

Transportation Cost 0.15
Total Cost per unit 2.393664
Current Cost per unit,
delivered 2.96
Savings per unit 0.566336
Annual Savings 5309400
Capital requirement 5750000

Annual Production 9375000
Buy back period 1.082985
In House Production
Total Capital
Requirement 3607000
Annual Savings 2673819
No of Units Produced 4687500
Buy Back Period 1.349007
Bergerac
Calculation.xlsx
If we consider the additional savings from the utilization of 8 Presses for the manufacturing of
Cartridges from the above-mentioned calculation, we can see that acquiring GenieTech have
financial advantage as the buyback period of the investment is less. Apart from financial
advantage their supply chain will be flexible if there is a demand spike as they have total
control of the supply. Considering the increasing growth in the market capacity this would be
the optimal solution as it will be handy if they decide to expand.
Q3. What other advice would you offer Ian Wyckoff about his manufacturing
operations?
1. Introduce efficient manufacturing process – As there was a market growth potential,

the plant should utilize the whole production capability and achieve economies of scale
such that the Bergerac captures the market share and can reduce its manufacturing
cost improving the contribution margin from products.
4
2. Maintain good relationships with the suppliers – As Bergerac had many suppliers
supplying critical components to its manufacturing of products, I would suggest Ian
Wyckoff to maintain good relationship with the suppliers and find new suppliers
supplying critical components as any discrepancies would hinder the manufacturing
process so there should more than one supplier for a smooth manufacturing process.
3. Increase production capability - As the market was in the growth stage and had high
competition, my advice to Ian Wyckoff would me to increase the inhouse production
capability to increase the growing market and capture the market share.
4. Utilising excess production from GenieTech – If the management decides to acquire

GenieTech then Bergerac should utilize the manufacturing capability of GenieTech by
increasing the overall production capability and maintain higher inventory such that all
demand spikes could be accommodated

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What are the business and operational challenges facing Bergerac Systems?

Should Bergerac Systems integrate backward into the manufacturing of injection- molded parts for its cartridges? Why or why not?

Bergerac Systems:

2. Should Bergerac Systems integrate backward into the manufacturing of injection-

Total Over Head 1759500

Annual operating Cost

Cost per Unit 2.243664

Annual Savings 5309400

Capital requirement 5750000

1. Introduce efficient manufacturing process – As there was a market growth potential,

4. Utilising excess production from GenieTech – If the management decides to acquire

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