Introduction
Bergerac System is a company that produces diagnostic instruments for animal care. In July 2010, Ian Wyckoff, CEO of Bergerac System, got feedback from a group of veterinarians. The feedback reminded him that Bob McCarthy, the director of Bergerac’s Planning Department, had provided him an analysis report about OmniVue. The report discussed whether Bergerac should build a cartridge fabrication on their own or via external acquisition. Because Bergerac had a growing trend for demand, but limited resource would delay the production in present competitive market, Wyckoff had to make a decision immediately. External Analysis
In 2010, veterinary spending was expected to be $13 billion in the United States, and there was an uptrend of 7% – 8% per year during the past decade. Three reasons contributed to this growth. First, pet ownership had increased steadily from 56% to 62% of American households. Approximately 73 million families in the U.S. had one or more pets. Second, pet humanization had become a factor for people to be willing to spend money on it. The third one was an increase in the sophistication and availability of veterinary care. Therefore, the veterinary service market has a good prospect.
The significant change in veterinary service affected the in – house lab equipment. Technology development boosted in-house lab equipments to provide immediate diagnostic test result. In general, veterinarians recommended taking diagnostic tests two or three times every day. The equipment led to the high volume of testing to let customers get results as soon as possible. Based on the case, industry analysts predicted 8% to 10% annual increase for the in – house diagnostic market in North America in the next five years. In addition, there were approximately 30,000 veterinary practices in the United States, and only 40% had adopted in – house equipment. Due to market growth, Bergerac System has an opportunity to expand business. There are three major competitors in the veterinary diagnostic instruments market.
Idexx Laboratories, Inc.Abaxis, Inc.Heska Corporation
Position/ReputationIndustry leaderIdexx’s primary competitorThird major competitor Strong pointBoasted the largest product line
Best established distribution network and sale force
Strong brand name
Largest installed base
Provided products of more cost – efficient and easier to useOffered similar set of products, as well as a line of pet vaccines and pharmaceuticals Customer Relationship“Sticky” Not mentioned N/A
ProductCatalyst Dx chemistry analyzerVetScan VS2N/A
Internal Analysis
Bergerac is a company, which develops, manufactures and markets in – house diagnostic equipment, located in Parsippany, New Jersey, founded in 2001. Its target market is household pets. Bergerac was growing fast; there was an average 17% growth annually. Bergerac research and development team are responsible for new innovation of products. The OmniVue instrument was the main Bergerac product that provided chemistry, electrolyte, immunoassay and blood gas analysis, and was used at the point – of – care in a veterinary clinic.
Cartridges collected small sample of blood or serum to insert into OmniVue for analysis were proprietary for Bergerac. OmniVue produced highly accurate test results and was simple to use. It had small physical footprint, and the attractive price average at $9,500, and its test cartridge average price at $9.25. The firm had sold over 750 OmniVue analyzers in the first 12 months and had clearly increased in the following year. The projected sale was around 7500 analyzers by the end of 2007 across North America. In addition, OmniVue Mobile would be the next product concept launched in 2013 that would be a lighter, easy – assembled instrument that worked with smaller cartridge. Value Chain
The process chart above shows the value chain of the cartridge. Each test for OmniVue required a single – use cartridge, so the increasing demand of the cartridge could not be ignored by Bergerac. The cartridge is made up with two injection – molded plastic pieces: a base and a cover. The plastic source is from oil; the oil price is variable and has a fluctuating trend. It also depends on petrochemical to transfer from oil into plastic. Bergerac System’s reagents came from a dozen third – party chemical suppliers, but the injection – modeled plastic parts only sourced from two suppliers: GenieTech and Elsinore Plastic. These two suppliers met with competitive and fragmented market with very low margins.
They had little buying power and depended on petrochemicals as a key input. However, GenieTech provided over three quarters of Bergerac’s cartridge needs, and had friendly business relationship with Bergerac that accounted for 50% of Genie Tech’s revenue. Elsinore Plastic shared one quarters of Bergerac’s plastic demand, which would come up for renegotiation three weeks later. In addition, Bergerac had a small direct sales force of 20 reps, and sold through a network of veterinary distribution. Those all factors as showed above had contributed challenges for the company. SWOT & Challenge
a)Strengths:
The OmniVue was the competitive product of Bergerac System. The OmniVue enabled veterinarians to run a wide range of tests on their animal patients. It also delivered accurate results in less than 10 minutes. It was easy to use, requiring no training work, and had small physical footprint. The price of the OmniVue equipment and the cartridge was lower than Abaxis system. “Furthermore, it featured self – calibration capabilities, and its quality control had been recognized for its accuracy in flagging compromised patient samples.” Besides that, Bergerac System’s instruments were certified by FDA regulations for Good Manufacturing Practice required for Medical device. b)Weaknesses:
Bergerac was a small size player with limited resources. It kept limited market share and sold products through 20 reps and network of veterinary distribution. Bergerac System deepened on long-term, single – source relationship supplier. Cartridges were supported by two suppliers with uncertain business future. c)Opportunities
In fact, Bergerac had met with growth in market, which gave a bid chance to expand business. d)Threats
It also had three strong competitors within market.
The limited resource would cause confliction with increasing demand. Uncertain economic environment
e)Challenge/Problem
Shortage of demand & unreliability of suppliers
The company needed to make decision on outsourcing or insourcing. .Identification of Alternative
A)“Buy” opportunity
Outsourcing would build long relationship between Bergerac and suppliers. In fact, Bergerac had a friendly relationship with GenieTech, however, Wyckoff found the GenieTech founder and owner was interested in retirement. The purchase price was $5.75 million; Bergerac would get 8 molds that could produce 80 cartridges per cycle time, which accounted for 75 seconds. Also, the company required experience labor force, including supervisors and machine operators. Under the condition of 90% uptime over 3 shifts and a 5 – day working week, the appendix II showed annual capacity of cartridge would be 10,368,000 that could satisfy Bergerac’s current needs. In addition, outsourcing with GenieTech would reduce overhead and lower costs by nearly 26 cents per unit. McCarthy, the director of Planning, found that the payback period of the buy option would be approximately 5 years.
B)“Build opportunity
“Build” opportunity provided Bergerac with an option to make the plastic components in-house at the Parsippany plant. The new in-house lab would only need 4 molding presses to meet its demands. The new faster machine would shorten cycle times at 70 – second, more effective use of raw material, and machine uptime of 95%. The option also would save 57 cents per cartridge unit. But this choice would require time to install and test, as well as hire new employees. The annual capacity of cartridge would be 5,856,750, which also met with current needs. Recommendation/Implementation
Based on the case, the analysis concluded that Bergerac should build new capability. There were several significant weaknesses of outsourcing. First, the potential retirement of GenieTech founder and owner, that would result in rebuilding relationship with GenieTech new owner or looking for new partner. Secondly, both GenieTech and Elsinore Plastic had uncertain business future because of low margin and little buying power within market. The unreliability of suppliers would increase the risk to Bergerac business. It also leads to company to carry more inventory to avoid break down, that
means the costing for inventory would increase. Thirdly, the payback period would be nearly five years if the company choose “buy” option. Build the cartridge parts production capability in – house would provide competitive advantages to Bergerac for fully control the supply rather than waiting for suppliers. From Exhibit 4 Analysis of Backward Integration Option of the case, which presented lots of useful information. When complete in – house set up, Bergerac System acquires newer machinery with shorter 70 – second cycle times and machine uptime of 95%. The total labor cost would be $1,087,000, are much smaller than GenieTech cost at $1,143,000. Also, slightly more efficient use of raw materials could save $114,844. The Parsippany plant will allocate 10k square feet, and require only 4 presses. In addition, there will no incremental cost, and all functions performed by current staff. Therefore, the total overhead would account for $1,074,400; that would compare to total overhead expenses at $1,759,500 of GeinTech. Moreover, the annual saving at current production of Bergerac would be $2,673,819 because of no delivery cost. The total capital requirement would be $3,607,000, which are cheaper than external acquisition at GenieTech was $5,750,000. Last but not the least, Bergerac System will get the payback periods of nearly 16 months. However, the initial set – up would require time to install, test new machine, and recruit and train additional staff. The new plan would start at August 2010, the company need to give up renegotiation with Elsinore in the next year because Bergerac should put all emphasizes on building a new cartridge parts production capability within plant. There were five months to work on this project. The in – house production capability located at Parsippany plant, and would take up 10K square feet. It will be appropriate to put first three months to work on installation, after that two months would spend on testing new machine. But hiring new employees would start at the beginning of August that give rich time to recruit 2 production supervisors and 6 machine operators. The way that employ additional employees could promote current Parsippany staffs who are experienced and use social media to attract talent people. The training program is aim to let new employees to adjust new environment and operate the new machine that would last for one month. Moreover, two high level production supervisors should be passed on knowledge of management policy by McCarthy. The increasing demand of cartridges has become another significant
problem. As significant growth of demand during five years, as showed in Appendix I, the limited and stable capacity would cannot meet the needs in the 2013. Thanks for inventory that carried in the 2011, as showed in Appendix VI, the total capacity would meet the demand until 2017. Therefore, year 2007 would become a key year to do some changes. In addition, new machines have 8 – year depreciation, and these machines only left one year depreciated life in 2017. The Bergerac should take some measures to improve the cartridge capacity to meet the increasing needs, such as purchasing new machine, adding one molding presses, or working for longer hour. There will be several years that cannot perfectly forecast; all the company should do is to build in-house factory and keep stable capacity in the present.
Written Document
Appendix I
In 2010, the projected size of the installed base was 7500 analyzers, and veterinarians suggested diagnostic tests average 2.5 times every day. Assuming there are 250 days a year. So, the demand of cartridges for one year will be: 7500 X 2.5 times X 250 days = 4.69 million
Industry analysts projected 10% annual growth for the in –house diagnostics market in North America over five years. YearDemand(units)
20104.69 million
20114.69 X (1+10%) = 5.16 million
20125.16 X (1+10%) = 5.67 million
20135.67 X (1+10%) = 6.24 million
20146.24 X (1+10%) = 6.86million
20156.86 X (1+10%) = 7.55 million
Appendix II (BUY)
Bergerac would acquire 8 molding presses, each equipment with 10 cavity molds and operating with a 75 – second cycle time. Each cycle time can produce: 8 molds X 10 = 80 cartridges
Assumption: 1 shift = 8 hours = 8 X 60 minutes X 60 seconds = 28,800 seconds One shift can finish: 28,800 / 75 =384 cycles
The capacity of cartridge per shift: 80 X 384 =30,720
Individual cartridge can divide into two parts (cover and base): 30,720 /2 =15,360 With uptime: 15,360 X .90 = 13,824 units
3 shifts: 13,824 X 3 =41,472 units
5 days: 41,472 X 5 = 207,360 units
50 weeks one year: 207,250 X 50 = 10,368,000 units
Appendix III (Build)
Bergerac would require 4 molding presses, each equipment with 10 cavity molds and operating with a 70 – second cycle time. Each cycle time can produce: 4 x 10 = 40 cartridges
Assumption: 1 shift = 8 hours = 8 X 60 minutes X 60 seconds = 28,800 seconds One shift can produce: 28,800 / 70 =411 cycles
The capacity of cartridge per shift: 40 X411 = 16,440
Individual cartridge can divide into two parts (cover and base): 16,400 / 2 =8,220 With uptime: 8220 X .90 = 7809 units
3 shifts: 7809 X 3 = 23,427 units
5 days: 23427 X 5 = 177,135 units
50 weeks one year: 117,135 X 50 =5,856,750 units
Appendix VI
Assumption: there is no inventory in the beginning of 2010.
GenieTech supply 10,368,000 cartridges in the 2010. Also, Bergerac ended the contract with Elsinore in the 2010. Inventory of 2011: 10,368,000 – 4,690,000 =5,678,000
Capacity of 2011: 5,856,750(from appendix III)
Inventory of 2012(Demand of previous year – Capacity – Inventory): 5,160,000 – 5,856,750 – 5678,000 = 6,374,750
Years Inventory Capacity (units)Demand (units)
2010010,368,0004,690,000
20115,678,0005,856,7505,160,000
20126,374,7505,856,7505,670,000
20136,561,5005,856,7506,240,000
20146,178,2505,856,7506,860,000
20155,175,0005,856,7507,550,000
20163,481,7505,856,7508,305,000
20171,033,5005,856,7509,135,000
Work Cited
Garvin, David A., and Sunru Yong. “Bergerac Systems: The Challenge of Backward Integration.” Harvard Business School Brief Case 114-381, December 2011.
