Case Study Bergerac Systems: The Challenge of Backward Integration

Case study Bergerac Systems: The Challenge of Backward Integration

1. Describe business and operational challenges for Bergerac Systems.

Bergerac Systems, relying on two outside suppliers for the plastic components of the cartridges, recently experienced delays in delivery resulted from shortages and stock-outs. The CEO is considering apply vertical integration to meet the growing demands without facing production fluctuations. But demand forecasting is difficult for plastics suppliers and their customers, leading to occasional productions delays and in final equipment manufacture.  So how to improve the ability to control the supply of plastics pieces is the biggest business challenge.

     2) Should the company integrate backwards into the integration of manufacture of injection-molded parts for its cartridges? If so, how?

To decide whether or not to apply the backward strategy, we need to consider several conditions, such as Bergerac’s current production capacity, labor cost, future product demand. The CEO of Bergerac Systems is considering two potential backward integration solutions: 1. “Buy” opportunity: takeover one of its suppliers, GenieTech; 2. “Build” opportunity: develop an in-house molding facility at the Parsippany plant. And I will evaluate the McCarthy’s proposal first and do my own analysis in the next part.

3) a. What are the advantages and disadvantages of acquisition versus developing in-house capabilities? b. What quantitative evidence supports your recommendations?

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Using annual capacity data and annual production from Exhibit TN-1 and Exhibit TN-2 in Excel to evaluate “buy” and “Build” options.

In-house option:

Advantage:

1. 4 molding presses, lower repair & maintenance cost

2. smaller cycle time (70s) than GenieTech(75s), which is more effective;

3. machine up-time is 95%, more stable than “buy” option (90%);

4. shorter payback period (16 months);

5. save more unit cost (57cents).

Disadvantage:

1. The cartridge capacity can only meet the demand to 2012, if the demand grows as expectations, Bergerac would have to increase more molds to meet the demand or introduce outside suppliers again.

2. Initial set-up process would require time for installation and testing

3. Extra training and labor cost for additional staff.

GenieTech option:

Advantage:

1. Sufficient capacity to meet future demand to 2015, even if Bergerac continues to grow faster than the overall market.
2. Experienced labor force including supervisors and machine operators to guarantee the production

Disadvantage:

1. Longer payback period (5 years);
2. Save lower unit cost (26 cents);
3. Longer cycle time (75s) less effective;
4. Higher labor and overhead cost (mainly from rent/ floor space)

3) Discuss procurement problems and examine a more comprehensive sourcing strategy for your company.