FREY BIOMEDICAL INC

Frey Biomedical was one of the largest independent companies supplying the foodprocessing industry. Its initial success had come with a food preservative, used mainly for
meat-based products, and marketed under the name of FBXX. Other products were
subsequently developed in the food colouring and food container coating fields, so that now
FBXX accounted for only 25 per cent of total company sales, which now were slightly over
$100 million.
Process Line Configuration

BRAYFORD

BI-LINE 8

Capital cost

$5,900,000

$8,800,000

Processing costs

Fixed: $150,000/mth

Fixed:$400,000/mth

Variable: $750/kg

Variable: $600/kg

Design

1,050 kg/mth

1,400 kg/mth

capacity

98%0.7% purity

99.5%0.2% purity

Quality

Manual testing

Automatic testing

Maintenance

Adequate but needs

Not known probably good

servicing
After-sales services

Very good

Not known unlikely to be good

Delivery

Three months

Immediate

Table: A comparison of the two alternative process line configurations

The decision
The problem over which there was such controversy related to the replacement of one of the
process lines used to manufacture FBXX. Currently two such process lines were used, both had
been designed and installed by Brayford Corp., a process equipment manufacturer. It was the
older of the two Brayford lines which was giving trouble. High breakdown figures, with erratic
quality levels, meant that output level requirements were only just being reached. The problem
was: should the company replace the ageing Brayford line with a new Brayford line, or should it
commission another process line, the Bi-line 8 line, which would be manufactured by a

relatively new company, Bi-Line Inc. V.P. for Technology had drawn up a comparison of the
two units, shown in the table.
The body considering the problem was the newly formed Management Committee. The
committee consisted of the V.P. for Technology and the Marketing V.P., who had been with the
firm since its beginning, together with the V.P.s for Operations and Finance, both of whom had
joined the company only six months before.
What follows is a condensed version of the information presented by each manager to the
committee, together with their attitudes to the decision.

The Marketing Vice President

Currently the market for this type of preservative had reached a size of some $50 million, of
which Frey Biomedical supplied approximately 48 per cent. There had, of late, been
significant changes in the market in particular many of the users of preservatives were now
able to buy products similar to FBXX. The result had been the evolution of a much more
price-sensitive market than had previously been the case. Further market projections were
somewhat uncertain. It was clear that the total market would not shrink (in volume
terms) and best estimates suggested a market of perhaps $60 million within the next three or
four years (at current prices).
Although the food preservative market had advanced by a series of technical innovations, real
changes in the basic product were now few and far between. FBXX was sold in either solid
powder or liquid form, depending on the particular needs of the customer. Prices tended to be
related to the weight of chemical used, however. Thus, for example, currently the average
market price was approximately $1,050 per kg. There were, of course, wide variations
depending on order size, etc.

At the moment I am mainly interested in getting the right quantity and quality of FBXX each
month. Im worried that unless we get a reliable new process line quickly, we will have
problems. The Bi-line 8 line could be working in a few weeks, giving better quality too.
Furthermore, if demand does increase, the Bi-line 8 will give us the extra capacity.

The Vice President for Technology

The major part of the V.P. for Technologys budget was devoted to modifying basic FBXX so
that it could be used for more acidic food products such as fruit. This was not proving easy and
as yet nothing had come of the research, although the Chief Chemist remained optimistic.
If we succeed in modifying FBXX the market opportunities will be doubled overnight and we
will need the extra capacity. I know we would be taking a risk by going for the Bi-line 8
machine, but our company has grown by gambling on our research findings, and we must
continue to show faith. Also, the Bi-line 8 technology uses principles which will be in all similar
technologies in the future. We have to start learning how to exploit them sooner or later.

The Operations Vice President

The FBXX Division was self-contained as a production unit, located at the smaller of the
companys two sites. Production requirements for FBXX were currently at a steady rate of
around 1,900 kg per month. The technicians who staffed the FBXX lines were the only
technicians in Frey Biomedical who did all their own minor repairs and full quality control.
The reason for this was largely historical, since when the firm started, the product was
experimental and qualified technicians were needed to operate the plant. Four of the six had
been with the firm almost from its beginning.

Its all right for some of my colleagues to talk about a big expansion of FBXX sales; they dont
have to cope with all the problems if it doesnt happen. The fixed costs of the Bi-line 8 unit are
nearly three times those of the Brayford. Just think what that will do to my budget at low
volumes of output. As I understand it, there is absolutely no evidence to show a large upswing
in FBXX. No, the whole idea (of the Bi-line 8 plant) is just too risky. Not only is there the risk. I
dont think it is generally understood what the consequences of the Bi-line 8 would mean. We
would need twice the variety of spares for a start. But what really worries me is the staffs
reaction. As fully qualified technicians they regard themselves as the elite of the firm; so they
should, they are paid practically the same as I am! If we get the Bi-line 8 plant all their most
interesting work, like the testing and the maintenance, will disappear or be greatly reduced.
They will finish up as highly paid process workers.

The Finance Vice President

The company had financed nearly all its recent capital investment from its own retained profits,
but would be taking out short-term loans next year for the first time for several years.
At the moment, I dont think it wise to invest extra capital we cant afford in an attempt to give
us extra capacity we dont need at the moment. This year will be an expensive one for the
company. We are already committed to considerably increased expenditure on promotion of our
other products and capital investment in other parts of the firm. I accept that there might
eventually be an upsurge in FBXX demand but, if it does come, it probably wont be this year
and it will be far bigger than the Bi-line 8 can cope with anyway, so we might as well have three
Brayford plants at that time.