BERGERAC iSYSTEMS: iTHE iCHALLENGE iOF iBACKWARD iINTEGRATION

Q1.
Operational iChallenges

• Supply iissues: iThe icompany ihas ibeen ifacing isupply iissues idue ito iprojected iincrease iin
idemand ibetween i8 ito i10% iannual igrowth

• Production idelays: iProduction idelays iwere ifrequent ias ithe isupply iof iInjection imoulding
iparts iwas isporadic

• Capacity iConstraint: iBergerac iwas icapacity iconstraints idue ito ithe iincrease iin idemand
ifor iits iproducts iwhich iwas igrowing icontinuously. iLooking ifor iexpansion

• Unreliability iof iSuppliers: iThe isimultaneous idelays ifrom iboth iplastic iparts isuppliers iled
ito ia ishortage iof ifinal iproduct

• Demand iForecasting: iDemand iForecasting ibecame iincreasingly idifficult ifollowing ithe

ifinancial icrisis iof i2008 iand ithe ivolatile iprices iof imany iof iits iraw imaterials

Business iChallenges

• The imarket iwas ivery icompetitive ifor iveterinary idiagnostic iinstruments imarket iand
ifaced istiff icompetition ifrom iIdexx iLaboratories, iAbaxis iInc. iand iHeska icorporation

• The icompany iremained ia ismall iplayer iand ihence iwas ilooking ifor iopportunities ito
icapture ia iwider ishare iof imarket

• Although iBergerac iwas igrowing ifast iaveraging i17% iannually, ito imaintain iits igrowth
iTrajectory iit iwas iimportant ito ibuild icredibility iamong iits iconsumers

• Bergerac ineeded ito irevamp iits isupply ichain istrategy iin iorder ito iimprovise iits ientire
isupply ichain

Q2.

i Genietech
Labor- icartridge i Remarks
i$ i i i i i i i i Production ico-ordinator, i3
Supervision
i2,36,500.00 i iforemen
i$ i i i i i i i i
Direct/Indirect ilabour 12 imachine ioperators i@$22K
i2,60,700.00 i
i$ i i i i i i i i
benefits iand itaxes i
i6,46,400.00 i
i$ i i i i i
Total i
i11,43,600.00 i
RM icosts i- icartridge i i
 i$ i i i i i i i i i i i i i i i i
Cost iper ipound, idelivered i
i i i i i i i2.45 i
Yield i(RM ipounds iper i1000 iunits) 320 i
iConsidering i8 ipresses iare iin
Total icartridge i(units) 9375000
ioperation
Pounds iper iannual idemand 3000000 i
i$ i i i i i
Total i i i
i73,50,000.00 i
Labor iand iRM i- ireagents i i
i$ i i i i i i i i i i i i i i i i
Avg icost iper icartridge i
i i i i i i i1.15 i
iConsidering i8 ipresses iare iin
Total icartridges i(units) 9375000
ioperation
Total i i i i$ i1,07,81,250.00 i i
Overhead i i
i$ i i i i i i i i
Rent/floor ispace i
i2,55,000.00 i
i$ i i i i i i i i
Depreciation i
i3,15,400.00 i
i$ i i i i i i i i
Utilities i
i4,82,400.00 i
i$ i i i i i i i i i i i
Insurance i(equipment) i
i54,900.00 i
i$ i i i i i i i i
Repairs i& imaintenance i
i2,13,200.00 i
Maintenance, irepair i& iOps i$ i i i i i i i i
i
isupplies i1,08,900.00 i
i$ i i i i i i i i
Variable ioverhead i
i3,29,700.00 i
i$ i i i i i
Total i
i17,59,500.00 i
i$ i i i i i i i i i i i i i i i i
Contingency i
i i i i i i i i i i i i- i i i
i$ i i
Annual ioperating icost i
i2,10,34,350.00 i
i$ i i i i i i i i i i i i i i i i
Cost iper iunit i
i i2.2437 i
i$ i i i i i i i i i i i i i i i i
transportation i+ ifuel icharges i
i i i i i i i0.15 i
i$ i i i i i i i i i i i i i i i i
Total i
i i i i i2.394 i
i$ i i i i i i i i i i i i i i i i
Current icost iper iunit i
i i i i i i i2.96 i
 i$ i i i i i i i i i i i i i i i i
Savings iper iunit i
i i i i i i i0.57 i
Annual isavings i@ icurrent i$ i i i i i
i
iproduction i53,09,400.00 i
i$ i i i i i
Capital irequirements i
i57,50,000.00 i
break ieven ivolume 10152983 i
Annual iproduction ivolume 9375000 i
Payback iperiod i(years) 1.08 i

i In-house
Labor- icartridge i Remarks
i$ i i i i i i
Supervision i
i2,42,100.00 i
i$ i i i i i i
Direct/Indirect ilabour i
i2,30,500.00 i
i$ i i i i i i
benefits iand itaxes i
i6,14,400.00 i
i$ i i i i10,87,000.00
Total i
i
RM icosts i- icartridge i i
i$ i i i i i i i i i i i i i i i i
Cost iper ipound, idelivered i
i i i i i i2.45 i
Yield i(RM ipounds iper i1000 iunits) 310 i
Total icartridge i(units) 4687500 i
Pounds iper iannual idemand 1453125 i
i$ i i i i35,60,156.25
Total i i i
i
Labor iand iRM i- ireagents i i
i$ i i i i i i i i i i i i i i i i
Avg icost iper icartridge i
i i i i i i1.15 i
Total icartridges i(units) 4687500 i
i$ i i i i53,90,625.00
Total i i i i
i
Overhead i i
i$ i i i i i i
Rent/floor ispace i
i1,47,900.00 i
i$ i i i i i i
Depreciation i
i3,78,800.00 i
i$ i i i i i i
Utilities i
i4,11,100.00 i
i$ i i i i i i i i i i
Insurance i(equipment) i
i32,800.00 i
 i$ i i i i i i i i i i
Repairs i& imaintenance i
i57,100.00 i
Maintenance, irepair i& iOps i$ i i i i i i i i i i
i
isupplies i45,700.00 i
i$ i i i i i i i i i i i i i i i i
Variable ioverhead i
i i i i i i i i i i- i i i
i$ i i i i10,73,400.00
Total i
i
i$ i i i i i i i i i i
Contingency i
i90,000.00 i
Annual ioperating icost i$ i1,12,01,181.25 i i
i$ i i i i i i i i i i i i i i i i
Cost iper iunit i
i2.3896 i
i$ i i i i i i i i i i i i i i i i
transportation i+ ifuel icharges i
i i i i i i i i i i- i i i
i$ i i i i i i i i i i i i i i i i
Total i
i i i2.390 i
i$ i i i i i i i i i i i i i i i i
Current icost iper iunit i
i i i i i i2.96 i
i$ i i i i i i i i i i i i i i i i
Savings iper iunit i
i i i i i i0.57 i
Annual isavings i@ icurrent i$ i i i i
i
iproduction i26,73,818.75 i
i$ i i i i
Capital irequirements i
i36,07,000.00 i
break ieven ivolume 6323470 i
Annual iproduction ivolume 4687500 i
Payback iperiod i(years) 1.35 i

The ierror iin ithe ianalysis iof ibuying iis ithat iMcCarthy idid inot iconsider ithe irevenue, ior ithe
iannual isavings igenerated ifrom ithe iother i4 imoulding ipresses ithat icould ie iused ifor ioutside
ibusiness. iHence itaking ithis iinto iconsideration, ithe iproduction ivolume igoes iup iby i100% iand
ithe ipayback iperiod icomes idown ito i1.03 iyears iwhich iis iless ithan ithat iof ithe iIn-house
iproduction iproposal. i
Q4.

Our irecommendation iis ito ibuy iGenietech iinstead iof istarting iin-house iproduction iof icartridges
ifor ithe ifollowing ireasons

 50% iof iGenietech irevenue iis ifrom iBergerac iand ithe irest i50% iis ifrom ioutside ibusiness.
iThis i50% irevenue ifrom ioutside ibusiness iincreased ithe iannual isavings ihence ireducing
ithe ipayback iperiod ito i1.03 iyears iwhich iis ilesser ithan ithe ipayback iperiod i(1.35 iyears)
iof iin-house iproduction i
 Genietech ihas ithe itechnical iexpertise, imanagerial iresources iand icapabilities ito ihandle
ithe icurrent iproduction iand itheir ifuture iplan iof iproduction iof ismall icartridges ifor
iOmnivalue imobile istarting ifrom i2013
 In ithe ilong iterm, iBergerac ican ipass ithe icost ireduction ibenefits ito ithe icustomers igiving
ithem ian iedge iover ithe icompetitors iresulting iin ithe iincrease iin imarket ishare