Berger System is a company that produces diagnostic instruments for animal care. In July 2010, Ian Haycock, CEO of Berger System, got feedback from a group of determinants. The feedback reminded him that Bob McCarthy, the director of Bracer’s Planning Department, had provided him an analysis report about Omnivore. The report discussed whether Berger should build a cartridge fabrication on their own or via external acquisition.
Because Berger had a growing trend for demand, but limited resource would delay the production in present nominative market, Haycock 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 52% of American households. Approximately 73 million families in the U.S. Had one or more pets.
Second, pet humanitarian 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 0,000 veterinary practices in the United States, and only 40% had adopted in – house equipment. Due to market growth, Berger System has an opportunity to expand business. There are three major competitors in the veterinary diagnostic instruments market. Dioxide Laboratories, Inc.Basis, Inc.Hakes Corporation Position/Reputation Industry leader Idea’s primary competitor Third major competitor Strong point Boasted 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 use Offered similar set of reduces, as well as a line of pet vaccines and pharmaceuticals Customer Relationship “Sticky’ Not mentioned N/A Product Catalyst DXL chemistry analyzer Veterans VS. N/A Internal Analysis recharge is a company, which develops, manufactures and markets in – house diagnostic equipment, located in Parsimony, New Jersey, founded in 2001. Its target market is household pets. Berger was growing fast; there was an average 17% town annually.
Berger research and development team are responsible tort new innovation of products. The Omnivore instrument was the main Berger product that revived 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 Omnivore for analysis were proprietary for Berger. Omnivore 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 Omnivore analyzers in the first 12 months and had clearly increased in the following year.
The projected sale was round 7500 analyzers by the end of 2007 across North America. In addition, Omnivore Mobile would be the next product concept launched in 2013 that would be lighter, easy – assembled instrument that worked with smaller cartridge. Value Chain ere process chart above shows the value chain of the cartridge. Each test for Omnivore required a single – use cartridge, so the increasing demand of the cartridge could not be ignored by Berger. 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.
Berger System’s reagents came from a dozen third – party Chemical suppliers, but the injection – modeled plastic parts only sourced from two suppliers: Genetic and Elisions 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, Genetic provided over three quarters of Bracer’s cartridge needs, and had friendly business relationship with Berger that accounted for 50% of Genie Tech’s revenue. Elisions Plastic shared one quarters of Bracer’s plastic demand, which would come up for renegotiation three Knees later.
In addition, Berger 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.
SOOT & Challenge
- Strengths: ere Omnivore was the competitive product of Berger System. The Omnivore 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 raining work, and had small physical footprint. The price of the Omnivore equipment and the cartridge was lower than Basis system. “Furthermore, it featured self – calibration capabilities, and its quality control had been recognized for its accuracy in flagging compromised patient samples. Besides that, Berger System’s instruments Nerve certified by FDA regulations for Good Manufacturing Practice required for Medical device.
- Weaknesses: recharge was a small size player with limited resources. It kept limited market share and sold products through 20 reps and network of veterinary distribution. Berger System deepened on long-term, single – source relationship supplier. Cartridges Nerve supported by two suppliers with uncertain business future.
- Opportunities: In fact, Berger had met with growth in market, which gave a bid chance to expand business.
- Threats: It also ad n three strong competitors within market. ere limited resource would cause confliction with increasing demand.
- Uncertain economic environment
Shortage of demand & unreliability of suppliers ere company needed to make decision on outsourcing or incurring.
Altercation of Alternative
- “Buy’ opportunity Outsourcing would build long relationship between Berger and suppliers. In fact, Berger had a friendly relationship with Genetic, however, Haycock found the Genetic founder and owner was interested in retirement. The purchase price was $5.75 million; Berger 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 uptime over 3 shifts and a 5 – day working week, the appendix II showed annual capacity of cartridge would be that could satisfy Bracer’s current needs. In addition, outsourcing with Genetic 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.
- “Build opportunity ‘Build” opportunity provided Berger with an option to make the plastic components n-house at the Parsimony 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 Mould be 5,856,750, which also met with current needs. Recommendation/ Implementation eased on the case, the analysis concluded that Berger should build new capability. There were several significant weaknesses of outsourcing. First, the potential retirement of Genetic founder and owner, that would result in rebuilding relationship with Genetic new owner or looking for new partner. Secondly, both ninetieth and Elisions Plastic had uncertain business future because of low margin ND little buying power within market.
The unreliability of suppliers would increase the risk to Berger 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 Berger 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, Berger 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 Genetic cost at $1,143,000. Also, slightly more efficient use of raw materials could save The Parsimony plant will allocate ask square teeth, 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 Genetic. Moreover, the annual saving at current production of Berger 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 Genetic was $5,750,000.
Last but not the least, Berger System will get the payback periods of nearly 16 months. However, the initial set – up Mould require time to install, test new machine, and recruit and train additional staff. ere new plan would start at August 2010, the company need to give up renegotiation Ninth Elisions in the next year because Berger should put all emphasizes on alluding a new cartridge parts production capability within plant. There were five months to work on this project. The in-house production capability located at Parsimony plant, and would take up ASK 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 Parsimony staffs who are experienced and use social media to attract talent people. He 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 l, 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 et 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 Berger 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.