Abstract Veterinary expenditure has been on an increasing trend due to the increase in pet ownership in the United States. Bergerac is a company producing equipments used for testing pet patients in the veterinarian clinics. Omnivue is one of the most successful equipments produced by the company, which is priced at a competitive rate to attract lower and middle sized veterinarians. The production of Omnivue involves the use of plastics and chemical reagents supplied by two major suppliers, GenieTech and Elsinore.
The management of Bergerac is planning to take control over its suppliers to reduce the production fluctuation and overhead costs of the firm. There are three strategic alternatives for the company to implement its future plans. It can opt for forward integration strategy by controlling its distribution channels; it can implement backward integration strategy through acquisition of building its own plant. Bergerac also have the option to operate the way it is currently operating to avoid risks arising from forward and backward integration. Introduction and Problem Identification
Bergerac systems, established in 2001, focused on developing latest medical assistance machines for pets. As the trend of pet keeping and caring was increasing, Company took advantage of the moment and started to invest in research and development for a better substitute to the normal blood testing machines at veterinary clinics. Pet healthcare industry grew at a rate of 7 to 8 percent due to an increase in the pet possession rate. A number of pet owners in the United States consider their pets to be a family member and spend a decent amount of their earnings on the pet healthcare.
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Veterinary doctors have been focusing on clinical diagnostic and are relying on the latest machines providing accurate and fast results. Omnivue was one of the latest additions to the pet healthcare industry. A tabletop sized machine attracted professionals of the industry through its unique features such as low price, fast results, simple operating procedure and compact size. Omnivue was used by putting a small sample of blood in an animal specific cartridge, and the test was completed in a time span of ten minutes. The cartridges were made by Bergerac systems using plastic as the basic manufacturing material.
Chemical reagents were sourced from multiple companies such as GenieTech plastics and Elsinore limited. Due to an increased demand of Omnivue, the demand of chemical reagents also increased and Bergerac faced difficulty when the suppliers went short of the supplies. Bergerac has to move towards vertical integration to meet the growing demand of their products without facing production fluctuation. Strategic Alternative 1- Forward Integration
A forward integration is a type of vertical integration whereby a company expands its operations in order to take command of the dispersion of its products in the market. It is done by controlling channels of distribution and managing supply chain to maximize market share and profitability. Forward integration eliminates the existence of a middle man in the supply chain process and allows the company to sell its products directly to the final consumer. Companies have been focusing on their immediate customer i.e. wholesaler, and their immediate supplier, reducing the chances of the end consumer satisfaction. Bergerac can opt for forward integration to control the market and satisfy the end customer with promised product quality.
Advantages of this strategy include reduction in the number of supply channels and sale of the product at a competitive price. Bergerac can attain a greater control over the distribution of Omnivue, and it can reduce its price to attract small and middle sized veterinarians. However, the control of distribution channels should not affect the manufacturing process at any cost. The lack of experience in the distribution area can affect the sale of Omnivue in a negative way. Inventory handling and the expansion of storage facility are an additional cost of opting for the strategy of forward integration. Hence, manufacturing department should not interfere in the distribution department, and the latter should be experienced in distribution of products like Omnivue to the end customers. Strategic Alternative 2- Backward Integration
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Backward integration is a type of vertical integration in which a company takes control over its suppliers. It is a form of acquisition of the intermediary players involved in supplying the raw materials used in the production process of the firm. Raw materials, intermediate manufacturing and assembly are controlled by the firm whereas distribution to the end customer is done by a third party company. In this way, company increases production efficiency and gains a competitive advantage by lowering its production cost. Bergerac can opt for the buy option and implement its backward integration by acquiring GenieTech.
GenieTech can provide the company with eight efficient molding machines for the acquisition price of $ 5.75 million. The price includes experienced labor force and management. Bergerac can fulfill its chemical reagent demand by using 4 out of 8 moulds provided in the acquisition. Rest of the presses can be used in the expansion process or can be used to meet the demand of a third party. This investment can result in the reduction of overhead expenses by twenty six percent per unit.
Bergerac can pay the amount over a period of five years making the project feasible for the company. Vertical integration can also be achieved by making the chemical reagents at Bergerac’s own plant located at Parsippany. GenieTech’s acquisition would provide 8 molding presses exceeding the requirement of the company by 4 presses. Contrary to that, Bergerac can attain its own presses and achieve greater efficiency and productivity through proper training of labor and management of the plant. Strategic Alternative 3- No Integration
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In a No-Integration scenario, a company only takes control of its assembly, and it outsources the supply of its raw materials and intermediate manufacturing. After assembling the product and finalizing it, the company lets its distributors do the rest of the supply chain management. End customer gets the final product through the wholesaler or retailer. There is no direct contact of the manufacturer and the end customer. Bergarac can operate the way it is handling the production of Omnivue and avoid any issues regarding capacity building and supervision of supplies and distribution.
The company can continue receiving the chemical reagent supplies from GenieTech and Elsinore, and focus on the production of innovative veterinarian equipments such as Omnivue. It can direct the potential investment into research and development to maintain a competitive advantage in the market. However, Bergerac can face the shortage of supplies as it faced in the past due to production issues from the supplier side. It can also lose the authority to lower price of the products due to a number of overhead and transportation expenses.
Recommended Action Plan
Bergerac is recommended to implement a backward strategy and control the supply of chemical reagents by starting the production at Parsippany production plant. The plastic components can be manufactured using four molding presses which will cost less than the acquisition of GenieTech. The company could buy latest machines with greater efficiency and production speed as compared to that offered by GenieTech. This alternative would reduce the cost of a single unit of cartridge by 43 cents; thus, allowing Bergerac to invest a greater amount of funds in its research and development program.
It can also reduce the price of Omnivue and be a market leader in the veterinarian medical equipment market. However, it should be noted that building a new plant would require a high initial investment. Training of new staff and management would require further investment and time of the company.
The payback of this investment would be 1.3 years and profitability would increase substantially after that time. Building option is better than buying option, forward integration and no integration as it is the only way to increase the control of Bergerac over its suppliers in an effective and efficient manner. It will not only increase the assets of the company but also enable it to build a customized production plant according to its specifications. It can also opt for the modification of plant in future as to deal with the increasing demand of Omnivue and anticipation of its future models.
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