Freeman Biotest Case Analysis

Freeman Biotest Inc CASE 2

Freeman Biotest was one of the largest independent companies supplying the food processing

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.

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. VP for Technology had drawn up a comparison of the two

units, shown in Table 4.7.

The body considering the problem was the newly formed Management Committee. The

committee consisted of the VP for Technology and the Marketing VP who had been with the

firm since its beginning, together with the VPs 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.

VP, Marketing

Currently the market for this type of preservative had reached a size of some $50 million, of

which Freeman Biotest 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. I'm 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 VP for Technology's 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'.

Vice President, Operations

The FBXX Division was self-contained as a production unit, located at the smaller of the

company's two sites. Production requirements for FBXX were currently at a steady rate of

around 1900 kg per month. The technicians who staffed the FBXX lines were the only

technicians in Freeman Biotest 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

'It's all right for some of my colleagues to talk about a big expansion of FBXX sales; they don't

have to cope with all the problems if it doesn't 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

don't 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 staff's

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'.

Vice President, Finance

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 don't think it wise to invest extra capital we can't afford in an attempt to give

us extra capacity we don't 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 won't 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'.

Process Line Configuration

BRAYFORD

BI-LINE 8

Capitalcost

$5,900,000

8,800,000

PROCESSING COST

Fixed : $150,000/month

Variable: $750kg/month

Fixed: $400,000/month

Variable:$600/kg

DESIGN CAPACITY

1050kg /month

98%+ 0.7% purity

1400kg/ month

99.5% + 0.2%purity

QUALITY

Manual testing

Automatic testing

MAINTENANCE

Adequate but needs servicing

Not known- probably good

AFTER SALES SERERVICE

Very good

Not known-unlikely to be good

DELIVERY

Three months

I

immediate

1. Overview of case

2. Determine and state the major issue/ issues

3. Suggest options which could possibly lead to a solution/amelioration of the stated issues.

4. Perform in-depth evaluation of all the options.

5. Recommendations and the rationale from options as per the case.

6. Recommendations and their rationale outside of the ambit of the information given above.