Verity Insurance: Buy the Supplier or Keep Buying From Them?
Verity Insurance operates in insurance across US. It buys a critical input worth $94 M a year from 3 suppliers, who earn an estimated 34% margin on it.
The strategy team argues the company should build its own plant: $411 M of capital and $45 M a year of fixed cost, running economically only above about 75% utilisation.
The CEO's case is that the supplier margin is "our money". The COO points out the company has never run a plant of this kind, and that demand for the end product has swung by more than 20% in each of the last three years.
context
- end demand volatility pct
- 20
- prior manufacturing experience
- none
current
- margin pool m
- 32
- supplier count
- 3
- annual purchase m
- 94
- estimated supplier margin pct
- 34
build option
- capex m
- 411
- annual fixed cost m
- 45
- economic utilisation threshold pct
- 75
Advise the board. Your answer should provide:
- Analysis — the margin at stake versus the cost of capturing it, and the break-even volume.
- Risks — operational, strategic and demand-related.
- Recommendation — integrate, partner, or keep buying, with the condition that changes it.
State any assumptions you make.
80 points, 60% to pass.
- recommendation15
- market analysis25
- risk assessment20
- financial analysis20
Reveal suggested structure
Size the margin pool, subtract the fixed cost of owning it, then test against demand volatility and the utilisation threshold.