Owens and Minor Case Analysis
| Owens & Minor | Case Analysis | | | 2/1/2011 |
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Executive Summary
Owens & Minor is a distributor of surgical and medical supplies to hospitals and other health care facilities. Due to changing demand from customers, the company is facing increased operating costs, which has resulted in lower profit margins and even losses. In 1993, O&M recorded an $18 million profit, which was reduced to a loss of $11 million in 1995. The entire industry is experiencing similar difficulties. In an effort to resume profitability, O&M is evaluating alternatives to “cost-plus pricing”. Cost-plus pricing does not reflect the true cost of the services provided by O&M. Customers are demanding more of O&M while expecting the price structure to stay the same. The new method of pricing, called Activity-Based Costing (ABC) and Activity-Based Pricing (ABP) will increase efficiency in the supply chain and reduce overhead expenses. Furthermore, it will allow O&M to identify that certain services and customers are unprofitable and tie additional fees to additional services.
Ideal, a large hospital buying group, has put their supply contract out for bid, presenting an enormous potential revenue opportunity for O&M if it can undersell its competitors to win the contract. O&M believes that by adopting this new pricing model, Ideal will save money. The challenge lies in convincing Ideal of this, and then gaining their commitment to implement the model. ABP recognizes the customer’s increasing desire to shift logistics responsibilities to suppliers, and as such requires more integration with the customer to achieve efficiency.
Customers would be required to invest significant resources to adjust their current business practices to fit the ABP model. Therefore, gaining this commitment from a customer has long-term benefits and implications; if O&M is successful in convincing Ideal or any other customer to adopt this model, it
|
Executive Summary
Owens & Minor is a distributor of surgical and medical supplies to hospitals and other health care facilities. Due to changing demand from customers, the company is facing increased operating costs, which has resulted in lower profit margins and even losses. In 1993, O&M recorded an $18 million profit, which was reduced to a loss of $11 million in 1995. The entire industry is experiencing similar difficulties. In an effort to resume profitability, O&M is evaluating alternatives to “cost-plus pricing”. Cost-plus pricing does not reflect the true cost of the services provided by O&M. Customers are demanding more of O&M while expecting the price structure to stay the same. The new method of pricing, called Activity-Based Costing (ABC) and Activity-Based Pricing (ABP) will increase efficiency in the supply chain and reduce overhead expenses. Furthermore, it will allow O&M to identify that certain services and customers are unprofitable and tie additional fees to additional services.
Ideal, a large hospital buying group, has put their supply contract out for bid, presenting an enormous potential revenue opportunity for O&M if it can undersell its competitors to win the contract. O&M believes that by adopting this new pricing model, Ideal will save money. The challenge lies in convincing Ideal of this, and then gaining their commitment to implement the model. ABP recognizes the customer’s increasing desire to shift logistics responsibilities to suppliers, and as such requires more integration with the customer to achieve efficiency.
Customers would be required to invest significant resources to adjust their current business practices to fit the ABP model. Therefore, gaining this commitment from a customer has long-term benefits and implications; if O&M is successful in convincing Ideal or any other customer to adopt this model, it