Case Summary: Owens & Minor, Inc.
Case Summary: Owens & Minor, Inc.
Owens & Minor, Inc. is one of the nation’s largest distributors of medical and surgical supplies that has been in operation for over 114 years. Obtaining and keeping profitable customers was critical for Owens & Minor, Inc. The company had an opportunity to negotiate business with Ideal Health Systems, a manufacturing company, when Ideal’s $30 million annual medical/surgical supply contract was up for bid. This was an opportunity Jose Valderas, divisional vice president for Owens & Minor did not want to pass up.
This case explains the strategy Valderas and his team approached to attain the bid with Ideal. The year prior to the bid, O&M was struggling to contain its costs while trying to understand the profitability of their customers and services. By the end of 1995 the company had encountered an $11 million loss due to a decrease in gross margin and an increase in expenses. Valderes knew that he needed to reevaluate the company’s costing and pricing methods if they wanted to even be considered in winning the Ideal contract. Valderes and the team were concerned with their current cost-plus pricing method. Cost-plus signified that the customer paid a base manufacturer price plus a mark-up added on by the distributor. This allowed for drawbacks like customers engaging in “cherry-picking” and only enabling the distributors to manage low-margin, inexpensive products. This method also tied O&M’s fee to the value of the product rather than the value of the service. The complexity of the pricing structure made it difficult for purchasing manager to track actual product costs or compare quotes from competing manufacturers and distributors.
The company did more than what was being paid for. Their tasks included:
• Own and manage the inventory for the manufacturer
• Take on the financial risk associated with the function of managing the inventory flow to the hospitals
• Care for product returns
• Carry the receivables (cash flow
Owens & Minor, Inc. is one of the nation’s largest distributors of medical and surgical supplies that has been in operation for over 114 years. Obtaining and keeping profitable customers was critical for Owens & Minor, Inc. The company had an opportunity to negotiate business with Ideal Health Systems, a manufacturing company, when Ideal’s $30 million annual medical/surgical supply contract was up for bid. This was an opportunity Jose Valderas, divisional vice president for Owens & Minor did not want to pass up.
This case explains the strategy Valderas and his team approached to attain the bid with Ideal. The year prior to the bid, O&M was struggling to contain its costs while trying to understand the profitability of their customers and services. By the end of 1995 the company had encountered an $11 million loss due to a decrease in gross margin and an increase in expenses. Valderes knew that he needed to reevaluate the company’s costing and pricing methods if they wanted to even be considered in winning the Ideal contract. Valderes and the team were concerned with their current cost-plus pricing method. Cost-plus signified that the customer paid a base manufacturer price plus a mark-up added on by the distributor. This allowed for drawbacks like customers engaging in “cherry-picking” and only enabling the distributors to manage low-margin, inexpensive products. This method also tied O&M’s fee to the value of the product rather than the value of the service. The complexity of the pricing structure made it difficult for purchasing manager to track actual product costs or compare quotes from competing manufacturers and distributors.
The company did more than what was being paid for. Their tasks included:
• Own and manage the inventory for the manufacturer
• Take on the financial risk associated with the function of managing the inventory flow to the hospitals
• Care for product returns
• Carry the receivables (cash flow