Owens

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  • Topic: Pricing, Costs, Purchase order
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Technische Universität München

Management Accounting
-Case Study-

Harvard Business Case

Case Study: Owens & Minor

Structure of the Case Study

1. 2. 3. 4. 5.

O&M: Company Profile Costing and Pricing at O&M The Case O&M‘s Proposal Solution of the Case-Questions

© Gunther Friedl – WS 11/12

Case Study: Owens & Minor

Owens & Minor, Inc: Company Profile Headquarter: Mechanicsville, Virginia, U.S Revenue 2010: $ 8.12 billion Number of employees 2010: 4,800

One of the leading distributors of medical and surgical supplies 200,000 products from about 1,200 manufacturers, e.g. gloves, wound closure devices, sterile procedure trays, intravenous products, operating room items, etc

© Gunther Friedl – WS 11/12

Case Study: Owens & Minor

Owens & Minor, Inc: Company Profile Core Business-Process:
Services (Consulting, Logistics Service, etc. )

Manufacturer Manufacturer
Bulk Products Individual Order‐ Delivery

Manufacturer Manufacturer

Customer

Customers: primarily hospitals, healthcare systems, group purchasing organizations (= buying groups of hospitals) and the federal government

© Gunther Friedl – WS 11/12

Case Study: Owens & Minor

Situation: Change in Customer-Behaviour Initially: Service stopped at the hospital‘s loading door: pallets with high number of units Now: low-unit-of-measure or stockless systems become popular at customers: e.g. plastic totes that go directly to the nursing and surgical units, bypassing the entire storeroom process Increasing service-level

Questions for O&M: What are the costs of the service? How to price the service appropriately?

© Gunther Friedl – WS 11/12

Case Study: Owens & Minor

Activity-Based Costing at O&M (introduced at O&M in 1994) Several activites (= Cost Drivers) affect costs per customer and hence customer profitability: Type of service requested Number of lines per purchase order Number of purchase orders generated per month

Cost Drivers
Number of deliveries per week Method of order (mail, phone, electronic data) Interest costs from carrying receivables

© Gunther Friedl – WS 11/12

Case Study: Owens & Minor

Pricing at O&M Cost-plus pricing* was the dominant form of pricing in the medical/ surgical distribution industry Customer pays a base manufacturer price plus a markup added on by the distributor Cost-plus fees are individually negotiated with the customer (7% are a usual number)

+
Base manufacturer price $1 Markup 7%

=
Price of the product $ 1.07

* See lecture notes, chapter 5

© Gunther Friedl – WS 11/12

Case Study: Owens & Minor

Drawbacks of Cost-Plus Pricing for O&M

Cost-plus pricing ties the fee to the value of the product rather than the value of the service Customers avoid paying a high distribution fee on expensive products by buying them directly at the manufacturer only products requiring high order-units, high storage room or special management systems are ordered at O&M leaves O&M with inexpensive, low-margin products or products requiring a high service-level

© Gunther Friedl – WS 11/12

Case Study: Owens & Minor

Customer Profitability Statement for Customer Alpha Hospital

© Gunther Friedl – WS 11/12

Case Study: Owens & Minor

O&M‘s findings with Activity-Based Costing There is a wide disparity between the profits made on each customer Some customers (particularly those with stockless or low-unit-of-measure programs) are unprofitable for the company Fees on a cost-plus system are not ideal for the company

© Gunther Friedl – WS 11/12

Case Study: Owens & Minor

The Case Situation (1996): Ideal Health System (hospital chain) announces it is putting its $30 million annual medical/ surgical supply contract up for bid Problem: Atlantic Healthcare current supplier subsidiary of a medical supply manufacturer allows them to offer distribution services at extremely low rates these rates would force O&M to operate at loss

O&M
brand-neutrality...
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