Owens and Minor Case Analysis

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Owens & Minor|
Case Analysis|


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 would help ensure customer loyalty to O&M from that point forward. If O&M’s claims that the customer can save a significant amount money can be proven, there is sure to be a market for this type of service. The Distributor’s Contribution to the Supply Chain

As part of its role in the supply chain as a distributor of surgical and medical supplies, Owens and Minor offers a substantial number of value-added services to manufacturers as well as to end-user customers (hospitals). Some of these services benefit both the manufacturer and end-user at the same time. O&M provides information on product flow to the product manufacturers, including demand and purchasing patterns of the hospitals and other end-user customers. Manufacturers are able to use this data on customer usage and market trends to better manage their operations and production schedules. O&M allows the hospitals access to and choice among many different brands of surgical and medical supplies. In fact, as O&M is one of the few distributors that concentrates solely on distribution (as opposed to others that are also manufacturing their own private label supplies), there are no conflicts of interest in terms of providing hospitals with the full array of competitors’ products from which to choose. Another service the distributor provides is carrying receivables. This takes the financial burden off of the manufacturer (who can then collect revenue from consolidated distribution networks rather than individual end-users), and also extends time to the end-users to pay for the inventory they receive (sometimes up to 90 days). The core benefit that O&M provides to its customers is that it owns and manages the inventory of products, and then makes deliveries to the customers as part of either a just-in-time or stockless system. Hospitals generally have limited space and logistics systems in place to handle the product. As opposed to buying in bulk from the manufacturer, hospitals...
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