Case Background:

Who: Jose Valderas. divisional VP for Owens & A ; Minor ( O & A ; M ) What: How does O & A ; M sell ABP ( activity based pricing ) to Ideal? Could they implement ABP to assist Ideal? Why: Oxygen & A ; M needs to better borders ; by understanding where costs are derived from. they can so go through those costs onto the client. O & A ; M needs to extinguish the cost-plus system and would wish to travel to cost-plus nothing with monthly fee based on activity degrees

Case Overview:

* O & A ; M is a medical and surgical supplies distributer. They focus on administering one nucleus concern line ( medical/surgical supplies ) instead than spread outing to other lines. This gives them an advantage over the competition by being able to offer better merchandises. monetary values and services to clients. Their clients are predominately hospitals/hospital webs. * Through acquisitions over the old ages. they have presence across the state and became leader in low cost distributer of health care merchandises * They have 49 distribution centres in the US. which warehouse over 300. 000 merchandises from over 3. 000 makers to over 4. 000 clients ; each division served clients within a 100-150 stat mi radius utilizing owned/leased fleet. Customers on mean receive 2-6 deliveries/week * At Savage the ( Maryland ) division. they carry over 50. 000 line points. with 120 clients. They serve an country with about 12 million people within one hr *

* The sector is turning. but more and more cost force per unit areas ; led to clients demanding decrease in supply costs and bettering of stock list direction. Customers forced distributers to transport more of the stock list and do more delivers in lower measures. Distributors were being squeezed from both sides to cut down borders: customers/hospitals one side. and makers the other side. * Medical supply industry competitory. with fewer clients ( as consolidations have occurred. taking to big contracts but fewer in figure ) * Pricing presently done on a cost-plus theoretical account. which is based entirely on the cost of the merchandise and does non factor in the costs of distribution ; there is merely a % distributer mark-up on the base maker monetary value of the merchandise *

* By 1995. SG & A ; A costs were increasing once more above 7 % of gross revenues. and involvement disbursal had increased by over 100 % from old twelvemonth ; stock list costs in 1994 and 1995 were about ternary that in 1993. and A/R around double * To turn to the cost decrease enterprises of their providers and clients. O & A ; M shifted to a ABC construction * Focus in 1996 was to better service quality and control stock list costs ; every bit good increase gross border by seting higher monetary values to services that demanded more resources * They are fixing a proposal to a possible new client. Ideal Health system ( which purchases $ 30million yearly for medical/surgical supplies ) * O & A ; M created a matrix that was based on two major cost drivers: figure of purchase orders per month and the figure of lines per purchase order in a chase to acquire Ideal to utilize ABP

Challenges:

* Challenge within the industry is that many of the rivals are subordinates of makers. thereby leting them to countervail their distribution costs to clients with their high border from gross revenues of manufactured merchandises. However. what this meant was that these rivals didn’t offer the assortment of merchandises that O & A ; M could supply ( as merely sold self-manufactured merchandises ) * Cost plus system tied the fee to the distributer to the value of the merchandise instead than the value of the service ; Cost Plus was entrenched throughout the industry * The pricing construction within the industry was exceptionally complex and made it hard to track existent merchandise costs or compare quotation marks * A/R runs mean 90 yearss which is high

* Customers demanding system of distribution that was easier and immediate. and even short-circuit the storage room procedure ; this demand for JIT and stockless drove O & A ; M SG & A ; A costs up * The acquisition of Stuart Medical hurt O & A ; M. mostly because they were leader stockless and JIT * Challenge was to bind distribution fees to activity degrees and do the client aware of these. thereby in hopes that they would go more efficient * ABC was new. so how do you acquire them to understand benefits of ABP

Activities that affected O & A ; M profitableness were:
* Type of service requested
* Number of purchase orders/month
* Number of lines per P. O.
* Number of deliveries/week
* Method of order
* Interest cost from transporting receivables and stock list

Case Questions:

1. What are the services rendered by the distributer to makers and infirmaries? * O & A ; M purchases stuffs from the makers and sells them to infirmaries. * Under cost plus system. rates are negotiated between the maker and the client. and the distributer manages those contracted rates ( and adds % to the cost )

* How has the nature of distribution changed over clip?
* Because of a focal point on cost decrease within infirmaries. clients are now demanding JIT and/or stockless. By holding stuffs delivered on an as-needed footing. they are able to cut down their stock list costs * Distribution has shifted to providing big purchasing groups. as opposed to single infirmaries ; this combined buying power enables them to acquire best possible monetary values by coercing makers and distributers to cut down their borders

* What is the value-added by O & A ; M
* O & A ; M is able to run into the demands of clients looking for JIT and/or stockless * O & A ; M is willing to ain and pull off the stock list ; they are responsible for all returns. etc. . and run the hazard of outdated/obsolete goods * O & A ; M is non limited to selling one trade name ( i. e. self-generated merchandises ) *

2. Measure the impact cost-plus pricing has on distributers. clients. and providers. * For distributers. they face higher operating costs ( in 1995 was 7. 6 % of gross revenues ) . and immense stock list transporting costs. In 1995. speedy assets ratio for O & A ; M was 1. 02. Interest disbursals steadily mounting as a consequence of big stock lists. * For clients. simplifies the budgeting procedure by cognizing exact bing for merchandises

* For providers. is there an impact? ? ?

3. What consequence will ABP hold on client behaviour?
The end with ABP is to supply inducement for clients to alter their buying wonts. By supplying fiscal inducement to promote a alteration in behaviour ( in this instance. cut down the figure of orders and cut down the figure of line points ) . the control of cost nest eggs is in the custodies of the consumer.

4. Explain Exhibit 5. How does the pricing matrix work?
The fewer the figure of lines and the fewer figure of orders would cut down the cost to the consumer ( as this is so take downing the fixed and variable costs to O & A ; M ) .

* How make the costs in Exhibit 5 correspond to the costs shown in the client profitableness statement in Exhibit 4? The figure of orders impacts the Entire Order Cost ( all costs under order cost are impacted by an addition in the figure of orders placed ) . ( ? ? page 10 says the admin costs are fixed? ? )

The costs of Picking are tied to the figure of lines ; the fewer the lines. the lower the cost ) .

* Why doesn’t the matrix comprise all the costs shown in Exhibit 4? They have focused on those countries with the highest cost. and hence are those that have the greatest impact to cut downing overall operating disbursals and increasing borders.

5. What are the obstructions to successful execution of ABP at Ideal? * Ideal’s budgets presently have merchandise monetary values with distributer fees built in. so they would necessitate to modify their full budgeting system * Internally they besides use cost-plus for transportation monetary values ; they will now hold to implement ABC throughout internally to be able to suitably bear down sections. * Internal alterations are required: how staff purchase. shop. and use supplies ; every bit good hold to place how to extinguish fixed costs *

6. What type of clients will follow ABP foremost?
* Companies that need to cut down costs
* Flexible systems to easy let for alterations in system. such as monetary value alterations in budget. staffing. etc. * Smaller companies that are non portion of the larger webs and hence don’t already have the purchasing power to demand reduced costs *

7. How hard or easy is it for O & A ; M’s challengers to follow ABP * Probably tougher as most of the rivals have several concern lines. whereas O & A ; M merely has the 1 concern line ( medical & A ; surgical supplies )

8. What are the hazards associated with ABP for O & A ; M?
* Is there truly a necessity for the larger clients like Ideal to exchange ; they can already demand the lowest monetary values while guaranting their other costs ( e. g. stock list. labour. etc. ) are minimized.