Owens and Minor Case Analysis Essay

2653 Words11 Pages
| Owens & Minor | Case Analysis | | | 2/1/2011 |


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
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In turn, manufacturers are able to avoid this labor- intensive activity of breaking down larger packaging and delivering in smaller batches. O&M also tracks and monitors the prices and contractual agreements between customers and suppliers, including verifying agreed-upon pricing arrangements for a variety of different customers. This is a time-consuming and labor-intensive activity, which sometimes involves facilitating rebates and debits.
Finally, if any end-user customers were to adopt the activity-based pricing (ABP) system proposed by O&M, O&M could help hospitals better understand their costs and analyze their processes. This would improve efficiency and reduce waste due to loss, theft and expiration of sensitive medical supplies. O&M would reduce its costs by delivering only what is needed, and the hospitals would be buying fewer unutilized supplies.
The effect of Cost-Plus Pricing on Distributors, Customers and Manufacturers
Cost-plus pricing puts many distributors in a difficult position. Unless distributors manufacture the medical supplies they sell, they have difficulty offering competitive prices to customers while continuing to make reasonable profit margins. Applying only the cost-plus pricing method forces distributors to absorb the costs associated with holding, managing, and delivering inventory, regardless of the variations in weight, size or handling difficulties among different products. This is in addition to

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