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Owens & Minor Inc. is a large national medical and surgical distribution enterprise. As the prior cost-plus pricing structure rendered the pricing of services impossible, a clever manager developed an innovative pricing schedule. The new pricing is based on the customer's activities instead of the price of the product. Additionally, the case study explores the resistance of customers facing the new pricing proposal.
Narayanan, V.G., and Lisa Brem
HBS Premier Case Collection (100055-PDF-ENG)
Feb 14, 2000
Case questions answered:
- What are the services rendered by the distributor to manufacturers and hospitals? How has the nature of distribution changed over time? What is the value-added by Owens & Minor, Inc.?
- Evaluate the impact cost-plus pricing has on distributors, customers, and suppliers.
- What effect will activity-based pricing have on customer behavior?
- Be ready to explain Exhibit 5. How does the pricing matrix work? How do the costs in Exhibit 5 correspond to the costs shown in the customer profitability statement in Exhibit 4? Why doesn’t the matrix comprise all the costs shown in Exhibit 4?
- What are the obstacles to the successful implementation of activity-based pricing at Ideal? How would you address these obstacles?
- What type of customers will adopt activity-based pricing first?
- How difficult or easy is it for Owens and Minor’s rivals to adopt activity-based pricing?
- What are the risks associated with activity-based pricing for Owens & Minor?
- Work through an additional exercise sheet. In the Excel sheet, fill in the template in Table 2 based on the data in Table 1. How are Alpha and Beta Hospital responding to activity-based pricing? Why?
- Which types of services would you include in an activity-based pricing approach? Which not?
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Case answers for Owens & Minor, Inc. (A)
This case solution includes an Excel file with calculations.
1. What are the services rendered by the distributor to manufacturers and hospitals? How has the nature of distribution changed over time? What is the value-added by Owens & Minor, Inc.?
Owens & Minor, Inc. offers the following services for manufacturers:
- They own and manage the inventory for the manufacturer
- They take on the financial risk associated with the function of managing the inventory flow to the hospitals.
- They care for product returns and carry the risk for that.
- They carry the receivables (cash flow issues due to long payment terms of customers; actually a 90 days credit)
Owens & Minor offers the following services to hospitals:
- They carry and manage most of the inventory for the hospitals, which are sometimes even running stockless.
- They track and verify “customer prices for contracted product purchases” and “monitor agreements between end-users and manufacturers”
The distribution has changed in a way that hospitals required the distributors to carry more of the inventory and making more deliveries in lower units of measure while keeping the same originally negotiated prices. This has put a stronger burden on the distributors.
Owens & Minor creates a clear value-add for both manufacturers and suppliers. Manufactures usually only want to “produce and sell the product” before “getting it out of the door”. Hence Owens & Minor, Inc….
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