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Supply Chain Partners: Virginia Mason and Owens & Minor (A) (Abridged) case study tells of how two companies that continuously experience inefficiency and fragmentation in the healthcare system supply chain came up with a solution. The two companies, Virginia Mason (VM) and Owens & Minor (OM), have partnered to establish a new activity-based pricing method called the Total Supply Chain Cost (TSCC) method. The TSCC method was designed to audit supply chain activities in more detail and capture more activity-based costs in the pricing model. The issue is to evaluate if the TSCC method is worth implementing and assess the changes that need to take place to assure that both organizations can reach their strategic goals.
V.G. Narayanan; Lisa Brem
Harvard Business Review (110063-PDF-ENG)
April 14, 2010
Case questions answered:
- What is your evaluation of the Total Supply Chain Cost program Developed by O&M?
- What are the advantages and disadvantages of cost-plus pricing relative to the TSCC pricing program?
- What projections would you want to make decisions?
- What are the incentives for hospitals and distributors under a cost-plus contract?
- How does Virginia Mason’s lean philosophy affect the partnership?
- What does it mean to be lean and incorporate lessons from Toyota in their production system?
- Is this good for Virginia Mason’s relationship with O&M?
- How does TSCC change the behavior of O&M and Virginia Mason?
- What changes to the TSCC program would you propose?
- Is Virginia Mason missing other alternatives – such as engaging in self-distribution?
- Identify the issue.
- Analyze and evaluate the situation.
- Provide recommendations and alternatives.
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Case answers for Supply Chain Partners: Virginia Mason and Owens & Minor (A) (Abridged)
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Executive Summary – Supply Chain Partners: Virginia Mason and Owens & Minor
Virginia Mason (VM) is a non-profit hospital based in Seattle, WA, known for its efficient clinical operation networks consisting of primary and specialized care and partners with the University of Washington on a collaborative research institution. Owens & Minor (O&M) is a distributor of healthcare products, including medical and surgical supplies, and has a distribution center in the Seattle region of Washington.
Before 2007, VM was supplying their hospital through many vendors, and O&M was manufacturing some items and distributing thousands of products to facilities, including Virginia Mason, within a 200-mile radius of its distribution centers. However, this method of supplier-hospital relationship lacked comprehensive pricing and efficiency.
Neither company expresses satisfaction with this type of business relationship and seeks solutions that would improve supply chain efficiency, improve data tracking, and increase efficiency.
Virginia Mason has partnered with Owens and Minor to pilot a Total Supply Chain Cost program. In addition, Virginia Mason has sought counsel to determine if the company should adopt the TSCC program as standard practice.
Virginia Mason’s current cost-plus pricing contracts protect the company from market volatility, allows for manufacturer direct product negotiation, and rely on contracts for sustainability.
Even so, the cost-plus model lacks end-to-end price transparency, includes hidden costs and waste, depends upon VM housing supplies as inventory, and does not use analytics to communicate across the supply chain.
Owens and Minor had created the Total Supply Chain (TSCC) program to mitigate some of these supply chain challenges.
TSCC is a pricing strategy that aims to solve traditional cost-plus pricing ineptitudes. TSCC is compatible with VM’s vision of pioneering a new approach to the practice of medicine through working as one team and compliments their commitment to LEAN business practices.
The use of the Alpha vendor in the program leads to increased efficiency, cost reduction, and supply chain resilience.
While TSCC could be improved through even greater “smart” pricing that enables clinical decision-making and considers clinical outcomes, our firm recommends that Virginia Mason adopts the Owens and Minor Total Supply Chain Cost program.
Advantages & Disadvantages: Cost Plus Pricing relative to TSCC
Virginia Mason (VM) may recognize a number of advantages by continuing to use a cost-plus pricing contract. Cost-plus pricing makes it easy for VM to determine pricing over a long period of time (Deshpande).
Locking VM into long-term contracts, cost-plus pricing eliminates rapidly fluctuating rates, potentially protecting VM from market volatility.
Furthermore, by continuing to use cost-plus pricing, VM will maintain its ability to negotiate its own deals directly with manufacturers and device companies for those who currently have this arrangement.
Cost-plus pricing relies solely on contracts rather than relationships to hold parties accountable for the terms of the agreements. Meaning that VM does not need to invest human capital deeply into these kinds of agreements to ensure conditions are met.
This approach may leave VM feeling much more in control of their supply chain and purchasing. Lastly, because cost-plus pricing requires minimum order volumes, VM has invested in supply storage facilities.
Having access to bulk supply storage may instill a sense of supply security should there ever be a major supply chain disruption.
While these benefits may seem worthwhile, cost-plus pricing is not without disadvantages. Indeed, there is not…
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