MADM ASSIGNMENT #3

Owens & Minor, Inc.

SUBMITTED BY: Group L11

Mansi Tayal
Prashant Pratap Singh
Rishi Chopra
Rishabh Mukherjee
Sukhmbir Pannu

: 61710398
: 61710779
: 61710614
: 61710611
: 61710960

1. What is the value-added by O&M?

Ans: Owens & Minor generated value for both its customers as well as manufacturers, through
various operational and strategic procedures followed by them. Some of these are as follows:

Taking on the financial risk of owning and managing inventory flow. Absorbing the internal
costs of product returns, or obsolete products. This results in cost savings for inventory
management for both manufacturers and customers.
Carrying the receivables from customers for long periods of time (up to 90 days
sometimes).
Refraining to push private labels along with manufacturers products, thereby
strengthening O&Ms ability to act on behalf of the brand name suppliers.
Providing options of just-in-time and stockless systems, where carefully planned and
multiple shipments respectively are necessary. Often products are delivered directly to the
operating rooms of hospitals.
Tracking of customer prices for contracted product purchases. Customer usage and sales
data is shared with manufacturers.
Breaking down of large shipments of products into smaller sets for delivery to customer as
per the latters convenience, creating savings of both time and effort for them.

2. Evaluate the impact cost-plus pricing has on distributors, customers, and suppliers.
Ans:

Distributors: The diminishing margins forces distributors to look at internal cost control
measures. Also, stockless customers wanting smaller pellets of products need larger
number of shipments per week, resulting in even smaller margins for the distributors due
to increased costs being absorbed by them. Since services related to each product & order
are different, it often leads to loss on some contracts and negligible profits on others. In
short, there was a wide disparity between the profits made on each customer.

Customers: Customers are well-versed with the cost-plus pricing system that was widely
adopted, and had based their accounting processes on this system. Simply bargaining with
the suppliers for good deals can generate more profits for the customers in the short run.
However, separate prices for each contract, combined with incentives lead to difficulties
in tracking actual costs for the customer. Also, for customers ordering larger quantities of
products per order, it is not a profitable option, as economies of scale result in distributors
getting a larger share of the profit.

Suppliers: Cost-plus pricing does not place an onus on the suppliers to increase efficiencies
in their manufacturing processes. Cost reduction is not a priority as simply negotiating with
the customer for a price in a contract can get them to cover their costs.

3. What effect will activity-based pricing (ABP) have on customer behavior?

Ans: Activitybased pricing (ABP) would have a substantial effect on customer behavior, and their
approach to future contracts with suppliers and distributors, as highlighted below:

Customers would refrain from frivolous ordering of products, and would try to minimize
their activities to a minimum. They would only order products that they would really need.
Customers can alter the frequency of orders based on demand and thereby, maximize the
consumer surplus.
Customers may have to alter their accounting processes to deal with the variable pricing
systems, and will try to adopt cost saving techniques across the board.

4. What are the obstacles to successful implementation of ABP at Ideal?

Ans: There are multiple obstacles to the implementation of activity-based pricing at Ideal, some of
which are as follows:

Its internal systems (budgeting, incentive programs, etc.) were tailored as per the cost-plus
pricing system. It would require significant efforts to modify its budget.
It historically compensated its buyers based on the cost-plus percentage negotiated for a
deal, which would have to be modified.
Separating the distributor fee would also lead to changes in the way transfer costs to each
department.
Handling of supplies from purchase, storage and usage would have to be changed by
employees, which may lead to resistance from them.
Elimination or reassignment of personnel, space and equipment was also needed.
Ideal would also need to be linked by Electronic Data Interchange (EDI) to facilitate a
smooth transfer of data from and to O&M, which needed a significant investment.

5. How would you address these obstacles?

Ans: The above mentioned obstacles can be addressed in the following ways:

O&M can work in close partnership with Ideal to help realign their internal processes to
help minimize costs. O&Ms consulting service can take the initiative in this regard.
O&M can offer rebates in setting up EDI with long term contracted customers, which will
help the former tie down customers as well.
O&M can offer Ideal a cost-plus equivalent of the additional activity costs that they plan to
pass on to customers.

6. What types of customers are likely to adopt ABP first?

Ans: The two type of customers who are likely to adopt ABP first are as follows:
Who do not wish to pay for the cumulative services which also includes the services that
they do not use.
Who are willing to pay for selected additional service that they would like to consume.

7. How easy it is for O&Ms rivals to adopt ABP?

Ans: In order to adopt ABP the rivals would have to:
1. First do an ABC analysis and figure out cost drivers and rates.
2. Set up advanced costing and information technology systems necessary for
implementation of ABP.
The whole process would take a substantial amount of time and capital for implementation.
Thus would not be easy for the rivals to adopt.