CASE Presentation O & M Services Marketing Term VIII

Presented By Group 9 Moitrayee Majumdar (wmp7104) Ramji Natarajan (wmp 7122 ) Sandeep Koul (wmp7124) Sanjeev Kumar Panda (wmp 7125) Sarthak Swain (wmp 7126)

IIM Lucknow, Noida Campus

Contents
1

Case Narratives

2
3

Question 1 Question 2

4 5

Question 3 Question 4

Case Narratives
Owens & Minor (O &M) Distributor of surgical and medical supplies to hospitals and other health care facilities. Due to changing demand from customers, company facing increased operating costs, resulting 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. 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 expecting the price structure to stay the same. The new method of pricing, called Activity-Based Costing (ABC) and Activity-Based Pricing (ABP) will increase efficiency in the supply chain and reduce overhead expenses. Ideal, a large hospital buying group, has put their supply contract out for bid, presenting an enormous potential revenue opportunity for O&M if it can undersell its competitors to win the contract. O&M believes that by adopting this new pricing model, Ideal will save money. Customers would be required to invest significant resources to adjust their current business practices to fit the ABP model. The challenge lies in convincing Ideal of this, and then gaining their commitment to implement the model.

Question 1
What were the major drivers of cost to serve customers, besides those leveraged by O&M? Cost of handling different boxes were different. Managing inventory Product returns Tracking and verifying customer prices for contracted products purchases. Rebate Type of delivery needed: Bulk, Stockless, Just in Time Number of PO per month Number of line per PO Number of deliveries per week Method of order (mail, telephone, or electronic). Interest cost from carrying receivables and inventory

Question 2
Given the Menu based pricing started by O&M, what were the other alternative methods of pricing that they could have considered? Details required for each method recommended.
The other method could be perceived value pricing where price of distribution would also be tied to type or level of service one needed.
Example: Price (fixed by Manuf. and Customer) *7% (distributer margin) + service charge (based on perceived value of different services provided by distributor).

One more method could be Urgency as a pricing strategy where price will have a mark-up based on the level of urgency.
Example: Mark-up of x% to cover the support level expenses + additional profit analogous to Time based Tier pricing.

Cost Plus Model

MANUFACTURER PRICE + MARK UP(ADDED BY DISTRIBUTER) = SELLING PRICE

Dominant form of pricing in medical/ surgical distribution industry was cost plus Distributer added a 7% fee charging the customer for the delivered product

Cost Plus Model Advantages and Limitations

Advantages Easy to calculate Minimal information requirements Easy to administer Tends to stabilize markets insulated from demand variations and competitive factors Insures seller against unpredictable, or unexpected later costs Ethical advantages Simplicity It is readily available Price increases can be justified in terms of cost increases

Limitations Cost plus tide the exes to the value of the product rather then the value of the service . To avoid paying high distribution percentage on expensive product the customer would buy then directly from the manufacturer. That left O & M with low margin and inexpensive products

ABC Costing
Activity-based costing (ABC) is a costing model that identifies activities in an organization and assigns the cost of each activity resource to all products and services according to the actual consumption by each It assigns more indirect costing(over heads) into direct cost.

ABC Advantages and Limitations

Advantages It helps to identify inefficient products, departments and activities It helps to allocate more resources on profitable products, departments and activities It helps to control the costs at an individual level and on a departmental level It helps to find unnecessary costs It helps fixing price of product or service scientifically

Limitations Even in activity-based costing, some overhead costs are difficult to assign to products and customers..('business sustaining) Wastage will be more visible which may not be desired by some executives

Question 3
What were the effects of duration of use of the new pricing system on customers? Customer was able to weed out non value adding activities and was able to fine tune activities to minimize cost. This process enhanced relationship between distributor and customer. High level of trust was built between parties. Huge investments were made. Customer outsource portion of management activities related to material management to those who did it in best possible way.

Question 4
What method of setting the price would be most effective for each of the services? In order to find most effective price for a particular service, one has to find out service level that costs lowest to both customer and distributor. One has to find out economic ordering point not only considering customer activity and inventory but also activity and inventory of distributor.

Bulk order low cost for distributor but high inventory cost for customer

Just in time order low cost for customer but high cost
Optimum Point

for distributor.

Thank You