| Owens & Minor | Case Analysis | | | 2/1/2011 |

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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 …show more content…

Cost-plus pricing allows customers some bargaining ability; although limited space makes it unfavorable for hospitals to buy in bulk directly from manufacturers, hospitals have the option of doing just that. However, hospitals could avoid dealing with inventory holding costs and instead demand a lower price from distributors for high-margin products. If the hospitals choose to buy from the distributors, cost-plus pricing allows customers to buy the lowest quantity possible and replenish as often as necessary with no additional charge. Despite seeming more convenient, time and resources are actually wasted by the hospitals that place more frequent orders rather than manage their current inventory more effectively.
For the manufacturers on the other hand, cost-plus pricing attracts customers (hospitals) to purchase directly from them. While this provides them with an additional revenue channel, manufacturers cannot receive accurate demand data. By leveraging specific data from distributors, these suppliers could optimize their own manufacturing process. Activity-based pricing would change that, by giving distributors a much better information stream to be able to feed to the manufacturers.
Activity-Based Pricing (ABP) and Customer Behavior
Initially, customers would likely resist a switch to ABP. Customers may perceive that cost-plus pricing is easier to track because it is simple to understand. By implementing ABP, customers would be forced to modify