OM Case Presentation_Group9

7/30/2019 OM Case Presentation_Group9

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Presented

ByGroup 9

Moitrayee Majumdar (wmp7104)

Ramji Natarajan (wmp 7122 )

Sandeep Koul (wmp7124)

Sanjeev Kumar Panda (wmp 7125)Sarthak Swain (wmp 7126)

IIM Lucknow, Noida Campus

CASE Presentation O & MServices Marketing Term VIII


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Contents

Case Narratives

Question 1

Question 2

1

2

3

Question 34

Question 45


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CaseNarratives

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 towin 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.


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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 returnsTracking 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 1


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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 willhave 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.

Question 2


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

Dominant form of pricing in medical/ surgical distribution industry was costplus

Distributer added a 7% fee charging the customer for the delivered product

Cost Plus Model


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Cost Plus Model Advantages and Limitations

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

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


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Activity-based costing (ABC) is a costing model that identifies activitiesin 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 Costing


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ABC Advantages and Limitations

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

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


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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 3


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Optimum Point

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 ofdistributor.

Bulk order low cost for

distributor but high inventory

cost for customer

Just in time order low cost

for customer but high cost

for distributor.


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Thank You

Documents

OM Case Presentation_Group9