Burgos, Rivera, Rosario, Vidal University of Puerto Rico Mayagez Campus Department of Industrial Engineering

Case Study Owens & Minor Inc. ININ 4086 Profesor Alexandra Borja

Vivian M. Vidal Otero Clariermy Rosario Irvin Rivera Ivaniss Burgos Section 030

Burgos, Rivera, Rosario, Vidal Situation Audit

Jose Valderas, divisional vice president of Owens & Minor was aware of that Ideal Health System announce that they were offering a contract for 30 million per year, to medical/surgical supplies of for bid. Owens & Minor has been in operations for 114 years. The company was named by the Fortune 500 of being one of the largest distributors of medical/surgical supplies. For them it was extremely important of maintaining there customers liking the company. For this matter the company was in a not comfortable situation, because their customers were demanding for more services and lower distributions fees. The methodology they were using it was just based on distributor fees on product costs and not in the actual cost of delivering the product. Owens & Minor finished the year 1995 with a lost of 11 millions dollars because of a decrease in gross margin and an increment in the expenses. Owens & Minor was thinking that winning the Ideal contract will increased their revenues and saved them from bankruptcy. One of the things that made the company attractive to Ideal was that the company was brand-neutral. We were a lot more flexible than the other competence companies. Problem Owens & Minor Inc. was trying to use ABC information, not just to keep the costs down, but to add value to their customers. Not only could ABC help them to communicate with the internal costs to Ideal, it could also be a new a way to make the proposal. There were substantial risks involved, because the existing price structure was entrenched in the industry and ABC ideas were so new that Ideal might not understand and activity-based pricing system. Valderas believed that an activity-based pricing

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proposal might be the only way he could offer a competitive ideal to Ideal and still reap profits for the company. Alternatives 1-The Company could decide to continue with the cost-plus. 2-Or do the Activity-Based Pricing as the new system for Owens & Minor. Analysis The initial problem to solve was the unprofitable of the hold operation show in Exhibit 4 (Owens & Minor Stockless Customer Profitability Statement. This was because the bad allocation system used to distribute the costs. The old system was not agile to difference the distribution costs, the actual cost of the good and the fixed cost of the operation. Owen as a supplier of a stockless system of medial items for ideal begun to hold the add value of the services sold as fixed operation expenses and because of this the gross margin was not enough to make profit. Ideal with please the idea of lose the risks and costs of a warehouse, benefit that the stockless system produce. With the negative for a change of system and with the problem that the cost plus used do not cover the expenses incurred with redefine the way of charging for the services. We produce a new allocation that meet the demands make by idea. First, we show our income statement with a cost-plus percent of 6%, the one ask, base in the product sales and with this show our fixed expenses and net profit. Second, we create an invoice for ideal showing all the cost incurred to full fit the orders. Here we show the cost of the good buy by ideal an present in detail the distribution expenses and their drivers as total orders, total lines and shipping and handling cost; value added to the product because the stockless operating. This way

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we show how ideal can control the form that handles their need for medical goods and with this they can lower the final paying price of the goods. Results

Recommendations Make less orders of a higher quantity of products. Ideal is not going to commit because they find that with Cost-Plus they can resolve the problem. The problem was cause of the bad distribution of the costs. Ideal can plan ahead the orders to diminish the distribution costs. We do not suggest that Ideal Health System commit time and resources in activity-based pricing. This is because that we find out that their methodology of Cost-plus they can continue working, the only thing they must do is reassigned the distribution costs to find the real price of the product. Jose Valderas did not present the costs and benefits of the activity-based pricing because what he did was a matrix of the two major cost drivers that were purchase orders per month and number of lines orders per month. The problem was that this information wasnt sufficient for doing the activity-based pricing. Ideal Health System should continue with the Cost-plus methodology, only if they could improve the way of distributing the distribution costs.

Burgos, Rivera, Rosario, Vidal Appendixes

CGS+ Shipping and Order Cost, Line Cost, handling Interest, procurement and Labeling

O&M Deliveries

Owens & Minor Monthly Profitability Statement Revenues Product Sales New Cost-Plus Margin Net Sales Cost of Good Sold Vendor Discounts Cost of Good Sold Gross Margin Intrest (Holding Cost) Fixed Costs Occupancy Group Fee Expense Total Operating Expense Net Operating Profit

$ 150,000.00 $ 9,000.00 $ 159,000.00 $ 150,000.00 $ (4,035.00) $ 145,965.00 $ 13,035.00 $ 2,160.00 $ $ $ $ 1,007.00 750.00 3,917.00 9,118.00

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Pareto Chart of Activity

30000 25000 20000 100 80 60 40 20

15000 10000 5000 Activity 0

To
Count Percent Cum %

ta

e in lL

st Co ta To 9900 36.9 36.9

e rd O l

t os C r m O&
5914 22.0 58.9

e liv De

s r ie

r he Ot

st Co

H S&

er th

5491 20.5 79.4

3477 13.0 92.3

1560 5.8 98.1

500 1.9 100.0

Percent

Count