Assignment for the case study
Owens & Minor, Inc.
Prof. Mario Milone
Read carefully the case study entitled Owens & Minor, Inc. (A) and answer the following
questions. Note that you are allowed more than one page for this assignment. Please try to keep
the answers short and to the point.
1. What are the services rendered by the distributor to manufacturers and hospitals?
(a) How has the nature of distribution changed over time?
(b) What is the value-added by O&M?
2. Evaluate the impact cost-plus pricing has on distributors, customers, and suppliers.
3. What effect will ABP have on customer behavior?
4. Explain Exhibit 5. How does the pricing matrix work?
(a) How do the costs in Exhibit 5 correspond to the costs shown in the customer profitability
statement in Exhibit 4?
(b) Why doesn’t the matrix comprise all the costs shown in Exhibit 4?
5. What are the obstacles to successful implementation of ABP at Ideal?
(a) How would you address these obstacles?
6. What type of customers will adopt ABP first?
7. How difficult or easy is it for O&M’s rivals to adopt ABP?
8. Work through the numerical exercise below by filling the provided template.
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Numerical Exercise (2 pages)
1. You are an account manager at Owens & Minor. You have two customers on a stockless
program. Below are each customer’s activity levels, activity rates, and customer level costs.
See Alpha Hospital—Customer Profitability Statement (Exhibit 4 of the case). Draft a
customer profitability statement for Beta Hospital using the format shown in Exhibit 4.
Activity Rates
Edi Order Cost $4.50/edi order
Non-Edi Order Cost $9.01/non-edi order
Line Cost $0.66/line
Delivery Cost $457.58/delivery
Interest Cost 8.64% per annum
Emergency Order Cost $25/emergency order
Shipping and Handling Costs $130/delivery
Customer Level Costs
Procurement $1,486
Labeling $1,000
Account Mgmt $991
Occupancy $1,007
Group Fees $ 750
Activity Levels Alpha Hospital Beta Hospital
Sales/month $150,000 $150,000
Orders/month 750 333
Lines/month 15,000 10,000
Deliveries/month 12 10
% EDI orders 25% 95%
Accounts Receivables $300,000 $75,000
Emergency Orders/Month 20 10
Vendor Discounts $4,035 $4,035
Cost-Plus % 15.0% 15.0%
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2. It is one year later. Both your customers switched to activity-based pricing nine months
ago. You charge each customer what it costs you to provide service, making margin only on
distributor discounts. Draft new customer profitability statements for both Alpha Hospital
and Beta Hospital using the new activity drivers shown below. What is the cost-plus equivalent of the activity fee each customer is charged? Explain why each customer responded
differently to activity-based pricing.
Activity Levels Alpha Hospital Beta Hospital
Sales/month $150,000 $300,000
Orders/month 400 660
Lines/month 11,000 20,000
Deliveries/month 7 10
% EDI orders 95% 95%
Accounts Receivables $75,000 $150,000
Emergency Orders/Month 6 6
Vendor Discounts $4,035 $8,070
Alpha Beta Alpha 1 Beta 1
Cost Driver Rate Volume Volume Volume Volume
EDI Orders 4.5 187.5
Non-EDI Orders 9.01 562.5
Lines 0.66 15,000
Deliveries 457.58 12
Account Receivables 8.64%/yr 300,000
Eemergency Orders 25 20
Shipping and Handling 130 12
Product Sales $150,000 $150,000 $150,000 $300,000
Cost Plus Margin 22,500
ABP Fees
Total Revenue 172,500
COGS 150,000
Vendor Discounts 4,035 4,035 4,035 8,070
Gross Margin 26,535
EDI Order Costs 844
NonEDI Order Costs 5,068
Line Costs 9,900
Shipping and Handling 1,560
Delivery Cost 5,491
Emergency Orders 500
Interest 2,160
Procurement 1,486
Labeling 1,000
Account Management 991
Occupancy 1,007
Group Fees 750
Net Operating Profit (4,222)
Cost Plus/Equivalent Cost
Plus 15%
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