Owens & Minor, Inc. is a distributor of medical and surgical supplies. The company uses a pricing system which is called “cost-plus”. The cost-plus means a basic production cost plus the shipping price that marked by distributors. This pricing system is also used among in the whole industry. As a medical and surgical supplies, its customers are hospitals. Ideal Health System is a not-for-profit hospital. It is also the big customer for O&M. As the time passed by and society developed, distributors get more and more requirements from their customer. O&M realized that the cost-plus system cannot calculate their costs accurately. The company wants to adopt a new pricing system which is called activity-based cost/price system.
The challenge for O&M in this case is that how to convince the Ideal health group to use the ABC system. The issue is that ABC system is a totally new system for the whole industry. No one had heard it before, and no one is familiar to use it. Although, the Ideal group is interested in the ABC proposal that provided by the O&M company, it has to consider carefully about the cost and risk of changing. The case mentioned that if Ideal adopts the ABC system, it has to “change the way they purchased, stored, and used supplies. Ideal would have to eliminate personnel, equipment, and warehousing space.
In fact, the ABC system is beneficial to all manufacturers, distributors and customers. For manufacturers, ABC can help them to know what kind of products or services that customers really need. For distributors like O&M, it is a good way to maintain an awesome customer relationship by delivering the customers’ actual needs and high quality services with lowest price. O&M can also calculate their costs accurately in order to get profits. However, there are still some risks for O&M to use the ABC system: the labor costs may increase because they may need more labors; the inventory costs might goes up since the distributor should guarantee that they have enough products to meet the customers’