Owens & Minor Inc. is one of the leading distributors of medical and surgical supplies. The company headquarters in Mechanicsville, Virginia, U.S. In 2010, the company has 4800 employees, with revenues of $8.12 billion. The company provides 200,000 products from about 1200 manufacturers; the products include gloves, wound closure devices, sterile procedure trays, intravenous products, operating room items, etc. The core business-process of Owen & Minor Inc. is that manufacturers provide bulk products to OM, and then OM provides individual order-delivery products and services, including consulting, logistics services, etc., to customers, which represented by primarily hospitals, healthcare systems, group purchasing organizations (=buying groups of hospitals) and the federal government.
The OM company has ever faced a change in customer-behavior. Initially, services stopped at the hospital's loading door. At now, low-unit-of-measure or stockless systems become popular at customers, for instance, plastic totes that go directly to the nursing and surgical units, bypassing the entire storeroom process.
The entire service-level increased. In 1994, the Activity-Based Costing method was introduced at O&M. Under ABC model, the cost drivers can affect cost per customer, and hence customer profitably. At O&M, cost-plus pricing was the dominant form of pricing in the medical or surgical distribution industry. Customer pays a base manufacturer price plus a markup added on by the distributor. Cost-plus fees are individually negotiated with the customer.
However, for O&M, there were still several drawbacks of cost-plus pricing. The first challenge jumped into eyes is that cost-plus pricing ties the fee to the value of the product rather than the value of the service. Also, Customers avoid paying a high distribution fee on expensive products by buying them directly at the manufacturer. These two drawbacks left O&M with inexpensive, low-margin products or products requiring a high service-level, and...