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.
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.
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 equiv- alent of the activity fee each customer is charged? Explain why each customer responded differently to activity-based pricing.