MBAD 6213 WE
CASE 4: Owens & Minor Inc.
Q: Evaluate the impact cost plus pricing has on distributors, customers and suppliers.
DISCUSSION
In a Cost-Plus model, the customer pays a base manufacturer price plus a negotiated percentage of the base price as the distributor markup.
Under a Cost-Plus pricing scheme, Owens & Minor was not realizing the true cost of warehousing and delivering their products to the customers. The distribution costs for bulky items were usually higher than for smaller, higher cost items.
Customers could demand enhanced services from distributors, since price was based on product cost rather than delivery cost. Customers were able to shift their inventory-carrying costs to the distributor. Stockless, just-in-time, and low-inventory customers were not profitable to Owens & Minor. The Cost-Plus model enabled customers to demand greater and more costly services since the additional costs to Owens & Minor to provide the enhanced service levels were not factored into the price. To keep costs down, distributors needed to provide the very least service possible to keep the customer. Cost-Plus Pricing heightened the contradictions between what the customer wants and what the distributor is willing to provide.
Customers could “cherry-pick,” by purchasing the most expensive products directly from manufacturers. Manufacturers were motivated to ship high priced, high volume items directly to the end-customer hospitals. Cost-plus pricing in this case creates inventory inefficiencies and overconsumption for the hospitals holding inventory of high-cost items. This practice would leave Owens & Minor with inexpensive, low-margin products, products that require a high service-level.
Pricing structures under Cost-Plus grew complicated. Hospitals and other customers negotiated their own prices with manufacturers so prices varied