Company Background
Owen and Minor was the leading medical supplier to the acute care hospital. Its earning was $ 6.8 dollars billion with the net of $ 72 million Owen and Minor distribution centers delivered. In approximation, about 400m goods every year while the smallest center delivered $60m.
Owen and Minor operated in the medical/surgical supply industry that was characterized by disposable supplies. The Company also provided services in supply chain management and private label production.
As per the 2007 annual report, the company distributed over 180,000 finished medical and surgical products produced by over 1200 suppliers to approximately 4,100 health care provider customers from 45-distribution centers nationwide. As per the report, the company’s primary distribution customers were the acute care hospital. Owen and Minor earned 90% of its revenues from acute care. The company operated its distribution services under contractual arrangements. Most of its sales included consumable goods such as gloves, dressings, syringes, and needles.
Owen and Minor was a provider of value-added services to its customers. It was also a provider of services designed in streamlining the supply chain such as inventory management, activity-based pricing, consultancy, and services outsourcing. To achieve its goals in offering these services on a nationwide basis Owen and Minor launched a merger in the late 1990s.
Even with the customers paying a cost-plus fee Michael Stephanie the Owen and Minor cost manager wanted to use the activity-based pricing system. However, his hope of finding a truly innovative partner to explore the full potential of activity-based pricing had thus been in vain.
Problems encountered
The entire supply system tried to maintain consistent and accurate data, but errors were frequent and costly. Manufacturers changed product size, description, units of measure on items and prices to give timely notice to distributors and / or providers. Providers and manufacturers representatives could agree to rice outside the standard contract and fail to notify the distributor. Rounding errors occurred in the low unit of measure environment because GPO contracts had the basis on bulk UOM.
Problem with cost-plus pricing to Owen and Minor
The potential for customers to engage in ‘cherry-picking forms a cost-saving practice that providers or GPOs would contract with the distributor. It delivers low-cost items while ordering high-ticket products directly through the manufacturer thus avoiding the higher cost-plus fee on the expensive products. This practice left the distributor with low margin items in their contract and placed the responsibility for high-value items with the provider hospital, which often did not have an appropriate inventory control system or storage space. This, in turn, led to high –cost products becoming obsolete, expired, lost, and damaged.
The problem of activity-based pricing to VM
Virginia Mason was complaining of the increased cost of its procurement system. The new TSCC (total supply chain cost) contract laid so much cost on VM. VM was used to cost-plus pricing that had hidden costs. Activity-based cost exposed against costs, for instance, the cab fee that made VM feel that the system was inefficient.
Operations analysis
Most notably, operational analysis is a form of analysis that is performed to ensure that a company’s operations are in line with the strategic plan. The operational analysis examines the current performance. Moreover, it compares it with predetermined performance parameters, company goals, or objectives. The operational analysis helps a company to identify its strengths, weakness, and opportunities. When VM is compared with other hospitals that get supplies from Owen and Minor.
When compared with northwest hospitals because of quality measures, defects and reworks VM scores between 92% and 96 % and Owen and Minor are working to improve this to achieve 100% or zero defects. Other hospitals in northwest scored 70%, and as Mene explained they are working to improve this to 90%. These hospitals had had problems with the new system, but they are adapting to it very quickly and have agreed to sign a contract with Owen and Minor for supplies. Therefore, from this comparison, VM is far much better as compared to other hospitals.
Strategic analysis
Customer satisfaction is a key element in any supply system. This includes the speed at which customer orders processing inventory and customer service are done.
Owen and Minor had begun to use TSCC pricing in June 2006, where both TSCC and cost-plus systems were to run concurrently to enable comparison on savings made from the two systems. Owen and Minor want to operate by Reducing inventories, improve on product variability, lower operating costs, and achieve customer satisfaction with this Owen and Minor will achieve an effective supply chain management.
Owen and Minor discovered that costs to forecast purchase, store, handle and maintain computer transaction records were much greater with the cost-plus pricing as compared to TSCC. The main problem was that people were afraid of something new. Most of the people did not understand the model, for instance, the lawyers involved in signing the contract did not understand that the contract was a mutual agreement between the VM and M&O.
The main mistake done by VM is putting all the blame on Owen and Minor. It was done without considering they did many errors in the system by no signing the contract such that they did not get the correct pricing, VM also made an error of not communicating their needs, so Owen and Minor did not have the demanded products at hand.
Conclusion
The decisions on supply chain management are both long-term and short-term. Making of decisions deal with important operational and strategic policies and involves overall design and the supply chain system. This affects the day-to-day activity of an organization and needs to be handled with a lot of care. Owen and Minor should focus on achieving customer satisfaction and cost-efficiency. Furthermore, customer service, effective transport considerations, and appropriate pricing must be understood by both parties in order to build an efficient supply chain.
VM should understand that the pricing system could change anytime and unexpectedly hence their system should be flexible to adapt to these changes.
Action Plan
The supply company should consider using the lean supply system, and all levels of supply will involve reducing the cost of operation; this will require the supply chain to reduce the number of resources involved in the supply system. This includes reducing the inventory, warehouses, transportation trucks, and labor. The new supply system should be designed in such a way that it will be able to sustain itself in the end.
Going lean is an evolutional process; it takes organizational commitment and time to see the benefits. Therefore, VM should be patient and enjoy long term benefits. VM needs to identify defects in its material management and avoid blaming it all on Owen and Minor.