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Supply Chain Partners: Virginia Mason and Owens & Minor (A) (Abridged) Case Solution
The objective of the total supply chain cost programme was to minimise the supply chain cost between Virginia Mason and Owens & Minor, which was developed by Virginia Mason in collaboration with the O & M in 2005. It was designed in such a way that the result would activity based costing and elimination of the legacy cost-plus pricing method. The major cost driver in the value chain that did not account for by the industry was stock keeping units. These costs take into account the inventory holding cost, interest on inventory, occupancy cost, storing cost and overhead cost. The cost changes with the number of SKU’s. The objective was to reduce the SKU and to utilise the already available SKU’s.
Following questions are answered in this case study solution
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What is your evaluation of the Total Supply Chain Cost (TSCC) program developed by Owens & Minor and Virginia Mason?
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What are the advantages and disadvantages of cost-plus pricing relative to the TSCC pricing program?
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How does Virginia Mason’s lean philosophy affect the partnership?
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What changes to the TSCC contract would you propose?
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Below are VM’s monthly activity levels and activity rates for July 2007 and July 2008.
Case Analysis for Supply Chain Partners: Virginia Mason and Owens & Minor (A) (Abridged)
2. What are the advantages and disadvantages of cost-plus pricing relative to the TSCC pricing program?
• Advantages
The biggest advantage is the achievement of desired revenues based on the cost and adding the profit margin to it. Also because of its simplicity is commonly used among the companies to come up with the prices. Moreover, the usage of the company’s data to find out the prices allow the company to find the deficiencies in the operations and the reason for the increase in the expenses.
• Disadvantages
The biggest disadvantage is that the overheads added are ignored because of the margins are constant. The higher product cost can result in a price increase in the future. For the distributors, it has the disadvantage of trading the low-end products and the high end product that might expire. The distributors are not provided with any guarantee and they depend on the contract between the manufacturer and the consumer.
3. How does Virginia Mason’s lean philosophy affect the partnership?
This lean philosophy of VM is the main reason that total supply chain cost system is refined. The inefficiencies which resulted in greater cost were identified. This system exposed the loop holes in the supply chain. The result was that efficiency rating was boosted and other corporation starting imitating their technique.
4. What changes to the TSCC contract would you propose?
The total supply chain cost model was very complicated and it required a lot of effort to explain how it works. Thus, it was preferred by most accountants to use a simple cost-plus method. Therefore, it is required to make this model to incorporate a fewer standard of operations using an iterative process based on the trial and error method. This refined model total supply chain cost might allow companies to incur a minimum initial cost. The focus needs to be shifted from only cost to the profits. There should be more emphasis on return on equity.
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