Case | HBS Case Collection | April 2009 (Revised June 2010)

Supply Chain Partners: Virginia Mason and Owens & Minor (A)

by V.G. Narayanan and Lisa Brem

Abstract

Virginia Mason Medical Center (VM) hired Owens & Minor (O&M) as its alpha vendor for medical/surgical supplies in 2004. By 2005, O&M was performing Just-in-Time and Low Unit of Measure services for VM, but they believed the pricing model in the industry was outdated. VM and O&M partnered to create the Total Supply Chain Cost (TSCC) pricing program, an activity-based model that assigned all the cost drivers of distribution and inventory handling to VM, but also assured O&M of a profit. The TSCC incented VM to streamline its distribution activities, since these would directly impact its fee. After beta testing the TSCC for one year, VM's Daniel Borunda and O&M's Michael Stefanic believed that TSCC was a better and more cost-effective pricing model, but could they convince their companies to continue to invest in TSCC?

Keywords: Activity Based Costing and Management; Price; Distribution; Supply Chain Management; Medical Devices and Supplies Industry;

Format: Print 27 pages EducatorsPurchase

Citation:

Narayanan, V.G., and Lisa Brem. "Supply Chain Partners: Virginia Mason and Owens & Minor (A)." Harvard Business School Case 109-076, April 2009. (Revised June 2010.)

Related Work

  1. Case | HBS Case Collection | April 2010 (Revised September 2011)

    Supply Chain Partners: Virginia Mason and Owens & Minor (A) (Abridged)

    V.G. Narayanan and Lisa Brem

    Owens & Minor (O&M) performed lean inventory services for Virginia Mason (VM) as its Alpha Vendor, but the outdated industry pricing model created perverse incentives and could not capture O&M's costs. Together, O&M and VM created an activity-based pricing model: Total Supply Chain Costs (TSCC), which incented both companies to be more efficient and to streamline their distribution activities. After beta testing the TSCC for one year, VM's Daniel Borunda and O&M's Michael Stefanic believed that TSCC was a better and more cost-effective pricing model, but could they convince their companies to continue to invest in TSCC?

    Keywords: Supply Chain Management; Partners and Partnerships; Activity Based Costing and Management; Business Model; Non-Governmental Organizations; Nonprofit Organizations; Motivation and Incentives; Asset Pricing; Cost Accounting; Fair Value Accounting; Medical Devices and Supplies Industry;

    Citation:

    Narayanan, V.G., and Lisa Brem. "Supply Chain Partners: Virginia Mason and Owens & Minor (A) (Abridged)." Harvard Business School Case 110-063, April 2010. (Revised September 2011.)  View Details
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About the Author

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V.G. Narayanan
Thomas D. Casserly, Jr. Professor of Business Administration
Chair, MBA Elective Curriculum
Accounting and Management

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