Supply Chain Partners: Virginia Mason and Owens & Minor Harvard Case Solution & Analysis


Virginia Mason is private non for profit organization which is offering medical care facilities in western Washington. The Virginia Mason is operating a clinic network with 336 licensed beds and the numbers of physicians who are working in the Virginia Manson are 400. Although it is a non for profit organization but the Virginia Manson earned 665 million dollars revenue in the year 2007.

VM is practicing a Toyota Production system in order to be the market leader and quality leader in the health care industry. The VM employees works in a team work and under the Toyota Production System they are working towards the improvements in processes and trying to reduce defects at zero level.

Evaluation of the Total Supply Chain Cost

O&M the Alpha vendor of the VM is using currently cost plus pricing basis for its clients but the management of the VM suggested O&M to apply Total Supply Chain Cost model in order to estimates the cost related to VM activities. It is expected that the supply chain cost that occurs due to the inefficient practices will not be traced in a cost plus pricing basis but it will be traced easily by applying Total Supply Chain Cost model.

The Total Supply Chain helps to identify the areas which are under performing and decreasing the value of the organization. Therefore by identifying those areas and taking immediate action the organization efficiency could be enhanced. On the same way it helps to analyze those areas which are performing the well and adding value to the organizational efficiency therefore by identifying such areas and paying more attention, it will helps to sustain the position and make sure that the processes will run in a more efficient way than earlier.

Total Supply Chain Cost model removes the inefficiencies and defects from the operations and make the operations more beneficial for the organization, therefore it is expected that by applying this model it will help to reduce cost which occurs during wastes and defects which in turn will improve the profitability of the organization.

Advantages and Disadvantages of Cost-Plus Pricing Relative to the TSCC

Advantages with Respect to TSCC

Cost plus pricing model is a model in which companies adds the total value of the cost and add a specific percentage on the cost to earn its profit.  O&M is currently using cost plus pricing model against its clients and adding 7% margin on cost for its services. The biggest advantage of this system is that O&M can clearly estimates its expenditure and can earn its target profit of 7% by applying this rate on the cost. The cost plus pricing model is a very simple model and protects the management to falling in complexities and increasing the chances of error.

On the other hand in Total Supply Chain Costing model plenty of drivers involved to estimate the cost and overheads. Therefore by estimating the cost through cost drivers there is greater chances of error in total cost estimation and there is a probability that wrong cost drivers assigned to wrong cost pools which also leads to the wrong estimation of the cost. As compared to the cost plus pricing model TSCC is a very complex method to calculate the cost.

Due to the simplicity of the cost plus pricing model it is expected that the errors identify in that model immediately as compared to the complex Total Supply Chain Cost model therefore it is expected that in cost plus pricing model immediate actions could be taken in order to remove inefficiencies while TSCC immediate actions are not possible due to the complexity of the Total Supply Chain Cost system.Supply Chain Partners Virginia Mason and Owens & Minor Case Solution

Disadvantages with Respect to TSCC

The cost plus pricing model based on the historic cost analysis and adding simply margin into the cost therefore inefficiencies which present into the past figures will transfer to the future also but in the case of TSCC it identifies the reason of the cost and if there is any inefficiency present into the system it eliminates that element and provide better estimates for the future.

The cost plus pricing model does not take into account the strategies and actions of the competitors and does not strike for the improvement also whereas the TSCC accounts for the actions of the competitors and always strive for the zero defects which helps the organizations to attain competitive advantage over its competitors......................

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