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. O