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Supply Chain Partners

Virginia Mason &Owens & Minor








Deficiencies in the current cost plus margin model
For Customers
The base price is usually opaque
The margin added is always same irrespective of other costs
Higher product costs become the basis for the future increases.
Difficult to calculate the product cost because of complexities also
difficult to compare two similar products of different companies
For Distributors
Customers start cherry picking, buy high cost products from the
companies directly.
Distributors will end up selling low end products and expired high
end products.
Distributors at the mercy of contracts between manufacturers
and customers.
Total Supply Chain Costing
It is an activity based costing system rather than cost plus.
The biggest cost driver is the number of SKU-Stock keeping
units.
In the cost plus model customer charged a flat percentage
irrespective of number of SKU offered.
The cost of forecast ,purchase, store and handle changes
with the number of SKU handled
If a customer wants a unique SKU the entire carrying cost is
assigned to them.
The distributor would try to reduce the number of SKU and
make customers to buy from the existing one.
Customers are moved to the efficient suppliers
TSCC tries to reduce even invoicing cost by clubbing orders
Lean Philosophy of Virginia Mason:
It is actually VMs lean philosophy that helped both VM and O&M in
making improvements in TSCC. It helped them in identifying inefficiency
of the vendors which O&M was originally absorbing. TSCC exposed
deficiencies in supply chain. O&M have applied the quality measures,
defects and reworks methods which learned from VMs lean to other
customers. The efficiency ratings of O &M have gone up from 70% to
90. Other large organizations have started accepting the lean technique
which O&M successfully implemented with V&M. Knowledge is the key
value adds they have applied across supply chain.
Difficulties in implementing TSCC:
TSCC is highly complex and it is difficult to explain the model to lots of
people especially to accountants. They would prefer a simple cost plus
model because it has visible benefits. TSCC has to be explained using
simple examples like surgical gloves models or taxi fare models. Also
they need to explain SKU concept and more SKU mean higher costs.
Changes in TSCC models: TSCC may be beneficial to low end products
but high end products can become more expensive to the customers.
More activity based cost system means higher price to the end users.