The Proposal to IDEAL

Activity- based Pricing

Valderas, Petrella and Stefanic worked togather to make the leap
from activity- based costing to activity- based pricing (ABP).

•If customer could see how their activity levels affected their costs,
customer would want to become more efficient.

•Better customer efficiency saved O&M money in:

–Processing
–Delivery
–Product handling
Continued…
• Activity-based pricing system would align fees
with services, relieving O&M of the burden of
unprofitable customer.

• O&M needed to eliminate the cost- plus

system and offer what was essentially cost-plus
zero with a monthly fees based on activity level.
•But no one in the industry had done such a thing before
Hence…

• Decision is taken to offer both ABP and

cost –plus , in idea to show O&M flexibility
in offering two different approaches to
distribution.
 Bidding process
• Earlier proposed idea-
– Increase cost plus percentage + small flat
activity fee.
Note- But this wasn’t related to any thing
• Implemented idea-
– Simple matrix based on two major cost
drivers:
1. Number of purchase orders/month
( tied to fixed administrative fees )
2. Number of lines per purchase order
(tied to our variable cost i.e the number of times a
worker had to go to a product rack)
Concept behind…..
• It could actually affect O&M service
delivery fee depending on the type and
amount of service requested, and
frequency and size of each request.
• Sharing of distribution center’s financial
data with customers, So that transparency
could be maintained.
 Barriers in implementations.
• Initially Ideal had several doubts regarding new fee
structure.
• Major Ideal’s internal system, buying group and
healthcare programs were geared for cost-plus. To
implement activity-based pricing ideal would have to
modify its budgets- a time consuming task.
• Transfer pricing was also an issue. Ideal most hospitals
used cost- plus to assign transfer price.
• Employees may not change their behavior, they way
they purchased, stored and used supplies.
• Technology barriers.