Part I: Policy and economic issues Part II: Pharmaceutical management Part III: Management support systems Selection Procurement 18 Managing procurement 19 Quality assurance for pharmaceuticals 20 Quantifying pharmaceutical requirements 21 Managing the tender process Distribution Use chapter 18 Managing procurement Summary 18.2 illustrations 18.1 Introduction 18.3 Figure 18-1 Procurement cycle 18.4 Figure 18-2 Impact of hidden cost on total cost 18.6 18.2 The procurement cycle 18.3 Figure 18-3 Comparison of procurement indicator results 18.3 Factors influencing pharmaceutical prices and total for six countries 18.17 costs 18.3 Unit prices • Reorder frequency and the total cost of box purchasing • Visible and hidden costs Box 18-1 Good pharmaceutical procurement 18.4 Overview of procurement methods 18.6 principles 18.12 18.5 Good pharmaceutical procurement country studies practices 18.10 CS 18-1 Hidden costs in the procurement process: examples Reliable payment and good financial management • from nine countries 18.7 Procurement by generic name (International Nonproprietary CS 18-2 Pooled procurement through the Organisation Name) • Procurement limited to essential medicines list of Eastern Caribbean States/Pharmaceutical or formulary list • Increasing procurement volume by Procurement Service 18.8 aggregating demand • Formal supplier qualification and CS 18-3 Assessing regional collaboration of procurement monitoring • Competitive procurement • Monopsony activities to increase access to HIV/AIDS medicines and pooled procurement • Order quantities based on and commodities in sub-Saharan Africa 18.10 reliable estimate of actual need • Transparency and written procedures • Separation of key functions • Product quality assurance program • Annual audit with published results • Regular reporting on procurement performance 18.6 Organization and management of the procurement and distribution functions 18.16 Supervision by senior management • Responsibilities in the procurement process • Procurement office staffing and management systems 18.7 Financial sustainability 18.21 Sources of funds for pharmaceutical procurement • Access to foreign currency exchange • Reliable payment mechanism • Financial support for the procurement office Glossary 18.22 Assessment guide 18.23 References and further readings 18.26 copyright © management sciences for health 2012 18.2 procUREMENT SUMMARY This chapter focuses primarily on best practices for • Limitation of procurement to the essential medi- health systems that manage procurement in-house. An cines list effective procurement process seeks to ensure the avail- • Increasing procurement volume by aggregating ability of the right medicines in the right quantities, at demand reasonable prices, and at recognized standards of qual- • Formal supplier qualification and monitoring ity. Pharmaceuticals may be acquired through purchase, • Competitive procurement donation, or manufacture. • Monopsony commitment • Order quantities based on reliable estimate of fore- The procurement cycle involves the following steps— casted actual need • Mobilize procurement team and key players • Transparency and written procedures • Review medicine selections • Separation of key functions • Specify quality standards • Product quality assurance program • Determine quantities needed • Annual audit with published results • Reconcile needs and funds • Regular reporting of procurement performance • Choose procurement method indicators • Locate and select suppliers As described in Chapter 8, different systems for manag- • Specify contract terms ing supply chains for public health systems include the • Monitor order status central stores system, autonomous supply agency system, • Receive and check medicines direct delivery system, primary distributor system, pri- • Make payment vate pharmacy system, or often a mix of these systems. • Distribute medicines All involve pharmaceutical procurement. • Collect consumption information Procurement may proceed under different purchasing The major procurement methods used by health systems models—annual purchasing, scheduled purchasing, or are open tender, restricted tender, competitive negotia- perpetual purchasing. Different combinations of these tion, and direct procurement, which vary with respect to models may be used at different levels of the system or for their effect on price, delivery times, and workload of the different medicines. procurement office. In recent years, some public-sector procurement systems (particularly in Latin America) Effective procurement is a mechanism for managing have introduced e-procurement (Internet tendering) the buyer-seller relationship to ensure transparent and and more specifically the “reverse auction” approach, ethical transactions that result in the buyer receiving the although these methods have not been widely used to correct goods and the seller receiving timely payment. A procure pharmaceuticals. Funding sources (governments collaborative process is needed between the procurement and donors) often dictate which procurement method office, with requirements for trained staff and appro- to use. Finally, some developing-country health systems priate management systems, and technical and policy purchase medicines and health commodities directly committees, which may make final decisions as to which from international procurement agents, many of which medicines to buy, in what quantities, and from which are based in Europe. suppliers. Key principles of good pharmaceutical procurement for Key considerations for financial sustainability include health systems include— reliable access to funds for pharmaceutical purchase and support of the procurement office, access to foreign cur- • Reliable payment and good financial management rency exchange for international procurement, and reli- • Procurement by generic name able payment mechanisms. • Clear specification of a recognized pharmaceutical quality standard 18 / Managing procurement 18.3 18.1 Introduction procurement have had mixed results, although there are some long-standing regional programs that have achieved The pharmaceutical procurement system is a major deter- some successes. At the global level, United Nations agen- minant of pharmaceutical availability and total pharmaceu- cies such as UNICEF, United Nations Population Fund, tical costs. In most developing countries, pharmaceutical and United Nations Development Programme have long purchases represent the single largest health expenditure functioned as pooled procurement systems serving their after personnel costs. Pharmaceuticals also consume the country programs. In recent years, a number of new global major share of health-related foreign currency exchange. procurement mechanisms have emerged, such as the An effective procurement process should— Stop TB Global Drug Facility, the U.S. President’s Plan for Emergency AIDS Relief (PEPFAR)–funded Supply Chain • Seek to manage the buyer-seller relationship in a trans- Management System (SCMS), and the Global Fund to Fight parent and ethical manner AIDS, Tuberculosis and Malaria’s voluntary pooled pro- • Procure the right medicines in the right quantities curement system. • Obtain the lowest practical purchase price Although the procurement chapters in this manual are • Ensure that all pharmaceuticals procured meet recog- written primarily with public-sector procurement programs nized standards of quality in mind, the principles and procedures can be applied to • Arrange timely delivery to avoid shortages and stock- either public or private procurement at any level, from a outs rural aid post to a national health program. The details of • Ensure supplier reliability with respect to service and procurement at various levels may be slightly different, but quality the basic steps are the same. • Set the purchasing schedule, formulas for order quan- tities, and safety stock levels to achieve the lowest total cost of purchasing at each level of the system 18.2 The procurement cycle • Achieve these objectives in the most efficient manner possible The procurement cycle includes most of the decisions and actions that determine the specific medicine quantities Given the impact of procurement activities on the opera- obtained, prices paid, and quality of medicines received. tion and effectiveness of health services, it is essential that Procurement is defined here as the process of purchasing these activities be performed by competent staff using sound supplies directly from national or multinational private or procedures, working in adequate offices with good commu- public suppliers; purchasing through global agencies and nications, and with access to reliable inventory and con- procurement mechanisms or regional procurement sys- sumption information. Good procurement management tems; or purchasing from international procurement agents. also demands medical, pharmaceutical, managerial, finan- These sources may be used individually or in combination to cial, and often political expertise. meet the entire range of pharmaceutical needs. Some developing countries have relatively successful Steps in the procurement cycle are illustrated in Figure public-sector procurement programs, but in many coun- 18-1 and discussed in Chapters 9–15 and 18–21. tries, pharmaceutical procurement continues to be less suc- cessful, in spite of extensive reform efforts and substantial financial assistance from aid agencies. 18.3 Factors influencing pharmaceutical When a health system sets up a centrally managed phar- prices