College of Medicine
DRUG AND MEDICAL SUPPLIES
MANAGEMENT II
MANAGING PROCUREMENT 1
Felix Khuluza
2
OBJECTIVES
1. Describe the purpose of effective
procurement.
2. Describe the procurement process
3. Explain factors influencing pharmaceutical
prices and total costs
4. Describe procurement methods
5. Describe good procurement practices
(GPC)
6. Explain principles of drug donation
7. Describe the procurement process in
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Malawi
Drug Procurement
• Management support systems
– hold the cycle together
• Policy
– guide to action
• Legal framework-
– Instrument used to control Pharmaceutical
activities
4
Procurement
Definition
• The process of acquiring supplies through
purchase, donation or manufacture from
different sources individually or in
combination to meet the entire range of drug
needs.
• Process of purchasing supplies directly from
national or multinational private or public
suppliers; purchasing through global
agencies and regional procurement systems
or purchasing from international 5
procurement agents.
Sources of Drugs and other
Medical Supplies
• Primary
‒ Manufacturers
• Secondary
‒ order directly from manufacturer
‒ E.g. UNIPAC\UNICEF, IDA, ECHO, exporters and
wholesalers
• Tertiary
‒ Procurement agents for programs e.g. CMS (for EDP)
‒ Get their supplies from primary or secondary sources
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Purpose of effective procurement
process
1. Seek to manage the buyer-seller
relationship in a transparent and ethical
manner
2. Procure the right medicines in the right
quantities
3. Obtain the lowest practical purchase
price
4. Ensure that all pharmaceuticals procured
meet recognized standards of quality
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Purpose of effective procurement
process
5. Arrange timely delivery to avoid
shortages and stock outs
6. Ensure supplier reliability with respect to
service and quality
7. Set the purchasing schedule, formula for
order quantity and safety stock levels to
achieve the lowest total cost of
purchasing at each level of the system.
8. Achieve these objectives in the most
efficient manner possible 8
Steps in Procurement Cycle
Review Determine
Drug Quantities
Collect Selection Needed Reconcile
Consumption Needs and
Information Funds
Choose
Distribute
Procurement
Dugs Procurement cycle Method
Locate
Make And Select
Payment Suppliers
Review Specify
And Monitor Contract
Check Drugs Order Terms
status 9
Factors influencing Drug Price and
Total Cost
Unit price
‒ Type (generic), quantities and quality
‒ Number of suppliers contacted
‒ Increasing competition among suppliers and
products decreases prices.
‒ The “rule of five” in pharmaceutical pricing says
that in general the lowest competitive prices
are available when five or more generic
alternatives for a particular product are available
or when in tender, there are at least five bids per
item. 10
These factors can be influenced by
–Government policies on
registration,
–Licensing for manufacturing and
distribution
–Authority to prescribe and dispense
–Generic substitution and
–Price control
11
Reorder frequency and total cost of
purchasing
1. Pharmaceutical acquisition prices are
only part of the total cost of
pharmaceutical purchasing
2. Inventory holding costs,
3. Purchasing system operational costs,
4. Shortage (stock out) costs
12
Total purchasing costs can be minimized by
choosing the optimal reorder frequency model
as defined by the:
• Interval between orders-options annual,
scheduled and perpetual.
• Safety stock targets-vary due to lead
times, patterns of consumption and
service level objectives
• Formula used for calculating the order
quantity: fixed or variable quantity
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• Visible and Hidden costs
‒ Total cost = Visible + Hidden Costs
‒ Visible cost
‒ Acquisition + Running cost
‒ Hidden Cost
‒ Cost of running out of stock
14
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Hidden costs associated with poor
supplier performance or procurement
office:
1. Increased acquisition costs due to
emergency procurement
2. Replacement costs when goods are lost
3. Replacement costs for short shipments,
incorrect concentrations, wrong dosages
4. Storage, port charges and admin expenses
5. Health and economic costs of stock outs
from delay
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Procurement Methods
1. Open Tender
– any supplier
2. Restricted Tender (Closed Bid)
– pre-qualified supplier
3. E-procurement and reversed auction
4. Competitive Negotiation
5. International or local shopping
6. Direct Procurement
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1. Open tender
• A for procedure by which quotes are
invited from any suppliers representative
on local or worldwide basis,
• subject to the terms and conditions
specified in the tender invitation
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2. Restricted tender
• Interested suppliers must be approved in
advance,
• Often through approved formal
prequalification process that considers
– adherence to good manufacturing practices,
– past supplier performance,
– financial viability and related factors
• The prequalification process is often open
to any supplier that wishes to apply.
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3. E-procurement and reversed
auction
• E-procurement is internet-based tendering.
• In reverse auction approach ( a variation of
restricted tendering),
• Qualified bidders submit an initial offer;
• The lowest offer received is posted publicly
without naming the bidder after the first
round;
• Then the qualified bidders are invited to
offer lower prices than the posted low price.
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3. E-procurement and reversed
auction
• The process continues round-by-round
until no more prices are submitted;
• Then the lowest posted bid wins the
contract (used in Latin America)
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4. Competitive negotiation
• The buyer approaches a limited number of
selected suppliers (typically at least three)
for price quotations
• Buyers may bargain with these suppliers
to achieve specific price or service
arrangements
• Private, public-sector forbidden from
negotiating with suppliers
• E.g. UNICEF, Clinton Foundation have
successfully negotiated for ARV medicines
with manufacturers. 22
5. International or local
shopping
• As with competitive negotiation, the buyer
obtains at least three quotes from
suppliers;
• However, bargaining of any kind are
generally not permitted
23
6. Direct Procurement
• The simplest but most expensive method
• Method of procurement is direct purchase
from single supplier’
• Either at the quoted list price or
• At negotiated standard price discount off
the list price
• For single-source medicines (patented),
the buyer has three choices: negotiated,
direct procurement or select alternative
product 24
Comparison of purchasing methods
Purchasing Effect on Delivery Workload Conditions Favoring Use
Method Price Times
Open tender Very Long Very high Many reputable suppliers are
favorable available
May be necessary at the
beginning of the program to open
supply channels
Restricted Favorable Moderate Moderate Only a few reputable suppliers
tender are available
Products for which
bioequivalence, sterility, precise
formulation are important
Large-volume, standard items for
which all reliable suppliers are
known
Negotiated Moderately Short High Bulk buying of single-source
procurement favorable initially, low drugs
later Special terms or specifications
are required by the buyer
Direct Unfavorable Very short Very low Low-price, small-volume items
procurement Emergency purchases
Items from international nonprofit
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groups
POOLED PROCUREMENT SYSTEMS
• At global level, UN agencies such as
UNICEF have long operated pooled
procurement systems primarily serving
their own country programs.
• In recent years, Global pooled
procurement mechanisms have
emerged along with the large increase in
funding for procurement through financing
mechanisms e.g. Global fund, UNITAID,
PEPFAR. 26
Three types of Global
procurement mechanisms:
1. Integrated “local-to-global” supply chain
systems
• Work directly with countries to
– coordinate demand and manage tenders and
competitive negotiations to establish best prices
– Manage global freight and logistics systems to
coordinate distribution
– Operate in-house product quality assurance programs
– UNICEF system is the best example
– SCMS now provides HIV-related commodities to
countries that receive PEPFAR funding.
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2. Donor-supported global
procurement agencies
• Stop TB/WHO Global Drug Facility
– Purchases and distributes both 1st line
and 2nd line TB medicines and
– The Global Fund’s voluntary pooled
procurement mechanism,
– Which purchases and delivers
medicines and other health commodities
Global fund principal recipients
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3. Non-profit procurement agencies
• Purchase and distribute medicines and
other health commodities to developing
countries.
• Often but not always donor funded e.g.
IDA foundation, MissionPharma.
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CHALLENGES OF POOLED PROCUREMENT
1. Lack of political commitment
2. Lack of harmonization of several procurement
aspects. These include laws, regulations and
operational processes related to-
– Medicines regulation and registration of
products
– Procurement processes and local preference
issues
– Financial mechanisms and payment to
suppliers
– Standard currency
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FOUR MODELS OF PROCUREMENT
COLLABORATION
1. Informed buying
2. Coordinated informed buying
3. Group contracting
4. Central contracting and
purchasing
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FOUR MODELS OF PROCUREMENT
COLLABORATION
• Regional pooled procurement does not
have to start with a full-fledged pooled
procurement system
• The first step might be information sharing
between national and subnational
procurement agencies
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1. Informed buying
• Member countries share information
about prices and suppliers
• Countries conduct procurement
individually.
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2. Coordinated informed buying
• Member countries undertake joint market
research,
• Share supplier performance
information and monitor prices
• Countries conduct procurement
individually
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3. Group contracting
• Member countries jointly negotiate prices
and select suppliers
• Members countries agree to purchase
from selected suppliers
• Countries conduct purchasing individually
• Pooled procurement
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4. Central contracting and purchasing
• Member countries jointly conduct tenders
and awards contracts through an
organization acting on their behalf.
• Central buying unit manages the purchase
on behalf of the countries
• Pooled procurement
36
Good Pharmaceutical Procurement
Practices (GPPP)
Involves procurement :
• By Generic name
• Limited to essential medicines /formulary
list
• In bulk
• Following formal qualification and
monitoring of supplier
37
Good Pharmaceutical Procurement
Practices (GPPP)
Involves procurement:
• On competitive tender
• with Sole-source commitment
• Based on reliable actual needs estimated
‒ Consumption or morbidity data, also V.E.N
• With reliable payment and good financial
management
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Good Pharmaceutical Procurement
Practices (GPPP)
Involves procurement with:
• Transparency and written Procedures
• Separation of key functions
• Product quality assurance program
• Annual audit with published results
• Regular reporting on procurement
performance
‒ indicators to asses the performance of the
system
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Reliable payment and good
financial management
• Single greatest influence on bringing down
pharmaceutical prices down and low
• Decentralized financial mechanisms
• Establish financial mechanisms with
separate pharmaceutical accounts
40
Procurement by generic name
• Formally known as International Non
proprietary name (INN)
• Standard for purchasing pharmaceuticals
• Reduction in prices e.g. ARV
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Procurement limited to essential
medicines list or formulary list
• Defines which medicines will be purchased
• Effective ways to control procurement costs
• Reduces inventory holding costs
• Avoid generic duplication
• Select safe, effective, cost-effective
medicines
• Use formal approval procedures for
procurement of non-listed medicines
42
Procurement in large volume
• Concentrate purchase on limited list to
increase quantities, reduce prices
• Specify divided deliveries
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Formal supplier qualification and monitoring
• Use formal supplier qualification based on
pharmaceutical quality, service reliability,
and financial viability
• Approve suppliers before tendering or
after tendering
• Use a formal monitoring system to ensure
continued supplier qualification
44
Competitive procurement
• Use competitive bidding on all but very
small or emergency purchases for best
prices
• Allow only prequalified suppliers to
compete in restrictive tenders
• Evaluate suppliers after submission of bids
in open tenders
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Monopsony commitment
• Monopsony refers to a situation involving
one buyer with many sellers
• This is the cornerstone of pooled
procurement system-the group members
act as one buyer
• Political will and commitment of member
governments-important in multi country
pooled procurement system
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Monopsony commitment
• Monopsony commitment should be
monitored and enforced
• Once members have committed to
purchase a certain percentage or quantity,
they are expected to honor that
commitment.
• Decentralization in some countries has
complicated the procurement issue.
47
Order quantities based on
reliable estimate of actual need
• Accurate estimates of procurement
volume are needed to avoid
– Stock outs of some pharmaceuticals and
– Overstocks of others in case of guaranteed
quantity contracts
• Suppliers compete for an estimated-
quantity supply contract if they believe that
the quantities specified are reasonably
accurate
• Based on accurate past consumption data48
Order quantities based on
reliable estimate of actual need
• When funds are limited use following 3 tools
to help with prioritization:
• VEN (Vital, Essential, Nonessential)
analysis.
– Classifies medicines in two or three categories
– According to how critical the medicines are for
treating commonly encountered diseases
– Priority is given to vital medicines
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Therapeutic category analysis
• Applies to economic analysis of
therapeutic choices
• To help select the best medicines for
treating common diseases while
• Minimizing overall cost to the health
system
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ABC analysis
• Assembles data from recent or projected
procurements
• To determine where procurement money
has actually been spent,
• Allowing managers to focus first on high-
cost and high-use items
• When considering ways to reduce
procurement costs
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Transparency and written
procedures
• The appearance and reality of open and fair
competition are essential to attract best
suppliers and best prices
• Fair competition can be achieved by maintaining
transparent tender procedures:
• Formal written procedures should be strictly
followed throughout the tender, and
• Formal explicit criteria should be used to make
procurement decisions
• When tender process is secretive, it tends to be
perceived as corrupt or unfair. 52
Separation of key functions
• These functions should be held by
different individuals, committees, experts
– Selection of medicines
– Quantification of pharmaceutical requirements
– Preparation of product specifications and
quality standards
– Approval of suppliers (pre/post qualification)
– Adjudication
– Award tender
• Contributes to professionalism and
accountability 53
Product quality assurance
system
• Three categories of procedures to
establish an effective quality assurance
system:
– Ensuring that only medicine products meet
current standards for quality are bought
– Verifying the shipped goods meet the
specifications
– Monitoring and maintaining the quality of
pharmaceuticals from receipt to consumption
by patient
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Annual audit with published results
• At least once a year, the procurement unit
should undergo a financial and
procurement audit, which is
• A formal examination and verification of
books and records by accountants who
specialize in financial audit procedures
• Internal audits are done by auditors from
within government
• External audits are done by auditors from
outside, less bias, more credible even if
process and findings are the same. 55
Regular reporting on procurement
performance
• Using standard indicators to monitor
performance and program implementation
• Significantly improves pharmaceutical
management
• Standard indicators allow comparison of
actual performance, targets, over time
• Some indicators use a standard list of ten to
twenty indicator medicines aka tracer
medicines
• Report key procurement performance
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indicators at least annually
Organisation and Management of The
Procurement System
Five different models used by Govt to supply drugs
to H/services viz:
1. Central stores system- CMS
2. Autonomous supply agency system
‒ Bulk procurement, storage, & distribution managed by
an autonomous or semi-autonomous agency
‒ Not directly managed by government
3. Direct delivery system
‒ Price & suppliers for each item is determined
by tender
‒ Items or drugs delivered to Individual facilities
4. Prime vendor system (Primary distributor
system)
‒ Drug price negotiated with suppliers
‒ Storage, distribution by private vendor/entity
(separate contract)
5. Fully private supply
‒ Private p’cies with or without reimbursement
• The concept of Pooled Procurement is the
most impo point in most models discussed
above.
Adv. Of pooled/group
purchasing
Economies of scale reduce the cost of
managing procurement
Easier to sustain effective program with only
one procurement to staff & manage
Promotes reduced prices
Systems of finance & payment may be more
readily managed to encourage suppliers to
compete for contracts & to perform
appropriately
Disadv. Of pooled/group
purchasing
• Corruption
• Lack of input from participating facilities
will fail to meet user’s needs
• If it does not function properly, all group
members suffer
Responsibilities in the Procurement Process
1. Procurement Office
‒ Collates info on drug needs
‒ Develops a proposed procurement list
‒ Monitors performance of suppliers.
‒ NB: The staff of the office should not have voice in
determination of products which are to be purchased and which
supplier is given a contract
2. Tender Board
‒ Manages the tendering process
‒ Decides or recommends suppliers
3. Drug selection committee
‒ Expert evaluate products
4. Procurement/tender committee
‒ Final decision maker on drug selection, procurement
qty, supplier selection, product specifications,
packaging and labelling and quality assurance.
Management
• Effective procurement requires
collaboration between the Procurement
office and the Technical and Policy
committees
Supervision by Senior
Management
• There is need for political commitment
Financial Sustainability
Key considerations:
• Sources of funds
• Access to foreign exchange
‒ International Procurement
• Reliable payment mechanism
Financial Sustainability
Sources of funds
• Government financing
• User fees
• Health insurance
• Community co-financing
– Village health funds
• Donor support
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PROCUREMENT AGENTS
IN MALAWI
Procurement of drugs and
medical supplies
• Procurement of health supplies for
public health sector is responsibility of
MOH
• Central Medical Stores-Trust is the
institution charged with that role
• Depending on funding source
procurement role is outsourced
Essential medicines and
supplies
• SWAp funded mainly. Procured by CMS
with oversight from procurement agent
(Charles Kendall)
• Bulk of supplies procured through
international competitive bidding (ICB)
• Also some local procurement for ad hoc
needs from local suppliers
• Also some procurement done at district
and facility levels- is being discontinued
Procurement agents
• UNICEF for procurement of supplies
funded by GFATM for HIV ,TB and malaria
• UNICEF for GAVI financed supplies for
immunization program
• USAID/DELIVER for PMI-malaria drugs
(ACTs)
• UNICEF for PMTCT supplies funded by
UNITAID
Planning for procurement
• Regardless of procurement agent planning
undertaken by MOH (programs)
• Warehousing and distribution arrangements
are varied. CMS for the bulk of supplies
• HIV supplies (ARVs-direct distribution by
UNICEF and other supplies through CMS)
• Immunisation supplies managed by EPI
program
• Malaria supplies- managed through CMS but
support from development partners e.g.
MSH/SPS and USAID/DELIVER
