The World Bank Institute in collaboration with

1. The World Bank Institute in collaboration with O’Hanlon Health Consulting, Tropical Health LLP, and University of California at San Francisco

2. SESSION 6 (Day 2)Using Markets to Strengthen Supply Chains for Essential MedicinesPrashant YadavWilliam Davidson Institute, University of Michigan The World Bank Institute in collaboration with O’Hanlon Health Consulting, Tropical Health LLP, and University of California at San Francisco

3. This session? You can expect three key takeaways • Basic introduction to supply chain management: concepts, tools, insights and lingo to deal with supply chain issues • Role of healthy markets in creating an effective supply chain for essential medicines • Examples and cases of market based supply chain improvement Caveats • We will strive for simplicity and attempt to boil messy supply chain phenomena down to some basic logical principles. On occasions the session will • require you to abstract from the immediate problem at hand • require you to think across industries and engage in cross industry learning

4. Will it be entertaining ?

5. Why worry about supply chains? • Supply chain: A system of organizations, people, technology, activities, information and resources involved in making a product reach the customer • Supply chains are the backbone of the health system- frequent stock-outs and high costs of commodity delivery can make health programs unsustainable • Supply chain also plays a crucial role in obtaining information about coverage, needs, and many other information sets crucial for planning • Supply chain management is a well developed scientific discipline • Supply chains are intrinsically suited to be run by market actors

6. Supply chains are a series of interconnected markets WHOLESALE NET MARKET SYSTEM RETAIL MARKET Supplies Retailer is buyer Retailer is seller Consumers Wholesalers RULES

7. Supply chains are a series of interconnected markets RETAIL MARKET WHOLESALE MARKET PRODUCT SUPPLIES RETAILER CONSUMER RETAILER WHOLESALER THE SELLER IN THIS MARKET… IS THE BUYER IN THIS MARKET…

8. Supply chains are a series of interconnected markets PRODUCTION MARKET WHOLESALE MARKET RETAIL MARKET D S S D SUPPLIES SUPPLIES D S

9. M4H Framework for the supply chain • Private Sector • Wholesalers • Distributors • Retail Pharmacies • Private insurance • Gov’t Functions • Gov’tRegulatory Authority • Reimbursement List/PBM • Gov’t procurement and distribution (CMS) PPD Supporting Functions RelatedServices Subsidy • Private Functions • Private sector supply chain • Information services Financing Functions Information Financing and Investing Informing and Communicating R&D Purchase • Civil Society • Patient advocacy groups • Other civil society orgs Quality Assurance Invest Infrastructure D S Essential Medicines Pharmaceutical Manufacturers End patients Setting & enforcing rules • Membership Orgs • Wholesalers association • Pharmacy association • Manufacturer’s association Standards Laws Pharmaceutical Regulatory Authority Regulations Informal Rules and Norms Rules

10. Pharmaceutical distribution structure in OECD* countries Prices negotiation *Exceptions include Sweden pre-2009 (discussed later) Payer Purchasing Private Sector Importers/ Distributors $$ Reimbursement Wholesalers Retail pharmacies Public and Private Hospitals Private market Patients

11. US pharmaceutical supply chain 3 major full line wholesalers control 80% of the market Approximately 57,490 pharmacies. 5-6 major national chains Once a day (or more) deliveries to each pharmacy Source: GAO Report 2006 & Yadav 2009 26% out-of-pocket expenditure on medicines

12. US pharmaceutical supply chain: financial flows Source: GAO Report 2006 Author’s analysis

13. US pharmaceutical supply chain: information flows Source: Yadav 2009

14. Spain pharmaceutical market: physical flows 106 wholesalers. Regional wholesalers (55 companies) command the largest part of the market share at 58%. Five big wholesalers control less than 40% Many wholesalers are pharmacy cooperatives Regulated margins Wholesale margin= 9.6% for drugs costing <€78.34 and a fixed fee for drugs exceeding that price Retail margin= 27.9% for drugs costing < € 91.63 and a fixed fee for drugs exceeding that price 21,000 community pharmacies. Deliveries to pharmacies are made 2-3 times a day from wholesalers. IT tool named BOT PLUS in every pharmacy Source: Yadav 2009

15. Government plays multiple supporting, financing and rule defining functions. Private actors manage wholesaling, distribution and retailing • Private Sector • Wholesalers • Distributors • Retail Pharmacies • Private insurance • Gov’t Functions • Gov’tRegulatory Authority • Reimbursement List/PBM • Gov’t procurement and distribution (CMS) PPD Supporting Functions RelatedServices Subsidy • Private Functions • Private sector supply chain • Information services Financing Functions Information Financing and Investing Informing and Communicating R&D Purchase • Civil Society • Patient advocacy groups • Other civil society orgs Quality Assurance Invest Infrastructure D S Essential Medicines Pharmaceutical Manufacturers End patients Setting & enforcing rules • Membership Orgs • Wholesalers association • Pharmacy association • Manufacturer’s association Standards Laws Pharmaceutical Regulatory Authority Regulations Informal Rules and Norms Rules

16. Pharmaceutical distribution structure in most developing countries Purchasing Procurement Private Sector Importers/ Distributors Central Medical Store Regional Medical Store Wholesalers Retail pharmacy Govt Health Facilities Government monopoly on large parts of the supply chain Patients Source: Yadav 2009

17. What drives this peculiarity? Government finances, procures and distributes Weak GovernmentAgencies carry out supporting functions Supporting Functions RelatedServices Financing Subsidy Financing Functions Information R&D Purchase Patient advocacy groups and other civil society orgs are non-existent Quality Assurance Invest Infrastructure D S Essential Medicines Pharmaceutical Manufacturers End patients Standards Laws Regulations Informal Rules and Norms Weak Government regulatory authority Weak rules of doing business Rules

18. Two needs for healthy market driven supply chains Purchasing Procurement Private Sector Importers/ Distributors Central Medical Store Regional Medical Store Wholesalers Private Dispensing Points Govt Health Facilities Patients

19. Two needs for healthy market driven supply chains Procurement • A healthy private market to provide supply chain services to the government run supply chain • Third party transport services • Warehousing and distribution services • Supply chain planning services • Information collection services Central Medical Store Regional Medical Store Govt Health Facilities Patients This session does not focus on this part. Please consult instructor for further information on this

20. Two needs for healthy market driven supply chains Purchasing A “healthy” private wholesaling, distribution and retail market Private Sector Importers/ Distributors Wholesalers Retail pharmacy Patients This session will focus mostly on this part.

21. Comparing the supply chains Source: Adapted from Yadav and Smith 2012

22. Private supply chain shortcomings Purchasing • High markups (wholesale and retail) • Inability to verify quality of product and services • Poor coverage/reach in rural remote regions (lack of equity in access) • Pharmacies do not stock “essential medicines” but only fast moving medicines Private Sector Importers/ Distributors Wholesalers Retail pharmacy Patients

23. Common response to supply chain market shortcomings

24. Systematic understanding of root causes of supply chain shortcomings

25. A policy toolkit to improving the supply chain

26. Retail competition and markups Study in 4 districts in Zambia by WB, UNZA and CHAI

27. DISCUSS CASE STUDY

28. Facilitating greater retail competition • Second-tier pharmacy models e.g. ADDOs For more details read R. Lowe and D. Montagu, “Legislation, regulation, and consolidation in the retail pharmacy sector in low-income countries,” Southern Medical Review, Vol. 2 Issue 2, September 2009, • Sweden re-regulation of 2009 increased the number of pharmacies • co-ownership and chain ownership rules relaxed in many EU countries • “Botiquines” (Spain) and Filialapotekare (Norway)-second tier pharmacies that operate under supervision of a community pharmacy

29. New models for understanding retail competition Competition/Wholesaler Network. Colors represent city of supplier, size represents degree of centrality (number of connections each shop has with other shops through perceived competition) Source: P.S. Larson, P. Yadav, J. L Cohen, S. Alphs, J. Arkedis, J. Massaga Stocking Patterns, Market Competition, and Customer Demand of Subsidized ACTs in Private Drug Shops in Tanzania. 2012

30. Facilitating greater wholesaler consolidation • Wholesaling and distribution have significant economies of scale • Sub-scale wholesalers and distributors cannot make investments in logistics, infrastructure and technology needed for national coverage • Wholesaler consolidation also eases quality enforcement • China’s stricter enforcement of GDP standards and government support of mergers and acquisitions- number of wholesaler decreased from 16000 to 7000. Three larger players emerging with national coverage

31. Creating incentives for rural distribution • Hard-to-reach populations usually experience poor availability from private supply chains • CSO Incentive Pool in Australia • 4% wholesaler rebate in Greece • Essential Small Pharmacies Schemes (ESPS) in the UK -financial assistance to pharmacies in rural or low population areas • Norway public private arrangement for rural access • Denmark’s rural pharmacy equalization scheme • Professional recognition of rural pharmacists in Spain

32. Wholesale and retail markup regulation • Significant variation exists on how to manage channel markups (regulatory vs. market-oriented) • The absence of any sound intervention or regulation may result in arbitrarily high mark-ups

33. Wholesale and retail markup regulation • Margins depend on price of the product sold. • regressive markups • Non linear markups

34. Challenges to wholesale and retail markup regulation in developing countries • A very fluid supply chain structure. No clear distinction of boundaries between wholesaler, distributor and retailer • Enforcement challenges • Policy interventions must recognize this reality and create strategies accordingly

35. Fluid supply chain structure= challenge to wholesale and retail markup regulation Manufacturer Distributor Sub-wholesaler Wholesaler Retail chemist Hospitals End-Patient

36. Fluid structure and high number of intermediaries in the channel Source: ACT Watch (e.g. UGANDA)

37. Cash and carry model creates distribution inefficiencies Source: Yadav P, J. L Cohen, S. Alphs, J. Arkedis, P. L Larson, J. Massaga and O. Sabot. Trends in availability and prices of subsidized ACT over the first year of the AMFm: evidence from remote regions of Tanzania, Malaria Journal 2012, 11:299

39. Lack of credit limits stocking of non fast moving medicines • 30-60 Days Credit for Some Manufacturer-Importer Dyads • Most Manufacturer-Importer Dyads Buy on Letters of Credit Delivery on 30 Days Credit or Post Dated Checks Cash &Carry / Cash Van Sales

40. Annex

41. Supply chain and program strategy Responsiveness the ability to react quickly to satisfy unanticipated customer requirements Agility the ability to adapt capacities and processes to a change in the cost or market structure- Rapid reconfiguration Leanness the ability to reduce costs to the extent possible Responsiveness Leanness Agility Where you operate in this triangle is a program strategy decision. Markets will require policy guidance on this

42. Supply chain type should suit overall strategy Adapted from : “What is the Right Supply Chain for your product ?” by M. Fisher, Harvard Business Review March-April 1997

43. Use of product segmentation to select the right supply chain recipe “ Adapted from : “What is the Right Supply Chain for your product ?” by M. Fisher, Harvard Business Review March-April 1997