Introduction

Supply Chain Management (SCM) in simple words

can be described as a network of facilities and
distribution options. Wherein SCM involves functions
such as material procurement, transformation of the
material into intermediate and finished products, and
then distribution of the finished product to consumer.
Supply chains are found to exist in both service and
manufacturing sectors, although the complexity of the
supply chain may vary vastly from industry to industry
and firm to firm, however it represents a logical
advance in our evolving understanding of business
performance.
Defining Supply
Chain Management
A supply chain is defined as the set of three or more entities
(Organizational or individual) directly involved in the
upstream and downstream flows of products,
services, finances, and/or information from
a source to a customer.
Supply chain management is states as :-

"The delivery of enhanced customer and economic value through

synchronized management of the flow of physical
goods and associated information from
sourcing to consumption.

A very simple example of supply chain can be explained involving a single product. The chain
involves procurement of raw material from vendors, transformed into finished goods in a
single step, then transported to distribution centers and ultimately to consumer. Realistically
supply chains are always very complex having multiple end products with shared components,
facilities and capacities. The flow of materials is not always along a simple network, various
modes of transportation gets involved and the cost of material for the end items may become
exorbitant.

In any organizational setup the supply chain refers to a wide range of functional areas which
include SCM-related activities, such as inbound and outbound transportation, warehousing,
inventory control, sourcing, procurement, supply management, forecasting, production
planning & scheduling, order processing, and customer service are all part of the same aspect
including the information systems which is necessary to monitor all of these activities. Thus it
can be simply stated that,

"The supply chain encompasses all of those activities associated with

moving goods from the raw-materials stage through to the end user."

Traditionally planning, procurement, manufacturing, marketing and the distribution set ups in
the organizations along the supply chain operate independently having their own objectives
and generally these are conflicting. Marketing objective of high consumer service and
attainment of maximum sales output, always conflicts with manufacturing and distribution
goals. Many manufacturing operations are designed to maximize output and lower costs with
little consideration for the impact on inventory levels and distribution capabilities. Purchasing
contracts are often negotiated with very little information beyond historical buying patterns.
The resultant of these factors is creation of a void with respect to an integrated plan in the
organization. There is a definite need for a system through which these different functions can
be coordinated and integrated together and SCM is a strategy through which such integration
can be achieved.

Management experts for this business process realized that significant productivity
enhancement could only come from managing relationships, information and material flow
across enterprise borders. One of the best definitions of SCM offered to date comes from
Bernard J. (Bud) LaLonde, SCM has been defined as,

"The delivery of enhanced customer and economic value through synchronized

management of the flow of physical goods and associated
information from sourcing to consumption.

The aspect, "from sourcing to consumption" last part of the definition suggests,
though achieving the real potential of SCM requires integration not only of these
entities within the organization, but also of the external partners. The latter include the
suppliers, distributors, carriers, customers, and even the ultimate consumers.

Importance of Supply Chain Management

In the ancient Greek fable about the tortoise and the hare, the speedy and
overconfident rabbit fell asleep on the job, while the "slow and steady" turtle won the
race. That may have been true in Aesop's time, but in today's demanding business
environment, "slow and steady" won't get you out of the starting gate, let alone win
any races. Managers these days recognize that getting products to customers faster
than the competition will improve a company's competitive position. To remain
competitive, companies must seek new solutions to important Supply Chain
Management issues such as modal analysis, supply chain management, load planning,
route planning and distribution network design. Companies must face corporate
challenges that impact Supply Chain Management such as re engineering globalization
and outsourcing.
Why is it so important for companies to get products to their customers quickly?
Faster product availability is key to increasing sales, a management consultant specializing in
manufacturing and information systems."There's a substantial profit advantage for the extra
time that you are in the market and your competitor is not," he says. "If you can be there first,
you are likely to get more orders and more market share." The ability to deliver a product
faster also can make or break a sale. "If two alternative [products] appear to be equal and one
is immediately available and the other will be available in a week, which would you choose?
Clearly, "Supply Chain Management has an important role to play in moving goods more
quickly to their destination. "

An example of a Supply Chain Management application:

To Reduce Cycle Time, Kick Those Bad Habits

......One of the chief causes of excessive order-to-delivery cycle times is the existence of
longstanding "bad habits" that result when companies fail to revise internal processes to
reflect market changes. The existence of separate, independent departments tends to
perpetuate these inefficient practices. Taking the supply-chain management view, on the other
hand, helps companies identify the cumulative effects of those individual procedures.
Eliminating such bottlenecks improves product availability and speeds delivery to customers--
both of which can increase sales and profits.
The case Consultant R. Michael Donovan illustrates the point with the tale of a client that
manufactures a made-to-order machine part. Average order-to-delivery time varied between
six and nine weeks. As a result, the manufacturer was losing business to "replicators" that
could produce low-quality "knockoff" versions in just three weeks. Donovan and his colleagues
analyzed the manufacturer's entire supply chain, from order entry and raw-materials supply all
the way to final delivery.

They found problems at every step of the way:

Handwritten orders were being re keyed into the materials-planning system on weekends,
which meant that some orders were sitting around unprocessed for an entire week. On
Monday mornings, production control would be overwhelmed with a week's worth of orders.
It often took them several days to plow through the backlog and issue manufacturing orders.
Once those orders had been cut, the engineering department required one week to produce
technical drawings. They needed several more days to match up drawings with orders and
other documentation. Those information packets then would go to the manufacturing line,
where the scheduling system allowed three weeks' time for production. "Orders could be
sitting there for almost three weeks before going into production, even though the actual time
required to produce an item ranged from a few hours to one full day," Donovan recalls.

The solution Supply Chain experts were able to slash order-processing time, including the
generation of engineering drawings, from about two and a half weeks to one day. They made
some alterations to the manufacturing process to speed up production. While they were
cutting waste out of physical processes, the consultants also were finding ways to speed up
the flow of information and to improve the accuracy of production orders. Today, materials
flow is closely correlated with information flow, and lead times have been cut from an average
of six to nine weeks down to fewer than three weeks.

The payoff! The payoff has been enormous. Instead of steadily losing market share to the
replicators, the manufacturer has doubled sales volumes. It has reaped an added benefit as
well: Because quality remains very high, the manufacturer has been able to charge more for
its products, generating even greater profits. Donovan proudly notes that this radical change
was achieved with technologies the manufacturer already had. "We didn't change the
technology, we just changed how it was applied," he says. "The magic is not in the software.
Information technology should not be the driver of re-engineering the order-to-delivery
process," he concludes. "It should enable you to achieve your objectives."

Fig: Supply chain OR Supply chain Network

Depending upon the how complex a supply network is, there are three types of supply
chains:
* Direct supply chain ,which consist of a company, a supplier and, a customer.
* Extended supply chain, which includes supplier of the immediate supplier, as well
as the customers of the immediate customer.
* Ultimate supply chain, which includes all the organizations involved in all the
upstream and downstream flows.
 SCM TODAY
If we take the view that Supply Chain Management is what Supply Chain Management people
do, then in 1997 Supply Chain Management has a firm hand on all aspects of physical
distribution and materials management. Seventy-five percent or more of respondents
included the following activities as part of their company's Supply Chain Management
department functions:
Inventory management
Transportation service procurement
Materials handling
Inbound transportation
Transportation operations management
Warehousing management

Moreover, the Supply Chain Management department is expected to increase its range of
responsibilities, most often in line with the thinking that sees the order fulfilment process as
one co-ordinated set of activities. Thus the functions most often cited as planning to formally
include in the Supply Chain Management department are:
Customer service performance monitoring
Order processing/customer service
Supply Chain Management budget forecasting

On the other hand, there are certain functions which some of us might feel logically belong to
Supply Chain Management which companies feel are the proper domain of other
departments. Most difficult to bring under the umbrella of Supply Chain Management are:

Third party invoice payment/audit

Sales forecasting
Master production planning

Today Supply Chain Management includes services such as:

Operational Analysis and Design Materials Handling
Distribution Strategy
Operational Improvements, Distribution Management
Computer Systems
Warehouse Design Project Management
Operational Commissioning
Computer Simulation
Technical seminars.
Basic SCM
 Procurement
Procurement is the process of finding, agreeing terms and acquiring goods, services or
works from an external source, often via a tendering or competitive bidding process. The
process is used to ensure the buyer receives goods, services or works at the best possible
price, when aspects such as quality, quantity, time, and location are compared. Corporations
and public bodies often define processes intended to promote fair and open competition for
their business while minimizing risk, such as exposure to fraud and collusion.

Almost all purchasing decisions include factors such as delivery and handling, marginal benefit,
and price fluctuations. Procurement generally involves making buying decisions under
conditions of scarcity. If good data is available, it is good practice to make use of economic
analysis methods such as cost-benefit analysis or cost-utility analysis.
An important distinction should be made between analyses without risk and those with risk.
Where risk is involved, either in the costs or the benefits, the concept of best value should be
employed.

Procurement activities are often split into two distinct categories, direct and indirect spend.
Direct spend refers to production-related procurement that encompasses all items that are
part of finished products, such as raw material, components and parts. Direct procurement,
which is the focus in supply chain management, directly affects the production process of
manufacturing firms. In contrast, indirect procurement concerns non-production-related
acquisition: obtaining operating resources which a company purchases to enable its
operations. Indirect procurement comprises a wide variety of goods and services, from
standardized items like office supplies and machine lubricant to complex and costly products
and services like heavy equipment, consulting services, and outsourcing services.
Most organizations think of their procurement process in terms of a life cycle. Different
consulting firms and experts have developed various frameworks. Some of the most common
steps from the most popular frameworks include:
Identification of need and requirements analysis is an internal step that involves an
understanding of business objectives by establishing a short term strategy (three to five
years) for overall spend category followed by defining the technical direction and
requirements.
External macro-level market analysis: Once an organization understands its
requirements, it should look outward to assess the overall marketplace. A key part of a
market analysis is understanding the overall competitiveness of the marketplace and
trends that are likely to impact the organization.
Cost analysis is the accumulation, examination and manipulation of cost data for
comparisons and projections. A cost analysis is important to help an organization make
a make-buy decision.
Supplier identification includes identifying particular suppliers that can provide the
required product or services. There are many sources to search for potential suppliers.
One good source is trade shows. Modern procurement software often incorporates a
supplier catalog for standardized goods and services.
Non-disclosure agreement (NDA): It is quite normal to request vendors to sign an NDA
prior to engaging with them. This protects the organisation where sensitive information
is shared with multiple potential vendors ahead of releasing detailed requirements
which often point to strategic decisions a firm has taken.

Supplier communication: When one or more suitable suppliers have been identified,
an organization will typically conduct a competitive bidding process. Organizations can
use a variety of competitive bidding methods including requests for quotation, requests
for proposals, requests for information, requests for tender, request for solution or a
request for partnership. Some institutions choose to use a notification service in order
to raise the competition for the chosen opportunity. These systems can either be direct
from their e-tendering software, or as a re-packaged notification from an external.
During this step direct contact may be made with the suppliers. References for
product/service quality are consulted, and any requirements for follow-up services
including installation, maintenance, and warranty are investigated. Samples of the
product/service being considered may be examined, or trials undertaken. Organizations
should do a risk assessment, total cost of ownership analysis and best value assessment
before selecting the final suppliers/solution.

Negotiations and contracting: Negotiations are undertaken that often include price,
availability, customization, and delivery schedules. The details are outlined in a
purchase order or more formal contract.

Logistics and performance management: Supplier preparation, expediting, shipment,

delivery, and payment for the product/service are completed, based on contract terms.
Installation and training may also be included. An organization should evaluate the
performance of the product/service as they are consumed. A supplier scorecard is a popular
tool for this purpose. When the product/service has been consumed or disposed of, the
contract expires, or the product or service is to be re-ordered, the organization should review
their experience with the product/service. If the product/service is to be re-ordered, the
company determines whether to consider other suppliers or to continue with the same
supplier.

Supplier management and liaison: Organizations that have more strategic goods or
services that require ongoing interfaces with a supplier will use a supplier relationship
management process. Strategic outsourcing relationships should set up formal
governance processes.

Pharmaceutical
procurement
Pharmaceutical procurement is a complex process which involves many steps,
agencies, ministries and manufacturers. Existing government policies, rules and
regulations for procurement as well as institutional structures are frequently
inadequate and sometimes hinder overall efficiency in responding to the modern
pharmaceutical market. Market constraints differ from country to country. Public
sector drug procurement must take place in the context of both the local pharmaceutical
market and the international market.
There are many steps in the procurement process. No matter what model is used to manage
the procurement and distribution system, efficient procedures should be in place: to select the
most cost-effective essential drugs to treat commonly encountered diseases; to quantify the
needs; to pre-select potential suppliers; to manage procurement and delivery; to ensure good
product quality; and to monitor the performance of suppliers and the procurement system.
Failure in any of these areas leads to lack of access to appropriate drugs and to waste. In
many public supply systems, breakdowns regularly occur at multiple points in this process. If
there is an appearance of special influence on the selection of products and suppliers or if the
procurement process is not managed in an efficient and transparent manner, interest among
suppliers in competing for procurement contracts decreases, leading to fewer choices and
higher prices for drugs. Pharmaceutical procurement is a specialized professional activity that
requires a combination of knowledge, skills and experience. Too often drug supply agencies are
staffed by individuals with little or no specific training in pharmaceutical procurement. It is
essential, therefore, that staff in key procurement and distribution positions be well trained and
highly motivated, with the capability to manage the procurement process effectively. The
procurement office should have at least one pharmacist as part of its senior staff, in addition to
having pharmacists expertise all along the pharmaceutical procurement chain.

Summary of main problems

Inadequate rules, regulations and structures;
 Public sector staff with little experience in responding to market
situations;
Absence of a comprehensive procurement policy;
Government funding which is insufficient and/or released irregularly;
Donor agencies with conflicting procurement regulations;
Fragmented drug procurement at provincial or district level;
Lack of unbiased market information;
Lack of trained procurement staff.

Strategic Objective for Good

Pharmaceutical

procurement

Four strategic objectives of pharmaceutical

procurement

1. Procure the most cost-effective drugs in the right quantities

2. Select reliable suppliers of high-quality products
3. Ensure timely delivery
4. Achieve the lowest possible total cost

1. Procure the most cost-effective drugs in the right quantities

The first strategic objective is that all organizations responsible for procurement, whether they
are public, private non-profit or private for-profit, should develop an essential drugs list to make
sure that only the most cost-effective drugs are purchased. Procedures must also be in places that
accurately estimate procurement quantities in order to ensure continuous access to the products
selected without accumulating excess stock.
2. Select reliable suppliers of high-quality products
The second objective is that reliable suppliers of high-quality products must be pre-selected, and
that active quality assurance programs involving both surveillance and testing must be
implemented.
3. Ensure timely delivery
The third strategic objective is that the procurement and distribution systems must ensure timely
delivery of appropriate quantities to central or provincial stores and adequate distribution to
health facilities where the products are needed.
4. Achieve the lowest possible total cost
The fourth objective is that the procurement and distribution systems must achieve the lowest
possible total cost, considering four main components:
the actual purchase price of drugs;
hidden costs due to poor product quality, poor supplier performance or short shelf-life;
inventory holding costs at various levels of the supply system; and
operating costs and capital loss by management and administration of the procurement and
distribution system.

Operational Principle for

Good Pharmaceutical Procurement

Efficient and Transparent Management

1. Different procurement functions and responsibilities (selection, quantification,
product specification, pre-selection of suppliers and adjudication of tenders) should
be divided among different offices, committees and individuals, each with the
appropriate expertise and resources for the specific function.

Justification and explanation

Senior managers responsible for procurement must ensure that pharmaceutical procurement is
carried out effectively, efficiently and in accordance with the countrys policies, laws and
regulations. The health systems procurement office, under various names, is normally
responsible for actually managing the procurement function. The procurement office should be
responsible for coordinating inputs to achieve the desired result. But in most public sector
contexts the reality is that all functions of the drug procurement process are entirely in the hands
of one office or official. Without appropriate separation of function and authority the
procurement process is much more susceptible to influence by special interests. In that case,
procurement personnel may be able to bias drug selection, manipulate orders to increase the
quantities of certain drugs, prejudice supplier qualification decisions, manipulate the final award
of tender, and slant product specifications to limit competition. Separation of key functions
contributes to professionalism, accountability and an efficient procurement system.

Practical aspects
A number of key procurement functions typically require different expertise and should be
separated. Examples include:
Drug selection,
Quantification of drug requirements
Product specifications
Pre-selection of suppliers
Adjudication of tenders

2. Procurement procedures should be transparent, following formal written

procedures throughout the process and using explicit criteria to award contracts.

Justification and explanation

Fairness and the perception of fairness are essential to attract the best suppliers and achieve the
best prices. When the pharmaceutical tender process is less transparent and even secretive, it ends
to be perceived as corrupt or unfair. There may be accusations of unfair influences. Whether true
or not, such charges are damaging and suppliers, health care providers and the public lose
confidence in the system. Unsuccessful suppliers may feel that they have no chance of winning
and consequently withdraw from future tenders. As the pool of potential suppliers decreases to a
small set, price competition decreases and procurement prices become much higher than
necessary.

Practical aspects
The tender procedures should be transparent. Formal written procedures should be developed
and be followed throughout the tender, and explicit criteria should be used to make procurement
decisions. Broad-based committees should have the sole authority to make contract awards.
Tender adjudication should be done properly and the award of contracts and issuing of orders
should be completed within the shortest period of time possible. Information on the tender
process and results should be public, to the extent permitted by law. At the very least, both
bidders and health personnel should have access to information on the successful suppliers and
the prices for all winning contracts.

3. Procurement should be planned properly and procurement performance should be

monitored regularly; monitoring should include an annual external audit.

Justification and explanation

In order to ensure that drugs are available where and when they are needed, drug procurement
must be carefully planned. Planners should consider factors such as access to suppliers; funding
availability and timing; the number of levels in the logistics system; constraints of time and
resources affecting procurement functions such as drug selection, quantification, tendering and
contracting; the lead times at various levels of the system; import procedures; customs clearance;
and access to transport.

Practical aspects
A reliable management information system (MIS) is one of the most important elements in
planning and managing procurement. Lack of a functioning MIS or the inability to use it
appropriately is a key cause of program failure. The MIS should track the status of each order and
payment, and compile the information required for supplier monitoring, as discussed in
Operational Principle 11. It is important that the MIS also tracks the number of orders placed,
payments made, quantities actually purchased compared with estimates, purchases from all
contract suppliers, and drug purchases from non-contract suppliers. In all but the smallest
procurement systems, the procurement information system should be computerized in such a
way as to facilitate tracking and reporting on performance by suppliers and by the health system.
The procurement office should be required to report regularly on key procurement performance
indicators, selected by senior managers. Some standard indicators include the planned versus
actual items and quantities purchased; prices obtained versus average international prices;
average supplier lead-time and service level; percentage of key drugs in stock at various levels of
the supply system; and report on stock-outs. At least once a year the procurement unit should
undergo an audit, either internal or external, to verify procurement office accounting records. The
auditor should issue a statutory audit report in accordance with the legal regulations of the
jurisdiction and in addition should issue a detailed Letter of Comment to the management of the
organization and to the appropriate public supervisory body.

Drug Selection and Quantification

4. Public sector procurement should be limited to an essential drugs list or

National/local formulary list.

Justification and explanation

No public or private health care system in the world can afford to purchase all drugs circulating
in the market within its given budget. Resources are limited and choices have to be made. A
limited list of drugs for procurement, based on an essential drugs list or drug formulary, defines
which drugs will be regularly purchased and is one of the most effective ways to control drug
expenditure. A nationally developed formulary or selection based on the essential drugs concept
has been used in both industrialized and developing countries' health systems for more than
twenty years. This allows the health system to concentrate resources on the most cost-effective
and affordable drugs to treat prevailing health problems. The selection of drugs based on a
national formulary or national list allows for concentrating on a limited number of products.
Larger quantities may encourage competition and lead to more competitive drug prices.
Reducing the number of items also simplifies other supply management activities and reduces
inventory-carrying costs.

Practical aspects
Some public and private health systems strictly limit procurement to drugs listed on an essential
drugs list. However, in most cases some mechanism exists to address special needs, allowing the
occasional procurement of non-list drugs after approval by senior officials.

5. Procurement and tender documents should list drugs by their International

Nonproprietary Name (INN), or generic name.

Justification and explanation

The INN is widely accepted as the standard for describing drugs on a procurement list or tender
request. Although this is most obviously applicable when purchasing drugs which are available
from multiple sources, generic description should also be used when purchasing single source
products. When purchasing products which present potential problems with pharmaceutical
equivalence or bio-equivalence the procurement request should specify the quality standards but
not mention specific brands.

Practical aspects
This does not mean that brand-name suppliers should be barred from tender participation; they
may offer the most cost-effective product, and in fact may offer more competitive prices for
certain branded drugs than generic competitors. However, all drugs supplied to the public health
system should be properly labeled in accordance with standards laid down by law (or in
accordance with labeling instructions), including the INN featured prominently in addition to the
brand name that may be on the label.

6. Order quantities should be based on a reliable estimate of actual need.

Justification and explanation

An accurate quantification of procurement requirements is needed to avoid stock-outs of some
drugs and overstocks of others. In addition, if suppliers believe the estimated procurement
quantities are accurate, they are more willing to offer the lowest competitive price on an
estimated-quantity supply contract.

Practical aspects
Past consumption is the most reliable way to predict and quantify future demand, providing that
the supply pipeline has been consistently full and that consumption records are reasonably
accurate. Such consumption data must be adjusted in the light of known or expected changes in
morbidity patterns, seasonal factors, service levels, prescribing patterns and patient attendance.
The downside of basing quantification only on past consumption is that any existing patterns of
irrational drug use will be perpetuated. In many countries consumption data are incomplete or
do not reflect real demand because the supply pipeline has not always been full and drug use has
not always been rational. In such cases the morbidity-based and extrapolated consumption
techniques may be used to estimate procurement requirements. These techniques, particularly the
morbidity-based method, should also be used periodically to check on the rationality of past
consumption, by comparing actual consumption with the estimated need to treat common
diseases based on standard treatment protocols and epidemiological data.

Financing and Competition

7. Mechanisms should be put in place to ensure reliable financing for procurement.

Good financial management procedures should be followed to maximize the use of
financial resources.

Justification and explanation

Potential sources of funds for pharmaceutical procurement include government financing, user
fees, health insurance, community co-financing and donor financing. These options vary in terms
of their efficiency, equity and sustainability. The most important considerations for procurement
are total funds available, adequate access to foreign exchange and the regularity with which
funds are available. It is the responsibility of governments and senior managers to establish
appropriate and reliable funding for public drug procurement as a high priority, and to
implement mechanisms which provide adequate funding on time to support public sector
procurement. Efficient financial management systems are especially important if funds are
limited and procurement priorities must be set. Being able to order drugs when needed and to
pay for them on delivery has a very positive effect on reducing both prices and stock-outs and on
increasing supplier confidence in the procurement system. Prompt, reliable payment can have as
great an influence on bringing down drug prices as bulk discounts.

Practical aspects
Financial mechanisms such as decentralized drug purchasing accounts may help the procurement
cycle to operate independently of the treasury cycle. Revolving drug funds can help achieve this
separation by establishing their own bank accounts and their own working capital. An aspect of
financing which is sometimes overlooked is funding for the procurement process itself.
Procurement services may be part of the warehouse and distribution operation or set up as a
separate office. In either case, salaries and operational costs of the procurement office must be
covered by the users. Options include:
support through the government budget;
periodic payment from users at the beginning of the procurement cycle, based on the projected
value of the total procurement, or at the end of the cycle, based on the actual value of total
shipments;
regular payment from suppliers, based on a percentage of the invoiced value of the shipment,
although this method may be contrary to some countries procurement integrity regulations;
payment from users in the form of a flat annual fee, based on total expenses divided by the total
number of areas and independent institutions served.
There is some risk in tying a procurement office's reimbursement to the value of purchases by
user facilities, as this may create an incentive for the procurement office to increase, rather than
decrease, prices and purchases. Therefore, if this sort of approach is used, checks and balances
must be put in place, such as a requirement that all major procurement decisions be made by user
representatives.

8. Procurement should be effected in the largest possible quantities in order to

achieve economies of scale; this applies to both centralized and decentralized
systems.

Justification and explanation

Larger procurement volume makes favorable prices and contract terms more likely, by increasing
suppliers interest in bidding and by providing them with an incentive to offer a competitive
price.

Practical aspects
A higher volume for single items may be achieved through pooling of procurement volume from
many facilities or from several States or countries, by restriction of the drug list or by elimination
of duplication within therapeutic categories.
A large contract awarded to one supplier by no means implies that the entire volume must be
shipped at once. Many procurement services specify, as part of contract terms, divided deliveries
over the period of the contract or to multiple delivery points. Some supply systems use estimated
quantity tenders, with orders placed throughout the contract period as needed. In decentralized
Procurement programs, one way to sustain procurement volume is to negotiate prices centrally
for a list of essential drugs and allow provinces, districts or health facilities to order the drugs as
needed from the contract supplier. These strategies allow for optimal use of available storage and
transport capacity, facilitate inventory management and ease cash flow constraints.

9. Procurement in the public health sector should be based on competitive

procurement methods, except for very small or emergency orders.

Justification and explanation

There are four main methods for purchasing drugs. Three of them are competitive: restricted
tenders, open tenders and competitive negotiations. The fourth method is direct negotiation with
a single supplier. Since inducing supplier competition is a primary key to obtaining favorable
pricing, the public sector should use competitive methods for all but very small or emergency
Purchases. This assumes, of course, that there are multiple suppliers for the items needed. As
discussed in Operational Principle 5, drugs which are available from multiple sources should be
competitively purchased under their generic (INN) name.

Practical aspects
As long as drug quality and service reliability are assured competition should be increased to the
point at which drug prices are as low as possible. The rule-offive for pharmaceutical pricing holds
that generic prices generally reach their minimum when there are at least five generic alternatives
on the market and that prices in tendering systems are at their lowest where there are at least five
bids per item adding more bids generally does not result in further lowering of prices. In
situations where most or all of the products in a therapeutic category are single-source or branded
products, the number of different drugs in a therapeutic category can be reduced through cost-
effectiveness analysis. Competition can be induced by therapeutic class tendering. For example,
among the newer antibiotics there may be several which are therapeutically similar, at least for
specific indications. Therapeutic class tendering means that offer are requested on two, three or
more therapeutically similar but generically different products. The selection of the most cost-
effective drugs within a therapeutic category should be done by the national essential drugs
committee, not by the procurement office.

10. Members of the purchasing groups should purchase all contracted items from the
supplier(s) which hold(s) the contract.
Justification and explanation
Except in those systems where each health facility negotiates prices and
purchases drugs individually, public pharmaceutical procurement systems are
seen as purchasing groups. Normally, group purchasing achieves lower prices
than would be available to the same group of health facilities if they purchased
individually. These discounts are based on the fact that facilities which are part
of the purchasing group will purchase contract items only from the selected
contract supplier, as long as that supplier is able to perform. This is called solesource
commitment. If group members are free to make separate deals for
contract items with other suppliers at will, the suppliers who participate in
tenders will have little incentive to offer the best possible discounts to the
purchasing group.
Practical aspects
Sole-source commitment must be monitored and enforced. Monitoring is
particularly important in systems where prices are negotiated centrally and
ordering is done by individual health facilities. Suppliers that do not win
contracts in a competitive tender may offer more competitive prices on a shortterm
basis in an attempt to split the purchasing group. If group members do not
Operational principles for good pharmaceutical procurement
16
resist such price dumping, the prices at subsequent tenders will rise to previous
unfavourable high levels.
Operational principles for good pharmaceutical procurement
17
Supplier Selection and Quality Assurance
11. Prospective suppliers should be pre-qualified, and selected suppliers should be
monitored through a process which considers product quality, service reliability,
delivery time and financial viability.
Justification and explanation
Pre- and post-qualification procedures help to eliminate substandard suppliers, if
properly managed. Pre-qualification is the procedure of evaluating supplier
capacity and reputation before bids are solicited for specific products. This is the
preferred procedure, especially for ongoing drug procurement systems.
Although substantial time is required to establish an initial list of pre-qualified
suppliers, once this has been done the lowest pre-qualified tenderer for each
product is deemed to be qualified, which expedites adjudication and contract
award.
Post-qualification evaluates the suppliers after bids have been received. If there
are numerous offers from unknown suppliers there may be long delays in
awarding contracts, as it will be necessary to validate suppliers capacity to
supply good-quality products.
Practical aspects
Most established procurement systems use some form of restricted tender with
pre-qualification, soliciting bids only from suppliers that have been pre-qualified.
Procurement systems using restricted tenders with pre-qualification should make
continuous efforts to seek out potential new suppliers in order to maintain
competitive pressure on established suppliers that had been pre-qualified
previously. Drug regulatory authorities may provide relevant information
regarding new suppliers.
The process for evaluating new suppliers can include formal registration, formal
inspection, reference checks with past clients and international agencies, test
purchases in small quantities and informal local information-gathering.
Countries that do not have functional regulatory agencies and drug quality
control laboratories must make vigorous efforts to check references of new
suppliers and should buy only from those suppliers that are known to provide
quality products. One important aspect of quality assurance is the concept of
traceability. The supplier must be able to trace the product to the finished
product manufacturer, and the latter must be able to trace the ingredients to their
producers, all in a transparent manner.
In addition to using pre- or post-qualification procedures, successful
procurement offices ensure continued good supplier performance through a
formal monitoring system which tracks lead time, compliance with contract
terms, partial shipments, quality of drugs, remaining shelf-life, compliance with
packaging and labelling instructions, etc. A cumulative file for each supplier
should have copies of registration papers, references, special correspondence,
complaints and other anecdotal supplier information. The information system
should track chronologically the number and value of tender contracts awarded,
Operational principles for good pharmaceutical procurement
18
and the value of total purchases from the supplier by year and performance for
each tender.
12. Procurement procedures/systems should include all assurances that the drugs
purchased are of high quality, according to international standards.
Justification and explanation
Four components make up an effective quality assurance system:
selecting reliable suppliers of quality drugs;
using existing mechanisms, such as the WHO Certification Scheme on the
Quality of Pharmaceutical Products Moving in International Commerce;
establishing a programme of product defect reporting; and
performing targeted quality control testing.
The selection of suppliers that are known to provide high-quality products as
discussed in Operational Principle 11 is the primary key to ensuring drug
product quality. When using new suppliers whose products are not familiar in
the country, the procurement system must be particularly alert to product quality
issues.
Practical aspects
Some products vary substantially in formulation and bio-availability from
supplier to supplier. When this difference is therapeutically significant,
purchasing offices should be cautious about making changes in supplier from
year to year, and particularly about accepting unknown suppliers. Even when
new products are completely equivalent in content and effect, changes in dosage
form can be problematic, requiring patient and provider re-education. For drugs
used in chronic diseases there should be a significant cost benefit before changes
are made.
The WHO Certification Scheme on the Quality of Pharmaceutical Products
Moving in International Commerce is a way of exchanging information on the
supplier between the regulatory authorities of the exporting country and those of
the importing country. It does not constitute an absolute assurance of product
quality but does provide a mechanism for ascertaining that a drug product comes
from a reputable source. The certificate is as independent and reliable as the
regulatory authority that issues it.
All shipments from suppliers should be physically checked on receipt. A formal
system should be established which encourages health workers to report
potential problems with poor product quality, ideally using pre-printed, simple
reporting forms. All reports should be carefully assessed to establish the need for
laboratory testing and appropriate follow-up action must be taken, including
product recall if warranted. The reporter should be informed about the results
and the action taken, even if products are not defective, in order to encourage
continued participation in the reporting programme. Product defect reports and
results should be recorded as part of the supplier monitoring system.
If supplier selection is managed effectively it is not necessary to carry out quality
control testing on every batch of every drug received. Many procurement
Operational principles for good pharmaceutical procurement
19
agencies limit routine testing to new suppliers and to sensitive products.
However, all public drug supply systems should have access to quality control
laboratories to test suspect drug products.
Unfortunately, not all governments have been able to sustain governmentoperated
laboratories. In some countries a college of pharmacy or an
independent laboratory may have the required testing facilities. Also, quality
control laboratories in industrialized countries will provide drug analyses
against payment. If analyses must be performed by foreign laboratories, foreign
exchange problems may be reduced by requiring the suppliers of suspect
products to pay the laboratory directly, with the arrangement clearly described
in the purchase contract. Financing for quality control testing is a difficult
problem in many countries, and governments and donors should collaborate to
find viable solutions.
 SCM TOMORROW
The future for Supply Chain Management looks very bright. This year, as well as lastyear, two
major trends are benefiting Supply Chain Management operations. These are
Customer service focus
Information technology
Successful organisations must be excellent in both of these areas, so the importance of
Supply Chain Management and the tools available to do the job right will continue to
expand.
Prospects
India is a highly attractive market for multinational companies and to successfully source or
sell products, there is a need to realize that conditions may differ greatly from the more
developed economies; this is especially true when it comes to the supply chain. The
framework offered can help companies pursue the right supply chain strategy to advance their
business goals. Supply chain challenge, enhancement of various components of logistics and
growth of SCM activities and innovations can take place in the following:-

(a) The sea mode is one of the most eco friendly modes of transport with vast water bodies
available, the sea mode of transport can be developed and used effectively.
(b) A modern highway infrastructure with tracking technologies like Global Positioning System
(GPS), techniques such as cross docking, and state-of-the-art container ports have all become
the norm for supply chains in the developed world. They are far from the norm, however, in
the lesser developed countries of the world.
(c) The focus is essentially required to be on supply chain conditions in the emerging economy
that has enormous long-term growth opportunity. In addition to a rapidly growing market
India possesses a workforce that is considerably younger and larger than more developed
regions like Europe and North America. These factors have prompted multinationals to
seriously consider India both as a source for manufacturing and as a market for their goods.

CONSUMER SERVICE FOCUS

Transportation :-
Transportation generally refers to the movement of practically everything from raw material
to finished goods between different facilities in a supply chain. In transportation the trade-off
between responsiveness and efficiency is manifested in the choice of transport mode. Fast
modes of transport such as airplanes are very responsive but are also more expensive. Slower
modes such as ships and railways are very cost effective but not as responsive. Since
transportation costs can be as much as a third of the operating cost of a supply chain,
decisions made with respect to transport are very important. There are six basic modes of
transport that a company can choose from:-

(a) Waterways (Ships) is cost effective but is also the slowest mode of transport. It is limited
to use between locations that are situated next to navigable waterways and have facilities
such as harbours and canals.
(b) Railways (Trains) It is also very cost efficient but can be slow. This mode is also restricted
for use between locations that are served by rail lines.
(c) Pipelines These can be very efficient but are restricted to commodities such as liquids or
gases such as water, oil, and natural gas.
(d) Roadways (Trucks) Trucks can go almost anywhere and hence are relatively quick and thus
provide a very flexible mode of transportation. The cost of this mode is prone to fluctuations
with the variations in the cost of fuel and also depends on the condition of roads.
(e) Airways (Airplanes) This is a very fast mode of transport and are very responsive. This is
also the most expensive mode and it is somewhat limited by the availability of appropriate
airport facilities.
(f) Electronic Transport It is the fastest mode of transport and it is very flexible and cost
efficient. However, it can only be used for movement of certain types of products such as
electric energy, data, and products composed of data such as music, pictures, and text.
Someday technology allowing us to convert matter to energy and back to matter again may
completely rewrite the theory and practice of supply chain management.

Transport Industry:-
The freight transportation industry has undergone revolutionary changes during
the last decade. Deregulation has spread to all modes of transport and the number of
surviving companies has declined considerably. Carriers unprotected by regulations discovered
that they could not differentiate themselves from the competition on price alone. Successful
transportation companies also need to provide prompt pickup, excellent customer service,
swift, complete and damage-free delivery. The motor carrier industry forges a critical link in a
multimodal SCM system and must compete against time and service to stay in business.
Shippers move cargo over whatever mode provides the best service. Less-than-truckload (LTL)
motor carriers find their competition particularly stiff. Parcel carriers constantly increase their
maximum shipment weight while truck load carriers now accept partial trailer loads as small
as 500 Kgs. Shorter cycle times mean better service. Customers needs have also changed. The
growth of JIT and Quick Response inventory management and third-party SCM requires all
participants in the SCM chain to consider shorter cycle time as a competitive advantage.

INFORMATION TECHNOLOGY IN SCM

Information Technology (IT) Manufacturers, distributors, and some carriers effectively use IT
to reduce cycle time and improve the quality of freight handling. Package handlers use the
technology to great competitive advantage. Less than Truckload (LTL) carriers are beginning to
adapt their information systems to provide on-line, real time data on the movement of freight
through their systems. Successful use of IT to speed the movement of freight is only possible if
these carriers have low cost methods to accurately gather and disseminate data. Bar code and
radio frequency technologies provide the tools for LTL carriers to survive and thrive as
discussed below:-
(a) Bar Codes
Traditional bar codes uniquely identify every package in the pipeline. Scanning the
packages positively confirms custody transfer from shipper to carrier to consignee. Two
dimensional bar codes on shipping documents record the entire Bill of Loading. Scanners in
drivers hands provide error-free entry of the Bill of Loading in less than a second. Radio
communication from the truck cab to central operations/ control centre immediately informs
dispatchers of incoming freight. Similar scanning during delivery shortens the billing cycle and
provides positive confirmation of delivery. IT enhances the information speeds of cargo
movement through every phase of LTL operations. Dock management systems speed cross
docking operations.
(b) Combination
A combination of radio communication and bar code scanning enhances
delivery of control information to people who need it. The information is required by the
dispatcher, fork operators and the recipient are every effected member of the dock team who
receives immediate information where they work. The system efficiently tracks all packages
from inbound docks through staging to outbound docks. No package waits for information.
Yard management systems ensure the delivery of the right equipment to the right location at
the right time. Radio communication to yard tractors keeps shuttle drivers working on the
highest priority tasks. Real-time communication between yard drivers, hub managers, and
information support systems provides positive control of all moving stock. Consistent
application of appropriate IT throughout the SCM pipeline results in shortened cycle times and
lowered effort. Immediate, reliable information allows managers to optimize their physical and
human resources. While maximum benefit comes to those carriers who implement a
consistent information strategy throughout their operations, segmentation of the problem
allows carriers to phase in their transformation. Each phase provides immediate economic
benefits, while improving the strategic position of the carrier.

Coordinating Multiple Initiatives through IT.

The SCM Model of LTL(LESS THAN TRUCKLOAD) carries the greatest advantage and the
fundamental vulnerability of the mode. City terminals break bulk consolidation and other
cargo transfer techniques allow LTL carriers to sell economies of scale to transporters with
small cargo consignments. However, the same process requires multiple handling and offers
frequent opportunities for delays, incorrect transportation, and cargo damage. Effective use of
IT maximizes the advantages and minimizes the risks inherent in LTL transportation, as each
package needs to be positively identified every time it is handled. Information about every
destination must be checked and double checked to maximize cargo speed while minimizing
empty trailer kilometers. Implementation of competitive IT begins wherever carriers feel they
need the most assistance and for many, dock management represents a logical starting point.
Positive tracking of every package in and out of every hub drastically reduces the possibility of
cargo delays and damage. Automatic optimization techniques simultaneously reduce handling
expenses and allow some trailers to bypass consolidation hubs entirely.

When carriers augment a dock management system with yard management support, the two
projects amplify each other's advantages. Yard management initiatives closely control the
movement of trailers and drivers based on information provided by the dock management
system. The dock management system in turn profits from data provided by pickup and
delivery automation. In case where load information from city drivers flows to the hubs,
support systems and supervisors, they can well anticipate future requirements. Incoming
cargo stays in motion because dock managers already know what is on each inbound truck. If
pickup and delivery systems are not immediately automated, carriers can implement
intermediate systems to efficiently feed information to hub management support projects.
Dockside data collection allows operators to enter all data about an inbound truck's cargo at
the dock even as operators strip the cargo for consolidation.

Dockside data collection becomes more efficient when carriers encourage their shippers to
produce scan-able bills of loading, printers with specialized software. A two-dimensional bar
code encodes all necessary shipment information. In less than one second, a dockside scanner
captures an entire bill of loading. The same scan-able documents can be used when the carrier
later implements a pickup and delivery management system. Effective SCM may be the best
way to achieve reduced order-to delivery cycle time. Instead of treating each function as
consisting of discrete activities, SCM considers all functions to be linked and interdependent.
As a result, SCM can reveal the cumulative effect of problems anywhere in the chain, not just
within SCM areas of responsibility.

Though some companies are content with data-capture and communication systems, other
companies rely heavily on the third category of supply chain technologybusiness software.
Computer software makes it possible to manage thousands of transactions and make
intelligent decisions required to match distribution flow to demand.

Software developers have devised a host of solutions to handle specific supply chain tasks. For
instance, there are warehouse management systems (WMS), which oversee the use of labour
and equipment in a distribution centre. This type of software firstemerged at the United States
in the mid-1970s, as an alternative to the construction of mechanised and automated
warehouses. Today, it's become the cornerstone of many Another type of software commonly
used in SCM is transportation management software (TMS). This application co-ordinates
inbound shipments, manages delivery requirements, and selects carriers. Another popular
solution--advance planning and scheduling (APS) software--allows manufacturers and retailers
to gauge inbound and outbound inventory demand. Other packages facilitate order
management or keep track of international shipping requirements.

Over the past year, a wave of mergers has swept the software industry, resulting in the
emergence of companies that offer a broad array of applications. Although no company yet
offers a complete supply chain suite that includes order management, planning, and execution
applications, most analysts believe that these combinations eventually will result in the
creation of an all-encompassing category of software called supply chain planning and
execution suites.
In the meantime, both single-point distribution solutions and software suites will have to be
linked to older legacy systems, particularly to enterprise resource planning (ERP) systems,
which historically have overseen finance and manufacturing in corporations. Because these
disparate programs lack a common format, systems integrators often have to write custom
interfaces to allow the exchange of data between distribution and ERP applications.
Another category of software--enterprise application integration (EAI)--has emerged to
enable companies with different computer systems and software to link their systems
together. "Supply chain management is about integrating different applications," "There's a
new class of 'middle ware' geared toward tying ERP applications together. It's called EAI
software. If you had [software created by] three different WMS vendors and by SAP (a large
ERP vendor), you would use EAI software to make them work together." As a result of recent
mergers and acquisitions, several companies now offer suites of software modules for logistics
operations. Industry analysts refer to these packages of distribution-related programs as
logistics execution software (LES).

ERP systems :-
There's a powerful new presence to be reckoned with in the planning arena--the major ERP
(enterprise resource planning) vendors. These software giants, whose enterprisewide products
are grounded in financials or manufacturing, now are incorporating supply-chain planning
functionality into their offerings. They're either developing this capability in house-the path
taken by SAP--or acquiring it These are some of the big ERP vendors are positioning their
supply-chain planning capability:
SAP, the biggest of the ERP providers, now offers a product called SCOPE-supply-chain
planning, optimisation, and execution. The module is integrated into the company's core R/3
enterprise application. It enables users to optimise performance and cost across the entire
supply chain, according to the vendor.
Oracle recently announced that it would offer i2 Technologies' suite of planning and
scheduling products as part of Oracle's enterprise solution for the industrial sector. The
company says that its planning products are designed for customers with complex supply-
chain planning requirements who need to make real-time optimisation decisions.

IMPLEMENTATION PROCEDURE

Steps-actions/Phases
Subsequent actions to implement the supply-chain
agenda, which Kearney says should be carried out by individual project teams, typically fall
into these broad categories:
Designing the long-term supply-chain structure to position the company in the right roles in
the right supply chains with the right customers and suppliers.
Re-engineering supply-chain processes to streamline product, information, and funds flow
internally and externally.
Reinforcing the supply chain's functional foundation by improving quality and productivity
within operational areas such as warehousing, transportation, and fleet
management.

A Flexible Approach

specialises in the design, development and implementation of solutions to Supply Chain

Management problems.Consultancy approach is tailored to suit the particular requirements of
a client's project. This ensures the provision of the most appropriate form of assistance, from
a full traditional consultancy assignment, to a placement working within a client's team.
Strategic Analysis
Specification
Implementation

Strategic Analysis :-
It's the study of the current and future needs of business and development of such solutions
to meet these requirements. This normally involves the use of computer models to gain a full
understanding of the key issues and to examine the practical alternatives. A recommendation
follows with the most appropriate and cost effective solution. This approach:
gives confidence in the recommended solution.
identifies a clear way forward.
determines the associated cost and timescales.
enables the next stage of the project to be planned.
Specification :-
In this stage, any recommendations have to include operational detail, enabling systems,
equipment or buildings to be procured to meet the exact requirements of the solution.
This provides:
correct logical emphasis on each aspect of the solution.
a clear specification of proposals, minimising the risk of unforeseen cost.
finalised project cost budgets.
competitive equipment procurement.
agreed implementation timescales.

Implementation:-
Refers to responsibility for the tendering of equipment and supplier selection, contract
negotiation and placement. Contract Management through to completion to ensure that the
project is progressed in accordance with the requirements of time, cost and quality. Work with
the client on preparing any organisational changes and training to ensure a smooth start to
the new operation.
There has been found that many companies have not thought comprehensively about the
design of their supply chains. Often, their attempts to achieve excellence have been focused
on perhaps one or two supply chain building blocks--and not, as they should be, on all of the
dimensions required for world-class performance. The framework below outlines the five key
dimensions of supply chain management through the implementation procedure that are
required to achieve superior performance. These areas must be addressed iteratively and,
generally, in a hierarchical fashion:
1. Strategy-
specifically, the alignment of supply chain strategies with the overall business direction. Key
decision points for managers here include:
What is required to align the supply chain with the business strategy?
What level of customer service must we provide to each customer segment to compete
effectively?
Which channels of distribution best meet our goals and our customers' needs?

2. Infrastructure-
which affects cost-service performance and establishes the boundaries within which the
supply chain must operate. Pertinent questions include:
How must the physical network of plants and distribution be structured?
Can we rationalise our current network?
Can we use contract manufacturing or third-party logistics capabilities?
What transportation services can best link together the network of facilities?
Which activities should we outsource?
3. Process-
the drive to achieve functional excellence and integration across all major processes.
Managers must ask themselves the following:
What are the core supply chain processes driving the business?
How can we adapt best-in-class approaches to our core processes (e.g., manufacturing,
integrated demand planning, procurement, cycle-time compression, dynamic deployment)?
How can we build linkages with our suppliers and customers?

4. Organisation-
providing the critical success factors of cohesion, harmony, and integration across organisation
entities. Questions to consider include:
What level of cross-functional integration is required to manage core processes effectively?
How can we leverage cross-company skills and abilities?
What performance-measurement and reporting structure can help us achieve our
objectives?

5. Technology,
which empowers the supply chain to operate on a new level of performance and is creating
clear competitive advantages for those companies able to harness it. Companies should
address the following points:
Do our IT platform and core applications software support world-class SCM?
Where will advanced decision-support capabilities have the greatest impact on
business performance?
What data are required to manage the core business processes outlined above?
How can we capitalize on advanced communications (e.g., intranets and the Internet) in
managing the supply chain?
How can we leverage enhanced visibility of customer demand and other key operating
parameters?