1. The World Bank Institute in collaboration with O’Hanlon Health Consulting, Tropical Health LLP, and University of California at San Francisco MAY 12, 13, 14, 2014

2. MARKETS FOR HEALTH SESSION 6 (Day 2) Using Markets to Strengthen Supply Chains for Essential Medicines Prashant Yadav William 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. MARKETS FOR HEALTH 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. MARKETS FOR HEALTH Will it be entertaining ?

5. MARKETS FOR HEALTH  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 Why worry about supply chains?

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

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

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

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

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

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

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

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

14. MARKETS FOR HEALTH 14 106 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 Spain pharmaceutical market: physical flows 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. MARKETS FOR HEALTH R&D Rules Regulations Standards Laws Informal Rules and Norms S D Information Quality Assurance Subsidy Infrastructure Purchase PPD Pharmaceutical Manufacturers Essential Medicines End patients Related Services Invest Gov’t Functions  Gov’t Regulatory Authority  Reimbursement List/PBM  Gov’t procurement and distribution (CMS) Private Sector  Wholesalers  Distributors  Retail Pharmacies  Private insurance Membership Orgs  Wholesalers association  Pharmacy association  Manufacturer’s association Pharmaceutical Regulatory Authority Informing and Communicating Setting & enforcing rules Financing and Investing Private Functions  Private sector supply chain  Information services Civil Society  Patient advocacy groups  Other civil society orgs Government plays multiple supporting, financing and rule defining functions. Private actors manage wholesaling, distribution and retailing

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

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

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

19. 19 Central Medical Store Regional Medical Store Govt Health Facilities Patients Procurement Two needs for healthy market driven supply chains 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 This session does not focus on this part. Please consult instructor for further information on this

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

21. MARKETS FOR HEALTH Comparing the supply chains FactorOECDDeveloping country Regulatory  Strong and well-defined regulatory structure  Good ability to enforce regulations.  Weak, fragmented regulatory structures  Poor ability to enforce regulation Distribution systems  Few large distributors with nationwide coverage  Relatively low markups in distribution  Wholesale and retail markup regulation in many  Very fragmented private distribution market  Govt quasi-monopoly on distribution  Few or none with nationwide coverage  High markups in distribution Information and communication across supply chain actors  Well developed  In some instances facilitated by government  Skeletally developed Source: Adapted from Yadav and Smith 2012

22. 22 Patients Importers/ Distributors Wholesalers Private Sector Purchasing Private supply chain shortcomings 1.High markups (wholesale and retail) 2.Inability to verify quality of product and services 3.Poor coverage/reach in rural remote regions (lack of equity in access) 4.Pharmacies do not stock “essential medicines” but only fast moving medicines Retail pharmacy

23. MARKETS FOR HEALTH Common response to supply chain market shortcomings There are shortcomings in the private supply chain Belief that private supply chain does not serve the poor, charges high prices, distributes only fast moving medicines, and provides poor quality medicines Invest in government run supply chain for essential medicines

24. MARKETS FOR HEALTH Systematic understanding of root causes of supply chain shortcomings Lack of competition Information asymmetry Too many intermediaries High markups Excessive fragmentation Wrong targeting of limited quality enforcement resources Poor quality Excessive fragmentation Inadequate solidarity or USO contracting Pick-up vs. drop-off Inequitable reach Slow moving medicines require much greater working capital than fast moving medicines Inadequate assortment

25. MARKETS FOR HEALTH A policy toolkit to improving the supply chain Facilitating retail competitionFacilitating wholesale consolidationCreating incentives for rural distributionWholesale and retail markup regulationFocused quality enforcementBroadcasting price information

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

27. MARKETS FOR HEALTH DISCUSS CASE STUDY

28. MARKETS FOR HEALTH  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 Facilitating greater retail competition

29. MARKETS FOR HEALTH 29 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 New models for understanding retail competition

30. MARKETS FOR HEALTH  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 Facilitating greater wholesaler consolidation

31. MARKETS FOR HEALTH  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 Creating incentives for rural distribution

32. MARKETS FOR HEALTH 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. MARKETS FOR HEALTH Wholesale and retail markup regulation Manufacturer Importer/ Wholesaler Secondary Wholesaler Pharmacy/ Drug Shop Patient  Margins depend on price of the product sold.  regressive markups  Non linear markups

34. MARKETS FOR HEALTH 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 Manufacturer Importer/ Wholesaler Secondary Wholesaler Pharmacy/ Drug Shop Patient

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

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

37. MARKETS FOR HEALTH Cash and carry model creates distribution inefficiencies 37 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

38. MARKETS FOR HEALTH 38

39. Manufacturer Importer/ Distributor MAJOR CITY Large Retail Pharmacies Wholesaler Sub - Wholesaler SMALL TOWN or RURAL Smaller Retail Pharmacies 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 Lack of credit limits stocking of non fast moving medicines

40. Annex

41. MARKETS FOR HEALTH 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 Where you operate in this triangle is a program strategy decision. Markets will require policy guidance on this Responsiveness Agility Leanness

42. MARKETS FOR HEALTH Supply chain type should suit overall strategy EfficientResponsive Primary purposeLowest possible costRespond quickly Asset utilizationsHigh utilizationDeploy excess capacity Inventory strategyGenerate high returnsDeploy significant Butter or safety stock Lead time focusShorten if not cost increase Invest in order to decrease Supplier selectionPrice and qualitySpeed, flexibility, quality Product designMinimize cost High performance Modular design Postponement Adapted from : “What is the Right Supply Chain for your product ?” by M. Fisher, Harvard Business Review March-April 1997

43. MARKETS FOR HEALTH “ 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 “Functional” Products“Innovative” Products Efficient Supply Chain MatchMismatch Responsive Supply Chain MismatchMatch