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Supply Chain Metrics Measuring Total Cost per Patient to Drive Supply Chain Improvement in the Developing World www.pwc.com/publicsector Measuring Total Cost per Patient to Drive Supply Chain Improvement in the Developing World > Introduction A global response to health challenges requires the integration of prevention, treatment, and care programs; and the coordinated delivery of key commodities, including: medicines, test kits, and other medical consumables. Each improvement to supply chain processes has the potential to reduce response time and to shift the allocation of budgeted resources from logistical costs to direct patient care. In recent years, multi-national organizations have made significant strides in implementing supply chain mechanisms that have driven improvements in drug delivery to the developing world (see Appendix A for examples). Most improvements have been implemented at the global level by donor or partner organizations. Often, however, countries that would benefit from such measures have not adopted these industry standard practices to improve their internal supply chain systems and processes. On the contrary, many nations have become dependent on external parties to perform key supply chain activities on their behalf, and thus have had little incentive to identify reforms or invest resources to improve their own systems. To address this concern, donor organizations and governments should consider adopting measures tied to new or ongoing aid projects and programs that serve to properly incentivize supply chain improvement and innovation. This will serve to promote the longer-term goal of facilitating self-sufficiency and sustainability in countries benefitting from humanitarian aid. Barriers to Improvement Numerous inefficiencies exist in national supply chains despite large amounts of disbursed aid. In fact, large disbursements of aid given unconditionally can in itself act as a barrier to realizing efficiencies. When clear systems of accountability or mechanisms for oversight have not been defined, aid funding is at greater risk of misuse or misappropriation at the country-level. Commonly encountered supply chain inefficiencies within countries receiving such aid include frequent stock-outs of critical medicines, and large amounts of product waste driven by inadequate forecasting and demand planning capabilities, resulting in higher prices paid for expedited product orders. In-country distribution networks and infrastructure may be inadequate, with an inordinate amount of resources directed toward facilitating product availability at the “last mile.” Capabilities of supply chain practitioners in-country present yet another challenge, as this field is often considered an added duty rather than a career track unto itself, and therefore adequate training is not provided or widely available. Additionally, managers often lack the necessary data systems and analytical tools to gain end-to-end visibility of their supply chains. Resolving supply chain inefficiencies in the developing world is a long-term effort, requiring significant time, resources, and political commitment. While there is no short-term solution, some aid initiatives are better structured than others to help speed the pace of improvement and innovation. To encourage countries to invest human and financial resources to improve supply chain systems and processes, donors and government organizations should carefully assess and recommend project structures that incentivize countries to engage in continued capacity-building. 1 PwC Supply Chain Metrics > Performance Measures Drive Improvement Countries that are inefficient often share one characteristic: they have failed to adopt supply chain leading practices that are proven at the global level. The development and application of a commonly used, sound metric that gives donors insight into the efficiency of supply chain operations within a given country can motivate countries to reduce inefficiencies and drive down costs through the adoption of leading practices. One such metric that can help to drive desired improvement is total cost per patient, specifically as related to implementing and maintaining a public health initiative within a given country. This metric serves as an indicator of the efficiency and maturity of a country’s distribution system. Less mature supply chains consume a great deal of resources to achieve desired results, resulting in a higher cost per patient. Conversely, countries operating more efficient supply chains are poised to achieve the same results at a lower cost per patient. While many organizations measure their individual cost contribution toward specific programs and projects, measuring by total cost per patient differs in that it accounts for total end-to-end supply chain costs incurred in drug delivery. It also relates costs to the number of patients served, which provides additional perspective and context for determining the true efficiency (or magnitude of inefficiency) of the system being measured. Example: An aid organization purchases $10M of medicines for Country A, and $10M for Country B. The additional cost associated with management, warehousing and delivery in each country is $5M. However, the patient population for Country A is 10,000 and Country B 20,000. In this example, Country A will achieve a total cost per patient of $1,500 and Country B $750, indicating the Country B is able to more efficiently deliver product in-country. Total supply chain cost per patient is a powerful metric as it can be both actionable and meaningful to multiple stakeholders. It provides aid organizations with a greater understanding of the total costs associated with program implementation, and aligns stakeholders behind an informed mechanism for action. The metric can be measured in many different ways and customized to specific areas of interest. When measured by country and by disease, the metric allows for comparison across the two, giving organizations the ability to highlight inefficiencies and to direct their resource portfolio to facilitate improvements. Measuring the total cost per patient over time also enables an understanding of the impact of investments on improving the efficiency of drug delivery. A successful supply chain improvement will have a direct, measurable, and positive impact on overall cost; conversely, an inefficient supply chain mechanism will have a negative impact on overall cost. Understanding how to use the cost per patient metric is equally as important as defining how to measure it. Aid organizations should seek to continually improve this metric, and consider building this requirement into grants as a performance evaluation criterion or a condition for continued funding. It is important to note, however, that this metric cannot be viewed in isolation; rather, it must also be considered against the effectiveness of aid. Implementing a total cost per patient measure without consideration to supply chain outcomes could create perverse incentives to reduce cost at the expense of service, and negatively impact the availability and affordability of medicines and other critical health commodities. When adopting a measure of this nature, aid organizations must strike a balance between efficiency and effectiveness. Supply Chain Metrics PwC 2 > Measuring Total Cost per Patient A common fallacy in measuring the cost per patient metric is to consider the supply chain as a discrete set of activities operating in isolation of one another, and which can be measured and analyzed independently. Rather, supply chain activities are tightly linked, and actions taken in one area of the supply chain may have a direct and significant impact on another. As a result, to adequately measure the total cost per patient of a public health initiative, organizations must account for total costs incurred at each stage, from product procurement through delivery to the final customer. By evaluating the supply chain as a cohesive system, organizations gain a better visibility of the root cause of supply chain inefficiencies in order to target appropriate measures for improvement. The challenge in measuring total cost lies in defining the components that should be included in its calculation. A framework such as the Supply Chain Operations Reference® (SCOR®) Model can be leveraged to account for end-to-end cost components. Created collaboratively in 1996 by supply chain practitioners in industry and academia, the SCOR® Model is commonly accepted as the premier and most broadly used tool for commercial and public sector supply chain management. SCOR® is a process reference model that “links business process, metrics, leading practices, and technology features into a unified structure to support communication among supply chain partners; and to improve the effectiveness of supply chain management and related supply chain improvement activities.”1 It is important to note that SCOR® is purposefully generic, so that it may be applied to a number of industries and supply chains. As a result, the framework must be tailored and customized to the environment in which it will be used. The SCOR® Model deconstructs the supply chain into its most fundamental elements, and defines the key processes, activities, and tasks commonly performed within any distribution system. Each relevant process, task, and activity has a corresponding cost associated with it that must be incorporated into the measurement of total cost per patient. At the highest level, SCOR® defines five “Level 1” supply chain processes, including Plan, Source, Make, Deliver, and Return. These Level 1 processes can serve as a foundation for identifying the cost components that should be included within a total cost per patient metric. The adjacent table defines each SCOR® Level 1 process and provides examples of costs that must be considered within each category. http://supply-chain.org/scor *SCOR® is a registered trademark of the Supply-Chain Council, Inc. 1 3 PwC Supply Chain Metrics > Closing Thoughts The mechanisms implemented by donor organizations and governments to address supply chain inefficiencies have been effective at a global level, and improvements are continually being made. However, the lack of in-country capabilities continues to thwart efforts made by global organizations to improve the availability, affordability, and access to critical medicines and other health supplies. It is important to build in-country capacity and encourage country self-sufficiency so that the benefits of these supply chain improvement mechanisms can continue to be realized. To identify the areas in the supply chain where resources should be placed, the SCOR® framework and the metric of total cost per patient should be used. Using this metric can help donor organizations measure the effectiveness of their aid programs and the supply chain mechanisms they put in place. As the effectiveness of the end-to-end supply chain improves, donor organizations will be more easily able to contribute to getting medications to people in developing countries most in need and when they need them. Supply Chain Metrics PwC 4 > Next Steps About PwC PwC recognizes that donor organizations are focusing on their return on investment (ROI) now more than ever. Donors want to see that aid distributions are reaching patients in the most effective and efficient way possible. Currently, many donors fail to understand the real impact of their aid because they lack a universal, end-to-end methodology to measure this ROI. We hope that this whitepaper encourages organizations to consider measuring total cost per patient as a mechanism for evaluating investments. This paper is intended to be a catalyst for change in the way that international aid organizations measure efficiency, manage their portfolio of programs, and incentivize countries receiving aid to self-improve. PwC is a recognized leader in delivering operational strategy and results to the global health and development sector. Having worked with several major pharmaceutical companies, PwC brings extensive knowledge of relevant, commercial healthcare leading practices to our public health clients. In addition, we recognize the unique set of challenges and requirements in the global health and development space. Our understanding comes from ground-level experience in developing countries. We have developed customized solutions for supply chains required to operate in environments with poor resources, limited infrastructure, and several stakeholders. Furthermore, our approach to supply chain diagnostics is inherently collaborative. By working closely with clients in a structured way, PwC not only provides high-quality deliverables, but also ensures the continued client ownership of solution design and outcomes necessary for a sustainable solution. We offer the SCOR® framework as a starting point for that change, which will lead to customized solutions for individual organizations and their programs. If your organization is interested in learning more about how to measure total cost per patient for your programs or projects, please contact one of our team members listed at the end of this paper. 5 PwC Supply Chain Metrics PwC firms provide industry-focused assurance, tax, and advisory services to enhance value for our clients. More than 180,000 people in 157 countries in firms across the PwC network share their thinking, experience, and solutions to develop fresh perspectives and practical advice. Appendix A: Examples of Global Supply Chain Innovations Global supply chain innovations have taken form through a variety of mechanisms including pooled procurement. Implemented by organizations such as the U.S. Agency for International Development (USAID) and the AIDS-relief group UNITAID, pooled procurement synchronizes the timing of procurement for multiple parties (e.g., organizations, countries) and places product orders in bulk at regularly scheduled intervals. This enables organizations to achieve economies of scale and discounted prices that they otherwise might not have independently. It can also stabilize product supply, particularly for entities that require only small volumes of product. By aggregating orders, donor or government organizations are more likely to meet manufacturer minimum batch size requirements for production, and are therefore less likely to experience delays or difficulties in obtaining products. Buffer stock schemes represent another mechanism that has been implemented by organizations such as UNICEF, USAID, and the Stop Tuberculosis (TB) Partnership Global Drug Facility (GDF) to improve supply chain reliability and effectiveness. Supply chain leading practices suggest holding a small, rotating stockpile of inventory to maintain consistent supply in the event of unanticipated fluctuations in supply or demand. Organizations that fail to maintain product buffers are slower to respond when inventory is less than actual demand, or when manufacturers face limited production due to low supply of raw materials. Product held in a buffer can be delivered almost immediately once a need is identified, and organizations maintaining buffers are not exposed to unpredictable manufacturer lead times. By contrast, those that do not maintain a buffer have to place a new order with suppliers each time a need is identified. Another example of a global supply chain improvement is the increased availability of generic drugs to the developing world. Donor organizations have funded many initiatives to encourage new research and development, and to reduce barriers to entry for generics manufacturers, with the objective of improving the availability of affordable medicines in the developing world. The growing presence of generics manufacturers drives competition in the marketplace, strengthens local industry, and promotes the development of emerging markets and their infrastructure. If you would like to discuss any of the issues raised in this report, please reach out to any of the contacts listed below. Chandresh Harjivan Principal Public Sector Practice [email protected] +1 (202) 756-1710 John Geiran Managing Director Public Sector Practice [email protected] +1 (703) 918-1266 Shabana Farooqi Director Public Sector Practice [email protected] +1 (571) 215-5222 Supply Chain Metrics PwC 6 www.pwc.com/publicsector © 2014 PwC. All rights reserved. “PwC” and “PwC US” refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. PSP-013e_WP Supply Chain Metrics_HGF