Pharmaceutical supply chain project: executive summary of the outputs of phase one
Purpose of paper
This paper describes the rationale for, and process of, undertaking an analysis of the pharmaceutical supply chain into the NHS hospital sector. It summarises the key outputs and messages of phase one of the project, which has now been completed. It should be noted that, due to the multiplicity of supply arrangements across the country, issues and experiences reported by some participants will not necessarily resonate with pharmacists in another part of the country.
NPSG is asked to discuss the contents of the paper, and members are invited to feed back their comments via the attached questionnaire.
Background
Current situation
In April 2000, two bodies were established as successors to NHS Supplies: the NHS Purchasing and Supply Agency (PASA) was set up as an agency of the Department of Health to oversee, modernise and improve supply management across the NHS in England; NHS Logistics provides the primary supply route for consumable products into the English NHS and is also developing into its new role as supply chain manager for the NHS. (Whilst NHS Logistics does not physically handle pharmaceutical products, its new role involves consideration of the supply channels covering all commodities distributed to the NHS.)
Contracting is undertaken by regional/divisional pharmacy purchasing groups, representing a partnership between trusts and PASA. These contracts include the particular delivery arrangements offered by the manufacturer. Where there is no contract for a product, trusts may put in place a prime wholesaler agreement and use this to achieve discounts. Alternatively, they may simply purchase their supplies from one or more wholesalers.
This means that there are several supply routes for pharmaceutical products into the NHS:
direct from the manufacturer to the hospital
via a wholesaler (including parallel imports)
via a regional short-line store
and a multiplicity of agreements in place between different parties.
Drivers for the project
The last year or two has seen a significant increase in complaints from trusts about the performance of the supply chain for pharmaceuticals, centring on dissatisfaction with the service provided by the wholesalers. Particular problems that have been highlighted include inaccurate deliveries, invoicing errors and the inflexibility of wholesaler systems, creating additional paperwork and workload for the trusts. However, this had not been independently investigated to verify the situation, ascertain the extent of the problem, identify its causes or develop potential solutions. Indeed, one of the issues was that there were no objective and universal indicators for measuring performance in the pharmaceutical supply chain – and, due to the variety of IT systems in operation across the supply chain, as well as the nature of relationships between the different players, there was a paucity of good quality, consistent management information to support systematic measurement and a general lack of visibility throughout the process.
The NHS Purchasing and Supply Agency was asked by NPSG to investigate and address the issue.
A cross-functional project steering group was formed, comprising representatives from PASA, NHS Logistics, trust pharmacies and the Department of Health (see Annex A for a list of members) and supply chain consultants Kurt Salmon Associates were appointed following a tender exercise.
Objectives of the project
The project was conceived in two phases.
Phase one – supply chain analysis (current situation)
To determine where the problems lay and the reasons for the poor performance of the wholesalers, it was necessary to look at all types of players in the supply chain (trusts, wholesalers, manufacturers and short-line stores) and examine practices, systems and behaviours that might influence the effective operation of the supply chain. This was the first time an objective, national study had been undertaken since the MMM report in 1986. Specific objectives were:
· to assess current performance in the supply chain, highlighting weaknesses and opportunities for improvement
· to put forward key performance indicators that could be used as an agreed basis for measuring supply chain performance
· to identify options for the future.
Phase two – implementation issues
Phase two has not yet been started, pending consultation on the outputs of phase one and the way forward. However, the intention is:
· to critically evaluate the options identified
· to develop action plans to trial or implement tactical options, where appropriate
· to develop the optimum business model for future supply arrangements, focusing on the type and nature of contractual relationships between the players.
Process
KSA was provided with a wide range of background material from a variety of sources. To obtain as full as possible a picture, interviews were conducted with key representatives of a number of trusts, wholesalers, manufacturers, short-line stores and a supply chain expert in this field. A list of participants is at Annex B.
The wholesaler picture
Overview
Wholesalers typically make 80 per cent of their sales to retails and 20 per cent to hospitals. As a whole, the hospitals market is only 50 per cent serviced by wholesalers, with AAH and Unichem accounting for 27 and 13 per cent of that figure respectively. The following issues emerged from the study:
· orders to wholesalers may represent around 1/3 of value and 2/3 of lines ordered by trusts
· one trust reported doing 89.6 per cent of its business (by value) with 30 suppliers[1] (72 per cent of order volume). The remaining 10 per cent (or 28 per cent of orders) is done with 127 suppliers. Consolidating the bottom 100 through a single channel could be of far greater benefit than consolidation the top 30
· one wholesaler reported that 40 per cent of its orders from NHS trusts were electronic compared with 90 per cent from its other customers. A manufacturer delivering direct reported that less than 25 per cent of orders are electronic. Electronic orders reduce keying errors, pricing errors and coding errors. Optimisation of systems use could reduce stocks
·
·
· wholesalers’ profitability in the hospital sector is affected by the need to carry the ‘tail’ of low value, slow moving items
· percentage mark-up arrangements are not liked by producers of expensive products. They see themselves as effectively subsidising the cheaper generic products
· AAH supplies ward boxes to a handful of trusts – Perth, Doncaster, Leeds, Barnet, Royal Gwent, Wishaw (Scotland).
Wholesalers’ business strategy
To understand the root causes of some of the difficulties in the supply chain, the study looked at the business strategies employed by some of the main wholesalers. The following is a summary of the key points to emerge.
· Looking across wholesalers’ total business, net margins can be as low as 1.3 per cent – partly because the level of rebate has grown over the years as wholesalers have competed for market share. Clearly, cross-subsidies occur to offset the losses on some lines
· Manufacturers’ mergers put price pressure on wholesalers
· Wholesalers are moving towards vertical integration, acquiring chains of community pharmacists. The parent companies of AAH and UniChem now own over 1,800 pharmacies in the UK.
· With much higher margins on pharmacy retailing, it can be 10-12 times more profitable for wholesalers to invest in retailing rather than wholesaling. As retailing becomes a bigger part of their business, will they be tempted to adopt the ‘Boots approach’ and serve only their own outlets?
· These trends have a number of consequences (actual and/or potential):
- the wholesalers’ operations are already geared towards serving the retail market
- any new investment in infrastructure, systems or people is likely to be in this part of the business
- low profits and high ‘nuisance factor’ increases the risk of one of the major wholesalers pulling out of the hospital market, leaving the remaining national wholesaler in a position of dominance
· As other supply channels have emerged, the number of wholesaler depots overall has fallen dramatically (for example, from over 180 to around 60 between 1986 and 1996) leading to an effective monopoly in some parts of the country and contributing to a deterioration in service.
Performance issues
· An analysis of three key wholesalers showed an average service level of around 90 per cent[2] (see Annex C for sample reports).
· Wholesalers claim that pricing errors are often due to late notification of price changes by the manufacturer, notably on promotional deals. The extent of the problem has not been quantified.
· During the study, many people questioned the need for twice daily deliveries. There was a view that this was done for the convenience of the wholesalers, to fit in with the delivery schedules required by community pharmacists. Demand from hospitals is usually generated either by an immediate patient need or by the routine top-up of ward stocks. Twice daily deliveries does not fit either of these scenarios.
· Twice daily delivery also acts as a barrier to entry to new players in pharmacy distribution.
· Some participants said a dedicated hospital service was needed.
Other players
· Short-line stores
Short-line stores were set up following the 1986 MMM report. As well as stocking lines where manufacturers give big discounts for volume, they also stock ‘service lines’ – for example, when a minimum order quantity is too big for small units. Stockholding is typically £3-5 million, and on-cost averages out at 1.9%. Ward assembly is carried out at Leeds, Wessex and UCL.
· E-marketplaces and pre-wholesalers
E-procurement companies such as Rx-e.com function as fully web-enabled marketplaces bringing buyer and selling together, consolidating orders without owning any stock. There are also pre-wholesalers such as Healthcare Logistics, who provide third party fulfilment against orders placed with manufacturers. While there may be scope for these types of players to increase their market share in some areas of the country, there is a big question mark over their fulfilment capability were there to be a significant increase in demand.
· Manufacturers
The GlaxoSmithkline (GSK) agency model, whereby the company owns the stock in the trust, is unique in UK. Other manufacturers are considering a similar model but are reluctant to give up a month’s income to put consignment stock in place. Good data and visibility throughout the supply chain means there is generally a better service level into the wholesalers.
·
Key issues
By looking across the whole supply chain, rather than concentrating solely on wholesalers, the study was able to gain an insight to the very different perspectives of the different players on key issues.
· Payment problems
The study found very clearly that there are two sides to the story. Because of the perceived unreliability of wholesalers’ service, trusts are spending time matching invoices to orders (although this is usually done electronically), raising price and other queries and progress-chasing those queries when wholesalers fail to respond. This is frustrating and potentially time-consuming when the incidence of invoicing errors is high. In the meantime, no payment is made, even if 19 out of 20 items on an invoice are correctly priced and delivered.
For their part, wholesalers are operating on very tight margins for their NHS business and often lack the resources to resolve problems. From their point of view, the NHS is a difficult customer from whom they make little profit, and who often do not pay on time, whatever the reason.
The current ‘system’ only serves to exacerbate the situation. For the NHS, withholding payment until the query is resolved is not only a function of trust procedures, pharmacy/accounting systems and trust SFIs, it is also seen as a ‘stick’ with which to beat the wholesalers. A possible alternative is payment against a monthly statement (as is the practice between the wholesalers and their retail customers), only withholding payment for those lines that are in dispute. This would, in theory, give the wholesalers more cash resources to resolves outstanding queries, whilst creating more goodwill to do so – especially if combined with other incentives and/or rewards for good performance. In short, using the ‘carrot’ as well as the ‘stick’.
· Price versus total cost
Supply chain decisions often tend to be driven by considerations of price rather than total cost to supply. Whilst it is recognised that this is a generalisation, activity associated with, for example, order placing/chasing, receipt and distribution, payment (including time spent in the Finance department) and stockholding, is not always fully considered and costed into the equation. Previous studies at Oxford John Radcliffe (Miebach Logistics) and Southampton UHT (NHS Logistics) indicate that trust internal supply chain activity associated with pharmacy is several times more costly than for other consumable products. This can only partly be explained by the need for a robust audit trail, and labour costs for pharmacy staff.
Considerations of total cost tend to favour focusing on supply through fewer ordering points.
· Ward order assembly
The NHS introduces lumpy demand into the supply system. While this is fine for the manufacturers (so long as the lumps are not wildly erratic) it is problematic for the wholesalers. The report suggests that ward box assembly could help smooth demand, reduce stocks and simplify supply operations. While it is arguable how much cost could be taken out of the system and NHS staff time saved, it might achieve a better service level and would reduce (but not remove) the need for pharmacy stores on the trust site. Ward box assembly may also have an effect on the Christmas peak, although more work would need to be done to determine precisely the underlying causes of the peak.
Ward box assembly could be undertaken by wholesalers or by the NHS, perhaps with top-up deliveries from the wholesaler to a satellite unit. A KPI could be introduced to reflect the share of pharmaceutical demand met from ward stocks, leading to better patient care and lower stockholding.
· Use of IT
At least six different pharmacy systems are being used by trusts to order and manage pharmacy stocks. There are, however, indications that maximum use of these is not being made across all trusts – one wholesaler reported that 40 per cent of its orders from trusts were electronic, compared to 90 per cent from non-NHS customers. Greater adoption of electronic methods would reduce the risk of errors and the activity associated with resolving them.