Supply Chain Frontiers Issue #25. Read all articles in this issue
How to deliver high-quality medicines at affordable prices to communities in developing countries has long been a difficult challenge for humanitarian organizations. Ground-breaking research into the supply chains that support such programs could provide some solutions.
In both the private and public sectors, “our understanding of the markets and logistics systems in some of these transitional economies is very poor,” observed Prashant Yadav, professor of supply chain management at the MIT-Zaragoza International Logistics Program, Zaragoza, Spain. Philanthropic and development aid organizations are now starting to fill the knowledge gap. For instance the Bill and Melinda Gates Foundation recently funded a five-year, $10 million program to better understand how supply chains and markets work for malaria drugs.
Yadav is focusing on the supply of malaria drugs, and he is currently testing a new idea in Zambia with backing from The World Bank and the UK Department for International Development. As he explained, as high as 50% of the people in various recipient countries who need malaria drugs buy the treatments from privately run pharmacies or the developing nation equivalent of the supermarket. But the medicines available in these locations are often substandard. “So even if we create the infrastructure for delivering malaria medicines and let the countries buy the drugs with international financing, at least half of the people are still buying treatments that are ineffective,” Yadav said.
The supply chain solutions he is trialing are part of a new global initiative called the Affordable Medicines Facility for Malaria (AMFm) that was originally proposed by the Nobel Laureate Kenneth Arrow. The entity would negotiate drug prices with pharmaceutical manufacturers. Private sector and government outlets in recipient countries would still be able to buy medicines direct from manufacturers, with the AMFm acting as a co-payment mechanism. If, say, a drug costs one dollar per unit to buy from a pharmaceutical company, then the AMFm might give the buyer – possibly a wholesaler or government agency - a 90-cent subsidy upon proof of purchase. The mechanism causes minimal disruption to the market.
However, the solution does have a potential flaw: there is no guarantee that the subsidy will be passed on to the end customer. Yadav and his collaborators have proposed a remedy that is reminiscent of the demand shaping schemes used by commercial organizations. As part of a secondary intervention private buyers would be rewarded retrospectively when they sell high volumes of medicines. In order to achieve these sales the sellers would have to keep prices in check. “If they put steep mark ups on the drugs then the population will not be able to afford it,” explained Yadav. “By cutting retail prices, they stimulate demand, and we give them an incentive in the form of retrospective rebates for volume sales.”
To reinforce the program, Yadav and his colleagues have also recommended a sticker price program for the malaria medicines. A sticker price on each product unit tells consumers what the base price is and puts them in a better position to question exorbitant mark-ups. Individuals might decide to shop around for cheaper sources. The sticker price approach was tested in Tanzania by the Clinton Foundation with positive results, said Yadav.
The AMFm would become an important source of transactional data given that it is meant to negotiate with manufacturers and process co-payments. As a result, it complements another innovative concept for streamlining the malaria medicines supply chain that Yadav calls an infomediary.
Demand forecasting for aid programs is fraught with difficulty. For example, multiple parties are involved in estimating demand for malaria drugs, and there is no strong incentive for sharing the various inputs. Key to accurate forecasting is “what assumptions do you make about things that you do not know,” said Yadav.
The infomediary would act as a central, neutral clearing house for the data and, ideally, provide baseline forecasts that planners could build on. The concept is only in the development stage but, if it materializes, would support the AMFm, since both entities would be vital sources of intelligence on malaria drug markets and usage. The AMFm is closer to reality and was approved last year by the board of Roll Back Malaria, a partnership between the biggest donors for malaria drugs.
“We want to gain a better understanding of these developing country medicine supply chains,” said Yadav. In part that means adapting some of the techniques used in the private sector to match supply and demand. “That’s the kind of ability we need in these markets before any successful interventions can take place,” he added.
For more information on the research and humanitarian supply chain, contact Prashant Yadav.