PROCUREMENT get the lowest price without losing

PROCUREMENT – A functional department, normally deemed to address Supply considerations of the firm. The activities of the Procurement department could either encompass all, or only a part, of the strategic Supply considerations in the firm. ‘PURCHASE’ and ‘PURCHASING’ are used synonymously to mean the same functional department.

Competitive advantage : a superiority gained by an organization when it can provide the same value as its competitors but at a lower price or can charge higher prices by providing greater value through differentiation, it results from matching core competencies to opportunities.

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 Pharmaceutical industry: The U.S. pharmaceutical industry is the group of manufacturers, in the United States, which produce human drug products, veterinary drug products, biological products, and medical devices (FDA, 2011c).

– Best practices: Best practices are procedures and practices implemented throughout an organization to increase organizational competitiveness (Seeger, Locker, & Jergen, 2011).

 

v Statement of problem

Do procurement practices affect the organization competitive advantage in a pharmaceutical industry?

 

 

 

 

 

Literature review

After the 1990s the procurement process had a turning point which was considered as an important force in the value generating process and the competitive environment .  the purchasing process has five rights for it to be done perfectly

1.      Purchasing the needed item or service

2.      Most suitable quality

3.      Needed quantity

4.      At the right time

5.      At the right place

The aim of these processes is to minimize the total cost of ownership and to contribute to the organizations goal. There are many factors that shape and control the organizations procurement system.

Now that the role of procurement has changed and the focus is on global expansion as there are  many opportunities in international markets which will lead us to a new factor that shapes the procurement practices for the companies will change their internal functions. Another factor that shapes the procurement practices is the global drive towards sustainability, an important contributor for alignment of internal and external factors is the sustainability oriented procurement .

Price is not the only factor that affects the decision but it’s the main one according to the effective cost management theory, as we need to get the lowest price without losing the quality or customer satisfaction. However we can manage to decrease our costs with other ideas such as standardization of our products, implementation of centralized purchasing model, improving our transportation, reduction of inventories cost, competitive tendering and so on.

Procurement in pharmaceutical companies has a complex process and has many decisions that needs to be function optimally in order to be able to offer cost effective, good quality and efficacious medicines that will make us obtain a competitive advantage, we will discuss each of the key processes in procurement practices

1) Registration
it’s the step to be taken in the pharmaceutical chain, it contains the labeling, marketing, prescription, usage and possible side-effect. This procedure needs to be applied uniformly and transparent. This process should guarantee drug efficiency and safety.

2) Selection

The selection of the raw materials and components of the drug should be on a cost benefit analysis, cost effective and needs to be chosen carefully, the selection criteria should be based on the acceptance by key prescribers and upon regulations of the country. 

 3) Procurement the main goal of it is to purchase the right quantity of raw materials in the most cost effective way. This includes aggregate purchasing , inventory management, technical and financial analysis for orders, public bidding, following up with payments and receipts of materials purchased along with quality control check on purchased materials. In order to gain a competitive advantage we can implement the competitive procurement that requires clear criteria for the selection of suppliers, and during the process of selecting the winning bidder. Transparency is a must for us to reduce corruption , on the other hand these procurement procedures is costly as it’s a continuous process which requires an ongoing evaluating and monitoring  for the process in order to obtain the competitive procurement.

4) Distribution in pharmaceuticals industry we must make sure that all drugs are transported, distributed and stored in the most appropriate way. This requires regional and central warehouses, pharmacies and dealing with the best distributors. For us to obtain that we must have all the facilities like the refrigerated entities to guarantee that we will not have any defected drugs due to failure in inventory conditions. For us to eliminate the risk of thefts we must implement a system to control the movements of the inventory, delivery schedules and checking the delivery orders against inventory of products. The output of this control system and the information from it must flow every level as needed.

5) Service delivery

We must build a strong relationship with our customers that are the pharmacist, physicians and doctors that will deliver our service as they will prescribe the drug. In the pharmaceutical industry the interaction between the pharmaceutical company and doctors is a zone that is particularly subject to corruption, as the doctors can be influenced by the marketing practices that they face from other drug companies. There’s always a needed interaction to educate the doctors about the quality of new drugs, however, there is convincing evidence that suggests that the profit maximization is the motivation and not health education.
In all above mentioned decisions honesty and greater transparency will improve all the procurement processes and will lead us to the competitive advantage.

 

 

 

Besides the decisions that we mentioned and as we illustrated earlier that the pharmaceutical procurement is a complex process and it involves many steps, ministries, manufacturers, agencies, rules and regulations, and governmental policies. We will discuss now the strategic objectives of the pharmaceutical procurement that is suitable for any procurement and distribution no matter what model is used, we shall monitor the performance of the suppliers and the procurement system.

The strategic objectives of pharmaceutical procurement are : 1. Procure the most cost effective raw materials in the right quantitiesthis is the first strategic objective in any organization that has a department for procurement they should progress the most cost effective raw materials in the most appropriate way . also we must keep in mind to estimate the accurate quantities so we don’t have unneeded  stock which will be considered a waste of capital.

  2. Select reliable suppliers of high-quality productsbuilding a relationship with suppliers is very important as selecting a reliable suppliers that will provide us with high quality components with reasonable prices, before selecting the supplier and register them we must implement quality assurance programs to test the raw materials and make sure they are suitable for us to use.

3. Ensure timely deliveryfinally, the last strategic objective is ensuring timely delivery as we previously stated in the distribution decision we must ensure that we deliver the right quantities to warehouses for us to deliver them to the customers and get a competitive advantage to be responsive to customers’ needs.

 In procurement practices we must consider the total cost of ownership and to achieve the lowest price over all total cost considering the actual price of the components (raw materials), quality price as we cant choose a supplier just for his price we cant tolerate the hidden cost for poor quality or unreliable supplier or short shelf life product as we will pay low price but will effect the total cost eventually we will pay higher price to fix this problem, inventory costs at each level of supplying and manufacturing until it’s a finished good and needs to be delivered to customer, finally considering the operating cost by managing the procurement process.

After discussing the decisions and strategic objectives for the pharmaceuticals procurement we shall talk about the operational principles that’s needed for a good pharmaceutical procurement1. Managing the procurement process, different functions of the procurement process like selection of suppliers and the winning bidder of the tenders , and technical and financial analysis  should be done through committees and appropriate expertise  for each specific function, each individual in the procurement department is responsible as for managers they must ensure that the process is carried out efficiently and effectively in  congruence with the law and regulations and the country’s policies, the procurement officer should be accountable for organizing inputs to achieve the desired result. Separating the functions will enhance to accountability and professionalism and will contribute an efficient procurement division.  

Examples include: A. Drug selection, which should be done by a national formulary or essential drugs list (EDL) committee.B. Quantification of drug requirements, which should have inputs from the medical stores and/or from district or health facility managers in decentralized systems.C. Product specifications, which should be prepared by a standing committee or an ad hoc technical committee.D. Pre-selection of suppliers, which should be done by a broad-based procurement committee composed of managers and technical staff, including quality assurance experts.E. Adjudication of tenders, which should be reserved for the procurement committee or tenders board.- Pharmaceutical procurement is a specialized professional activity that requires a combination of knowledge, skills and experience. 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.
2. Transparency of the Procurement procedures, by illustrating the criteria of selection to the vendors for them to acknowledge of how to win the contracts, also we should follow formal written procedure ( SOP) throughout the process.  The well-known criteria should be used to take procurement decisions and for awarding of contracts. Information on the tendering result and process should be explicit and the issuing of the order should be done in the shortest period of time and shall include all needed information.

 3. Monitoring and planning the Procurement process, the process should be planned properly and to monitor the performance regularly it shall include internal and external audit. For us to make sure that the raw materials are available in the needed time we must carefully plan for this process and to purchase the items at the right time without delays when attainment to the reorder point.  Management information systems and ERP system nowadays has made the planning, managing and monitoring procurement easy as they are reliable. The system tracks the request, order placed, payments made and gather the required information for each supplier and it monitor their performance like the average lead time and service levels. Also they can provide us with information about the planned against actual items and quantities purchased, percentage of drugs in stock against the level of supply and report on stock out drugs.  also we can use these systems in inventory management as they compare the actually purchased items with estimated .
4.procurement in the Public sector should be limited to an essential drugs list,  in public sectors its different as the selection of the drugs are based on a national list that allows for concentrating on a limited number of products so larger quantities will reassure competition and lead to more competitive prices. Reducing number of items will increase specialty and simplify management activities and inventory carrying cost.

5.      Competitive Procurement is a must in public sector  we have four main methods for procurement: open tenders, restricted tenders, competitive negotiations and direct negotiation with a single supplier.  The first three are considered competitive procurement.  In order to obtain a favorable price supplier competition is a the primary key to obtain that, in the public sector we use competitive methods for all purchases except for the emergency or very small purchases for components will be available at multiple sources which will help us get them in a competitive price as their quality and reliability are assured. Competition will carry us to the point at which the prices are as low as possible.  A rule of five in pharmaceutical pricing will generally reach the level where we have at least five beds per item and will lower the prices in the tendering system. In other situation where most of the products are single source the completion is reduced so we shall start sourcing for newer suppliers that can give similar quality to get better prices however doing that requires a drug committee to evaluate the quality of the similar product and not by the procurement officer alone.

 

6.      ensuring reliable financing for procurement; to build a strong relationship with suppliers and to get good prices finance management should be followed to the use of financial resources, paying on time to suppliers, investing money in purchasing more components to reinvent drugs and in research and development, paying on time has a very positive effect on decreasing the stock out and reduce prices and increasing the supplier confidence in the procurement system.

 

7.      Procurement procedures should assure that the items purchased are high quality and according to international standards, effective assurance system needs:A. as we defined earlier selecting reliable suppliers of quality items is important.                       B. implementing a product defect reporting program C. applying targeted control testing.selecting the suppliers that provides high quality product is the primary key to ensure the product quality, procurement department must be alert to the product quality issues and not only pricing issues. Some products differ in formulation from supplier to supplier so the purchasing officer should be watchful when sourcing new suppliers, even when products are equivalent they must pay attention to changes in dosage that can cause problems. But if selecting suppliers is managed effectively its not necessary to carry out quality control testing on each batch received. Many procurement agencies limit the testing to new suppliers.

All these principles should help us obtain the competitive advantage in the pharmaceuticals industry.