Framework contracts for medicine inventory management in public healthcare Muhammad Naiman Jalil, Wafa Malik, Areeb Javaid and Ali Jan Khan I t was a cold afternoon of January 2, 2018 when Shahbaz Yasin - a procurement specialist who led medicine procurement at Primary & Secondary Healthcare Department (P&SHD) - met Ali Jan Khan (Secretary, P&SHD) along with rest of medicine procurement team. The agenda of the meeting was to review the progress on the medicine procurement carried out for that financial year 2017-2018 and start planning for procurement process for the next year. "We signed medicine supply contracts with suppliers for year 2017-18 in September, 2017. We also issued the purchase orders in November, 2017. These days, the medicine shipments from suppliers are starting to arrive", started Shahbaz. Ali Jan asked while pondering over a handout that listed the stock levels from January 17th May, 2017, "Do we have enough warehousing capacity to hold stocks this year? I remember, we ran out of warehousing space last year". "Yes, we arranged for additional space in our Medical Stock Depot (MSD), but I guess the key here is that our distribution plan for distributing these medicines onwards to medical facilities should be well-organised and timely. But still, all our yearly supplies shall arrive in MSD till May, 2018. So, we shall be stocked up during coming months", Shahbaz replied earnestly. Ali Jan quipped, "I think the choice of the procurement configuration is also critical here. Since it directly impacts medicine inventory levels and the warehouse space used, I know we would have to look at that later, but I am just thinking out loud about the possibilities here." He took a pause and resumed to ask, "Anyways, how are we looking in terms of medicine procurement for next financial year (year 2018-19)?" "We have already started demand data collection, and we shall be starting preparation of procurement documents in March, 2019", replied Shahbaz. After few more minutes of consideration, the meeting was over. Shahbaz and his team started to leave for their office. On his way back, Shahbaz kept pondering about Ali Jan's remark about procurement configuration. Shahbaz knew that such a task required optimising the current periodic inventory cycle in relation to the medicine consumption and procurement process. Given that P&SHD was a public sector entity, he also knew that the cycle had to follow governmental procurement and financial regulations. This meant that Shahbaz had to also deep dive into how the financial cycle tied with the procurement scheduling process. With his work cut out for him, he paced towards his office to get a head start on this complicated task. Muhammad Naiman Jalil is based at the Suleman Dawood School of Business, Lahore University of Management Sciences, Lahore, Pakistan. Wafa Malik, Areeb Javaid and Ali Jan Khan are all based at Organizational Research and Institutional Knowledge Management Center (ORIM), Primary and Secondary Health Department, Government of Punjab, Lahore, Pakistan. DOI 10.1108/EEMCS-06-2018-0118 VOL. 9 NO. 1 2019, pp. 1-21, Emerald Publishing Limited, ISSN 2045-0621 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 1 Primary and secondary health-care department Formed in November 2015, Primary and Secondary Health-care Department (P&SHD) constituted the main department assigned with the fundamental responsibility for health development of the whole population and communities within Punjab. P&SHD delivered on several levels - promotive, preventive, rehabilitative and curative health-care services from primary health-care level to secondary health-care level. These services were provided through a large network of almost 3,000 health facilities throughout the province. An overview of P&SHD is given in Exhibit 1 along with information on the number of primary and secondary health-care facilities, number of beds at each facility level and the catchment populations served by these facilities. P&SHD maintained an inventory of almost 300 medicines, vaccines and medical supplies throughout its network. Financial (budget) planning and clearing Similar to other governmental functions, P&SHD was subjected to the annual financial cycle for budget planning and clearing for its provision of funds. Shahbaz wanted to have a complete grasp of the budget planning process and remembered that his previous discussions with Mubashir ul Hassan had yielded some important insights into the budget planning timeline. He hence spared no time in meeting with Mubashir at his first availability. Together, they reviewed the standard financial planning process. Mubashir brought timeline of government budget cycle from his office to assist Shahbaz in understanding the process (Figure 1). The process of budget making was a continuous one where financial planning of next year's budget started right after the finalisation of the current year's budget. The financial planning for the budget of the next year starts in September of the previous year with the issuance of Budget Call Letter. During the next three to four months, all governmental departments prepared their budget estimates and consolidated these estimates. These budget estimates included next year's potential expenses for existing schemes and new initiatives, as well as current year's statements of expenses to identify any excess amounts available from current year's budget. After validations and approvals, the first draft of next year's budget was presented to the Finance Department and Planning and Development (P&D) Department. Figure 1 Procurement timeline for the year 2017-2018 PAGE 2 j EMERALD EMERGING MARKETS CASE STUDIES j VOL. 9 NO. 1 2019 For next two-three months, the draft budget was reviewed by various functionaries in the provincial government leading to the preparation of second budget draft and its review and approval in mid-April. The Chief Minister (CM) office's review of the draft took place in the first week of May, after which final changes were incorporated and the budget was ready for presentation to the provincial parliament by late May. Typically, there were little or no changes or adjustments to the budget estimates after the approval of Chief Minister's office approval. The final budget was approved by the Parliament in early June and a Budget book was published in early July. Towards the end of the discussion, Mubashir pointed out, "Here is the something important for you to consider. We know how much money is available for medicine procurement during next financial year after CM's office review is complete. But these funds are only made available for expenditure after the budget book is published". "So that means I can issue request for proposal (RFP) or bid documents after CM's office approval?" exclaimed Shahbaz. Mubashir remarked, "Well, that's for you to decide". "Ok, how about financial clearing? How long it takes to clear an invoice from supplier?" Shahbaz followed quickly. Mubashir replied, "You must consume these funds before financial year ends, otherwise the funds shall lapse. The time from submitting an invoice to delivery of cheque is almost 20days". Shahbaz noted down all of the details in his notepad and flipped it shut before thanking Mubashir for clearing out the details for him. He rushed towards his office in the Procurement Cell to work out how different procurement configurations could affect inventory levels in the system. Procurement in primary and secondary health-care department Once departmental budget for next financial year was approved, the Procurement Cell of the P&SHD carried out central procurement of all medicines, vaccines and medical supplies under the regulatory framework of Punjab Procurement Rules, 2014. The functionaries at Procurement Cell were organised around procurement themes of medicine, equipment and services procurement as shown in Exhibit 2. Procurement under each theme was carried out by a team led by a procurement specialist. Shahbaz had managed the medicine procurement at the Cell for the past eight years. His team comprised a pre-qualification specialist, technical officer, tender coordination officer and coordination support officer. Their designations along with their respective average monthly salary and percentage contribution to the procurement process are shown in Figure 2. Apart from these monthly salaries, the Procurement Cell also incurred running utility costs of approximately PKR 67,870 per month. Medicine demand data collection The Procurement Cell was the ultimate recipient of the P&SHD's medicine demand data. P&SHD used a bottom-up approach to collect medicine demand data for annual procurement of medicines and supplies. Medicine consumption data at almost 3,000 medical facilities was collected on a daily basis by the hospital staff and used for reporting next financial year's annual demand to P&SHD through an e-procurement software. These demand data were then consolidated and rationalised at P&SHD and forwarded to Procurement Cell to establish medicine procurement needs. Demand collection was a yearly exercise; P&SHD typically requested medical facilities for their annual demand estimates for the next financial year at the beginning of the calendar year (i.e. January or February). VOL. 9 NO. 1 2019 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 3 Collected demand data were consolidated at P&SHD and included in the bid documents for their procurement. The consolidated demand data for the medicines that constituted the bulk of the quantity purchased (>80 per cent) in the year 2017-2018 is shown in Table I. Furthermore, an example of monthly demand for a specific medicine, Fefol Snapsule Tablet, is shown in Figure 3. Medicine procurement process in the year 2017-2018 The Procurement Cell was ultimately charged with the responsibility of centralised medicine procurement for all the public healthcare facilities across the network. In the year 2017- 2018, medicines were procured under the framework contract where the total procured Table I Medicines demand of P&SHD medical facilities in the Punjab (year 2017-2018) Medicine name Yearly demand (units) Price per unit (PKR) Fefol Spansule Caps 56, s PG 234,794,680 1.6 Calpol Tablets 500 mg 161,606,312 0.7 Folitab 5mg 120,850,000 0.4 Qalsan D (30's) 119,824,680 2.2 Voltral FCT 50 mg 52,400,000 2.6 Amoxil capsule 500 mg 38,578,404 3.7 Septran Tablets 400 mg 35,600,000 1.6 Zyrtec Tablets 10 mg 35,065,000 2.7 Omega Capsules 20 mg 34,612,000 2.7 Gen-Cipro 500 mg 33,720,000 3.8 Brufen Tablets 400 mg 32,350,000 1.9 Flagyl 400 mg 29,808,404 1.3 Vibramycine Cap 100 mg 25,100,000 3.5 Ostinac 75 mg /ml injection 24,963,000 4.6 Myrin P 19,215,000 8.1 Figure 2 Average Monthly Salary_ and contribution in procurement activity by designation PAGE 4 j EMERALD EMERGING MARKETS CASE STUDIES j VOL. 9 NO. 1 2019 quantity was requested in three installments with each installment being triggered by issuing a purchase order. The standard procurement process under Punjab Procurement Rules 2014 was followed. The standard process included the collection of formulary, estimation of yearly medicine demand, preparing bid document, bid solicitation, collection of supplier bids, bid evaluation and contract finalisation. After the contracts were signed, P&SHD successively issued three purchase orders with each PO pertaining to the installment of medicine delivery. Punjab Procurement Rules 2014, specified certain timelines as regulatory requirements for the standard procurement process. For example, minimum required response time for procurement advertisements was set at least 15 working days. Similarly at least 10 working days should be provided as a grievance period after procurement evaluation and before issuance of notice of award. Due to these regulatory requirements, Shahbaz knew that the possibility of altering any timelines until the contract signing step was slim (see Figure 4 for year 2017-2018 timelines). However, there was no regulatory duration requirement after the contract signing step. Hence, the timelines of PO system configuration, issuance of POs and instalment receipts were under the control of P&SHD to a great extent. From his experience, Shahbaz was well aware of the manpower requirements to conduct the medicine procurement process (Figure 4). The figure outlines the steps in the procurement process along with the respective man-days consumed (in days) and the manpower required, in a realistic scenario. In 2017-2018, procurement process was initiated with the design of formulary in March 2017 and bid documents were issued to the suppliers after Chief Minister office's approval of budget. From that point onwards, contract signing step was accomplished in early September 2017. In 2017-2018, P&SHD decided to centralise purchase orders issuance by using an electronic portal. The configuration of this system started after contract signing (around Figure 3 Monthly demand of Fefol Snapsule tablet (year 2017-2018) VOL. 9 NO. 1 2019 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 5 12 September 2017) and took almost three months till the start of December 2017, when P&SHD were able to issue first set of POs to the suppliers. Procurement contract in the year 2017-2018 As far as the procurement contract was concerned, Shahbaz knew that for the procurement cycle for year 2017-2018, P&SHD moved towards the exclusive use of framework contract. The department used a central prequalifying mechanism for the central procurement of around 300 medicines, vaccines and medical supplies, where a price was fixed on a per unit basis. Shahbaz had sat through all the discussions that proposed the shift from regular one-time contracts towards a framework contract. He knew that the regular one-time contract required price and delivery schedule of the procured commodity to be fixed at the time of procurement; changes to the fixed delivery schedule, agreed price and quantity were not allowed after the contract had been signed. This was disadvantageous since medicine demand was erratic and any additional procurement to satisfy additional demand was a time and resource consuming process. During the year 2017-2018, under the renewed framework contract, price per unit of medicine was fixed. Total procured quantity was also agreed upon at the beginning, but the number of installments for delivery of total procured quantity was kept flexible. The schedule of delivery for each installment was also flexible, and it was finalised after the contract was awarded to a supplier. Given that the medicine demand could be erratic, flexibility in delivery schedule and quantity procured was a desirable aspect of the contract. The framework contract could also be easily extended to carry out procurement for successive years. As for distribution, during the year 2017-2018, framework contract was configured as such that deliveries of all medicines were to be made in three separate shipments using three separate purchase orders. The issuance of the purchase order for 40 per cent of the total contracted quantity was to be done immediately after contract signing with a delivery lead- Figure 4 Procurement timeline for the year 2017-2018 and man-days requirements for medicine procurement process PAGE 6 j EMERALD EMERGING MARKETS CASE STUDIES j VOL. 9 NO. 1 2019 time of 60 days. Second and third installments, each constituting of 30 per cent of the total quantity were to be delivered, with a delivery lead time of 45 and 30 days, respectively, after the issuance of the purchase order by the P&SHD. The delivery schedule of the installments for the year 2017-2018 is shown in Table II. P&SHD had a centralised medicine warehousing facility called Medical Stock Depot (MSD) in the city of Lahore. All the supplier deliveries first arrived at MSD. The department along with a third-party logistics service provider was responsible for the forward distribution of medicine to the end-user facility. P&SHD's estimation of the warehousing cost per unit stood approximately at 1.5 per cent per year for stored medicines. Moreover, the department used the current Treasury Bill rate of 6 per cent per year for the estimation of any financial cost of inventory. Current situation Shahbaz was sitting in his office with all of the collected information in front of him. He was anxiously looking at the handout on medicine stock levels that Ali Jan was referring (Figure 5). Now it was time for analysis. He was confident that he can perhaps prepare a revised procurement model for next financial year that could help P&SHD to manage medicine inventories in a better way. The improved model would ideally suggest the amount to order (size) in each installment, as well as the number and timing of installments under the procurement contract. As Shahbaz was contemplating which variables to use for his initial Table II Schedule of instalments for the year 2017-2018 Delivery schedule Delivery of Qty. without penalty (Days) Grace period (Days) Total period (Days) Immediately after receiving of Contract/ Purchase Order (40% stock) 60 15 75 Second instalment (30%) 45 10 55 Third instalment (30%) 30 10 40 Note: Created by authors based on data from Primary and Secondary Healthcare Department (P&SHD) Figure 5 Total consumption and stock levels of selected medicines at the Tehsil Headquarter Facilities fromJune 2016 to January 2018 VOL. 9 NO. 1 2019 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 7 analysis of the increasing stocking levels, he made a mental note of all the procurement and financial timelines he needed to abide by. The obvious place to start was costs. One reason to use framework contract in lieu of regular one-time procurement contract was to reduce the costs associated with overall procurement activity. Nevertheless, the item quantity in each purchase order and number of purchase orders issued throughout the financial year under the framework contract impacted average inventory levels. Hence, warehousing needs and costs were also somehow related to the procurement configuration. "Perhaps, I need to first compare regular one-time procurement contract (as a baseline) with framework contract and then analyse optimal number of purchase orders under the blanket framework contract. Only then, I can begin to understand how optimal number of purchase orders and each installment size can be best planned in the procurement timeline". He knew it is not going to be simple due to the prevalence of the financial and procurement constraints originating from various regulations. "The best laid plans of mice and men often go awry", he thought aloud while opening a spreadsheet file on his computer. Exhibit 1. Overview of primary and secondary healthcare department (P&SHD) Figure E1 Keywords: Procurement/purchasing, Inventory control, Public administration PAGE 8 j EMERALD EMERGING MARKETS CASE STUDIES j VOL. 9 NO. 1 2019 Exhibit 2. Organogram of procurement cell - P&SH About the authors Muhammad Naiman Jalil received PhD in Management from Rotterdam School of Management, Erasmus University, The Netherlands. His professional experiences and academic publications are in environmentally conscious supply chain management, healthcare supply chains and service parts supply chain management domains. Endorsing data-driven decision-making philosophy, he is interested in applying analytical modelling techniques to solve complex supply chain management issues. Muhammad Naiman Jalil is the corresponding author and can be contacted at:alik graduated with a BSc Honors Accounting and Finance from LUMS and since has been working on supply chain issues at health department. She aims to continue drawing insights from her time with the public sector and provide data-driven solutions in the field of operations and analytics. Areeb Javaid received his BSc Honors in Accounting and Finance with focus on Management Sciences from LUMS. Since 2015, he has been working with Chief Minister's office and Health Department to design and deliver on reform initiatives in health. He writes and presents on issues of supply chain, data systems, health sector administration, roadmap and delivery approach in public sector. Ali Jan Khan holds Master in Financial Economics (MFE), from University of Oxford, Said Business School. He is serving as Secretary of primary and secondary health department which is responsible for primary and secondary health-care including preventive health care across Punjab and manages more than 150 hospitals and 3,000 primary health-care facilities with >100,000 workforce