pooled procurement in the vaccine market: unicef’s experience€¦ · vaccines.5 paho, through...

December2015

PooledProcurementintheVaccineMarket:UNICEF’sExperience

Foradditionalinformation,contact:[email protected]

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TableofContentsAcronyms/Abbreviations.......................................................................................................2

Acknowledgements................................................................................................................2

Introduction...........................................................................................................................3

BackgroundontheVaccineMarketinDevelopingCountries..................................................3

BackgroundonPooledProcurement......................................................................................5

InitialPooledProcurementatUNICEF....................................................................................7

MarketShortcomings.............................................................................................................7

RootCauseAnalysis...............................................................................................................9

MarketIntervention:StrategicPooledProcurement............................................................11

BenefitsofStrategicPooledProcurementandLessonsLearned............................................13

Summary...............................................................................................................................15

References............................................................................................................................16

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Acronyms/Abbreviations

ARV AntiretroviralDCM DevelopingCountryManufacturerEPI ExpandedProgrammeonImmunizationGavi GlobalAllianceforVaccinesandImmunizationsGCC GulfCooperationCouncilGDF GlobalDrugFacilityHIC High-incomecountryLIC Low-incomecountryLMIC Lower-middleincomecountryLTA LongTermAgreementMNM MultinationalManufacturerPAHO PanAmericanHealthOrganizationSCMS SupplyChainManagementSystemTB TuberculosisTT TetanusToxoidUNFPA UnitedNationsFundforPopulationActivitiesUNICEF UnitedNationsChildren'sFundWHO WorldHealthOrganization

Acknowledgements

LauraKopczakisgratefullyacknowledgedasanearlycontributorforthecontentofthiscasestudy,andmultiplereviewersareacknowledgedfortheirtimeandcontributions.

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IntroductionVaccinesareasuccessfulpublichealthproduct,preventinganestimatedtwotothreemilliondeathseachyearfromdiseaseslikediphtheria,tetanus,pertussis(whoopingcough),andmeasles.1TheWorldHealthOrganization(WHO)recommendsthatchildrenworldwidereceiveimmunizationsagainstsixchildhoodvaccine-preventablediseases.ThisrecommendationisknownastheWHO’sExpandedProgramonImmunization(EPI).Today,85%2ofchildrenreceiveEPIvaccines,upfrom20%in1980.3Marketinterventionstrategieshavemadethisincreaseinglobalcoveragepossiblebyenablingaccesstoverylow-priceEPIvaccinesindevelopingcountries.ThreefactorscontributedtotheaffordabilityofEPIvaccinesinlow-andmiddle-incomecountries:pooledprocurementcarriedoutbyUnitedNationsChildren’sFund(UNICEF)andthePanAmericanHealthOrganization(PAHO);differentialpricingarrangementsofmultinationalmanufacturers;andtheentryofemergingmarketmanufacturers.Thiscasestudyexaminesthefirstofthesefactors,pooledprocurement,asusedbyUNICEFforpurchasingvaccinesforlow-andmiddle-incomecountries.Pooledprocurementreferstoconsolidatingthepurchasequantitiesofmultiplebuyersunderonethird-partyentity,inordertoleveragelargervolumepurchasingtoobtainbetterpricingthantheindividualbuyerscouldobtainbypurchasingdirectlyfrommanufacturersontheirown.Inthevaccinemarket,UNICEF’sSupplyDivision,PAHOandtheGulfCooperationCouncilGroupPurchasingProgram(GCC)poolordersfromindividualcountriesandprocureontheirbehalf.GiventhatUNICEFistheworld’slargestprocurementagentofvaccinesfordevelopingmarkets,itsexperienceintheprocurementofvaccinesprovidesanimportantlearningforunderstandingmarketdynamics.Asthiscasewillshow,thekeyshortcomingsofthevaccinemarketrequiredUNICEFtomovefromtraditionalpooledprocurementtostrategicpooledprocurement.ConsiderationsrelatedtopooledprocurementwillbediscussedaspartofthisretrospectiveanalysisofUNICEF’sroleandevolutionintheglobalvaccinesmarket.

BackgroundontheVaccineMarketinDevelopingCountries

MarketSizeandPlayersTheglobalvaccinemarkethastripledinvaluefromUS$5billionin2000toUS$24billionin2013.InthecountriesservedbyUNICEFandPAHO,purchaseshavecomparablygrownfromUS$340millionin2002toUS$1.4billionby2011.4Broadlyspeaking,theactorsinthevaccinemarketplaceincludesuppliers(themanufacturersofthevaccine),donors(whoprovidefunding),governments(whoapprove/qualifyvaccinesforquality,safetyandefficacyand,insomecountries,setprices),policymakers(whodetermineprioritiesforvaccines)andprocurers(whopurchasevaccinesonbehalfofothers).

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Indevelopingcountries,governmentsanddonororganizationsprovidethemajorityofthefundingforvaccines.Then,procurementagenciespurchasethevaccines.UNICEFandPAHOactastheseprocurementagencies,andtheypurchasemostvaccinesforlow-incomecountries.UNICEFbuysfor80to100countriesannually,procuringroughly$1.286billionworthofvaccines.5PAHO,throughitsRevolvingFund,buysforaregionalgroupof41LatinAmericanandCaribbeancountries.6Together,UNICEFandPAHOcontrolmorethan70%oftheglobalvaccinemarketbyvolume,butonly7.5%ofitbyvalue.7Thisnotabledisparitybetweenvalueandvolumeisduetothedeeplydiscountedpricesofvaccinesprovidedbymanymultinationalvaccinemanufacturerstolow-incomecountries.

ThecreationofGavi,theVaccineAllianceinJanuary2000providednewresourcestolow-incomecountries(LICs)andsomelower-middle-incomecountries(LMICs).Gaviisapublic-privatepartnershipwhosemissionistoincreasepoor-countryaccesstoimmunization1aswellastothevaccinesthemselves.ThroughGavi,manycountriespreviouslyunabletoaffordvaccineswereabletoaccessthem.UNICEFistheprocurementpartnerforGaviandprocuresGavi-fundedvaccinesonbehalfofeligiblecountries.

MarketStructureVaccinedevelopmentandmanufactureisverycomplexandhighlycapitalintensive.Itrequiressupplierstomakehighup-frontinvestments.Unlikethemulti-purposesmallmoleculemanufacturingfacilitiesrequiredfororaldosepharmaceuticals,vaccinesrequirededicatedfacilities.Thefixedcostsinoperatingavaccineproductionfacilityarehigher(approximately60%ofoverallcosts)8thanformostpharmaceuticalproducts.Thecapitalcostandtechnologicalknowhowrequiredtoimplementmanufacturingprocessescapableofreliablyproducinghigh-qualityvaccinesaremoresignificantthanforpharmaceuticalsorotherhealthproducts,particularlybecausevaccinemanufacturingisbasedonlivebiologicalsratherthanchemicals.

Second,governmentsrequirethatthemanufacturingprocessesofvaccinesmeetstrictqualitystandards.Meetingthesestandardsrequiresadditionalcostsandoftenbringsdelaysduetotheprocessofgettingregulatoryapproval.Finally,manufacturersneedeconomiesofscale.Thatis,manufacturersmustproducehighvolumesofvaccinestoreducethecostofproducingeachvaccine.Together,thesefactorsresultinvaccinemarketshavingfewerparticipatingmanufacturersforextendedperiodsoftime,insomecasesevenafterpatentexpiration.

1 Immunizationistheserviceofadministeringthevaccinetothepatient)incontrasttothevaccine,whichistheproduct.

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BackgroundonPooledProcurementTheconceptofpooledprocurementisstraightforward:procurementagenciespoolmemberproductrequirements,establishfinancingandsupplierpaymentmechanisms,andutilizeprequalificationrequirements;allinordertoinsuresecureandtimelyproductdeliveryatfavorableprices.Whilesuchconsolidationofpurchasingpowercantakedifferentoperationalforms,thiscooperationbetweenbuyersresultsinagreaterdegreeofleverageandtransactionefficiencyinthemarketplace.Inthevaccinemarket,UNICEFandPAHOconsolidatedordersforvaccinesacrossmultipleLICsandLMICs,inordertoensureaffordabilityandavailabilityofvaccines.

Pooledprocurementinvolves:

• Negotiatingpricesandcontracttermswithsuppliers• Creatingaggregateforecasts• Placingordersandmakingpayments.

Pooledprocurementisoneofvariousdemand-sidestrategiestoaddresssupplychainrisksinpublichealthmarkets,suchasdemandfragmentation,inefficientprocurement,highper-unitproductcosts,andinaccurateordelayedforecastingandsupplyplanning.Althoughthiscasestudyfocusesonvaccines,pooledprocurementhasmultipleapplicationsinotherareas,suchasantiretrovirals(ARV)forthetreatmentofHIV.Pooledprocurementistypicallyutilizedinconjunctionwithothermarketandeconomictools,suchasdemandforecasting,variouscontractingprovisions,andfinancingarrangements(PAHO’sRevolvingFund).Otherwell-recognizedexamplesofpooledprocurementmechanismsinglobalhealthinclude:

• SupplyChainManagementSystem(SCMS)Project(forHIV/AIDSdrugs,underPEPFAR)• TheGlobalDrugFacility(GDF)fortuberculosis(TB)drugs• TheGlobalFundtofightAIDS,TuberculosisandMalaria• TheGulfCooperationCouncilGroupPurchasingProgram(GCC)(vaccines,drugs,

supplies,chemicalsusedinthepublicsectors)• UnitedNationsFundforPopulationActivities(UNFPA)ProcurementServicesBranch

(contraceptives)

Pooledprocurementisnotneededandwouldnotnecessarilyworkforallproducts.Forexample,forproductssuchasmedicalsupplies,barrierstoentryandrisksforsuppliersarerelativelylow,sotherearesufficientnumbersofsuppliersinthemarketwithoutactively“managing”supplysustainability.Buyerswithlowvolumeordivergentproductneedsandunpredictabledemandarenotwell-suitedtoestablishjointprocurement.

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Broadlyspeaking,buyersandsellersneedtobesimilarlysituated,aspooledprocurementislessviableforparticipantswithtoomuchheterogeneity.Thatsaid,therearecurrentpoolingarrangementswithelementsofheterogeneityacrossthebuyers.PAHOandGCCarebothgeographically-basedprocurementpools,withconsiderableincomeheterogeneityacrosstheirmembercountries.IncontrastthevaccineprocurementpoolwhichUNICEFrunsforGaviisincome-based.

Fundamentalprinciplesofpooledprocurementinvolveforecastingandaggregatingdemandforstandardizedproductsinordertoeconomizeontransactioncostsbetweenbuyersandthesellers.ThisUNICEFcasestudyhighlightsvaccineproductionasanexcellentexampleofwherethespecializedphysicalassetsrequiredforproductionincreasetheappropriatenessandlikelihoodofsuccessforpooledprocurement.Anecessarymarketconditionisstandardizedproductrequirementsacrossthemultiplepurchasersincludingqualityandregulatoryguidelinesinordertoaggregatedemandatanacceptablelevelforsuppliers.

Inadditiontostandardizedproductrequirements,poolingmechanismsrequiregovernancestructurestomediatetheexchangeofgoodsandservices,typicallyacentralauthorityorsecretariat.Thisfactorsintowhenpooledprocurementwillandwillnotwork,aspotentialparticipantshavetoassessdifferentstructuresandtheirinstitutionalcapacityforparticipation.Finally,asthepredominantthemeofpooledprocurementiseconomiesofscale,itisimportanttoexaminethetransactioncostsforthepool(versusnon-pooled);inordertodeterminethepotentialbenefitofagivenprocurementmechanism.Incaseswherethetransactioncost,i.e.planning,executing,monitoringandadaptingthepooledprocurementactivitiesexceedthesavingsderivedthroughnegotiatedprices,thenpooledprocurementwillnotbeadesiredmethod.

Anon-globalhealthexampleofpooledprocurement,inFlemishsportsinfrastructureprojectsin2008,waspresentedintheliterature,exploringtheapplicationofbundledprocurementtobuildingprojectsaimedatsolvingasevereshortageofsportingfacilityinfrastructure.9Inhispaper,vandenHurkcomparedtheoreticalexpectationsandempiricalfindingsforthebundledprocurementinthepublic-privatepartnershipforsportsinfrastructuredevelopment.Heconcludedthatinthismarket,thecontractingauthoritiessufferedautilitylossastherequirementtoaligntomedianpreferenceswasatoddswithlocalinterests.Additionally,inthiscasethebundledprocurementwasdeemedtohampercompetitionbothbythescaleofthebundlingandthestrictfinancialcontractualrequirements.Asaverydifferentsector,thisconstructioncaseservesasabriefexampleofwhenpooledprocurementmaynotwork.

Pooledprocurementasintroducedearlier–referredtoaspassiveprocurement–worksinhealthymarkets.Asthiscasestudywillshow,UNICEFhadtoapplyamoreadvancedformof

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pooledprocurement--strategicpooledprocurement–inthevaccinemarkettoaddressthemarketshortcomingsitdiscovered.

InitialPooledProcurementatUNICEFTosupportitsgoalofenablingmoreoftheworld’sLICchildrentoreceivetovaccines,UNICEFimplementedpooledprocurementtoimprovevaccineaffordability.Inthe1980s,UNICEF’sandPAHO'suseofthepooledprocurementmethodyieldedlowerpricesforvaccinesthanthosepaidbyindividualcountriesontheirown.10

UNICEForiginallyimplementedpassivepooledprocurementinordertogainpreferentialpricingbyaggregatingvolumesacrosscountriesandtoreducetransactioncostsforsuppliersbyactingasprocurementagent.Thispooledprocurementmethodalsosucceededinstandardizingtheprocurementprocessacrosscountries,whichreducedtheburdenoncountriesandensuredtimelinessandreliabilityintendering,ordering,receiptandpayment.

UNICEFwassoonthedominantpurchaserinthemarketforlow-incomecountriesandwaspurchasingover40%oftheglobalannualdosesofvaccines(mainlyEPIvaccines).TheseearlystagesofpooledprocurementwerepredicatedonUNICEFplayingapassivepurchasingroleinthemarket.UsingthesameapproachastheCentersforDiseaseControldidintheUSpriorto1993,11UNICEFawardedcontractstooneortwosupplierswhowerethelowestpricebiddersinanad-hoctransactionalrelationshipbasis.Althoughseveralsupplierswerequalifiedtosupplyvaccines,UNICEFusedawinner-takes-alltenderingapproach,consistentlyawardingvirtuallyallofthepurchasevolumetooneortwosuppliers.

MarketShortcomingsInthe1990s,thevaccinemarketevolvedinawaythatcreatedfundamentalstructuralchanges,whichultimatelyledtovaccineshortagesin2002-2003.

ShiftinEconomiesofScaleFirst,untilthe1980sand1990s,high-incomecountries(HICs)purchasedthesamekindsofvaccinesasLICs.Therefore,thevaccinescouldbeproducedinhighvolumes,achievingeconomiesofscale.However,innovationsduringtheseyearsledtonewformulationsofvaccinesagainstdiphtheria,tetanus,pertussisandpolio.HICnationsmovedtowardthesenewerformulations,butthehigherpricesofthenewformulationsprecludedLICsfrompurchasingthem.Manufacturerscouldprofitfromthehighpricesgarneredfromthenewvaccinesbuthadlessincentivetocontinuemanufacturingthelow-priceEPIvaccines.ManufacturerscouldputtheirproductioncapacitytomoreprofitableusebymanufacturingthenewformulationsinsteadoftheEPIvaccines.

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FewSuppliersSecond,thenumberofvaccinemanufacturersbegantodecreaseduetoacquisitionsandsupplierexit.In1967,26companiesmadevaccines.By1980,therewereonly17andby2004

therewereonlyfive.12Pharmaceuticalcompanies,inparticular,acquiredvaccines

manufacturers.Bythe2002-2003timeframe,onlyasmallnumberofinnovativemultinationalfirmsparticipatedinanyvaccinemarket.

VaccineSupplyInsecurity2002-2003Inearly2000,UNICEFstartedexperiencingearlysymptomsofsupplyshortagesfortwovaccines:measlesvaccineandtetanustoxoid(TT)vaccines.Duringtheperiodbetween1992and1997,productioncapacityforallUNICEF-qualifiedsuppliersofmeaslesvaccinehadbeenwellinexcessofdemand,leadingtodownwardpricepressure.During1997-2001,severalsuppliersexitedthemarketduetomergersandthemarket’slowpricepoints.Asaresult,productioncapacitydroppedforEPIvaccinesdramatically.

Figure1:MeaslesVaccineAvailabilityvs.Demand,1992-200613

In2002,ashortageofmeaslesvaccineoccurred.AsshownFigure1,globalproductioncapacity(availability)fromallUNICEFsuppliersdroppedduetosuppliersexitingthemarket.Theseexitsresultedinthelevelofsupplybeingbelowthelevelofdemand,creatingashortage.

Similartothemeaslesvaccineshortage,in2000UNICEFwasleftwithonlyonesupplierofTTvaccine.Toincreasesupplyavailability,UNICEFrenegotiatedwithoneofthesupplierswhohadexited,explainingthemarketpotentialofTT.Thesupplierreenteredthemarketin2003,butwithapricethathaddoubled.AsshowninFigure2below,thatsecondsupplierchargedasubstantiallyhigherpricethanthefirstsupplier,inparttorecoupcostsandinpartbecause

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UNICEFwasbuyingvirtuallyallofthevolumefromthefirstsupplier,resultinginalowpurchasevolumewiththereenteringsupplier.

Thetraditionalwinner-take-alltenderingapproachofpooledprocurementbroughtsupplierriskanduncertainty.Supplierswerereluctanttoinvestinvaccinemanufacturingcapabilityiftheycouldn’tpredictwhethertheywouldbeabletosellthevaccines.Thisledtoinsufficientcapacityin2002-2003.

PriceEscalationUNICEFrespondedtotheshortagebynegotiatingwithadditionalsupplierstoincentivizemarketentry.Thesenegotiationsresultedinthereentryofsomesuppliersandabettermatchingofcapacityanddemandstartingin2004.However,followingthesenegotiations,theaveragepricepaidbyUNICEFtoallsuppliersincreasedbyabout25%.

Figure2:MeaslesVaccineAvailabilitytoUNICEFperSupplier14

RootCauseAnalysisSupplyandpriceinstabilityforcedUNICEFandtheglobalvaccinecommunitytoexaminethevaccinemarketsupplydynamicsmorecarefully.Anumberofconsultationsamongindustrialeconomicsexpertsandvaccineindustryspecialistswereinitiated.TheestablishmentofGaviandthesubsequentshapingofGavi’sprocurementstrategyfacilitatedsomeoftheseconsultations.

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AnalysescarriedoutbyMercerConsultingin2002forGavihighlightedseveralimportantcharacteristicsofthevaccinemarket.15Specifically,theseanalysesledtoabetterunderstandingofthemarketevolutionthathadcreatedthe2002supplyshortage.

First,analysisshowedthatmanufacturershadmoreprofitableinvestmentalternativesthantomanufacturevaccinesforLICs.Forexample,thetotalmarketsizeofvaccinesfordevelopingcountriesin2004wasamere$0.4billion,comparedtoa$340billionforglobalpharmaceuticals,and$6billionforglobalvaccines.16(SeeFigure3forthelargerpharmaceuticalmarketcomparedglobalandvaccinesforLICs.)Becausepharmaceuticalcompanieshadacquiredmanyofthevaccinemanufacturers,thechoicetodevoteproductioncapacitytopharmaceuticalproductionratherthanEPIvaccinesforLICswascompelling.

Figure3:2004MarketSizesforPharmaceuticalsandVaccines17

MarketIncentivesFromthedeepermarketanalysis,itbecameclearthat,historically,marketincentivesinHICshaddriventheinvestmentsforthedevelopmentandcapacityinvestmentsinvaccinemanufacturingplants.Whentherewassignificantover-capacityinvaccinemanufacturinginindustrializedcountries,suppliersutilizedthisexcesscapacitytofulfilldeveloping-countrymarketdemandthroughUNICEF.ButeventhoughUNICEFwasthedominantglobalpurchaserintermsofdoses,itspurchasesrepresentedlessthan5%ofthevalueofglobalannualvaccinepurchases.18Thus,fromarevenuestandpoint,UNICEFwasnotadominantpurchaser,andsalesofEPIvaccinestoUNICEFwerebarelyprofitablebyindustrystandards.19UNICEFwasnotacustomerofchoiceformanyofthesuppliers:thetotalvolumewastoolow,UNICEFwasbuyingontooshortatimeline,anditwastoofocusedonlowprice.

PricePointsFurthermore,asindustrializedcountriesbeganmovingawayfromthebasicEPIvaccinestowardmoresophisticatedvaccinepresentations,manufacturersinHICsstrategicallyfocusedtheir

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manufacturingcapacityonthenewvaccinepresentationsbecausethosegarneredhigherprices.Vaccinescheduledivergencebetweenhigh-incomeandlow-incomecountriesmeantthatifUNICEFweretokeepthesuppliersengagedtosupplytheEPIvaccines,itwouldhavetobepreparedtobearalargerportionofthefixedcostthanbefore.

CoincidenttotheexitofHIC-basedmanufacturersfromvaccinemarkets,apromisingnewtrendwasdeveloping.Since1992,thenumberofsuppliersfromemergingcountrieshadincreased.ThenumberofLICandMIC-basedsuppliersqualifiedbytheWHOtoproducevaccinesgrew,andtheirvolumeofproductionalsoincreased.AlthoughtheseemergingsupplierslackedR&Dandthepatentstoproducethenewvaccineformulations,theycouldproducetheolderoff-patentEPIvaccinesatmuchmoreaffordablepricesthantheirHICcounterparts.20

RisksofWinner-Takes-AllDeeperexaminationofthevaccinemarketalsorevealedthatthehighriskarisingfromdemanduncertaintiesaddedtotheproblemoflowreturnforvaccinesuppliers.Althoughfuturedemandforestablishedvaccines(forwhichhighlevelsofcoveragehavebeenreached)wasfairlypredictable,UNICEF’sshort-termorderingcyclesandwinner-takes-allapproachwerenotcreatingrevenuestabilityforthesuppliers.Suppliers’needtoabsorbrisksassociatedwiththe“feastorfamine”orderingapproachusedbyUNICEFatthattimeresultedinhigherprices,aswasobservedwiththerenegotiatedpricesofTTandmeaslesvaccinesin2002-2003.

UNICEFrealizedthatitneededtoadjustitsapproachtovaccinesuppliermanagementandpooledprocurement.Thenatureofthemarketinterventionneededwasclear.UNICEFhadtoincorporatesuppliermarketplacedynamicsintoitsprocurementstrategy.Thisincludedpreparingshould-costinformationforthemajorcomponentsofthekeyproductsandproactivelywatchingforandanalyzingbothrisksandopportunitiesastheyaroseinthesupplymarket.UNICEFneededtoshiftfrombeingapassivepurchasertoanactivemarketshaper.

MarketIntervention:StrategicPooledProcurementWiththesupplyshortageanddeeperreflectionontherootcausesofvaccinesupplierexits,UNICEFwasnowpreparedtomakesignificantchangesinitsapproachtocontractingforvaccines.UNICEFhadlearnedthat:1)agooddemandforecastcanbehelpfulinguidingsupplierstomaintaincapacitythatiswellmatchedtodemand;2)ahealthymarketisoneinwhichsupplyanddemandareingoodbalanceandpricingissufficienttomotivatesupplierparticipation;and3)awinner-takes-alltenderingpracticecreateshugecapacityriskforsuppliers,reducingprofitabilityandincentivizingexit,becauseonlyonesupplierwillbeabletouseitscapacitywellwhileotherswillreceivenoorders.

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UNICEFchangeditspooledprocurementmethodfrompassivetomoreactiveandstrategic,prioritizingmarkethealthasacriticalcomponent.UNICEFbegantothinkaboutachievingpricesthatwouldbeaffordabletogovernmentsanddonorswhilereasonablycoveringmanufacturers’minimumrequirements.Theexpandedobjectivesforvaccinesupplybecame:1)continued,sustainablesupply;2)qualityvaccines;3)multiplemanufacturerspervaccine;and4)affordableprices.

Foritspooledprocurementstrategymovingforward,UNICEFmadeseveralchangesthatwouldenablebettermatchingofsupplyanddemandandmorepredictableandsustainable“shareofUNICEFbusiness”forthemainvaccinesuppliers.KeyelementsofUNICEF’sstrategicpooledprocurementincluded:

• Betterlong-termandmoreaccurateforecastingtosupportpooledprocurement• Havingmanufacturerssharetheirlong-termcapacityandproductionplanswithUNICEF• Implementationoftwo-yearSupplyArrangementsandLongTermContractswith

flexibilityforchangingquantityandflexibilityforincludingadditionalmanufacturers• Ashifttomultipleawardspervaccineinsteadofasingleawardtothelowest-cost

supplier.

ImprovedForecastsUNICEFnowworkstomaintainhighglobalaggregateforecastaccuracy,accountingforvariousdimensions:thetypeofvaccine,thepresentation(vialsize),andthequantityandtimingofdeliveryofthevaccine.UNICEFhasfoundthatwhilecountry-levelforecastsvaryintheirlevelofaccuracy,particularlyfornewvaccines,aggregateforecastsareconsideredtobemoreaccurateandmoreusefultoguidesuppliersintheircapacityandproductiondecisions.

TheformalUNICEF5-yearVaccineForecastiscarriedoutannually.Countryofficesarerequiredtosubmittheirinputs,usingtheVaccineForecastSpreadsheet,toUNICEF’sSupplyDivision.TheSupplyDivisionreviewstheforecastandtakesotherfactors--suchascampaignplans,projectedfundinglevelsandhistoricalactualpurchases--todeterminetheSupplyDivisionforecastthatisissuedtomanufacturers.UNICEFthencomparesitsforecastwithproductionplanninginformationfromsuppliers,topromotesupplysecurity.Fromthat,UNICEFprojectsthedeliveryschedule,timing,andamountoffundsrequired.Italsoprojectsfromwhichsuppliersitwillpurchasevaccines,therebydecreasingsupplieruncertaintywhenplanningcapacity.

Throughouttheyear,UNICEF’sSupplyDivisionupdatesplansandcoordinateswithsuppliersandcountries.Inordertomaintainregulardialoguewiththesuppliers,UNICEForganizesanindustryconsultationdayforeachofitskeyvaccinemarkets.Thiscreatesaforumtoexchange

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informationaboutdemandwiththesuppliersandtolearnabouttrendsinsupplysidemarketdynamicsinordertoproactivelyadjustprocurementstrategiesaccordingly.

LongTermAgreement(LTAs)Inadditiontocreatinglonger-termstrategicforecasts,UNICEFalsomovedtolonger-termcontractinginitsstrategicpooledprocurementmethodforselectvaccines.Previously,UNICEFhadpurchasedusingaone-yearInvitationtoBidtenderfocusingonthelowestprice.After2003,UNICEFtransitionedtoamorestrategicprocurementapproachthattookintoaccountthevaccinemarketdevelopmentstage,thenumberofprequalifiedsuppliers,andthedemandprofile(i.e.,quantity,activitysplit,urgencyofneed,reliabilityofdemandforecast,anticipateddurationofdemand,andfundingprofile)beforedecidingtheexactprocurementinstrumenttobeusedforavaccineproduct.Formostvaccines,UNICEFtransitionedtoathree-yearLongTermAgreement(LTA)withmanufacturers.TheLTAsarebasedontheforecastsdescribedabove,andtheycommitUNICEFtoprocureoverasettimeperiodwhilealsorequiringsuppliercommitmentsabouttheirsupplycapacity.ActualordersundertheLTAarethenplacedasneeded,andtheLTAsareforanegotiatedfixedprice.

Split-TenderingReplacesWinner-Takes-AllUNICEFnowprocureseachvaccinepresentationfrommultiplesuppliers,manyofthemfromemergingcountries,whereproductioncostsarelower.21Thisapproachencouragesmultiplemanufacturerstostayinthemarketandmaintainslong-termmarkethealth.Inaddition,italsobuildsresilienceinthesupplysystem.Procuringfrommultiplemanufacturersprotectsagainstsupplygapsiforwhenbatchfailureoccursataparticularmanufacturer.Orderingfrommultiplemanufacturersacrossdifferentcountriesalsoreducesriskofregulatorysuspensionfromanyparticularcountry.IninstanceswhentheWHOsuspendstheNationalRegulatoryAuthorityofacountrynotmeetingsafetyandqualitystandards,allmanufacturersapprovedbythatregulatoryauthoritywouldbecomeineligibleforsupply.

BenefitsofStrategicPooledProcurementandLessonsLearnedBenefitsaccruefrombothpassiveaswellasstrategicpooledprocurement,andtheyaccruetobuyerslikeUNICEFaswellastothevaccinesuppliers.First,considerthemainbenefitsofpassivepooledprocurement.

PassivePooledProcurementBenefits• Aggregatedvolumesacrosscountriesenableeconomiesofscaleformanufacturersand

opportunitytoleveragevolumesforbuyers,inordertoobtainreducedunitprices22• Lowertransactioncostsforsuppliersthroughprocessingfewertendersandorders• Minimumbatchvolumesimposedbymanufacturersarereachedmorerapidly• Improvedforecastaccuracy,allowingbettermatchingofsupplyanddemand

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• Standardizationoftheprocurementprocessacrosscountriestoreducetheburdenoncountriesandtoensuretimelinessandreliabilityintendering,ordering,receiptandpayment.

Althoughpassivepooledprocurementmayhaveadvantages,particularlybetterpriceandlowerprocurementtransactioncosts,itsusecreatesriskofsupplierexitand/orpoorinvestmentincapacity,whichcanleadtosupplyshortagesand/orhigherpricesinthelongterm.Passivepooledprocurementmayworkinhealthymarkets,butsomepublichealthmarkets,suchasthoseforvaccines,requireastrategicpooledprocurementmethodthatincludestheuseofmultipleawards,longtermawardswithflexibility,globalforecasting,andsharingofproductionplansbymanufacturers.

Inpublichealthmarketscharacterizedbyatrifectaofissues–1)alimitedsupplybase,2)littleincentiveforsupplierstoremaininthemarket,and3)potentiallydisastroussupplyshortagesifsuppliersdoexit--strategicpooledprocurementisneededtoensurecontinuityofsupplyatareasonableprice.Considertheadditionalpossiblebenefitsofstrategicpooledprocurement.

StrategicPooledProcurementBenefits• Ensuringsupplysustainability(security)andappropriatecompetition• Encouragingnewsupplierstoenterthemarketthroughlong-termfundingandsecured

financing• Encouragingexistingmanufacturerstoremaininthemarketortoexpandcapacity• Reduceduncertaintyandincreasedpredictabilityforbuyersandsuppliersalike• Strategicplanningforbothmanufacturersandpurchasersisimproved

WithLTAs,UNICEFgainedsecurityofpriceandsupplyoveradefinedperiod,whilemanufacturersgainedsecurityofdemand.Otherstrategiccontractingpracticessuchasvolumeguaranteesandprepaymenthavebeenshowntodelayexitofapoliovaccinemanufacturerbymorethantwoyears.23

ExaminingtheevolutionofUNICEF’spooledprocurementalsoshowsthatGaviprovednotableasakeystabilizingfactorinrestoringthehealthofthevaccinemarket.ThefundingandcommitmentprovidedbyGavimeantthatadditionalcountrieswereabletoinitiateimmunizationprogramsandordervaccines;asaresult,manufacturerswereincentivizedtoincreaseproductionscale.

ResearchconductedtoexploretheadoptionofnewvaccinesinLMICsincludedinterviewswithmultinationalanddevelopingcountrymanufacturers(MNMsandDCMs),inwhichbothgroupsofmanufacturersreportedsupportforpooledprocurement.24TheauthorsreportedthatDCMs

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sawpooledprocurementasprovidingaccesstomarkets,andMNMsnotedthereductionoftransactioncostsandmore-reliableforecastingthatresultsfromprocurementpools.

SummaryUNICEF’spooledprocurementforEPIvaccinesisaninstructivecasestudyformarketshapinginglobalhealth.UNICEFSupplyDivisionprovidestheoldestexampleofcentralcontractingandprocurementinvaccines,andthemethodusedbyUNICEFhasevolvedovertheyearsfrompassivetostrategicpooledprocurement.Asdescribedinthisretrospectivecasestudy,strategicpooledprocurementincludeselementstoensuresupplysustainabilityandtobettercoordinatematchingofsupplyanddemand.Thisrequiresensuringthatthebuyingpowerandprice-reducingeffectsofpooledprocurementdonotshiftmarketbalancesandendangerthehealthofthemarket.UNICEF’sapplicationofstrategicpooledprocurementwilllikelycontinuetoevolve,toreflectchangingmarketconditionssuchasrolloutofnewvaccinesformiddle-incomecountriesandpricingstructureissues.

Thiscasestudyexploredonepotentialdisadvantageofpooling,thatbeingthepotentialforanover-emphasisonpricewithoutbalancedattentiontohealthycompetitiveconditionsandsupplierretention.Otherdisadvantagescouldincludetheforfeitingofindividualcountry(participant)interests,reducingcountryownershipindecision-makingandexecutionexpertise,hamperingthepotentialfordifferentialpricing,andfinallythepotentialfortransactioncoststooutweighthepotentialsavingsandotherbenefitsfrompooling.

Asademandconsolidationandnegotiatingpowerintervention,pooledprocurementaddressesthemarketimperfectionofexcessivefragmentationduetomultiplebuyers.Thisprocurementarchitectureisvaluablewhencarriedoutwithconstantfocusonadaptingprocurementmethodstoensuremarkethealth.Thepriceandnon-pricebenefitsofpooledprocurementrequirevigilantattentiontomarketintelligenceandsuppliersensitivityinordertoobtainaconsistent,affordableandsustainablesupplyoftheproductinquestion,particularlysoforvaccinesupplycomplexities.Utilizingpooledprocurementinawaythatmaximizesuseoflimitedresourcesbutalsoavoidsunduesupplyriskiscriticaltoitssustainableapplication.

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References

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