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Dear Pharma Veterans. This series of Blogs is a summary view of Pharma Business in Pakistan. It is a series spread over several parts covering the entire spectrum of Pharma business.
Pharma Business – OPERATIONS – SUPPLY CHAIN
PROCUREMENT III – Economic Procurement, Integrated Procurement
Economic Procurement and Integrated Procurement are important concepts. We look at these before closing discussion on Procurement.
The Planner calculates the requirement of materials based on the sales forecast and standard batch sizes. Procurement adds a third factor, Economy. Economy in Procurement is based on these factors.
- The buying price may be reduced if the quantity is increased. Certainly, there are limitations to this factor. If the economy is significant and investment is not heavy and extra stock shall not have shelf-life issues, it is better to buy economic quantities.
- The lead time is another determining factor. If the lead time is extra-long and is the same for smaller and larger quantities, it is better to go for higher quantity at better price. The consideration of value of purchase and shelf life have to be considered.
- Bank Charges are the third factor. Bank Contracts and Letters of Credit (LCs) are charged in multiple ways by the banks. This is not just in Pakistan, it is everywhere. In fact, the LC charges are seriously high in the developed countries. Therefore, it makes sense to consider purchase value which justifies cost of bank transaction.
- Logistics are the fourth factor and are important in three ways.
- Sea shipments are much cheaper than air shipments. Many Pharma materials may not have too much bulk and air shipment is preferred. However, if you plan to buy a material upward of 250 kg, sea shipment would be significantly less costly. At the same time, if the material price is small, it is not advisable to increase the cost by air-shipping it. Metformin is a perfect example. Per kg cost is around 4 US$ and it is usually purchased in 1000 x kg by any sizeable company. If it is air-lifted, the material cost will more than double. DRAP gives very small incremental price for Metformin combinations. Increase in shipping cost will not be absorbed and will directly hit the profitability.
- Even more than banks, the ports/airports have a huge array of fees and charges. The charges start applying as soon as the goods arrive and continue till the material exits out from the gate. Custom duties /surcharges/ various fees/ demurrages/ clearance charges/wharfage/ warehousing/ Delivery, carriage, and so on. Finally, when you get the material in your warehouse, you get the Clearing Agent’s bill. There are some undocumented expenses also. This applies disregarding the size of shipment. Care must be taken that shipments are not broken into too many small parts to save the purchase amount. Whatever little you may save there will be more than offset by handling charges.
- Import documentation matters a lot. Every time you make an amendment in LC, it costs. If discrepancies are found, there will be charges to accept these by the bank. If the shipping documents do not arrive at the bank on time, you may have to go for Shipping Guarantee at extra cost. If there is a mix up in the documents; wrong HS code, wrong quantities, wrong description, the port authorities shall get you by the neck and penalize heavily, not necessarily bona fide, claimable expenses.
A seasoned Procurement Professional will always consider these factors to bring home economic shipments in economic manner.
Each Pharma/ Nutra product would have multiple components broadly divided into materials (active, excipients, coating etc.), and primary/secondary/tertiary packaging. As mentioned earlier, the Planner plans on the basis of sales forecast and batch sizes and forwards to Procurers. The import procurement person may make changes based on factors given above; the local procurement may make changes based on Minimum Order Quantities (MOQs). While making these tweaks, it must be considered that all required components are adjusted accordingly. Many a times, the smallest components like caps, seals, leaflets are overlooked and halt the batch processing. What a heartbreaking situation is that; but not uncommon.
Integrated Procurement means that all components are aligned. Following factors have the potential to hinder integrated procurement.
- Lead times – Lead times shall always vary between components. Ordering schedule must follow lead times
- MOQs – Minimum Order Quantities shall always vary. The MOQ for leaflet may be 100,000 and for unit cartons may be 20,000; MOQ for bottles may be 50,000 and for labels may be 300,000. Usually, the MOQs are larger for low-cost items and smaller for high-value components. This is a relief actually, because the low-cost items can be purchased in bulk. Adjustments are definitely required.
- Storage Space – Space shall always be limited. Procurement should work with the warehouse officers to utilize space judiciously, without complaining about shortage of space.
- Finance – Money shall always be in limited supply. In all high-performing companies, Procurement and Finance always work in close coordination and keep aligning inflow and outflow on daily basis. This is particularly successful practice in organizations where the CFO or equivalent has adequate understanding and authority to manage finances.
We have seen in reasonable detail that Procurement is a holistic function that makes all materials/ products available for Production/ Trading. It is not just the act of buying; far bigger than that.
I would like to strongly emphasize that Procurement is a vital function which has the capability to affect the bottom line directly. It is in great interest of the company to keep developing and strengthening Procurement function.
We conclude our discussion on Procurement here and go to the next topic.