E-drug: Prices of Essential Drugs in developing countries (cont'd)
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A brief discussion on markup and freight charges.
In his E-drug message of 21/2/2000 Hilbrand Haak is discussing the
level of freight charged by suppliers, in the face of information he had
obtained from the MSH �yellow� book. This is not an uncommon
situation, as the structure of drug procurement and supply, and the
various factors to consider by all parties involved does create a
confusing scenario. In many cases, not all information relevant to their
procurement task is available to the party buying the goods. Equally,
some suppliers may not be aware of what information to supply to the
buyer.
Markup:
There are basically two types of suppliers of essential drugs to the
humanitarian and public sectors: (a) On one hand are those
confirmed and recognised �low- cost� suppliers of these products.
These organisations are involved in most if not all policy
discussions to ensure low cost supply of quality products. (b) On
the other hand are those suppliers whose business philosophy and
ethics are not in keeping with that held by humanitarian
organisations and those looking at best ways to increase access to
quality drugs.
Therefore, those in (a) will strive to keep as low as possible the
prices of both the goods and services (eg, insurance, freight, etc).
It is common to finds markups on products ranging from as low as
5% (depending on such factors as order volume) to say 30%, and
say 0.5% for insurance. Markup on freight may also be low,
although it may be difficult to obtain satisfactory margins if no
supply contracts are agreed with carriers, etc. Few freight
forwarding companies make concessions for suppliers in (a).
Companies in (b), tend to be ruled by commercial interests, and
consider the growing humanitarian sector as a profitable one. They
are not restricted from participating on, for example, public tenders
published by government or non- government institutions. They
may be encouraged by the fact that some of the buyers in some of
these organisations may not be aware of the benefits available by
procuring from or targeting tenders to recognised low- cost
suppliers. Therefore, the markups one finds from this group may
be up to any level that may get away with.
It is therefore essential for buyers to identify those suppliers who
can meet their needs, and are in support of their efforts. Just as
there are suppliers of cheap but low quality pharmaceutical
products, there are also those who can offer essential drugs at
astronomical price.
Taxes:
This is a matter for each country to address. One is faced with the
dilemma about how a government is expected to raise revenue
without taxing citizens and businesses. Whether the humanitarian
sector should be exempt from taxes, or whether they should be
levied a different tax is open to debate. However, there is a need to
know what the host country is charging for importing these
resources that are meant for use on humanitarian projects. The
supplier will only be involved at this level if they have agreed to
deliver goods on direct delivery to the buyers� premises, paying
import duty in the process (DDP; see below).
Taking all these markups and import duties together, I would be
surprised if goods from a low- cost supplier would end up with
markup of between 100% to 150%. Considerable negotiations go
on between such a supplier and other service providers to ensure
that all applicable costs are kept as low as economically possible.
As a buyer, you�re best approaching an office such as WHO
(Geneva), the UN�s IAPSO office in Copenhagen, or MSH
(Boston) for advise on which globally recognised low- cost
suppliers one can use as a sources of essential drugs.
Freight:
I am concerned about the recommendation that a buyer must add
20-30% for costs of shipping and handling. I presume this 20-30%
budget line is based on the value of goods. If this is the case, then
I suggest that it is not entirely correct way to view freight. It may
be the case for those who are buying the same goods, in the same
quantities and using the same mode of delivery arrangement. For
anyone attempting a new procurement cycle, or whose basket of
requirements is constantly changing, this recommendation may be
misleading. In discussing freight, I would refer to INCOTERMS
2000 edition published by the ICC, which is the current guideline
on types of freight contracts.
Freight is an important part of the medical procurement activity. In
some cases, this function is not under the control of the supplier,
who may be depending on commercial freight agents. Some
freighters may not be able to offer �low cost� charges. Other parties
involved in the freight of goods may not be able to offer low cost
charges. For example, the carrier and the insurer of goods.
How do you offer freight charge to a buyer of goods? Freight
charge is linked to either the weight of the goods or the volume, or
a mix of both weight and volume specifications of goods to be
transported. The mode of transportation will also be influenced by
which of these two factors (ie, weight or volume) is the more
significant. Generally speaking, if one wishes to send goods by air,
then the weight of the goods is an important consideration for both
the carrier (i.e., how much the goods contribute to the overall
allowable weight for carriage by air). If one wishes to freight
goods by sea, then the main consideration for the carrier would
volume (ie, how much space the goods will occupy on board). If
weight is significant (and if the goods are not perishable), one
might wish to transport the goods by say, sea. Other factors that
may influence choice of freight mode would for example be how
heat sensitive a product is, and of course, how urgently the goods
are required.
For the buyer, an added consideration is the cost of freight by the
selected mode of transportation. Generally, airfreight tends to be
more expensive than sea or road freight.
Relating freight to value of goods is misleading, for the simple
reason that if goods of lower value may have lower freight charges,
compared to goods of higher value. Suppose we take goods valued
at $20,000. If one where to add say, 20% of cost to this value,
then one is planning for a freight cost of $2,000. Suppose another
set of goods is valued at $1,000. According to this reasoning, one
should add $200 for freight. In either case, we are assuming that
these freight costs apply to whichever mode of transportation one
selects (for example, air or sea). In this approach, we have ignored
the two factors, weight and volume, which influence the mode of
transportation to be selected. It may be that the goods valued at
$1,000 are in fact best transported by sea on the basis that their
weight is such that airfreight would cost much more than the
expected $200. Equally, it may be that the goods valued at $20,000
are best delivered by airfreight, as they may have acceptable weight
and volume for this mode of freight, and the associated costs of
freight may be far less than the expected $2,000.
It is therefore important to request a freight quotation from the
supplier so that one may have a true picture of the actual freight
costs. A supplier will normally undertake negotiations with parties
involved in freighting of goods, to get the best deal per mode, to
the destination as identified by the buyer.
I would advise buyers to inform themselves on factors involved in
freight costing, by contacting a freight forwarder. Secondly, for
those who are able, arrange a freight contract with a carrier to your
location. By contracting your freighting needs in this way, you not
only reduce your freight costs, but you also provide welcome
business to that carrier.
Insurance:
Insurance is the only factor in freight that can be related directly to
the value of goods. Goods can be transported on the basis of CIF
(Cost of carriage, Insurance and Freight). Of course, the buyer can
select not to insure the goods during freight (eg, on basis of
Carriage and Freight only), as this is an added cost
Risk:
The supplier will want to cover the risk against loss or damage of
goods, and associated loss of earning, if the buyer has not
requested goods to be insured.
A few low cost suppliers of essential drugs are in that business
because they want to increase access to quality essential medicines
and so promote and compliment the provision of affordable quality
health care. To this end, they will offer overall prices of goods and
services that are fair to both the supplier and the buyer, to ensure
that quality products remain affordable and accessible.
Regards,
Bonnie
Bonnie Fundafunda PhD, MBA(Int Mgt), B.Pharm
Marketing Manager
ECHO International Health Services Limited
Ullswater Crescent, Coulsdon, Surrey CR5 2HR, UK
Tel: +44 (0)20 8660 2220
Fax: +44 (0)20 8668 0751
email: bfunda@echohealth.org.uk
[Thanks for this excellent explanation, Bonnie!
Hilbrand Haak, E-drug co-moderator]
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