Vendor-Managed Solutions: the evolution of GHSC-PSM's ARV procurement strategy

Over the past five years, USAID , through the USAID Global Health Supply Chain Program-Procurement and Supply Management project, has led the charge in reshaping the antiretroviral (ARV) market. We asked Robert Keating III to explain the increasing role of the private sector in improving access to lifesaving medicines and developing sustainable solutions to health supply chain problems.

How is GHSC-PSM transforming ARV procurement? ???

USAID and GHSC-PSM have fundamentally changed the way we manage our ARV supply chain in recent years.????

Our goal is to strengthen private-sector collaboration and turn suppliers into partners in addressing in-country supply chain challenges.

Making manufacturers and suppliers true partners is the key to tackling the health supply chain’s underlying issues.?????

How is this different from before? ?

Up until five years ago, HIV treatment guidelines were vast, and we managed an ARV product catalog of over 100 SKUs (unique products). The supply chain was quite complex. We worked with a high number of suppliers and the traditional supply chain approach was to procure commodities Ex Works or EXW.???

This is where the supplier makes the goods available at their location and the buyer is responsible for pickup, loading, transportation, and handling all international trade procedures. GHSC-PSM hired third-party logistics partners (3PLs) to pick up ARVS from the manufacturers, mostly based in India, and deliver them to PEPFAR-supported countries.??

Separately, another strategy of ours was to preposition products ahead of confirmed demand in any of our three regional distribution centers in Belgium, the UAE, and South Africa.??

These models require high levels of coordination and staffing and generate high levels of risk – which is assumed by both the procurement agent and USAID. But they worked – and it was the right approach for the time – but ‘that’s the way it has always been done’ wasn’t a good reason to maintain the status quo, particularly with PEPFAR’s buying power.???

Expanding the USAID vendor-managed solutions (VMS) program allowed us to broaden the scope of qualified vendors, making them fully integrated supply chain partners working with USAID and governments to develop sustainable solutions. ?

What is the vendor-managed solutions strategy?????

Generally, a vendor-managed solution refers to an approach where a third-party vendor takes responsibility for managing specific operational tasks, processes, or systems on behalf of an organization. ?

In our case, TLD suppliers were asking for better surety of supply. So, we leveraged that competition to request that vendors preposition stock at their own risk as part of a regional vendor-managed solution in exchange for two years of guaranteed TLD supply to Southern African countries.

We prequalified three suppliers who are now responsible for delivering ARVs that they preposition in quality-assured bonded warehouses in South Africa. This approach transfers the risk away from USAID and the procuring agent while forward stocking products in Southern Africa for regional use. ? ?

Our objectives were to:???

• Preposition the product closer to people living with HIV?

• Reduce the order lead time??

• Show that ARV suppliers could manage on-time deliveries by land under modified DDP incoterms?(we’ll explain this a little later!), and ?

• At a high level, demonstrate to PEPFAR countries in Southern Africa that our ARV suppliers and their private sector partners can vertically integrate additional components of the supply chain.???

I want to reemphasize this last point: Our main objective was to demonstrate to PEPFAR countries in Southern Africa that our ARV suppliers and their private sector partners have the capability to take on more aspects of the supply chain.??

What was the first step in this new private-sector engagement strategy?????

We developed a framework strategy for increasing private-sector engagement. This framework emphasized transitioning various aspects of our supply chain model to ARV manufacturers. ??

In 2022, we started by shifting our contractual INCOTERMs from EXW/FCA towards a D-TERM program.???

Incoterms are international rules that define who handles costs and risks in shipping goods.??

D-term Incoterms mean the seller delivers goods to a named destination, covering most or all transport costs and risks. This basically required prequalified TLD suppliers to not only manufacture the product but also manage the international freight, clearing, and end delivery to 10 PEPFAR countries under two types of D-Terms: modified Deliver At Place (DAP) or Delivery Duty Paid (DDP) incoterms.???

And they did it. And we learned some things along the way:???

• ARV manufacturers partnered with best-in-class international freight partners??

• They had effective Quality Management Systems to oversee product quality throughout the supply chain while in their care and custody??

• They could communicate and coordinate with PEPFAR stakeholders for waivers and delivery windows??

• And they could deliver on time.???

In 2023 and 2024, we expanded this D-Term program by including all ARVs for delivery, and not just TLD, and, where possible, enabled all ARV manufacturers to apply to be D-Term eligible. Nearly 60 percent of ARVs in the last two years have been delivered by our ARV suppliers through the D-Term program.???

And this led to the expansion of our private sector engagement approach through the regional vendor-managed solutions strategy.???

(For more info on how this strategy evolved, check out this short article by Bob and his team >>> Increasing private–sector involvement in antiretroviral delivery)

Was this strategy welcomed by procuring countries??????

With 85 percent of people living with HIV being administered one first-line product, TLD, we long advocated to partner ministries of health to use their purchasing power to require ARV suppliers to preposition TLD in their country – hold it – and deliver it to a Central Medical Store based on demand. Or better yet, deliver it to a downstream facility or warehouse???

The responses were not always positive. They were worried about the cost and risk.?

Frankly, it was too big a leap from the traditional ARV supply chain models I earlier described.??So, from early 2023, we took a preliminary, small step toward that in-country 'stock and deliver' model.???

Our regional VMS program has demonstrated that ARV partners can take on the regional prepositioning AND delivery of TLD.???

Vendor-managed solutions suppliers have:???

• Prepositioned over 8 million 90-count bottles of TLD with 36-48 months shelf life??

• Have made 42 deliveries of over 5.8 million 90-count bottles to participating countries???

• Have created a four-language label – offering better flexibility to service countries that require Portuguese???

• Have cut the average lead time for deliveries by 40 days. ??

• And we have done all of this at a max one percent price premium versus the traditional model.???

So, the price remained steady despite inflation and significant benefits for all parties? ?

Yes, we calculated an estimated?maximum one percent premium for these added services. This is pennies.???

The project has maintained an HIV treatment cost of under $40 per patient per year for inventory pre-positioned in Southern Africa through the VMS program. ?

But if we drill down further, for PEPFAR, the impact is tremendous logistical savings—particularly the required manpower to coordinate international freight, customs clearance, in-country distribution, central warehousing, and last-mile delivery are transferred to the private sector with VMS.???

And don’t forget the shift in risk. We should highlight that TLD prepositioned in VMS warehouses is done so at the VMS supplier’s risk—they preposition based on demand signals—and there is no procurement commitment by PEPFAR. The risk is truly transferred away from the donor. This is a win-win because the manufacturer can better plan manufacturing and sales forecasts.???

USAID moved from market takers to market shapers.????

What’s the next step in vendor-managed solutions????

We are proud of our regional VMS program's successes to date, and we have extended the program until November 2026.???

But we haven’t taken our eye off the main objective, working with stakeholders in PEPFAR countries in Southern Africa to prove the concept that they can leverage their purchasing power and call upon the private sector to offset challenges within their own country supply chains.???

We started in Mozambique. GHSC-PSM assessed the supply chain model in Mozambique, documented the flow of TLD, interviewed stakeholders, and identified four main challenges in the country:???

• Central and regional warehouses have significant capacity constraints???

• The Government of Mozambique, responsible for moving TLD from the central to lower regions has significant funding constraints to cover the in-country freight costs??

• Inconsistent and long lead times for import and duty waivers prohibit an ideal just-in-time delivery model to the central level??

• Due to these challenges, the established regional hub-and-spoke supply chain model in Mozambique is often inefficient. This increases costs, time, and, above all, risk.???

How can our supply chain partners help address these challenges????

We studied the data. We found that roughly 80 percent of TLD imported into Mozambique flows from their central warehouses to eight downstream provincial or intermediary warehouses—high-volume facilities.???

So, we went to the market and requested our VMS partners to provide fixed trucking lane rates from their VMS warehouses in South Africa directly to those eight downstream regional warehouses in Mozambique.???

Again, there was skepticism... it will cost too much... can they do it? Well, we found the lane rates were on par with what GHSC-PSM would be paying with our own freight partners and similar to rates used for planning by stakeholders in Mozambique.

We’ve made the first delivery to Chimoio in western Mozambique directly from a vendor warehouse in South Africa.???

So, by now bypassing the central level, we are not only helping alleviate storage space there but also embedding the cost of delivery into the commodity budget and helping the Government of Mozambique offset its in-country freight costs. Best of all, the private sector is leading the management of those activities.???

We’re now investing time to advocate with the Global Fund and the Mozambique Ministry of Health to participate in the VMS program. Thus, ensuring more TLD brought into Mozambique pulls from VMS warehouses. This will increase inventory turn, keep costs down for VMS suppliers, and enable the Central Medical Stores in Mozambique, CMAM, to further reduce their central stock levels as they can plan – or even require – TLD being held regionally.???

What most excites you about this vendor-managed solutions program????

What is exciting is other countries in the region, such as Zimbabwe, have participated. VMS suppliers have delivered products from their warehouses in South Africa directly to Bulawayo and Masvingo provinces, and we are establishing rates for 12 downstream warehouses in Zambia.???

This activity is another step closer to proving the concept that the private sector can take on more responsibility for making their commodities available closer to the burden of disease.???

Finally, it's exciting and encouraging to see our ARV manufacturing partners start to develop additional innovations.???

They are asking why they should preposition regionally. They have their own warehouses or our partners’ warehouses to preposition goods in Mozambique and Zambia, which would mean they can deliver in days instead of weeks and months.???

With such a high-volume product like TLD, with a long shelf life and relatively low cost – we are at a tipping point in fundamentally changing the ARV supply chain model for the better.??

Making manufacturers and suppliers true partners is the key to tackling the health supply chain’s underlying issues.?????