Why do Supply Chain Costs Matter? Peru Points the Way

The Ministry of Health staff in Peru answered this question very eloquently: “collecting and knowing supply chain costs was key to visualize hidden costs and use them for inclusion in regional management plans to allocate sufficient funds, which ultimately will contribute to  ensuring availability of essential medicines.”

Essential medicines and health supplies—such as vaccines, antiretrovirals, contraceptives, and micronutrients—are key to achieving public health outcomes. In the Mesoamerican Region (including Dominican Republic) governments spend an estimated US$600 million annually to procure medicines.

However, procuring medicines does not make them available to clients at the last mile; functioning and fully funded public health supply chains are essential to delivering health supplies for all. An international cost analysis has shown that, on average, an additional 12–25 percent over and above the cost of essential medicines is needed to deliver them to the last mile. The cost of the public health supply chain is an essential consideration for health planning and results-based budgeting.

In La Libertad, Peru’s third most populous region, we collaborated with the Ministry of Health’s Regional Director, the Technical Director of the Regional Specialized Warehouse, and the National Center for the Supply of Strategic Resources in Health (CENARES) to sample supply chain costs for 304 essential medicines, including those used for maternal and child health, nutrition, reproductive health, HIV and AIDS, and tuberculosis interventions. Our costing focused on warehousing and transportation activities because MOH Peru had analyzed their system bottlenecks and determined that, to improve product availability these two functions were the most challenging. The costing exercise estimated that for every U.S. dollar spent on medicines, warehousing and distributing medicines cost 29 cents. Breaking down the costs for each budget line, 70.8 percent corresponds to labor, followed by vehicles (15.6 percent), warehouse equipment (3.2 percent), per diem (2.8 percent), and storage space (2.5 percent).

CENARES and La Libertad region used the evidence-based results of the costing exercise to include them in the regional budget allocation for distribution of medicines. In 2016, CENARES implemented a Regional Strategy for “Distribution Plans” – as a result, La Libertad Regional budget allocation tripled in 2016 compared to the previous year. This allocation was possible after the logistics team presented the transportation and warehousing costs to decision makers and the financial manager, as evidence to show that budgets should include these costs to improve distribution and availability of medicines and medical supplies. Based on the success in La Libertad, CENARES is leading the expansion of the costing methodology and has made an online tool available to all Peru regions. Through the tool, the regions register their transport and warehousing costs which help them perform periodic evaluations to optimize their supply chains. Since 2016, all regions of Peru prepare and report their regional distribution plans to CENARES, which will help in the medium-term to have all regions carry out their cost analysis, and as a result show significant improvements in supply chain management.

“Every logistics function has a cost,” CENARES staff said, “visualizing the costs and optimizing them directly contributes to the efficient use of resources allocated…this is crucial to improve supply chain performance and to ultimately improve availability of essential medicines and supplies at the facility level, thus improve access of the population.”

We invite you to learn more about our work here:

• SC Costing toolkit in San Marcos University Peru 
• Estudio de Costos de Almacenamiento y Transporte de Medicamentos: La Libertad, Perú
• Supply Chain Costing: Visibility and Advocacy for the Public Health Supply Chain 
• Putting Cost into the Equation: Case Examples of Economic Evaluation of Public Health Supply Chains in Three African Countries

Lea la entrada de blog en español: Los costos de la cadena de suministro – ¿Por qué los necesitamos? Perú lo explica en forma convincente