Activity-Based

Costing in Public
Health Commodities
Supply Chains
Methodology Uncovers True Costs
of Operation, Gives Rise to New
Management Approach

PRIVATE-SECTOR CONCEPTS
Table of Contents
Acknowledgments ....................................3
Acronyms ......................................................3
Executive Summary ..................................4
ABC Background .......................................5
ABC Implementation ..............................7
ABC Management ..................................10
Lesotho Case Study ...............................12
Conclusion .................................................16
Appendices ................................................17

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U.S. Agency for International Development or the U.S. government.

PHOTO CREDIT (Cover): Mickael Breard | USAID GHSC-PSM

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Acknowledgements
The USAID Global Health Supply Chain Program-Procurement and Supply Management (GHSC-PSM) project is funded under USAID
Contract No. AID-OAA-I-15-0004. GHSC-PSM connects technical solutions and proven commercial processes to promote efficient
and cost-effective health supply chains worldwide. Our goal is to ensure uninterrupted supplies of health commodities to save lives and
create a healthier future for all. The project purchases and delivers health commodities, offers comprehensive technical assistance to
strengthen national supply chain systems, and provides global supply chain leadership.

GHSC-PSM is implemented by Chemonics International, in collaboration with Arbola Inc., Axios International Inc., IDA
Foundation, IBM, IntraHealth International, Kuehne + Nagel Inc., McKinsey & Company, Panagora Group, Population Services
International, SGS Nederland B.V., and University Research Co., LLC. To learn more, visit ghsupplychain.org

Lead GHSC-PSM author: Steve Thomas, Warehousing Inventory and Logistics Advisor

GHSC-PSM contributing authors: Barry Chovitz, Technical Director – Leadership and Governance; James Johnson, Workforce
Strengthening Advisor; Ralph Titus – Director of Health Systems Strengthening; Ryan Triche, Analyst – Warehousing and Distribution

Consultant writer/editor: Michele Weaverling

Acronyms
3PLs Third-party logistics providers

ABC Activity-based costing

ERP Enterprise resource planning system

GAAP Generally Accepted Accounting Principles

GHSC-PSM Global Health Supply Chain-Procurement and Supply Management project

KPI Key performance indicator

MOH Ministry of Health

NDSO National Drug Service Organization

PDCA Plan do check act

USAID United States Agency for International Development

WMS Warehouse management system

 01.

PHOTO CREDIT: Lan Andrian | USAID GHSC-PSM

Executive Summary

A Traditionally Private-Sector Approach for Transforming

Management and Controlling Cost
In public health supply chains, warehouses at the country level serve a key role,
receiving large orders for medicines and medical products from the international
supply chain, storing these products, and then packing and shipping smaller
orders for distribution to local health facilities.

These warehousing activities require For programs funded by the U.S. — Present a detailed case study on ABC
infrastructure, equipment, human President’s Emergency Plan for AIDS implementation in Lesotho and the
resources and expertise, all of which bring Relief (PEPFAR), activity-based costing will positive results that unfolded.
significant costs. be an emphasis in 2021 and beyond.
— Provide annexes with example tools
Donors and country governments For countries that want to manage their that are used to implement and
are beginning to use a traditionally own supply chains without hiring third- practice ABC.
private-sector approach to measuring party logistics providers (3PLs) to provide
Throughout the handbook, the term
warehousing costs as a way to warehousing services, implementing ABC
“distribution center” is used instead of
better understand these cost drivers, is especially important to ensure that
“warehouse” to reinforce the idea that
identify inefficiencies in warehousing warehouse performance and costs are
these facilities should not be points for
processes and costs, implement process competitive with what 3PLs offer.
long-term and costly storage of products
improvements to lower costs, and
This handbook will: but rather shorter-term intermediaries
continually evaluate performance for
in continually moving products to the last
further improvements. This approach — Help country governments mile and to clients. This change in concept
is called activity-based costing, or ABC, understand what ABC is, the steps is helping public health supply chains focus
and it engenders a new way of managing involved in implementing ABC, and on more rigorous approaches to supply
called activity-based management. the expected outcomes. chain management within the storage realm.
 02.

PHOTO CREDIT: Bobby Neptune | USAID GHSC-PSM

ABC Background

What Activity-Based Costing Is and Why It Is Important

in Public Health Supply Chains
In public-sector supply chains, such as those for medicines that treat called activity-based costing (ABC) has
infectious diseases, distribution centers receive supplies of commodities that become a focus for USAID and other
public donors, and is being adopted in
have been ordered in larger quantities to meet the needs of a local region. public health supply chains, particularly
in distribution centers. Lesotho, Rwanda
Distribution center staff receive the indicator of the cost to provide distribution and Uganda have implemented ABC
commodities and move them into storage center services: A large box arriving at with guidance from the USAID Global
space and then they fulfill local orders by a distribution center may contain very Health Supply Chain-Procurement and
picking, packing and loading commodities lightweight commodities of low value — Supply Management (GHSC-PSM) project,
for shipping to an interim or final for example, cotton swabs. Calculating the and Ghana is currently preparing for
destination. distribution center service fee based on a implementation. ABC identifies
percentage of this box’s value would result activities in an organization — in this
Traditionally, the service fee established in a relatively low fee. But the large box case, receipt, put-away, picking, packing
for these warehousing processes has been requires the same (or sometimes more) and shipping — and determines the direct
calculated as a percentage of the value of distribution center activities to manage its and indirect (overhead) costs associated
the commodities being received, handled, receipt, storage and ship as does a small with a specific commodity for each of
stored and shipped. This is known as value- box with high-value goods — for example, these activities. This exercise ascertains
based accounting. While straightforward, a box containing expensive medicines the true cost of receiving, storing and
this approach is a more arbitrary or laboratory reagents in relatively small shipping a commodity, enabling distribution
determination of the costs to provide containers. Additionally, the large box center managers to pinpoint a more
warehousing services. Not only can takes up more storage and shipping space, representative service fee.
commodities themselves differ in value, but bringing its overall storage and handling
also storage costs can vary depending on costs even higher.
ABC is More Than a
how a commodity was delivered, where it Costing Strategy
is stored and even what season it is. Value- Public health supply chains often face more
based accounting often does not factor in This video on volumetrics
challenging budget limitations than those
explains this concept further.
these variations, thus the costs assigned are of the private sector. Constraints on donor
not as accurate as they could be. and government funding are perpetual
To determine a service fee that reflects realities for many countries, making it more
A basic example will demonstrate why a distribution center’s true activity costs, essential than ever for public-sector supply
commodity value is not an accurate a more rigorous costing methodology chains to be lean and efficient.
6 | ABC Background Activity-Based Costing in Public Health Commodities Supply Chains

In addition to traditionally using the

more arbitrary value-based accounting
to determine service fees, health supply DEFINITION OF DISTRIBUTION
CENTER ACTIVITIES
chains that are still developing often
depend on reactive key performance
re·ceipt - the physical receipt of products at a distribution center, inspection of the
indicators (KPIs), such as commodity
products for accuracy and quality assurance, determination of where the stock will be
stockouts at the facility level, to measure stored, delivery to that location and completion of receiving reporting.
performance. Unfortunately, these
put-a·way - taking incoming orders from the location where they are received to the
indicators illustrate only the effect of a storage area, placing them in storage units and recording their storage location.
breakdown somewhere in the supply chain,
pick·ing - retrieving items for an order from their storage location, taking them to be
rather than the cause.
prepared for shipping and recording preparation of the order.
By implementing ABC to determine the pack·ing - Packaging items in an order for shipping.
true cost of operations, not only can a ship·ping - transport of an order from the distribution center to its destination.
more representative service fee be set, but
also diagnostic KPIs can be established that
reveal root cause issues and opportunities, Outcomes of ABC Activity-based management —
enabling targeted improvement and more A variety of positive outcomes are possible operationalizing the efficiencies introduced
efficient supply chain management overall. through ABC implementation. through ABC into day-to-day management
By determining the actual costs to operate — is used in conjunction with ABC to
a distribution center, and understanding the First and foremost, by building knowledge identify areas that would benefit from
cost drivers that impact those costs, those of true supply chain operational costs process improvements. The activity rates
drivers can be adjusted to become more (monthly and annually), ABC gives determined through ABC provide valuable
efficient and productive, ultimately reducing organizations a powerful tool to monitor, clues on where to focus improvement
operational cost. analyze and improve operational efficiency. efforts. Benchmarking can also be used
to determine whether these activity
In this sense, activity-based costing is not ABC also breaks down costs in several rates align with world-class standards
just a costing methodology but a true shift ways to provide a full picture of the impact of performance achieved by other
in how an organization operates, leading of different costs on the organization: organizations.
to continual improvement and operational
excellence. In other words, activity-based — By function (e.g., receipt, put-away, Fortified with a new understanding of
costing ideally evolves into activity-based picking, packing, and shipping) as a true costs through ABC implementation
management. Supply chain managers can percentage of total costs and a focus on improving processes and
prescriptively address problems before — By unit, as a percentage of the total building efficiencies, an organization can
they create bottlenecks, stockouts and commodity: then implement strong and measurable
delays. KPIs that foster a cycle of continual
• Per volume or weight of commodities
improvement.
Activity-based costing is not just a costing
• Per kilometer transported
methodology but a true shift in how an Ultimately, implementing ABC will lead to
organization operates. In other words, — By costs of labor for functional areas long-term cost savings as efficiencies are
activity-based costing ideally evolves into (e.g., receipt, put-away, picking, packing, realized — savings for both distribution
activity-based management. and shipping) center operations and donors.

Activity-based costing is not just a costing methodology

but a true shift in how an organization operates. In
other words, activity-based costing ideally evolves into
activity-based management.
 03.

PHOTO CREDIT: Andi Gultom

ABC Implementation

Implementing ABC: A Phased-In Approach

Because ABC is a fundamental shift in costing and organizational both donor-funded products, such as
management, implementing ABC requires support for the change antiretroviral drugs (ARVs) to treat
HIV, and essential medicines, such as
throughout all levels of the organization, and a commitment to antibiotics. Because of the bulk ordering
maintaining new business processes in the long term. common in public health supply chains,
donor products tend to make up a larger
As such, ABC implementation is best managed, implementing ABC should be portion of inventory and tend to stay in
done in phases, allowing time within understood as a change management the distribution center longer, potentially
the operation for adaptive learning process. Hence, the first step is for the constraining available storage space. In
and continual improvement, as well as ABC advisors to educate supply chain some cases, if storage space becomes
building of capacity and ownership ABC personnel on what ABC is, how it will be too limited, countries may have to add
implementation is best structured in four implemented as a multi-phased change on costly external storage units. Excess
phases. Generally, implementation takes management tool and how financial data inventory also poses a higher risk of
place over six months, with four to six will be used to support supply chain product expiry or damage and higher
weeks between phases. operations and understand how decisions insurance costs. Understanding this
affect costs. potential source of increased cost and risk
Phase 1: Overview and Discovery associated with the largest commodity
Phase 1 lays the groundwork that will Determine the Commodity category can help the distribution center
inform implementation of ABC. Advisors Mix and Characteristics advocate for adjusting ordering schedules
experienced in ABC implementation work In this step, the ABC advisors interview in line with storage space to help lower
with distribution center and operations key stakeholder staff to determine which cost and risk and ensure efficient supply
managers, supervisors and other key commodities have similar characteristics chain management.
staff — in person or by remote — to or requirements to enable commodity
Categorizing commodities by common
provide an overview of ABC and conduct categorization, and how day-to-day
characteristics also enables those
discovery of key information. This phase categorization of products occurs in the
characteristics to be measured and
requires about 10 days and entails the distribution center. As ABC is implemented,
factored into the ABC model as
following activities: this knowledge can help the distribution
additional data points for determining
center manage those categories more
Build Awareness and Education true operational costs. Characteristics
efficiently.
that could be identified in public
Because ABC is not simply a change in
For example, in the global health supply health commodities include whether
costing calculations but also leads to a
chain, distribution centers often handle the commodities have particular
culture change in how an organization is
8 | ABC Implementation Activity-Based Costing in Public Health Commodities Supply Chains

requirements for how they are handled implementation. It is the tool that drives the volume of commodities that are expected
or stored, how fragile they are or whether organizational change needed for ABC to to move through the distribution center
they are sensitive to light exposure. These be successful. and the level of staffing that will be needed
characteristics can often be identified and to complete these tasks (plan). The next
measured by analyzing information in the The model used for the daily planner is morning, supervisors again meet briefly to
distribution center’s existing systems, such called plan-do-check-act (PDCA), a four- ensure the plan from the previous day is
as the warehouse management system step process for carrying out change. By still in place, and staff are then allocated to
(WMS) or enterprise resource planning conducting these four steps each day, guided conduct tasks according to the day’s plan
(ERP) system. by the daily planner, an organization gains (do). At the end of the day, the supervisors
visibility into what is and is not working meet again to analyze and discuss how well
Identify Data Gaps Before and can take iterative steps to improve that day’s plan worked (check). If something
Implementation of ABC processes and achieve efficiencies. did not work as planned — for example,
Finally, the ABC advisors collaborate if a shipment that was scheduled to arrive
In the context of ABC implementation in a
with distribution center staff to develop that day did not arrive, resulting in staff in
public health distribution center, the PDCA
a roadmap of what information will be the receiving department not having the
daily planner is used to measure the main
needed in Phase 2, such as volumetric data expected level of work —supervisors can
operational functions of the distribution
requirements and job codes (see Annex quickly identify this inefficiency and then
center, meaning those that touch freight/
1 for a list of the typical data needed), determine a solution for the next day — for
commodities — receipt, put-away, picking,
and determines if any gaps need to be example, strategizing how to re-allocate
packing and loading for shipping. These
addressed prior to implementation. staff with unexpected free time to another
functions are defined as direct labor
and are the cost drivers in a distribution area where assistance is needed (act).
Phase 2: Implementation
center. By splitting out these functions and As this PDCA cycle is conducted each
In Phase 2, direct labor is defined and
understanding how they work and interact, day with the daily planner, distribution
allocated, and ABC is implemented. This
the distribution center can then eliminate center supervisors and managers begin
process requires about 10 days of remote
overlaps or wastage in labor in each to understand the interactive nature
or in-person support and encompasses the
functional area to increase productivity and of distribution center functions and to
following activities:
reduce unnecessary cost. operate more as a team. They learn to
Implement a Daily Plan-Do-Check-Act identify, respond to and even anticipate
The process can work like this: at the
Planner To Define Direct Labor and inefficiencies, continually improving
end of each day, the supervisors for each
Enable Continual Improvement processes over time. Working as a team
functional area of the distribution center
This daily planner (See Annex 2 for an meet and use the daily planner to plan and having direct input into processes also
example) is the centerpiece of ABC for the next day, taking into account the helps build staff morale.

CONTINUOUS IMPROVEMENT
The PDCA Cycle

PLAN DO CHECK ACT

Set a target for Implement Ensure the implementation is Make this the
improvement. the plan. going well. See if actions have new standard.
had the intended effect.
9 | ABC Implementation Activity-Based Costing in Public Health Commodities Supply Chains

As such, this PDCA practice and tool, once As this PDCA cycle is conducted each day with the daily
established, is truly the foundation to a lean
supply chain and drives the distribution planner, distribution center supervisors and managers
center’s evolution to activity-based
management.
begin to understand the interactive nature of distribution
center functions and to operate more as a team.
Develop a Draft Labor Report
for Direct Labor
The direct labor report (see Annex 3
for an example) captures a distribution Collect All Indirect Labor and Determine Indirect Labor Allocation
center’s direct labor costs by each Transportation Costs to Distribution Center Activities
functional area, compared to the cost of In this step, the ABC advisors and Finally, the ABC advisors and distribution
(the hours used) moving commodities distribution center management team center management team will conduct
through the distribution center, to measure collect information on indirect costs, which interviews to ascertain the percentage of
productivity. are made up of two types of costs: support to a specific activity driver for all
indirect labor costs.
An output of the labor report is — Payroll costs for staff who perform
throughput, which is a “grade” on how the overhead functions — that is, functions Phase 4: Finalization
distribution center managed labor against such as procurement, order entry and This last phase, Phase 4, which requires 5
received and shipped product. Throughput customer service that are not directly to 10 days of remote or in-person support,
is calculated as total units received and tied to the main operational functions is when the ABC advisors, distribution
shipped, divided by the total hours used of the distribution center center operations manager and director
to perform those tasks. This measure of — Transportation costs, such as fuel, of finance review the ABC model, further
productivity provides insight as to when maintenance, depreciation and driver customize it as needed and finalize it.
resources are used most efficiently. per diem
The labor report is customized to fit each — Software and hardware
distribution center operation. PHASES OF ABC IMPLEMENTATION
This exercise provides raw data for
Allocate Direct Labor customizing the ABC costing model. Phase 1: Overview
In this step, the ABC advisors and and Discovery
distribution center team calculates salary Develop a Database to Allocate
The groundwork for
Indirect Costs to Distribution Center
levels for all direct labor employees implementation begins
Functions
involved in handling and moving product in
the distribution center. Next, the ABC advisors work with the
Phase 2:
finance and distribution center managers
Implementation
to create a database of these indirect costs
AM (Activity Measured) ÷ Direct labor is defined
and connect it with the organization’s and allocated
H (Hours) = TP (Throughput)
payroll system to create customized hours-
tracking reports by function. These reports
This information is used to assign actual are used to align indirect costs to a specific Phase 3:
costs to an activity. distribution center function on the direct
Customization
Data on indirect costs
labor report.
Phase 3: Customization allows customization

In Phase 3, data on indirect costs allows This activity is the critical point for future
ABC to be customized to the particular ABC efforts for the direct labor portion Phase 4:
distribution center. The following activities, of the ABC model, as this is when all Finalization
requiring about 10 days of remote or in- distribution center and transportation Management and finance
employees are assigned to a specific agree to final customization
person support, will take place:
distribution center function.
 PHOTO CREDIT: Tafadwa Ufumeli | USAID GHSC-PSM
04.
ABC Management

Evolving From ABC Implementation to Activity-Based Management

ABC is more than a costing strategy. It is designed to be woven into An executive dashboard (see Annex 4
critical management systems as a framework for continual improvement for an example) — a reporting tool that
provides a visual display of organizational
of an organization’s products, services and processes. KPIs, metrics and data — helps ensure that
these KPIs are fully adopted and utilized
This requires a fundamental change in how their jobs could change, how lines as input for continual monitoring and
organizational culture that is supported by of authority could shift, and how their improvement. Executive dashboards give
employees at all levels.1 performance could be measured. However, managers and executives accessible, at-a-
a gradual implementation process glance visibility into business performance
This is why ABC advisors conduct allows time for education about ABC, across all units.
implementation in phases to allow for understanding of the benefits to employees
orientation of all employees to the and to patients at the last mile of delivery,
principles and mechanics of ABC, what the Using this tool, managers and executives
and assimilation of the new approach. 3
organization is trying to achieve and how can establish routine meetings — ideally
the new approach will be used in their The most essential activity to establishing weekly, biweekly or monthly — to review
jobs. It’s also important that an organization activity-based management long term is the KPIs, identify gaps and inefficiencies, and
phase out old management processes determining diagnostic, measurable KPIs develop and implement solutions. Solutions
as the new processes are fully adopted. that reveal the root causes of challenges or can then be monitored for effectiveness
Additionally, the daily decision-making inefficiencies in the supply chain. Identifying and further improved, as needed.
process — aided by the daily PDCA root causes provides the opportunity for
In the next section, a case study from
planner — and the supervisors involved in managers to strategize and implement
Lesotho demonstrates in detail how
this process must be clearly defined, and targeted improvement efforts. Over time,
implementation of ABC to determine
performance measurement and employee this continual improvement mindset and
true distribution center costs and a
incentive programs should be tied to the approach can result in reduced operational
reflective service fee successfully evolved
new ABC structure. 2 costs and overall more efficient supply
into activity-based management, and the
chain management — always the ultimate
Employees may understandably resist positive results seen over the longer term.
goal in a public health supply chain. 4
this change based on uncertainty over

1
Joseph A. Ness and Cucuzza, T.G. “Tapping the Full Potential of ABC” Harvard Business Review, July-August 1995. Online: https://hbr.org/1995/07/tapping-the-full-potential-of-abc
2
Ibid.
3
Ibid.
4
Ibid.
11 | ABC Management Activity-Based Costing in Public Health Commodities Supply Chains

PHOTO CREDIT: Bobby Neptune | USAID GHSC-PSM

BENEFITS OF ABC
ABC helps drive a public-sector distribution center team to operational
excellence in the following ways:

• Determine the true costs of warehousing • Establish definitive KPIs and continual
activities improvement plans
• Determine the true cost of commodities • Instill activity-based management
to inform pricing and purchasing policy throughout the organization
• Identify individual products that are • Develop enterprise logisticians
wasteful
• Discover private-sector operations skills
• Reveal unnecessary costs to eliminate
• Drive operational proficiency
• Enable products to “pay their way” through
• Build capacity in supply chain management
understanding of cost and storage

CHALLENGES AND CONSIDERATIONS

Activity-based costing can be applied to any warehouse
Warehouse managers should fully consider four key factors or facility throughout the public health supply chain.
before launching ABC.

• Change Management. ABC is a • Unfamiliar Numbers. ABC produces • Generally Accepted Accounting
fundamental organizational change that categories of numbers that may be Principles (GAAP). ABC does not
requires commitment from leadership and unfamiliar to managers who work with conform to GAAP, because it can
buy-in from all stakeholders, especially traditional cost systems. Additionally, ABC exclude some organization-sustaining costs
employees. Developing a change management does not automatically point to root and include some indirect costs in its
strategy to guide this process is essential to causes but identifies underperforming calculations. In such cases, two costing
overcoming resistance to change and helping activities; therefore, it is important not to systems may be needed, with ABC
ensure a successful and sustainable transition. misinterpret unfamiliar numbers as serving as a supplement to a traditional
indication of root causes. cost system to identify areas where
• Question of Benefit for a Cost-Conscious
improvement can be made, as opposed
Organization. Changing an accounting P
 roviding continual guidance on unfamiliar
to serving as a bottom-line financial tool.
system can be difficult. In particular, a cost- numbers and reports throughout ABC
conscious organization may not feel that the implementation helps build understanding
benefits of ABC outweigh the time and costs and capacity in the organization. Distribution
of implementation. In this case, an ABC center staff with an eye for data and analytics
system likely cannot realize its potential may be helpful here to build this capacity
without full organizational support. in others.
 05.

PHOTO CREDIT: Andi Gultom

ABC Case Study

LESOTHO
Successful ABC Implementation
Since its founding in 1979, Lesotho’s National Drug Service Organization costing models was PEPFAR’s call to action
(NDSO) has been at the forefront of procurement, warehousing and to achieve the United Nations’ 90-90-90
HIV/AIDS program targets, with their
distribution of essential medicines to health facilities owned by the increased emphasis on laboratory services
Lesotho government and those affiliated with the Christian Health and the introduction of test-and-treat, an
Association of Lesotho. intervention strategy that called for earlier
treatment of individuals diagnosed with
HIV. Transition to these strategies initially
A parastatal organization, NDSO is Challenge: How to Make Last-Mile challenged supply chain planning globally
financially autonomous from Lesotho’s Delivery Viable Financially by changing the mix and increasing the
Ministry of Health (MOH).
Intuitively, the additional costs associated volume of commodities flowing through
To cover costs of its monthly deliveries with last-mile delivery would require the system. Until supply chains adjusted,
to 10 health districts and five principal NDSO’s markups to be revised. An the new strategies stretched resources at
hospitals, NDSO established markups increased markup, however, would likely many levels, including in Lesotho.
on donor-funded products and essential upset NDSO’s customer base (donors),
which might look for cheaper alternatives. Understanding Current
medicines. These health districts and
principal hospitals were then responsible But NDSO’s senior management was Performance
for conducting last-mile delivery of the also concerned that the service fee for With the support of USAID GHSC-PSM,
medicines to health facilities. donor-funded products was insufficient to NDSO began a multi-year initiative in 2016
cover NDSO’s actual handling, storage and to better understand overall operating
However, in 2016, due to ongoing transportation costs. They were further expenses and the cost differences in
challenges in medicines being delivered concerned that the reimbursement for product handling, storage and last-mile
from the health district level to the essential medicines had been set too low delivery requirements for donor-funded
facility level, the MOH tasked NDSO to ensure financial stability. products and essential medicines. The goal
with monthly last-mile delivery to was to identify opportunities to streamline
approximately 220 health facilities. Last- At the time, NDSO’s financial cost models processes, achieve cost efficiencies and
mile deliveries can often be the most lacked the ability to accurately track actual enhance performance.
difficult and expensive segment in a supply operating costs by functional cost center
chain due to increased distance, poor or to quantify the effect of unforeseen To do so, NDSO and GHSC-PSM
infrastructure, lack of paved roads and disruptions in the supply chain. An example prepared for application of the ABC
limited communication. of such a disruption that needed to be model.
accounted for in budgetary projections and
13 | ABC Case Study Activity-Based Costing in Public Health Commodities Supply Chains

First, GHSC-PSM needed to collect baseline

information.The project:

— Reviewed warehousing standard

operating procedures
— Identified, implemented and mentored
NDSO staff in warehousing best
practices
— Developed KPIs to monitor distribution
center performance
— Reviewed the NDSO cost recovery
scheme and prepared options to
achieve financial sustainability
— Analyzed data that included distribution
center activities for ABC and data
collection for distribution network
optimization
— Carried out foundational work for the Pharmacists entering consumption data. PHOTO CREDIT: 5Fifty Production | USAID GHSC-PSM
distribution network optimization and
cost recovery assessment customer-service levels, ensuring capacity center practices, such as the 5S system;
— Helped NDSO prepare for building and true ownership of the operator. WHO’s good warehousing practices; and
implementation of a systems- Using ABC methodologies allowed for the quantitative checks against adherence to
strengthening strategy, including a supply chain to charge donors a service fee systems, health and safety, and processes.
modified push model, last-mile delivery for the actual activity and not a commodity The self-administered tool is applied
and biweekly deliveries value-based “tax.” monthly, reinforcing best practices
and assisting the user in developing
— Created a roadmap for ABC GHSC-PSM introduced unique tools to improvement plans.
implementation with next steps and measure the costs of all NDSO activities:
suggested interventions Executive Dashboard
Labor Reporting Tool
— Reviewed the existing enterprise This tool provides senior management with
This tool is used for reporting throughput a monthly snapshot of the following KPIs:
resource planning (ERP) tool and
performance by period (monthly) for the
identified gaps in its use
fiscal year and can be used as a forecasting — Financial year-to-date trends and
— Built NDSO capacity by: tool for future years. GHSC-PSM trained averages for all operational costs
the NDSO finance manager and other key
• Providing the operators with a suite — Expense as a percentage of the service
staff to accurately track:
of tools to manage distribution center provided or the cost of goods for
and transportation performance in — Throughput — the movement of goods transportation and warehousing
conjunction with existing ERP and and the time expended by function — Results of a monthly NDSO assessment
payroll systems of all aspects of operations (process,
— Expenses per function, expressed as a
• Teaching them how to take financial financial value and as a percentage of the organization, health and safety) that
ownership of the supply chain service provided identifies challenges and enables staff
to determine and implement solutions,
Implementing ABC to Determine — Impact of overtime on financial fostering continual improvement
performance (if applicable)
True Costs
ABC Tracker
Next, to understand NDSO’s true costs, Distribution Center
This tool differentiates the true cost per
GHSC-PSM applied ABC performance Self-Assessment Tool
commodity unit by category (donor-funded
and accountability tools at the financial, This Excel-based tool measures qualitative products or essential medicines) to receive,
distribution center, transportation and efforts to follow best-in-class distribution store, pick, pack and ship. All activities
14 | ABC Case Study Activity-Based Costing in Public Health Commodities Supply Chains

management tracked costs at the activity

level. The model gave insight into donor-
funded products and essential medicines,
and the total volume of the mix of both
product categories.

With this knowledge, NDSO moved from a

reactive state, in which it lacked visibility into
the drivers behind its financial performance,
to a proactive state, understanding
the impacts of its markup decisions on
future performance. ABC provides the
foundational work to understand what is
happening and why.

Lessons Learned and

Recommendations
A successful and sustainable transition to
Activity-based costing gives managers a new perspective on how best to utilize human and financial resources. ABC requires commitment from local
PHOTO CREDIT: Mickael Breard | USAID GHSC-PSM
leadership, buy-in from all stakeholders
— especially employees — and a change
for donor-funded products and essential — Costs by function — procurement, management strategy.
medicines are segregated and quantified. receiving, storage, selection,
transportation Early on, a focus on quick wins during the
The actual costs for both commodity initial work with the ABC advisors helped
categories are identified for the fiscal year — Management costs as a percentage of
gain employee trust. However, that did not
to date. total supply chain costs
allay NDSO employee suspicion that the
— Costs by unit per commodity ABC effort would be used as pretense
Draft Service Fee Calculator With
for staff reductions. Senior management
Incentive Structure — Costs as a percentage of the total
worked hard to explain and assure staff that
At NDSO’s request, GHSC-PSM developed commodity value
this was not the intention, but rather that
a draft Excel-based calculator using — Per dollar (local currency) of value, improving patient outcomes was and is the
the NDSO ABC model. The calculator volume or weight of commodities drive for ABC. That has been proven over
demonstrates the actual impact of all time by senior leadership’s commitment to
distribution center and transportation costs — Per kilometer transported
retaining current positions and promoting
per month, with an emphasis on incentives — Costs by supply chain tier (central level, from within.
for the donor to optimize procurement regional level, clinic, or urban vs. rural)
schedules to help improve the rate of Strong in-country GHSC-PSM leadership
inventory turnover and mitigate the adverse — Costs of labor for procurement,
and collaboration with NDSO’s senior
impact of long-term, slow-moving inventory transportation, storage and management
management, driven by the NDSO general
storage on performance and costs. With the above processes and tracking manager, were key factors in the initiative’s
tools implemented in Lesotho, NDSO success. The general manager’s buy-in also
Compiling and Leveraging the Data
GHSC-PSM taught NDSO operators how
to continue to collect and compile the data Strong GHSC-PSM leadership and collaboration with
using the above tools. By continuing to track
all direct and indirect costs, the reporting
NDSO’s senior management, driven by the NDSO
output allows NDSO leadership to fully general manager, were key factors in the initiative’s
understand the current cost structure. This
reporting can be updated at any time by
success.
local staff and provides:
15 | ABC Case Study Activity-Based Costing in Public Health Commodities Supply Chains

RESULTS OF ABC IMPLEMENTATION IN LESOTHO

TIME SAVING SELF-RELIANCE TRANSPARENCY EFFICIENCY STAFF MORALE

NDSO reduced its NDSO transitioned NDSO routinely monitors By gathering, NDSO staff became
internal distribution to true activity-based the costs of every aspect of measuring, reporting more engaged in
center order entry management, exercising its operations and better and analyzing true process changes, worked
to dispatched cycle full control of its supply monitors and controls costs generated, together as a team and
time from two weeks chain and operating its expenses, resulting in NDSO became more had direct input into
to four days. in a state of continual a threefold improvement resilient and efficient. the evolving processes,
improvement, requiring in financial performance. boosting morale.
no outside intervention.

meant GHSC-PSM was granted access to Operational and Financial Transparency Resiliency and Efficiency
sensitive financial data and existing system Before ABC adoption, NDSO lacked By gathering, measuring, reporting and
information. If the general manager or other visibility into exactly which distribution analyzing true costs generated, NDSO
senior managers were not forthcoming with center functions accounted for what became more resilient and efficient.
information, the ABC study would not have portions of its recurring expenses. Like Overall, reduced operational costs allowed
realized the success that it did. many developmental logistics supply limited donor and MOH monies to be
chains, NDSO only had access to top- spent on other areas to help further
Results
line annual costs totaled for all functions. improve supply chain performance and
ABC implementation in Lesotho led to a Now, NDSO routinely monitors the costs ensure greater access for patients.
number of results: of every aspect of its operations and
better monitors and controls its expenses. Staff Engagement and Morale
Time saving
The fiscal year ending 2017 saw a very Once staff understood the intention and
Over the ABC initiative’s duration, NDSO positive outcome in bottom-line financial benefits of ABC implementation and
reduced its internal distribution center performance. By the end of 2018, NDSO’s bought into the change, they became more
cycle time for order entry to dispatch from more efficient processes and reduced costs engaged in the process changes, worked
two weeks to four days. Its year-over-year resulted in a threefold improvement in together as a team and had direct input
financial performance and stability also financial performance. into the evolving processes. This made staff
continue to improve. feel empowered and improved morale.
With visibility into operating costs, NDSO
Shift to Self-Reliance
senior managers could improve efficiency
Completion of the ABC work saw and curtail costs to the point that they
NDSO transition to true activity-based “broke even” while maintaining the same
management. The senior leadership was markups. They could also contemplate
empowered to operate the supply chain establishing a strategic capital investment
with full knowledge of how decisions they fund to become more autonomous in the
made immediately affected service for future and fund infrastructure expansion
the end recipient. By using ABC/activity- improvements. (A capital investment
based management, NDSO executive strategy for a supply chain uses some of
leaders exercise full control of their supply the money available at end of the fiscal
chain and operate in a state of continual year, due to the high-level performance
National Drug Service Organization (NDSO) staff in Lesotho
improvement, requiring no outside against past actual outcomes, to sustain conduct daily planning of distribution center activities as part
intervention. and improve the facilities.) of ABC implementation. PHOTO CREDIT: USAID GHSC-PSM
 06.

PHOTO CREDIT: Andi Gultom

In Conclusion

Keeping the Public Sector Competitive With

the Private Sector
Without implementing and managing a supply chain with ABC, the public
sector will face future competition from the private sector, who likely already
use the methodology to provide an efficient and cost-effective service.

In public health supply chains, implementing to ensure this is possible. Without such
ABC in distribution centers establishes an approach, inefficient costing and
the true cost of operation, which enables management could potentially lead to
a more informed, proactive management competition from 3PLs that can offer
approach to be built on this essential Ministries of Health much more efficient
knowledge. Improved costing and distribution center services for a lower
management practices tie directly to cost. This may be a viable or necessary
improved supply chain management overall. option for some countries, but for those
that want to maintain control of the supply
For countries that want to manage their chain and support continued employment
own public health supply chains, adopting of distribution center staff, ABC offers a
an ABC approach is an important way practical solution.
Appendices
Section .07

PHOTO CREDIT: Andi Gultom

18 | Appendices Activity-Based Costing in Public Health Commodities Supply Chains

ANNEX 1 | Typical Data Requirements for ABC Implementation

Distribution centers will need to gather data for ABC implementation.
The type of data typically needed appears in the table below.
19 | Appendices Activity-Based Costing in Public Health Commodities Supply Chains

ANNEX 2 | Example of a PDCA Daily Planner

The PDCA (plan do check act) daily planner is the foundation of a lean supply chain. It distinguishes the main operational functions of the
distribution center. These functions fall under what is called direct labor, which are functions and activities that touch freight/product. These
areas are the cost drivers in a distribution center, and once the operations team understands how these drivers work and interact, they can
then begin to adjust them to increase productivity and reduce unnecessary cost.

PDCA-Plan, Do, Check, Act-Daily Planner

Day of the Week Date

Put-Away / Replinishment
Required # # Empl
Receiving / Off Loading of empl. Us ed 75000
# of Required #
8 # Employee Used
Eaches 32000 9.2 Name of empl.

Name 6.9 7

1 Scott 6 Nagesh

1 Khalid 7 Sean 2 Andrew 7 Stefania

2 Kate 8 Juan 3 Gurivi 8

3 Susi 9 4 Allan 9

4 Eliza 10 5 Steve 10
Required #
# Employee Used
5 Xavier 11 Dispatch/Loading of empl.
# of
6 Chris 12 Cartons 68500 8.5 8
Required #
Picking of empl. 1 John 7 Ella
# of
Eaches 270 0.2 2 Dan 8 Michael
# Empl
1 Ralph 9 Cherif Used 3 Ashley 9

2 Jamey 10 8 4 Swaroop 10

3 Rene 11 5 Mohammad 11

4 Max 12 6 Paul 12

5 Kate 13

6 Ishan 14

7 Maqsoda 15

8 Ryan 16

Required Hours 198

Employees Used 39

Comments for Receiving / Off-Loading:

Comments for Put-Away:

Comments for Picking:

Comments for Dispatch & Loading:

20 | Appendices Activity-Based Costing in Public Health Commodities Supply Chains

ANNEX 3 | Example of a Direct Labor Report

The direct labor report captures direct labor cost compared to the cost of goods handled per month. Throughput is an output of this
report, a grade, per se, on how labor was managed against received and shipped product. Throughput is simply total units received and
shipped, divided by the total hours used to perform that task. It is a measure of productivity and provides insight into when financial
performance is maximized. The labor report is customized to the fit each operation.

Example of Labor Report

Monthly Labor Report-Throughput & Activity Based Financial Performance Tracking

Month Ending June

Period Number 3 Period to Date

Actual % to $ Actual % to $

$ 57,286,900 Sales 121,703,503

Receiving
450,339 Units 2,670,902
1,730 Regular Hours 5,190
1,862 7.09% Total 5,624 7.72%
66,141 0.12 Cost 200,944 0.17
242 Throughput 475
Put-Away
210,508 Units 626,038
692 Regular Hours 2,076
786 11.96% Total 2,481 16.32%
19,633 0.03 Cost 64,387 0.05
140 Throughput 132
Selection
228,086 Units 612,875
1,557 Regular Hours 4,498
1,676 7.10% Total 4,945 11.32%
40,046 0.07 Cost 125,338 0.10
80 Throughput 110
Loading
228,086 Units 612,875
692 Regular Hours 2,076
767 9.78% Total 2,291 9.38%
27,087 0.05 Cost 80,618 0.07
572 Throughput 541
All
888,933 Units 3,909,815
6,649 Regular Hours 19,764
7,189 7.51% Total 21,743 9.10%
268,415 0.47 Cost 831,931 0.68
124 Throughput 180
21 | Appendices Activity-Based Costing in Public Health Commodities Supply Chains

ANNEX 4 | Example of an Executive Dashboard

An executive dashboard is a reporting tool that provides a visual display of organizational KPIs, metrics,
and data. The objective of executive dashboards is to give directors and executives an at-a-glance visibility
into business performance across all units.

Example of Executive Dashboard

Year to Date Sales
Actual Projected Variance
$ 380,992,044 $ 279,289,565 $101,702,479
Distribution Center All Transportation/Customer Service All
Fleet
Overtime Labor % of DC Labor % of $ per Yield- Kilos per Labor % of
Cumulative Monthly Sales Throughput Wages % Sales Assesment Wages Sales Fuel $ Fuel Usage Fleet Cost Kilometers Kilo U.P.H. Litre Sales

November $ 22,919,094 144 $ 325,796 17.34 1.42 82.7 $ 79,418 0.0035 $ 80,990 7,632 55,743 63,891 $ 0.30 294 8.37 1.423
December $ 148,083,516 417 $ 256,832 4.89 0.17 83.76 $ 79,418 0.0005 $ 69,616 6,567 55,743 48,266 $ 0.24 259 7.35 0.171
January $ 12,734,618 221 $ 257,823 5.14 2.02 86.29 $ 79,418 0.0062 $ 72,532 6,761 55,743 45,191 $ 0.22 289 6.68 2.026
February $ 13,626,858 130 $ 236,778 0.86 1.74 84.2 $ 79,418 0.0058 $ 59,214 5,817 55,743 47,976 $ 0.25 241 8.25 1.746
March $ 60,277,238 424 $ 251,348 4.59 0.42 85.16 $ 79,418 0.0013 $ 75,451 7,189 55,743 54,046 $ 0.26 305 7.52 0.421
April $ 10,062,444 197 $ 253,421 5.14 2.52 75.78 $ 79,418 0.0079 $ 63,380 6,437 $ 55,743 53,485 $ 0.27 248 8.31 2.528
May $ 12,940,872 116 $ 254,640 5.65 2.07 N/A $ 79,418 0.0061 $ 58,281 6,307 $ 55,743 56,472 $ 0.29 253 8.95 2.076
June $ 12,273,654 178 $ 254,640 3.38 2.07 N/A $ 79,418 0.0065 $ 65,968 6,934 $ 55,743 45,615 $ 0.23 301 8.74 2.076
July $ 18,645,976 134 $ 307,479 13.32 1.65 N/A $ 79,418 0.0043 $ 49,269 5,640 $ 55,743 49,269 $ 0.27 228 8.74 1.654
Agust $ 37,677,188 207 $ 262,637 5.07 0.7 N/A $ 79,418 0.0021 $ 63,905 6,934 $ 55,743 52,527 $ 0.26 368 9.22 0.702
September $ 20,755,726 166 $ 288,533 9.48 1.39 N/A $ 79,418 0.0038 $ 60,122 7,002 $ 55,743 52,731 $ 0.27 281 8.59 1.394
October $ 10,994,860 146 $ 290,759 8.69 2.64 N/A $ 79,418 0.0072 $ 47,286 5,351 $ 55,743 33,065 $ 0.18 245 8.84 2.647
Average $ 31,749,337 207 $ 270,057 6.96 1.57 82.86 $ 79,418 0.0054 $ 61,541 $ 6,437 $ 55,743 49,038 $ 0.25 276 8.77 1.73