Contracting for On-Time Delivery in the U.S. Influenza Vaccine Supply Chain
Johns Hopkins University - Carey Business School
Carnegie Mellon University - Tepper School of Business
Washington University in Saint Louis - John M. Olin Business School
May 6, 2014
Motivated by the influenza vaccine industry, we study a supply chain contracting problem in the presence of uncertainties surrounding product design, delivery, and demand, respectively. In the supply chain, a retailer places an order before a flu season starts and a manufacturer decides on when to produce vaccines. Because production after a design freeze can result in late deliveries and hence lost sales, the manufacturer in practice initiates production prior to the design freeze at its own risk. However, since it is the retailer who reaps most benefits from selling more vaccines delivered on time, the manufacturer has little incentive to undertake at-risk production, which in turn induces the retailer to reduce the order size in anticipation of lost sales; and this further discourages the manufacturer from making efforts to improve its delivery performance. To break this negative feedback loop, we introduce two coordinating contracts and connect them to those used in practice: Delivery-time-dependent Quantity Flexibility (D-QF) contract that relates return quantity to delivery schedule, and Buyback-and-Late-Rebate (BLR) contract that combines buyback with rebate for late deliveries. In view of the complexity of the coordinating contracts, we also analyze two simpler formats, Quantity Flexibility (QF) and Late-Rebate (LR). We find that the QF contract nearly coordinates the supply chain over a wide range of situations and its performance is insensitive to a key contract parameter, whereas the LR contract performs well only when the retailer has a dominant bargaining power. Our numerical analysis suggests that the coordinating contracts can improve total supply chain profits by over 10%, on average, compared with the contracts currently used in this industry.
Number of Pages in PDF File: 36
Keywords: influenza vaccine, supply contract, on-time delivery, coordination
Date posted: November 20, 2012 ; Last revised: May 7, 2014
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