Contracting for On-Time Delivery in the U.S. Influenza Vaccine Supply Chain
Johns Hopkins University - Carey Business School (JHU)
Carnegie Mellon University - Tepper School of Business
Washington University in Saint Louis - John M. Olin Business School
July 19, 2015
Although influenza vaccine shortage is often attributed to low supply, it has been observed that even with abundant supply, major shortage can still occur due to late delivery. In this paper, motivated by the influenza vaccine industry, we study a supply chain contracting problem in the presence of uncertainties surrounding design, delivery, and demand of influenza vaccine. In this supply chain, the manufacturer has insufficient incentive to initiate at-risk early production prior to the design freeze because it is the retailer who reaps most benefits from selling more vaccines delivered on time. As a result, the retailer tends to reduce the order size in anticipation of lost sales, which further discourages the manufacturer from making efforts to improve its delivery performance. To break this negative feedback loop, a supply contract needs to achieve two objectives: incentivize at-risk early production, and eliminate double marginalization. We find that two commonly observed supply contracts in practice, the Delivery-time-dependent Quantity Flexibility (D-QF) contract and the Late-Rebate (LR) contract, may fail to coordinate the supply chain because of the tension between these two objectives. To resolve such a tension, we construct a Buyback-and-Late-Rebate (BLR) contract that can coordinate the supply chain and provide full flexibility of profit division. Numerical experiments demonstrate that the BLR contract may significantly improve supply chain efficiency compared to the contracts used in the industry.
Number of Pages in PDF File: 36
Keywords: influenza vaccine, supply contract, on-time delivery, coordination
Date posted: November 20, 2012 ; Last revised: September 18, 2015
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