Contracting for On-Time Delivery in the U.S. Influenza Vaccine Supply Chain

Manufacturing & Service Operations Management, Vol. 18, No. 3, pp. 332–346, Summer 2016

34 Pages Posted: 20 Nov 2012 Last revised: 20 Apr 2017

Tinglong Dai

Johns Hopkins University - Carey Business School

Soo-Haeng Cho

Carnegie Mellon University - Tepper School of Business

Fuqiang Zhang

Washington University in St. Louis - John M. Olin Business School

Date Written: November 17, 2015

Abstract

Although influenza vaccine shortage is often attributed to low supply, it has been observed that even with abundant supply, a 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, a manufacturer has insufficient incentive to initiate at-risk early production prior to the design freeze because it is a retailer who reaps the most benefits from selling more vaccines delivered on time. Anticipating that late delivery will lead to potential loss in demand, the retailer tends to reduce the order size, which further discourages the manufacturer from making an effort 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 and show that a properly designed BLR contract can not only coordinate the supply chain but also can provide full flexibility of profit division between members of the supply chain. Numerical experiments further demonstrate that the BLR contract significantly improves supply chain efficiency compared to the contracts used in the industry.

Keywords: influenza vaccine, supply contract, on-time delivery, coordination

JEL Classification: C44, C72, I11, L23, L65, M11

Suggested Citation

Dai, Tinglong and Cho, Soo-Haeng and Zhang, Fuqiang, Contracting for On-Time Delivery in the U.S. Influenza Vaccine Supply Chain (November 17, 2015). Manufacturing & Service Operations Management, Vol. 18, No. 3, pp. 332–346, Summer 2016. Available at SSRN: https://ssrn.com/abstract=2178157 or http://dx.doi.org/10.2139/ssrn.2178157

Tinglong Dai

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Soo-Haeng Cho (Contact Author)

Carnegie Mellon University - Tepper School of Business ( email )

Pittsburgh, PA 15213-3890
United States

Fuqiang Zhang

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

HOME PAGE: http://www.olin.wustl.edu/faculty/zhang/

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