Pharmaceutical Supply Chain Networks with Outsourcing Under Price and Quality Competition

International Transactions in Operational Research 20(6) (2013) pp 859-888

41 Pages Posted: 1 Dec 2016

See all articles by Anna Nagurney

Anna Nagurney

University of Massachusetts Amherst - Isenberg School of Management - Department of Operations and Information Management

Dong Li

Arkansas State University - College of Business - Department of Management and Marketing

Ladimer S. Nagurney

University of Hartford - Department of Electrical and Computer Engineering

Date Written: May 2013

Abstract

In this paper, we present a pharmaceutical supply chain network model with outsourcing under price and quality competition, in both equilibrium and dynamic versions. We consider a pharmaceutical firm that is engaged in determining the optimal pharmaceutical flows associated with its supply chain network activities in the form of manufacturing and distribution. In addition to multimarket demand satisfaction, the pharmaceutical firm seeks to minimize its total cost, with the associated function also capturing the firm’s weighted disrepute cost caused by possible quality issues associated with the contractors. Simultaneously, the contractors, who compete with one another in a noncooperative manner in prices a la Bertrand, and in quality, seek to secure manufacturing and distribution of the pharmaceutical product from the pharmaceutical firm. This game theory model allows for the determination of the optimal pharmaceutical product flows associated with the supply chain in-house and outsourcing network activities and provides the pharmaceutical firm with its optimal make-or-buy decisions and the optimal contractor-selections. We state the governing equilibrium conditions and derive the equivalent variational inequality formulation. We then propose dynamic adjustment processes for the evolution of the product flows, the quality levels, and the prices, along with stability analysis results. The algorithm yields a discretization of the continuous-time adjustment processes. We present convergence results and compute solutions to numerical examples to illustrate the generality and applicability of the framework.

Keywords: outsourcing, pharmaceutical products, healthcare, supply chains, supply chain networks, quality, competition, game theory, variational inequalities, dynamical systems

Suggested Citation

Nagurney, Anna and Li, Dong and Nagurney, Ladimer S., Pharmaceutical Supply Chain Networks with Outsourcing Under Price and Quality Competition (May 2013). International Transactions in Operational Research 20(6) (2013) pp 859-888, Available at SSRN: https://ssrn.com/abstract=2877550

Anna Nagurney

University of Massachusetts Amherst - Isenberg School of Management - Department of Operations and Information Management ( email )

Amherst, MA 01003-4910
United States

Dong Li (Contact Author)

Arkansas State University - College of Business - Department of Management and Marketing ( email )

P.O.Box 59
State University, AR 72467
United States
8709723728 (Phone)
8709723883 (Fax)

Ladimer S. Nagurney

University of Hartford - Department of Electrical and Computer Engineering ( email )

West Hartford, CT 06117
United States

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