Supply Chain Coordination and Influenza Vaccination

David Simchi-Levi

Massachusetts Institute of Technology

•Joint work with Stephen E. Chick (INSEAD) and Hamed Mamani (MIT)

March 2007

The Influenza Pandemic

Globally, annual influenza outbreaks result in 250,000 to 500,000 deaths 20,000 deaths and 100,000

hospitalizations in the US Social costs of influenza vary

between $1M-$6M per 100,000 inhabitant yearly in industrialized countries

The “Spanish flu” (H1N1) of 1918 killed 20–40 million people worldwide

Source: Report by the World Health Organization, 2005

Influenza Vaccination

Vaccination is a principal tool for controlling influenza Reduces the risk of infection to exposed

individuals (Longini et al., 1978) Reduces the probability of transmission from a

vaccinated individual infected with influenza (Longini et al., 1978)

Vaccination is cost effective Immunization in elderly saved $117 per person

in medical costs (Nichol et al 1994) Systematic children vaccination can result in

significant population-wide benefits (Weycker at al 2005)

The Production and Delivery Process

Northern hemisphere

Growing viruses in millions of fertilized eggs

Flu

season

Immunity takesAbout 2 weeks

Flu vaccine supply chain challenges

Operational challenges Beginning of the value chain

Strain selection End of the value chain

Vaccine allocation and delivery logistics Middle of the value chain

Align incentives of the different parties involved

Flu vaccine challenges strain selection

Change of virus over time Antigenic drift

Seasonal epidemics Antigenic shift

Global pandemics

Wu et al. develop an optimization model of antigenic changes Current vaccination policy is reasonably

effective Develop some heuristics to improve

selection process

Flu vaccine supply chain challenges

Operational challenges Beginning of the value chain

Strain selection End of the value chain

Vaccine allocation and delivery logistics Middle of the value chain

Align incentives of the different parties involved

Influenza vaccine challenges allocation and delivery

Vaccine allocation to different subpopulations (Hill and Longini 2003): mathematical

model of optimally allocating vaccine to different subpopulations

(Weycker et al 2005): stochastic simulation model to illustrate the benefit of vaccination of certain individuals (children)

Flu vaccine supply chain challenges

Operational challenges Beginning of the value chain

Strain selection End of the value chain

Vaccine allocation and delivery logistics Middle of the value chain

Align incentives of the different parties involved

The different players and their objectives

Governments (CDC in US), State health departments Balance the public health benefits and

the vaccination program costs Focus on high-risk individuals. In the US, in 1999, 66.9% of individuals of

age 65 and older were vaccinated (GAO-2001).

The different players and their objectives

Manufacturer Production volume and the need for

profitability Highly uncertain production yield due to

biological nature of production process Considerable shortage of flu vaccination in

2000-01. According to the US GAO Unanticipated problems growing the new influenza

strains Quality control issues raised by FDA

Considerable shortage in 2003-04 Early break of the epidemic

Significant shortage in 2004-05 Chiron’s manufacturing plant in the U.K. was shut

down due to bacterial contamination

Research on Supply Contracts

Focus on supply chain with Single supplier and single retailer Order Quantities; Production levels

Coordinating contracts Global optimization Nash equilibrium Flexible

Manufacturer Manufacturer DC Retail DC

Stores

Fixed Production Cost =$100,000

Variable Production Cost=$35

Selling Price=$125

Salvage Value=$20

Wholesale Price =$80

Supply Contracts

Demand Scenarios

Demand Scenarios

0%5%

10%15%20%25%30%

Sales

P

robabili

ty

Distributor Expected Profit

Expected Profit

0

100000

200000

300000

400000

500000

6000 8000 10000 12000 14000 16000 18000 20000

Order Quantity

Distributor Expected Profit

Expected Profit

0

100000

200000

300000

400000

500000

6000 8000 10000 12000 14000 16000 18000 20000

Order Quantity

Supply Contracts (cont.)

Distributor optimal order quantity is 12,000 units

Distributor expected profit is $470,000

Manufacturer profit is $440,000 Supply Chain Profit is $910,000

–IS there anything that the distributor and manufacturer can do to increase the profit of both?

Manufacturer Manufacturer DC Retail DC

Stores

Fixed Production Cost =$100,000

Variable Production Cost=$35

Selling Price=$125

Salvage Value=$20

Wholesale Price =$80

Supply Contracts

Retailer Profit (Buy Back=$55)

0

100,000

200,000

300,000

400,000

500,000

600,000

Order Quantity

Re

tail

er

Pro

fit

Retailer Profit (Buy Back=$55)

0

100,000

200,000

300,000

400,000

500,000

600,000

Order Quantity

Re

tail

er

Pro

fit

$513,800

Manufacturer Profit (Buy Back=$55)

0

100,000

200,000

300,000

400,000

500,000

600,000

Production Quantity

Ma

nu

fact

ure

r P

rofi

t

Manufacturer Profit (Buy Back=$55)

0

100,000

200,000

300,000

400,000

500,000

600,000

Production Quantity

Ma

nu

fact

ure

r P

rofi

t $471,900

Industrial supply chains

Supply contracts: Wholesale price Buyback Revenue sharing Options …

Linear cost models Deterministic production

Flu vaccine supply chain features nonlinear cost function

•Nonlinear effect of infection dynamics Nonlinear cost value

Flu vaccine supply chain features uncertain production

Inactivated virus vaccine eleven day old embryonated eggs

Prediction of number of eggs well in advance

egg yields are stochastic based on the strain and eggs

Uncertain production yield

Introduction

Industrial

Supply

Chains

Epidemic

Modeling

Outline

Model description

Current challenges

Effective supply contracts

Infection dynamics

Key components in epidemic modeling Initial infected fraction introduced to

the population (I0)

Basic reproduction number (R0): expected number of secondary infections caused by one infected in an otherwise susceptible, unvaccinated population

Infection dynamics

Vaccine role: Decreases the probability of infection

for a susceptible person by Φ Probability of getting the infection will be

multiplied by 1 - Φ If fraction f of population vaccinated

R0 decreases to Rf

If Rf ≤ 1 outbreak is prevented Critical vaccine fraction: f 0 = min { f : Rf ≤ 1}

Infection dynamics

f 0

Supply chain costs

Social costs of the disease Direct costs:

On The Counter meds (OTC)

Outpatient visit Hospitalization

Indirect costs: work days loss

Vaccination costs Vaccine purchase Administrative costs

Production costs

Model Description

Government &

Healthcare providerManufacturer

Model description assumptions

A single manufacturer Homogeneous population Perfect information Government is the purchaser of

vaccine determines how many people to

vaccinate

Game Setting

Government &

Healthcare providerManufacturer

Model Description system problem

System setting Ignores the transaction between the

different parties Optimizes the system wide cost Might not be beneficial for one of the

parties

Model Description system problem

Government &

Healthcare providerManufacturer

Game Setting vs. System Setting (convex case)

Manufacturer under produces production risk

Potential Insufficient order by the government

Assumption:

Supply chain coordination supply contracts

Wholesale price contract: Proposition: There is no wholesale price

contract that coordinates the supply chain Payback contract:

Government agrees to buy any excess production, beyond the desired volume

Shifts some of the risk of excess production from the manufacturer

Proposition: There is no Payback price contract that coordinates the supply chain

Problem: Payback contracts are based on the manufacturer output not on its effort

Wholesale discount / cost sharing contract: Incentive for government to order more

Wholesale discount pr(f) Incentive for manufacturer to produce more

Cost share pe(f)

Theorem: The contract defined above coordinates the supply chain: The optimal government action is f S while the

manufacturer production volume is nEs

The contract is flexible, that is, it allows any split of the cost benefit within a certain range

Supply chain coordination cost sharing +

(convex case) wholesale discount

Summary

Uncertain production yield is an important reason for insufficient supply of vaccine

Cost sharing contracts can have a major impact on the influenza vaccination supply chain

Production risk taken by the manufacturers maybe the reason why only a small number of manufacturer exists