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					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




                                                    Flu season
     Growing viruses in millions   Immunity takes
         of fertilized eggs        About 2 weeks




Northern hemisphere
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
                               Supply Contracts

Fixed Production Cost =$100,000

Variable Production Cost=$35

                               Wholesale Price =$80

                                                            Selling Price=$125
                                                            Salvage Value=$20


 Manufacturer          Manufacturer DC          Retail DC




                                                                    Stores
Demand Scenarios
Distributor Expected Profit
Distributor Expected Profit
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?
                               Supply Contracts

Fixed Production Cost =$100,000

Variable Production Cost=$35

                                  Wholesale Price =$80

                                                              Selling Price=$125
                                                              Salvage Value=$20


 Manufacturer          Manufacturer DC            Retail DC




                                                                      Stores
 Retailer Profit
(Buy Back=$55)
     Retailer Profit
    (Buy Back=$55)


$513,800
Manufacturer Profit
 (Buy Back=$55)
Manufacturer Profit
 (Buy Back=$55)



  $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

               Epidemic
               Modeling




               Industrial
               Supply
               Chains
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




                     f0
Supply chain costs

   Social costs of the           Vaccination costs
    disease                           Vaccine purchase
        Direct costs:                Administrative costs
           On The Counter
            meds (OTC)
           Outpatient visit

           Hospitalization
                                  Production costs
       Indirect costs:
           work days loss
Model Description

     Government &
   Healthcare provider
                         Manufacturer
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 provider
                         Manufacturer
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 provider
                         Manufacturer
Game Setting vs. System Setting
(convex case)

    Assumption:




 Manufacturer under produces              production risk


     Potential Insufficient order by the government
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
Supply chain coordination cost sharing +
(convex case)           wholesale discount

   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
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

				
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posted:6/27/2011
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