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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
of fertilized eggs
Northern hemisphere
Immunity takes
About 2 weeks
Flu vaccine supply chain challenges

Operational challenges

Beginning of the value chain


End of the value chain


Strain selection
Vaccine allocation and delivery logistics
Middle of the value chain

Align incentives of the different parties
involved
Flu vaccine challenges

Change of virus over time

Antigenic drift


Seasonal epidemics
Antigenic shift


strain selection
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


End of the value chain


Strain selection
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


End of the value chain


Strain selection
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



Considerable shortage in 2003-04


Unanticipated problems growing the new influenza
strains
Quality control issues raised by FDA
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
Sales
18
00
0
16
00
0
14
00
0
12
00
0
10
00
0
30%
25%
20%
15%
10%
5%
0%
80
00
Probability
Demand Scenarios
Distributor Expected Profit
Expected Profit
500000
400000
300000
200000
100000
0
6000
8000
10000
12000
14000
Order Quantity
16000
18000
20000
Distributor Expected Profit
Expected Profit
500000
400000
300000
200000
100000
0
6000
8000
10000
12000
14000
Order Quantity
16000
18000
20000
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
600,000
500,000
400,000
300,000
200,000
100,000
0
00 00 00 00
00 00 00 00 00
00 00 00 00
60 70 80 90 100 110 120 130 140 150 160 170 180
Order Quantity
Retailer Profit
(Buy Back=$55)
Retailer Profit
600,000
$513,800
500,000
400,000
300,000
200,000
100,000
0
00 00 00 00
00 00 00 00 00
00 00 00 00
60 70 80 90 100 110 120 130 140 150 160 170 180
Order Quantity
Manufacturer Profit
(Buy Back=$55)
500,000
400,000
300,000
200,000
100,000
0
60
00
70
00
80
00
90
00
10
00
0
11
00
0
12
00
0
13
00
0
14
00
0
15
00
0
16
00
0
17
00
0
18
00
0
Manufacturer Profit
600,000
Production Quantity
Manufacturer Profit
(Buy Back=$55)
500,000
$471,900
400,000
300,000
200,000
100,000
0
60
00
70
00
80
00
90
00
10
00
0
11
00
0
12
00
0
13
00
0
14
00
0
15
00
0
16
00
0
17
00
0
18
00
0
Manufacturer Profit
600,000
Production Quantity
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
disease



On The Counter
meds (OTC)
Outpatient visit
Hospitalization
Indirect costs:

work days loss
Vaccination costs

Direct costs:





Vaccine purchase
Administrative costs
Production costs
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

Wholesale price contract:


supply contracts
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