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 takes About 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 According to the US GAO Unanticipated problems growing the new influenza strains Quality control issues raised by FDA  Considerable shortage in Early break of the epidemic  Significant shortage in 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

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?

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)

$513,800

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 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 ( I 0 ) Basic reproduction number ( R 0 ): 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  R 0 decreases to R f  If R f ≤ 1 outbreak is prevented  Critical vaccine fraction: f 0 = min { f : R f ≤ 1}

Infection dynamics f 0f 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 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) Manufacturer under producesproduction 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 p r (f) Incentive for manufacturer to produce more  Cost share p e (f)  Theorem: The contract defined above coordinates the supply chain: The optimal government action is f S while the manufacturer production volume is n E s 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