Chronic flu vaccine shortages can be prevented by using supply chain contract management

April 2009

PROBLEM

The flu kills 36,000 people each year in the U.S. alone. The cost of the annual epidemic in health care, lost work and school days, and social disruption is between $1 million and $6 million per 100,000 inhabitants in the industrialized world, according to the World Health Organization (WHO). Vaccines can control the seasonal epidemic at a relatively low cost, but production shortages often force health-care providers to save the vaccine for a select portion of the population: children, the elderly and those with compromised immune systems. These shortages, coupled with recent fears of an outbreak on the order of the 1918 flu pandemic, lend urgency to the need to solve this recurrent worldwide health problem.

APPROACH

MIT Professor David Simchi-Levi, working with Hamed Mamani and Stephen Chick, analyzed the flu vaccination supply chain with the goal of structuring contracts to encourage increased production of vaccine. Using tools and strategies frequently applied to problems in other industries, the researchers modeled the production and delivery supply chains, as well as the worldwide spread of the epidemic itself.

Their model includes three important elements: uncertain production yield due to the biological nature of the production process, the infection dynamics, and the non-linear health benefits of vaccination. They analyzed different supply contracts, such as revenue-sharing, buy-back and option contracts to identify their impact on the various parties involved, including manufacturers, governments and health-care organizations.  Finally, they linked the supply contract design with epidemic modeling to make a system-wide cost-benefit analysis—a first for operations management.

FINDINGS

The flu vaccination supply chain is complicated by the high risks involved—death and widespread illness—as well as the dynamics—unknowns about the type and virulence of the next season’s strain. With a typical contract used at present, the manufacturers carry all the production risk, which does not motivate them to produce enough vaccine.

The researchers demonstrate mathematically that a cost-sharing contract provides incentives for the government (or HMO) to vaccinate more people and the manufacturer to produce more vaccine. In these contracts, the public sector (government or health care service provider) pays an amount proportional to the production volume, not production yield. Such contracts will decrease the manufacturer’s risk of excess production and provide an incentive to increase production. This type of contract would also reward the government for buying more vaccine. Ultimately, more people would be vaccinated and fewer would become ill.

IMPACT

This research shows that a carefully composed cost-sharing contract can help reduce the costs to society of the annual flu epidemic. In fact, some vaccine manufacturers in Europe have already begun using some form of risk-sharing in their contracts with government health agencies to positive effect, providing verification that optimizing the flu vaccine supply chain through cost-sharing contracts works. Through the widespread use of contracts like these, thousands of lives and millions of dollars worldwide could be saved each year.

MORE

A paper by Simchi-Levi, Mamani (now an assistant professor at the University of Washington in Seattle) and Chick (a professor at INSEAD) appeared in the November-December 2008 issue of Operations Research. Simchi-Levi also has applied supply chain theory to interplanetary travel. Visit spacelogistics.mit.edu for more information on that.

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