Contracting for On-Time Delivery in the U.S. Influenza Vaccine Supply Chain

Motivated by the influenza vaccine industry, we study a supply chain contracting problem under the presence of uncertainties that are related to product design, delivery, and demand, respectively. The supply chain consists of a manufacturer and a retailer, where the retailer places an order before the flu season starts and the manufacturer decides on when to produce the products. Because production after the design freeze can result in late deliveries and hence lost sales, the manufacturer may initiate production prior to the design freeze at its own risk. We show that a negative feedback loop in the firms’ incentives may arise in this supply chain; as a result, some of the traditional coordinating contracts (e.g., revenue sharing) could perform even worse than a wholesale price contract. To break the negative feedback loop, we introduce two coordinating contracts: Delivery-time-dependent Quantity Flexibility (D-QF) contract that relates return quantity to delivery schedule, and Buyback-and-Late-Rebate (BLR) contract that combines buyback with rebate for late deliveries. In view of the complexity of the coordinating contracts, we also analyze two simpler formats, Quantity Flexibility (QF) and Late-Rebate (LR). We find that the QF contract performs well when profit margin is either very high or very low, while the LR contract performs well when the retailer has a dominant bargaining power. This version: November 2012