Incentivizing resilient supply chain design to prevent drug shortages: policy analysis using two- and multi-stage stochastic programs

Abstract

Supply chain disruptions have caused hundreds of shortages of medically-necessary drugs since 2011. Once a disruption occurs, the industry is limited in its ability to adapt, and improving strategic resiliency decisions is important to preventing future shortages. Yet, many shortages have been of low-margin, generic injectable drugs, and it is an open question whether resiliency is optimal. It is also unknown what policies would be effective at inducing companies to be resilient. To study these questions, we develop new supply chain design models that consider disruptions and recovery over time. The first model is a two-stage stochastic program which selects the configuration of suppliers, plants, and lines. The second is a multi-stage stochastic program which selects the configuration and target safety stock level. We then overlay incentives and regulations to change the market conditions and evaluate their effects on two generic oncology drug supply chains. We find that profit-maximizing firms may maintain vulnerable supply chains without intervention. Shortages may be reduced with: moderate failure-to-supply penalties; mandatory supply chain redundancy; substantial amounts of inventory; and/or large price increases. We compare policies by evaluating the societal costs to reduce the expected shortages to 2% and 5% of demand.

Keywords:

• Drug shortages
• stochastic program
• pharmaceutical
• resiliency
• incentives

Acknowledgments

We would like to thank Erin R. Fox, PharmD of UUDIS for providing shortage data and her perspective. We appreciate Deanna Handley, Hannah Strat, Alexander Lopez, and the Institute for Healthcare Policy Innovation at the University of Michigan for supporting additional data collection and analysis. The authors are grateful for helpful discussions with the Drug Shortage Staff at the FDA and participants of the INFORMS Annual Meetings (2016, 2017) and INFORMS Healthcare 2017. We appreciate discussions with Barbara Higgins, PharmD, Iris Wang, PhD, and Allan Pfitzenmaier, MBA. We would also like to thank the reviewers for their valuable comments.

Additional information

Notes on contributors

Emily L. Tucker

Emily L. Tucker is a Ph.D. candidate in the Department of Industrial and Operations Engineering at the University of Michigan. She received her MSE in IOE from Michigan and her B.S. in industrial engineering from NC State. Prior to graduate school, she worked as a Research Health Economist for RTI International. She is a recipient of the NSF Graduate Research Fellowship and was a finalist for the 2017 Bonder Scholarship for Applied OR in Health Services. She has served as President of the Student Leadership Board in IOE and an editor of OR/MS Tomorrow, the INFORMS student magazine. Her research interests include the application of operations research to healthcare policy, operations, and supply chain decisions.

Mark S. Daskin

Mark S. Daskin is a professor in the Department of Industrial and Operations Engineering at the University of Michigan. He holds the Clyde W. Johnson Collegiate Chair in the College of Engineering. He is a fellow of both INFORMS and IISE and has received the IISE David F. Baker Distinguished Research Award. He is a member of the National Academy of Engineering. He has served as the Editor-in-Chief of both Transportation Science and IIE Transactions and as the president of INFORMS. He has also served as the chair of the IOE Department at Michigan and of the Industrial Engineering and Management Sciences Department at Northwestern University. His primary research interests lie in the application of operations research to supply chain problems, location models, and healthcare operations. He is the author of two books: Network and Discrete Location: Models, Algorithms, and Applications and Service Science, both published by Wiley.

Burgunda V. Sweet

Burgunda V. Sweet, PharmD, FASHP, is a clinical professor of pharmacy and director of curriculum assessment at the University of Michigan’s College of Pharmacy. She earned her PharmD degree at the University of the Pacific College of Pharmacy, completed a clinical pharmacy residency at the VA Hospital in San Diego, California, and an advanced practice residency in drug information at the University of Michigan. Dr. Sweet served as the director of the drug information and investigational drug services at Michigan Medicine for over 20 years where she interfaced with clinicians from different healthcare disciplines on a daily basis to resolve complex health-system problems, including managing drug shortages. She continues to practice as a clinical specialist in medication use policy at the Michigan Medicine health system. She has authored numerous articles and book sections in her area of specialty.

Wallace J. Hopp

Wallace J. Hopp is the Prahalad Distinguished University Professor of Business and Engineering at the University of Michigan. His research on manufacturing and supply chain systems, innovation processes, and health care systems has received a number of awards including the 1985 Nicholson Prize, 1990 Scaife Award, 1998 IIE Joint Publishers Book-of-the-Year Award, 2005 IIE Technical Innovation Award, 2011 INFORMS Pierskalla Award for Best Paper in Health Care Management Science, 2016 M&SOM Journal Best Paper Award, and 2016 MSOM Service Management SIG Best Paper Award. Hopp is a member of the National Academy of Engineering, and a Fellow of IISE, INFORMS, MSOM, POMS and SME. He has served as President of the Production and Operations Management Society and Editor-in-Chief of Management Science.