Volume guarantees in global health and economies of scale: the effect on current and future prices (joint work with Alexander Rothkopf) click here
Recently global health procurement organizations grant volume guarantees to pharmaceutical companies for the procurement of donor funded medicines and medical devices (e.g. pentavalent vaccine, contraceptive implants) and have been successful in achieving, among other things, lower prices. One main driver for substantial price reductions associated with volume guarantees are economies of scale. However, awarding one or more manufacturers a longer-term contract may inhibit recurring competition and also disincentivize new manufacturers to enter the market. This paper focuses on how the design of a volume guarantee (its size and split among incumbent suppliers) may affect competition and prices, currently and in the future, when technology is mature and fixed production costs are high. We find that due to economies of scale a) second period bids, a proxy for future prices, do not monotonically increase in the guarantee, b) first round bids, a proxy for current prices, do not necessarily decrease in the guarantee, as one would intuitively expect, and c) there is benefit from splitting the current volume among suppliers. Total procurement cost over both periods, and hence the success of the guarantee, depends heavily on whether or not suppliers behave strategically.
Lead Time Optimism: The Impact of Supply Timing Uncertainty on Ordering Behavior (joint work with Simone Balvers and Jan Fransoo) click here
Decision-makers face different forms of supply uncertainty when making ordering decisions. This paper focuses on two forms of supply timing uncertainty: lead time uncertainty and review period uncertainty (i.e., uncertainty in the time between two order moments). We motivate the importance of these two forms of uncertainty from the nanostore retail channel. Using an experimental design, we find that subjects order more under lead time uncertainty than under review period uncertainty, for both high and low margin products. We identify as an underlying mechanism the tendency of decision-makers to underestimate the expected lead time, while this is not necessarily the case for the expected review period. Interestingly, the underestimation of the expected lead time is not mitigated by reducing the lead time uncertainty.
Unbounded rampups under bounded rationality: the case of COVID-19 distribution in The Netherlands (joint work with Henk Akkermans and Albert Mandemakers)
Very fast and coordinated ramp-ups of new products or services are almost always problematic. Typically, managers are inherently boundedly rational, overestimate the scalability of their supply chains, consider fewer alternatives, and coordinate less with other supply chain actors. One notable exception to the phenomenon is COVID-19 production and distribution. In many countries, including European countries such as The Netherlands, vaccines could be designed, produced and distributed much faster than was anticipated. This is all the more surprising, because these ramp-ups were so risky. Why was this? We study the case of the Dutch COVID-19 distribution. The first mile of distribution, from the manufacturing sites to the regional distribution point, worked efficiently, despite the extreme challenges. The logistic service providers coordinated very well and prioritized COVID-vaccines leveraging their broad portfolio. Last mile distribution and vaccination was the responsibility of the regulator in The Netherlands. Outside industry expertise was insufficiently sought, alternative solutions were inadequately evaluated, and adjustments to prior choices were not made easily.