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The value of entrant manufacturers: A study of competition and risk for donor-funded procurement of essential medicines

Felix Lauton, Alexander Rothkopf and Richard Pibernik

European Journal of Operational Research, 2019, vol. 272, issue 1, 292-312

Abstract: Global-health purchasing organizations (POs) want to increase access to essential medicines in low-income countries. One way to purchase more medicines with limited funds is to contract with generics manufacturers, thereby increasing competition and lowering prices. However, many POs fear that these entrants are less reliable than others and increase supply risks: failure to adhere to lead times and supplier defaults may cause disruptions that result in unsuccessful medical treatments. The problem can be remedied or at least reduced if POs have a sound basis for assessing manufacturers. To this end, we develop a mathematical framework that supports decision-makers in an integrated evaluation of an entrant’s effect on purchasing costs and supply risks. Our approach accounts for the characteristics of donor-funded global-health markets and the particular tasks and specific challenges of POs in these markets. More specifically, our approach enables a PO to quantify a potential entrant’s value depending on important characteristics of the incumbent and the entrant manufacturer. We use data from a project for donor-funded procurement of Depot Medroxyprogesterone Acetate (DMPA) of two large POs. Our results show the feasibility of our approach for POs, manufacturers, and philanthropic investors in the global-health domain, and we explore the trade-off between competition and supply risks and provide insights into how the entrant’s value is affected by parameters like production costs, capacity, lead time and default risk, and in-country registration.

Keywords: Humanitarian logistics; Dual sourcing; Competition; Supply risks; Global health (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eee:ejores:v:272:y:2019:i:1:p:292-312