Sign risk-sharing contract with contract manufacturing organizations in pharmaceutical industry

Open Access
Gao, Youyang
Graduate Program:
Industrial Engineering
Master of Science
Document Type:
Master Thesis
Date of Defense:
Committee Members:
  • Tao Yao, Thesis Advisor
  • Susan H Xu, Thesis Advisor
  • risk-sharing contract
  • newsvendor
Outsourcing risks problem for the new ethical drugs manufacturing and commercialization is one of the most challenging problems for the pharmaceutical firms due to the big uncertainty of the FDA testing result, fluctuating market performance, changing government and finance environment. Motivated by the need of the ethical drugs risks sharing in the pharmaceutical industry, we are introducing a finite period analysis based on three different types of contracts which distinguished by the level of risk sharing including price discount, quantity flexibility and forecasting methods. These contracts are short term contract, long term time flexible contract and long term time inflexible contract. In order to analyze the performances of risk sharing of those contracts, we use mathematical functions to express the price discount, quantity flexibility and the demand risk and put them into the model of total extra outsourcing cost. By successfully use the concept of the Leibnitz’s Rule and newsvendor model, we successfully simplified the problem and classified the level of risk sharing for each contract, and also realized the complexity for those contracts. At the end of this thesis, we use a numerical analysis to give an introduction of how our model could be used in the contract selection. A quantitative solution is followed after that introduction and will select the best contract strategy under certain circumstance. The purpose of this thesis is to generate cost functions for the contracts, and help the firm to select the best contract strategy under different circumstances.