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April 30, 2009

What Does Swine Flu Teach Us About Supply Chain Risk?

Catherine New
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The outbreak of swine flu, which is responsible for at least 159 deaths in Mexico, has put the U.S. vaccine industry into overdrive. However, the New York Times reports that federal officials are warning consumers that a swine flu vaccine will not be available until late November at the earliest. What does this long lead time teach us about supply chain risks?

In the case of vaccines, it underscores how dependent the U.S. supply is on a traditional — and slow — manufacturing process that involves growing the vaccine viruses in hen eggs. The process takes approximately six months for a finished product to be ready for market.

Professor Awi Federgruen, who has written in Ideas at Work about his research on supply chain risk in general and the flu vaccine in particular, says that the vaccine industry is lacking adequate incentives for investments in better and faster technology and larger capacities.

“When the need arises for a new type of vaccine — like we have now — and to act on it with traditional technology, it takes an enormous amount of time to produce something that can be used,” says Federgruen. “That’s a real problem because by the time it gets to market the epidemic may have done all the damage. If we had an industry that was more agile, we would be in much better shape. How do you provide an incentive structure to invest in such technologies?”

While faster technology does exist, it has not been implemented on a scale that would be needed to supply an entire domestic market. Part of problem, says Federgruen, lies in the roulette-nature of flu vaccine manufacturing in general, where assessments are made far in advance of flu season or potential pandemics and easily result in mismatches of supply to the demand.

“This is another way in which we collectively pay a big price in that we have suppliers operating with inferior technology,” Federgruen says. “And they are operating with inferior technology and low capacities because to change these amounts to large investments, the long term benefits of which are too risky. The federal government has started to address the problem by providing roughly $1 billion in grants for construction costs and guaranteed vaccine purchases. However, considerably more needs to be done to provide adequate incentives to the industry.”

Photo credit: hmerinomx