Government strategies to secure the supply of medical products in pandemic times

Abstract

We investigate how to secure reliable access to personal protective equipment (PPE) in pandemics, which are characterized by random occurrences and durations, at the lowest expected cost. The policymaker’s strategy is based on a mix of (1) holding ready-to-use strategic stockpile that is acquired at regular price but incurs a holding cost, (2) building partnership with PPE manufacturers to relocate offshore production locally, which guarantees some local supply but requires offering subsidies, and (3) buying PPE from the spot market, which is characterized by long supply lead times and high prices.We model the problem as a Stackelberg game between a policymaker (leader) and a manufacturer (follower). The policymaker decides the PPE stockpile, the subsidy offered to the local manufacturer, and the quantity to buy from the spot market. The manufacturer determines whether to move production onshore. We determine the optimal strategy for each player and study the effect of spot market conditions and pandemic characteristics.Analytical results show that attracting local manufacturers is less costly for the government when the variability of pandemic duration increases. While it is sub-optimal to rely only on the strategic stockpile, holding some stockpile may be necessary even when the PPE can be obtained from the spot market as soon as the pandemic starts. Results reveal policymaker’s preference for subsidizing onshore production in the following cases: products with low spot prices (counter-intuitively), spot market with long supply lead time, less frequent pandemics, and shorter pandemics.