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Description: The US pharmaceutical supply chains are under a drastical transformation from the popular Buy-and-Hold contract to an Fee-for-Service (FFS) contract. The impact of the FFS contract on manufacturers and distributors is under heavy debate among industry observers, and its future remains unclear given the emerging competition from the logistics service providers. My research in this area focuses on comparing the effectiveness of the current contracts, and identification of implementable alternatives which are more mutually beneficial for both manufacturers and distributors in the US pharmaceutical industry.

Martino, K., Y. Zhao. (2008). Fee for Service Contracts in Pharmaceutical Industry. Working Paper, Rutgers Business School. Abstract: In this paper, we compare the current FFS contract and the Buy-and-Hold contract to an FFS leasing contract for brand drugs using a model-based mathematical approach. The latter differs from the former in terms of the inventory ownership and money flow, and resembles the contract structure used by logistics service providers. We analyze effective production-inventory policies under these contracts which reveals the behavior of the manufacturer and distributor under each contractual agreement. We consider both predictable and unpredictable demand, and show that the FFS leasing contract outperforms the current FFS contract by reducing distributor's inventory and smoothing the demand for the manufacturer. Via real world data, we quantify the difference between the contracts. We also discuss implementation issues other than financial gain/loss.