USING NEWSVENDOR WITH MONTE CARLO SIMULATION TO OPTIMIZE ORDERING OF FLU VACCINES: A CASE STUDY

The newsvendor model allows for decision makers to calculate the optimal quantity of a perishable product that is to be ordered when demand is unknown. The model assumes a one-period planning horizon and that product is... [ view full abstract ]

The newsvendor model allows for decision makers to calculate the optimal quantity of a perishable product that is to be ordered when demand is unknown. The model assumes a one-period planning horizon and that product is ordered and received prior to the beginning of this horizon. Inventory managers and other decision-makers in the healthcare industry often must order perishable biopharmaceuticals in advance of anticipated, but unknown demand. The perishability of the biopharmaceuticals creates a level of sensitivity to the amount of product desired by the medical facility. This paper presents a case study of the analysis of optimal inventory levels of flu vaccines at a medical facility using a newsvendor model. The objective of this model is to maintain appropriate customer service levels while maximizing profit. A portion of the case study is dedicated to examination of the newsvendor model assumptions. In particular, attention is paid to the selection of an appropriate probability distribution for demand. Six years of real-world, empirical data from a large, private medical physician’s office is used. Monte Carlo simulation is demonstrated for comparison with the newsvendor model results. This research provides a pedagogical context for the use of the newsvendor model in the healthcare industry and highlights the analytical steps that can be undertaken when faced with the need to order quantities of perishable biopharmaceuticals, such as the flu vaccine. An important contribution of this work is demonstrating the pedagogical value of the application of quantitative models that can be implemented into industry with the potential to influence practice and the ordering methods used in medicine.