Emergency preparedness: optimal pharmacy purchasing strategies

Abstract

This study examines the purchasing decision-making of retail pharmacies when the potential for emergencies arises within a single cycle. Beyond accounting for conventional demand, retail pharmacies also need to plan for emergency demand. This paper employs the classic newsvendor model as a benchmark (PN) and explores three pre-purchasing strategies: a combination of conventional procurement and option procurement (POM), one-time procurement taking possible emergencies into account (PNO), a combination of conventional procurement and emergency procurement (PNE). Through an analysis of these procurement strategies, we find that, while POM usually performs better as a strategy, its position is affected by emergency shortage cost, exercise price, inventory cost, and the timing of emergency situations. Especially, exercise price changes does not always benefit retail pharmacies. Furthermore, neither PNO nor PNE provide any absolute advantages. PNO performs excellently when faced with higher emergency wholesale prices or lower emergency shortage costs. On the contrary, under certain conditions, PNE becomes a favorable choice for retail pharmacies. Specifically, when the emergency demand of retail pharmacies increases significantly, PNE is most suitable for retail pharmacies, while PNO is more advantageous when emergency situations occur near the end of the cycle.