Drug Recall Management and Channel Coordination Under Stochastic Product Defect Severity: A Game-Theoretic Analytical Study

International Journal of Production Research
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Drug recall management and channel

coordination under stochastic product defect
severity: a game-Theoretic analytical study
Seyyed-Mahdi Hosseini-Motlagh, Mohammadreza Nematollahi & Nazanin

Nami
To cite this article: Seyyed-Mahdi Hosseini-Motlagh, Mohammadreza Nematollahi & Nazanin

Nami (2021) Drug recall management and channel coordination under stochastic product defect
severity: a game-Theoretic analytical study, International Journal of Production Research, 59:6,
1649-1675, DOI: 10.1080/00207543.2020.1723813
To link to this article: https://doi.org/10.1080/00207543.2020.1723813
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International Journal of Production Research, 2021
Vol. 59, No. 6, 1649–1675, https://doi.org/10.1080/00207543.2020.1723813
Drug recall management and channel coordination under stochastic product defect severity:
a game-Theoretic analytical study
a∗
Seyyed-Mahdi Hosseini-Motlagh , Mohammadreza Nematollahib and Nazanin Nami a
a School of Industrial Engineering, Iran University of Science and Technology, Tehran, Iran; b Dhillon School of Business, University of
Lethbridge, Lethbridge, Canada
(Received 22 May 2019; accepted 24 January 2020)
This paper analytically explores drug recall programmes in the pharmaceutical industry by considering the product defect
severity as a source of uncertainty. Under the Stackelberg game model, a pharma-manufacturer outsources the drug recall
management and pays collecting fees to a third party logistics provider (3PL) for collecting the defective medications. On
the other side, the 3PL provides incentives to customers to facilitate product recall. In this research, we first analytically
show the negative effect of lack of coordination between the pharma-manufacturer and 3PL. Then, a new coordination
model, namely collecting fee agreement is proposed under which the pharma-manufacturer aims to motivate the 3PL to
collect more defective medications. This research also analytically explores the effect of orchestrating the collecting fees
and incentives under stochastic product defect severity. Finally, a Nash-bargaining game model is proposed to share the
profits between the pharma-manufacturer and 3PL under the collecting fee agreement. Both analytical and numerical results
reveal that the collecting fee agreement not only increases the collection rate of defective items and protects the patients
from unsafe products, but also simultaneously improves the performances of whole pharmaceutical supply chain and its
members while reducing the governmental penalties imposed on the pharma-manufacturer.
Keywords: Pharmaceutical supply chain; drug recall; supply chain coordination; game theory; stochastic product defect
severity
1. Introduction
In practice, manufacturing systems may face unavoidable short-term disruptions (e.g. labour strike, machine failure, etc.),
which might lead to producing defective items and therefore having substantial negative impacts on the manufacturing
performance and the whole supply chain (Namdar et al. 2018). In the pharmaceutical sector, there are restrictive obli-
gations regarding defective medications, while in other industries, such obligations are scarce. This is because defective
pharmaceuticals may significantly threaten public health and therefore they should be immediately recalled thanks to the
health legislations and laws (FDA). A drug recall is the act of collecting distributed pharmaceutical products that cannot
meet basic standards set by the Food and Drug Administration (FDA). There are various factors causing the drug recall,
including but not limited to incorrect labelling, error in product formulation, and adverse side effects or drug reactions
not included in the package insert (WHO). Hence, production disruption can be considered as one of the major factors
causing defective or hazardous pharmaceuticals that did not follow manufacturing guidelines (Nagaich and Sadhna 2015).
Due to the randomness in disruptions, the occurrence of disruption within manufacturing processes may cause different
product defects with random severities, which determine the potential hazard level of the produced items. In practice,
FDA’s regulations characterise the recall’s category and strategy based on the products’ potential hazard (Nagaich and
Sadhna 2015).
In the case of a drug recall, companies have to deal with various challenges such as social costs, collection, and
disposing of/modification costs, restitution costs, and penalties imposed by the governments (Hora, Bapuji, and Roth
2011). In 2004, Merck & Co Inc. had to pay US$9 million for punitive damages and US$4.5 million for compen-
satory damages in case of recalling Vioxx painkiller (Cheah, Chan, and Chieng 2007). In 2007, Yabao Pharmaceutical
Company had to recall and destroy the improperly manufactured ‘Alginic sodium diester injection’ (Zhao, Li, and
Flynn 2013). Ahmed, Gardella, and Nanda (2002) explored the influence of drug recall on the shareholders’ wealth
of related companies and their competitors. They observed that receiving reports related to recalling a drug from the
*Corresponding author. Email: motlagh@iust.ac.ir
© 2020 Informa UK Limited, trading as Taylor & Francis Group

1650 S.-M. Hosseini-motlagh et al.
market devaluates shareholder’s wealth. Also, the imperfect pharmaceuticals that are not collected might cause serious
financial losses and incur high penalties to companies. According to the above-mentioned real examples, drug recall is
a significant issue in pharmaceutical supply chains and consequently companies seek for effective recall management
systems.
The production disruption occurred in the manufacturing system of a manufacturer affects the performance of other
supply chain (SC) members (Zhang, Xiong, and Xiong 2015). Hence, channel coordination is a practical policy to man-
age disruption and mitigate the risk of disruption by sharing it with all members (Chen and Xiao 2015). Coordination
mechanisms incentivize the individual members of a chain to decide based on the entire SC perspective (i.e. centralised
decision-making structure) and adopt the globally optimal solutions instead of individually local decisions (i.e. decentralised
decision-making structure) (Cachon and Lariviere 2005). To be more precise, the decentralised decision-making structure
leads to an inefficient system, since the members determine their decisions to maximise their own profit, regardless of the
entire system performance (Cachon 2003). On the other hand, the centralised decision-making structure achieves the perfect
performance of the whole SC, while it is often practically inapplicable since it neglects the members’ benefits and optimises
the decisions based on the whole SC point of view (Heydari, Zaabi-Ahmadi, and Choi 2018). Accordingly, a coherent
approach is needed to reach the globally optimal decisions alongside guaranteed profitability of the involving members
(Nouri et al. 2018). Channel coordination approach leads to the best performance of the entire SC (Hosseini-Motlagh et al.
2018) and neutralises the conflict of interests among the involving SC members (Yan et al. 2017), in a way that all involving
parties are satisfied (Phan, Vo, and Lai 2019).
Considering the importance of recall management in the pharmaceutical sector, many pharmaceutical companies out-
source the collection responsibility to third party logistic (3PL) providers. In real situations, the 3PL providers make some
efforts to customers in order to induce them to return the defective products. The higher is a 3PL provider’s efforts, the more
is the amount of collected defective products, and consequently, the better is the recall management provided by the corre-
sponding manufacturer. On the other hand, the price paid to the 3PL by the manufacturer for each collected item affects the
3PL’s profits and its efforts to collect items. Therefore, in order to implement an effective drug recall system, the decisions
made by the 3PL and manufacturer for recall practices in the pharmaceutical industry need to be coordinated in such a way
that both of them benefit from the coordination plan.
The major aim of this study is to implement effective recall management in the pharmaceutical industry under stochas-
tic production disruption. To this end, a manufacturer-3PL chain in the pharmaceutical sector is analytically analysed
where the pharma-manufacturer is subject to stochastic production disruption. Production disruption occurrence leads to
producing defective or unsafe medications, which should be recalled due to health legislation. The severity of product
defect is considered a stochastic variable based on the randomness of production disruption. The pharma-manufacturer
pays a unit collecting fee to the 3PL for collecting defective items in case of disruption. The 3PL offers a monetary
incentive to the customers in order to compensate their probable loss due to shortage of recalled products and to entice
them to return the defective medications. In the investigated chain, the decentralised, centralised and coordinated systems
are modelled and analysed. In the decentralised decision-making model, the pharma-manufacturer and 3PL individually
determine the incentive and collecting fee in a way that their own profit is maximised. Under the centralised decision-
making system, both members are assumed as a unique entity and the customer incentive is determined to optimise the
whole PSC performance. Despite the fact that centralisation improves PSC profitability, it may cause loss for one party.
Therefore, a collecting fee agreement is proposed in order to prevent the probable loss and entice both members to par-
ticipate in the coordination scheme. Moreover, a profit allocation strategy based on Nash-bargaining model is developed
to divide the surplus profit between both members. It is noteworthy to mention that the developed models are extended
considering another collection strategy, where the 3PL makes a collection investment instead of offering incentives to
customers.
The rest of the current paper is structured as follows. Section 2 contains the literature review of the paper. In Section
3, the investigated problem notations are described. In Section 4, the model formulations are proposed under decentralised,
centralised and coordinated structures. Analytical and numerical results along with managerial insights are provided in
Sections 5 and 6, respectively. Model extension along with analysis are provided in Section 7. Section 8 contains the
concluding remarks and recommendations for further research, respectively.
2. Literature review
This paper is related to four different streams of literature, channel coordination scheme under uncertainty, production
disruption and coordination, pharmaceutical supply chain coordination, and product recall management. Hence, in what
follows, studies of these research directions are reviewed.
International Journal of Production Research 1651
2.1. Channel coordination scheme under uncertainty

There are some scientific papers that use coordination mechanisms to deal with uncertainty in supply chains. Huang et al.
(2006) used a price discount policy to coordinate a supplier-retailer SC considering demand disruption. Likewise, Chen
and Xiao (2009) coordinated a SC when demand disruption occurs, applying a linear quantity discount model. Heydari
and Ghasemi (2018) investigate a two-echelon reverse supply chain, considering two sources of uncertainty: (i) stochastic
remanufacturing capacity, and (ii) stochastic quality of returned items. They use a revenue-sharing coordination contract to
share the risks among members. Chen and Xiao (2015) examine the effects of uncertainty in demand and production capac-
ity on the supply chain performance using Stackelberg game models. They conclude that the coordination mechanism can
be used to deal with randomness and achieve the best channel performance. Additionally, Mohammadzadeh and Zegordi
(2016) coordinated a two-level SC considering uncertain market demand and supply disruption. Coordination of a SC with
third-party logistics under production disruption is investigated by Giri and Sarker (2017) using buyback and revenue shar-
ing contracts. Later, He et al. (2019) coordinated a SC with both forward and reverse channels under competitive collection,
applying two coordination mechanisms. A transshipment contract was proposed by Aslani and Heydari (2019) for the coor-
dination of a green dual-channel supply chain under channel disruption. Moreover, Seyedhosseini et al. (2019) coordinated
a competitive supply chain, proposing the social price-sensitivity of demand. Also, Sadeghi et al. (2019) coordinated two
competitive reverse supply chains using two different contracts. They applied the Stackelberg game to obtain the optimal
solution of each chain assuming the second channel as a leader. Their study indicates that the integrated scenario achieves
the best performance for both channels.
2.2. Production disruption and coordination

In the supply chain context, various studies have been conducted to incorporate production disruption into the models
(Zhang, Xiong, and Xiong 2015). Davis (1993) identify production disruption as a source of uncertainty in supply chains.
Sana (2011) proposes an integrated production-inventory model for a three-level supply chain, considering the probability
of producing defective items. Li, Li, and Cai (2015) investigate remanufacturing and pricing decisions under uncertain
demand for remanufactured products and remanufacturing yield. Giri and Sarker (2016) use a coordination scheme as an
effective way to deal with production disruption. They study a two-echelon supply chain including two competing retailers
when there is a probability of disruption occurring in the manufacturing process. Giri, Bardhan, and Maiti (2016) develop
a coordination mechanism in a three-echelon supply chain considering stochastic demand and random yield in producing
both raw material and final product. Craighead et al. (2007) conduct an empirical research to show the disruptive effects of
the disruption occurring in pharmaceutical supply chains. However, none of the above-mentioned studies has noticed the
great significance of production disruption in the pharmaceutical supply chain context, which may cause disasters, leading
to adverse verdicts in drug product liability litigations (Nagaich and Sadhna 2015).
2.3. Pharmaceutical supply chain coordination

In the channel coordination literature, there has been less attention paid to the pharmaceutical supply chain coordination
(Nematollahi, Hosseini-Motlagh, and Heydari 2017). For instance, Nematollahi et al. (2018) coordinate visit interval and
service level using a multi-objective collaborative approach in a two-layer pharmaceutical supply chain under stochastic
market demand. Weraikat, Zanjani, and Lehoux (2016a) develop a negotiation-based coordination scheme to coordinate the
reverse pharmaceutical supply chain of unwanted/outdated drugs. Although the aforementioned papers address the issue of
pharmaceutical supply chain coordination, they neglect the issues of disruption the and recall management. Recently, Ding
(2018) identify the lack of cooperation and coordination among SC members as a major factor causing inefficient recall
management in pharmaceutical industry.
2.4. Product recall management

Researchers have studied product recall as a significant issue in industries, such as food, toy, automotive, and pharmaceu-
tical. Kong, Shi, and Yang (2019) investigated the economic effects of the food recall and concluded that product recalls
have significantly negative returns for associated firms. They also find that participation in corporate social responsibility
(CSR) alleviates the adverse effect of food recalls on the shareholders’ wealth. Murphy et al. (2019) investigated the causes,
frequency, and risks of vehicle recall in the automotive industry and presented a risk mitigation approach for automotive
supply chains. In addition, Bruccoleri et al. (2019) addressed pharmaceutical recall, applying a measure of a product recall,
which is the number of items withdrawn from the market because of quality failure. Moreover, Ni, Flynn, and Jacobs (2016)
assessed the reaction of shareholder’s wealth to the recent toy recalls. Their results revealed that a toy recall is associated
Figure 1. Comparison between existing researches and the current study.
with a negative effect on the stock market. A system of drug recall based on blockchain was developed by Wu and Lin
(2019) to evaluate problems of a drug recall, such as low effectiveness, in the long run.
2.5. Research gaps and contributions

Figure 1 highlights the major contributions of this paper compared to the previous researches. As Figure 1 depicts, the
channel coordination schemes have been recently adopted to resolve production disruption issue in general supply chain
systems (e.g. papers number: 8, 9, 11, 16, and 20). However, none of these studies deal with the recall issue caused by the
disruption occurred in the production system. In terms of the practical application, the channel coordination contracts have
been recently applied to coordinate different decisions in the pharmaceutical supply chain context (e.g. papers number: 25,
26, and 27). Different from previous studies, the main contribution of the current study lies in developing a new channel
coordination contract to cope with the production disruption in pharmaceutical supply chain systems. To be more precise,
this study contributes to the channel coordination literature by proposing a new coordination contract, named collection
fee agreement, to effectively resolve the production disruption and corresponding drug recall issues in the pharmaceutical
context (Table 1).
As Figure 1 illustrates, this study is the first to coordinate recall management decisions through a novel approach,
named collection fee agreement, in the pharmaceutical supply chain, considering uncertainty in the production disruption.
The current study analytically analyses and coordinates the recall management decisions made by a 3PL provider and a
pharmaceutical manufacturer facing uncertainty in production disruption. In the following, the main contributions of the
current study in comparison to the previous papers published in this research field are proposed.
• First of all, this study proposes collecting fee agreement as a coordination scheme, which not only is capable
of managing drug recall but also is practical and easy to implement. We analytically explore that the proposed
coordination scheme fully coordinates interactions of the members’ decisions and results in a win-win situation for
both members. Moreover, we develop a Nash-bargaining game model as a profit allocation scheme.
• Given that FDA classifies drug recall based on the level of hazard posed (Cheah, Chan, and Chieng 2007), it
would be of interest to assess how the companies’ performance is influenced when different classes of recall
Table 1. Papers reviewed in this study.

Number Papers Number Papers Number Papers
1 Hora, Bapuji, and Roth 10 Craighead et al. (2007) 19 Mohammadzadeh and
(2011) Zegordi (2016)
2 Cheah, Chan, and Chieng 11 Chen and Xiao (2015) 20 Giri and Sarker (2017)
(2007)
3 Zhao, Li, and Flynn (2013) 12 Nouri et al. (2018) 21 He et al. (2019)
4 Ahmed, Gardella, and Nanda 13 Heydari, Zaabi-Ahmadi, 22 Aslani and Heydari (2019)
(2002) and Choi (2018)
5 Davis (1993) 14 Hosseini-Motlagh et al. 23 Seyedhosseini et al.
(2018) (2019)
6 Sana (2011) 15 Yan et al. (2017) 24 Sadeghi et al. (2019)
7 Li, Li, and Cai (2015) 16 Huang et al. (2006) 25 Nematollahi et al. (2018)
8 Giri and Sarker (2016) 17 Heydari and Ghasemi 26 Weraikat, Zanjani, and
(2018) Lehoux (2016a)
9 Giri, Bardhan, and Maiti 18 Chen and Xiao (2009) 27 Weraikat, Zanjani, and
(2016) Lehoux (2016b)
occur. In this respect, the current paper analytically investigates the effects of different classes of recall on phar-
maceutical supply chain coordination from modelling perspective, while other studies on drug recall mostly
concentrate on statistical analysis (Cheah, Chan, and Chieng 2007; Nagaich and Sadhna 2015 Ball, Shah, and
Wowak 2018;).
• The present study analytically analyses the effects of stochastic production disruption in pharmaceutical sector
with a view toward efficient recall management, whilst most of the previous studies conducted on pharmaceuti-
cal industry focus on reverse flow of unwanted/outdated medications (Narayana, Elias, and Pati 2014 Weraikat,
Zanjani, and Lehoux 2016a; Weraikat, Zanjani, and Lehoux 2016b;), statistical analysis (Rossetti, Handfield, and
Dooley 2011; Zhao, Li, and Flynn 2013) or service level decisions (Nematollahi et al. 2018).
• In practice, the severity of product defect could be varied owing to the randomness of disruption (King 2016).
In the current study, for the first time, we consider uncertainty regarding product defect severity to build up a
reliable model in the real world. While, previous literature on uncertain production disruption mostly concentrate
on random manufacturing yield (Sana 2011 Giri and Sarker 2016; Giri, Bardhan, and Maiti 2016;).
• In practice, the modification cost depends on the quality of returned items (Radhi and Zhang 2016). However, the
previous papers on supply chain coordination neglect this important issue. Since the negative impact of defects
on the product performance would undermine the product quality, high-severity defects mean low product quality
and vice versa. This paper, for the first time, proposes a coordination model where the modification cost is a linear
function of product defect severity. In other words, we assume that the more severe is the product defect, the higher
are the costs of modifying the product.
3. Problem definition
Consider a pharma-manufacturer seeking to effectively manage the disruption that occurred in the manufacturing process,
which leads to producing defective or unsafe medications. Product defect severity, which is considered a stochastic variable
due to randomness of production disruption, defines the level of the potential hazard. Furthermore, FDA classifies drug
recall to three classes based on the level of hazard. A Class I recall happens if there is a high likelihood that the use of
a product will endanger consumers’ health or causes death. A Class II recall happens if the use of a product may cause
temporary health consequences or pose a slight threat of a serious nature. A recall is classified in Class III if a product
violates FDA standards but is not likely to cause health problems (Ball, Shah, and Wowak 2018). The items belonging to
Classes I and II are considered as mandatory recalls. Under such a case, the pharma-manufacturer must immediately recall
the distributed items; otherwise, he/she faces several penalties based on the hazard type of affected products. The pharma-
manufacturer voluntarily collects the products in Class II and donates them to charities, which can be considered as corporate
social responsibility (CSR) activities. These actions protect the public health and enhance the pharma-manufacturer’s
reputation and also lead to a unit tax exemption for the pharma-manufacturer (Weraikat, Zanjani, and Lehoux 2016b).
Moreover, the pharma-manufacturer can modify the collected defective medications in Classes II and III at a unit mod-
ification cost, which is linearly dependent on the product defect severity, while products in Class I must be disposed of
safely.
The pharma-manufacturer assigns the collection responsibility to a third party logistic (3PL) provider as the collec-
tion activities are beyond the core mission of the pharma-manufacturer. After finding out about recalls, customers (i.e.
pharmacies/hospitals) are not allowed to sell the defective medications and should remove the affected medications from
their inventory, regardless of the recall class.1 Therefore, the 3PL must collect and return all the defective items in three
classes. From the 3PL viewpoint, all the recall classes are the same, as all of them need to be returned. However, the
pharma-manufacturer decides on the collecting fee aiming to encourage the 3PL to return the defective medications in a
good condition and in a timely manner, and consequently improve the number of reprocessable items collected from the
customers. Accordingly, the pharma-manufacturer determines a single collecting fee for the 3PL as the 3PL is in charge of
returning all the defective items, regardless of their class. Under this case, the defective items will not be available for sale in
the pharmacies. This will cause profit loss for the pharmacies since they will not be able to respond to the patients’ demand.
While collecting the defective medicines, the 3PL pays a monetary incentive to the pharmacies in order to compensate
for their probable loss and more importantly to encourage them to prepare the defective items for return. The amount of
collected items depends on the incentive offered by the 3PL. The 3PL sends the collected items to the pharma-manufacturer
and receives a collecting fee for each item returned.
In the problem under study, the pharma-manufacturer firstly determines the collecting fee and afterwards the 3PL deter-
mines the incentive paid to customers considering the collecting fee offered by the pharma-manufacturer. Accordingly, a
game-theoretic approach is needed to derive the optimal collection fee and customer incentive. Meanwhile, the incentive
set by the 3PL affects the collection rate, which in turn determines the penalty paid by the pharma-manufacturer for each
uncollected defective medication. The aforementioned decisions (i.e. the collecting fee and customer incentive) are interre-
lated to each other and consequently, they need to be coordinated in order to achieve the perfect performance of the system
from economic and social points of view.
In this study, we analytically analyse the problem under three decision-making structures. First, the investigated problem
is modelled under the decentralised decision-making structure, in which each member tends to individually optimise its
profit, based on the manufacturer-leader Stackelberg game model. After that, the centralised system is investigated, in which
the decisions are optimised from the whole PSC viewpoint. The centralised structure results in the best performance of the
PSC, but it would not guarantee that both members benefit from the centralised solutions. Therefore, to entice both parties
to participate in centralisation, we propose a collecting fee agreement, which not only achieves the perfect performance of
the PSC but also results in a win-win situation for both the pharma-manufacturer and 3PL. In the following sub-section, we
introduce the notations used in the study.
3.1. Notations
c The unit cost paid by the 3PL for each transferred item to the pharma-manufacturer
S The product defect severity which is a stochastic variable with probability density function f (.) and cumulative
distribution function F(.)
GI The penalty imposed on the pharma-manufacturer by the government for each uncollected medicine belonging
to Class I
GII The penalty imposed on the pharma-manufacturer by the government for each uncollected medicine belonging
to Class II
X Unit tax exemption earned by the pharma-manufacturer per item donated to charities
T Total amount of defective medications distributed to the market
p Salvage value of the modified medications per unit
SI Maximum acceptable product defect severity for reprocessing in Class I
SII Maximum acceptable product defect severity for reprocessing in Class II
d Disposing cost for the pharma-manufacturer per unit
emax The maximum incentive at which the customers return all medications
r(S) The pharma-manufacturer’s modification cost for each defective medication
a The modification cost for the lowest possible severity
b The coefficient of severity elasticity
W Customers’ willingness to return defective medications as a function of incentive offered by the 3PL
Decision variables
e Incentive offered to customers by the 3PL

ξ Collecting fee paid to the 3PL by the pharma-manufacturer per unit
Notations of the extended model

τ Collection rate
I 3PL’s collection investment
CL Scaling parameter
4. Mathematical modelling
4.1. Impacts of disruption occurrence on the PSC
Defective medications are mainly produced by a disruption occurred in manufacturing process (WHO). According to the
regulations, the potentially harmful pharmaceuticals must be immediately recalled and collected from the market. The
product defects can be categorised based upon the level of severity, which determines the potential hazard of the products
(King 2016). FDA has classified the defective pharmaceuticals into the following classes:
• Class I: A dangerous or defective product that could cause serious health problems or death (i.e. chemical
contamination with serious medical consequences, etc.).
• Class II: A product that might cause a temporary health problem, or pose slight threat of a serious nature (i.e.
missing or incorrect safety information in leaflets or inserts, etc.).
• Class III: A product that is unlikely to cause any adverse health reaction, but is not properly labelled or
manufactured due to FDA standards (i.e. faulty closure not resulting in any medical consequences, etc.).
Clearly, Class I recalls are the most severe ones with high level of potential hazard. Class II recalls are not as severe
as Class I and Class III recalls have a low severity with no specific potential hazard. It is noteworthy that the product
recall in pharmaceutical sector could be either mandatory or voluntary based on the level of potential hazard. Generally,
FDA evaluates the recall effectiveness by examining a company’s efforts to properly collect the defective product from the
market.
Production disruption leads to producing defective medications while the severity of the defect is uncertain. Due to the
randomness of production disruption, the severity of the product defect (S) is considered to be stochastic in this paper. The
more is the product defect severity, the higher is the potential hazard of the products. Accordingly, in this paper, the product
defect severity is considered to be a stochastic variable within range [0, 1] and it identifies the level of hazard and recall
class of the products.
Based on the product defect severity, there are three different possible scenarios in the investigated study as follows:
• Scenario (1): Product defect severity is intensely high (Class I).
• Scenario (2): Product defect severity is moderate (Class II).
• Scenario (3): Product defect severity is low (Class III)
If the product defect severity takes a value within range (0,SII ), the product belongs to Class III. If the product defect
severity is within range (SII ,SI ), the product belongs to Class II and finally if the product defect severity is within range (SI , 1),
the product belongs to Class I. The items belonging to Classes I and II are considered as mandatory recalls and consequently
the government (Food and Drug Administration) imposes penalties on the pharma-manufacturer for each uncollected unit
belonging to these classes based on its hazard type. Besides, the products in Classes II and III can be modified in order to be
resold in the market, whereas products in Class I must be disposed safely. The pharma-manufacturer collects the products
in Class II and donates them to charities, which can be considered as corporate social responsibility (CSR) activities. These
actions protect the public health and enhance the pharma-manufacturer’s reputation and also lead to a unit tax exemption
(X ) for the pharma-manufacturer (Weraikat, Zanjani, and Lehoux 2016b).
The modification cost for each defective medication r(S) = a + bS depends on the product defect severity (i.e. hazard
type), where a is the modification cost for the lowest possible severity and b is the coefficient of severity elasticity. This
assumption is made based on the work of Radhi and Zhang (2016), who state that there is a liner relationship between the
modification cost and the quality of returned products in a reverse supply chain. According to Radhi and Zhang (2016),
as quality increases, remanufacturing cost decreases linearly. The slope in this relationship is set such that it is more prof-
itable to remanufacture higher quality returns compared to lower quality returns (remanufacturing cost = a − bq, where q
represents the quality of returned items). The assumption that the remanufacturing cost has a negative linear relationship
with the quality is also addressed in other several papers including: Galbreth and Blackburn (2006), Ferguson et al. (2009),
Galbreth and Blackburn (2010), and Watanabe, Kusuawa, and Arizono (2013). However, in our case, the more severe is the
product defect, the higher are the costs of modifying the product. Therefore, in this relationship, the slope is set such that
lower severity returns are more profitable for the pharma-manufacturer compared to higher severity returns (modification
cost = a + bS, where S represents defect severity of returned items).
The collection responsibility is on the third party logistic (3PL) provider. The pharma-manufacturer decides on the
collecting fee (ξ ), which is paid to the 3PL for each collected medication, and the 3PL sets the incentive (e) paid to customers
for each returned medication (Heydari and Ghasemi 2018). In this case, the 3PL decides on the incentives based on the
collecting fee offered by the pharma-manufacturer. Therefore, the models are developed using Stackelberg game structure
considering the pharma-manufacturer as the leader and the 3PL as the follower. The collection amount depends on the
customers’ willingness for returning their items, which can be formulated as (Hosseini-Motlagh et al. 2019):
e
0 ≤ e < emax
W = emax (1)
1 e ≥ emax
where emax is the maximum incentive at which customers return all defective medications. To be more specific, W is a
real number within range (0,1) that represents the collection rate as a function of the incentive offered to the customers
by the 3PL (Heydari and Ghasemi 2018). In the following sections, the problem defined above is analysed under various
decision-making structures.
4.2. Decentralised decision-making structure

Under the decentralised decision-making model, the 3PL and the pharma-manufacturer individually determine their
decisions under the Stackelberg game structure. This game model is a widely applied mathematical discipline in the
production research context (Choi, Taleizadeh, and Yue 2019). The following sub-sections provide the 3PL and the pharma-
manufacturer’s profit functions along with their optimal solutions. It is worth pointing out that in this paper the superscript
* is used to show the decentralised optimal solutions.
4.2.1. 3PL profit function

The 3PL collects the defective medications and transfers them to the pharma-manufacturer at collecting fee ξ . The collection
amount depends on the incentive offered to customers (e). Moreover, the 3PL incurs a cost ofc for each collected unit
transferred to the pharma-manufacturer. The 3PL’s expected profit function when the collection rate is W and the total
amount of defective medications distributed to the market is T, can be formulated as follows:
E(π3PL (e)) = (ξ − e − c)WT (2)
where WT represents the total amount of collected defective medications by the 3PL. By substituting W from Equation (1),
we have:
Te
E(π3PL (e)) = (ξ − e − c) max (3)
e
Proposition 1 E(π3PL (e)) is concave with respect to (e) and the profit maximising incentive under the decentralised model
is calculated as follows:
ξ −c
e∗ = (4)
2
Proof See the Appendix.
4.2.2. Pharma-manufacturer profit function

There are three possible scenarios for the product defect severity. Equation (5) shows the pharma-manufacturer’s profit
function, where r represents the modification cost, d represents the disposing cost, and X is the unit tax exemption that the
government considers for donating each medication.
⎧
⎪
⎨−WT(d + ξ ) − GI (T − WT) SI < S < 1
πM = WT(X − r(S) − ξ ) − GII (T − WT) SII < S < SI (5)
⎪
⎩
WT(p − r(S) − ξ ) 0 < S < SII
The pharma-manufacturer’s profit function depends on product defect severity (S). If S takes a value in range (0, SII ), the
potential hazard of the defective products is low and the products are in Class III. In such a case, the pharma-manufacturer
voluntarily collects and modifies the medications and resells them in the market at unit salvage value p. If S takes a value
in range (SII , SI ), the items are considered to be in Class II. The pharma-manufacturer is responsible for collecting these
items from the market. Otherwise, he will be fined GII for each uncollected medication. In addition, he donates the modified
medication of Class II and benefits from a unit tax exemption X . Finally, if S takes a value in range (SI , 1), the products are
in Class I and they are considered to be intensely harmful to patients. Therefore, the pharma-manufacturer must immediately
collect and dispose all the related items. Otherwise, he will be fined GI for each uncollected medication. Furthermore, the
modification costr(S) = a + bS for the pharma-manufacturer is a function of S. By substituting W from Equation (1) and
the modification cost function, the pharma-manufacturer’s expected profit function can be calculated as follows:
SII
eT
E(πM (ξ )) = max
(p − a − bS − ξ )f (S)dS
0 e
SI
eT eT
+ (X − a − bS − ξ ) − GII T − f (S)dS
SII emax emax
1
eT eT
− (d + ξ ) + GI T − f (S)dS (6)
SI emax emax
As can be seen in Equation (4), the 3PL’s optimal incentive depends on the collecting fee of the pharma-manufacturer.
Therefore, we replace the 3PL’s optimal reaction e∗ into the pharma-manufacturer’s profit function to obtain the optimal
collecting fee offered by the pharma-manufacturer. The pharma-manufacturer’s profit function will be transformed to:

SII SI
(ξ − c)T
E(πM (ξ )) = (p − a − bS − ξ )f (S)dS + (X − a − bS − ξ + GII )f (S)dS
2emax 0 SII
1 SI 1
− (d + ξ − GI )f (S)dS − GII T f (S)dS − GI T f (S)dS (7)
SI SII SI
Proposition 2 E(πM (ξ )) is concave with respect to (ξ ) and the profit maximising collecting fee under the decentralised
model is calculated as follows:

SII SI 1
∗ 1
ξ = (p − a − bS)f (S)dS+ (X − a − bS + GII )f (S)dS − (d − GI )f (S)dS + c (8)
2 0 SII SI
Substituting Equation (8) into Equation (4), the optimum customer incentive under the decentralised model is
obtained as:

SII SI 1
∗ 1
e = (p − a − bS)f (S)dS + (X − a − bS + GII )f (S)dS − (d − GI )f (S)dS − c (9)
4 0 SII SI
Using the decentralised optimal decisions (ξ ∗ , e∗ ), we derive the optimal PSC members’ profits under the decentralised
structure. The pharma-manufacturer’s profit is:

SII SI
T
E(πM (ξ )) dec
= max (p − a − bS)f (S)dS+ (X − a − bS + GII )f (S)dS
8e 0 SII
1 2 SI 1
− (d − GI )f (S)dS − c − GII T f (S)dS − GI T f (S)dS (10)
SI SII SI
Meanwhile, the 3PL’s profit function is as follows:

SII SI 1 2
T
E(π3PL (e))dec
= (p − a − bS)f (S)dS + (X − a − bS + GII )f (S)dS − (d − GI )f (S)dS − c (11)
16emax 0 SII SI
4.3. Centralised decision-making structure

Under the centralised system, it is assumed that a hypothetical central decision-maker tends to determine all the decisions in
a way that the whole supply chain profitability is maximised (Choi 2017). The expected profit function of the whole chain
in this case is as follows:
E(πPSC (e)) = E(πM (ξ )) + E(π3PL (e))

SII SI
eT
= max (p − a − bS)f (S)dS + (X − a − bS + GII )f (S)dS
e 0 SII
1 SI 1
− (d − GI )f (S)dS − e − c − GII T f (S)dS − GI T f (S)dS (12)
SI SII SI
As shown in Equation (12), the decision variable ξ is omitted in this case and e is the only decision that affects the
PSC’s profitability. It is worth pointing out that the superscript ** is used to show the optimal decision variables under
the centralised system.
Proposition 3 E(πPSC (e)) is concave with respect to (e) and the profit maximising incentive under the centralised model
is calculated as follows:

SII SI 1
∗∗ 1
e = (p − a − bS)f (S)dS + (X − a − bS + GII )f (S)dS − (d − GI )f (S)dS − c (13)
2 0 SII SI
Using the centralised optimal decision (e∗∗ ), the optimal PSC profit will be as follows:

SII SI
T
E(πPSC (e))cen = max (p − a − bS)f (S)dS + (X − a − bS + GII )f (S)dS
4e 0 SII
1 2 SI 1
− (d − GI )f (S)dS − c − GII T f (S)dS − GI T f (S)dS (14)
SI SII SI
According to Proposition 4, it is observed that the incentive offered by the 3PL under the centralised structure is higher
than that under the decentralised one. Therefore, the collection rate (W ) improves under the centralised system. Moreover,
Proposition 4 states that the PSC profit under the centralised structure raises in comparison with the decentralised one.
Consequently, the centralisation not only improves the amount of collected defective medication, but also causes that the
PSC achieves its best performance. Note that the findings proposed in Proposition 4 are in line with most previous literature
on supply chain coordination (Chaharsooghi and Heydari 2010; Chaharsooghi, Heydari, and Kamalabadi 2011).
Proposition 4 The incentive offered to customers by the 3PL under the centralised system is twice that of the decentralised
one, and by shifting to the centralised decision-making model, the profitability of the whole PSC improves.
Although the centralisation improves the entire PSC profitability, it does not necessarily results in better profits for both
members (Nouri et al. 2018). Therefore, the centralisation is practically unachievable without a supply chain coordination
strategy to encourage all members to participate in the centralisation.
4.4. Supply chain coordination

In this section, the supply chain coordination approach is used to induce the 3PL to apply the centralised optimal deci-
sion (i.e. changing the customer incentive from e∗ to e∗∗ ) and moreover a profit allocation scheme is used to share the
surplus profits (Johari et al. 2018). The pharma-manufacturer and 3PL accept the coordination scheme if and only if their
profits under the coordinated system become more than (or equal to) those under the decentralised one (i.e., E(π3PL )coo ≥
E(π3PL )dec and E(πM )coo ≥ E(πM )dec ). In this paper, for the first time, we treat the collecting fee as a coordinator parameter
to obtain a win-win strategy for both members. In this case, ξ ∗∗ represents the collecting fee under the coordinated model,
which is determined in a way that persuades both members to participate in the centralisation. Not only is this mecha-
nism easy to implement, but also it is capable of achieving full channel coordination under the uncertain disruptions. The
pharma-manufacturer’s profit function under the proposed coordination scheme will be as follow:
SII ∗∗
e T
E(πM (ξ ))coo = (p − a − bS − ξ ∗∗ )f (S)dS
0 emax
SI ∗∗
e T ∗∗ e∗∗ T
+ (X − a − bS − ξ ) − GII T − max f (S)dS
SII emax e
1 ∗∗
e T ∗∗ e∗∗ T
− (d + ξ ) + GI T − max f (S)dS (15)
SI emax e
Meanwhile, the 3PL’s profit function is formulated as:

e∗∗
E(π3PL (e))coo = (ξ ∗∗ − e∗∗ − c) T (16)
emax
As mentioned before, in order to achieve the channel coordination, the optimum collecting fee should be acceptable to both
members. Here, we obtain a feasible interval for the collecting fee, which is acceptable to both members. Proposition 5 indi-
cates the minimum and maximum amounts of the interval, which are determined by the 3PL and the pharma-manufacturer,
respectively.
Proposition 5 Equations (17) and (18) illustrate the minimum and the maximum values of the acceptable collecting fee
determined by the 3PL and the pharma-manufacturer, respectively.
∗∗ 1
ξmin = (ξ − c − e∗ ) + e∗∗ + c (17)
2

SII SI 1
∗∗ 1 ∗
ξmax = (p − a − bS)f (S)dS + (X − a − bS + GII )f (S)dS − (d − GI )f (S)dS + ξ (18)
2 0 SII SI

∗∗ ∗∗
The channel coordination is achievable, and both members participate in the centralisation when the interval [ξmin , ξmax ]
is non-empty. Proposition 6 proves that the interval is always non-empty and consequently, there is always a feasible
collecting fee for coordinating the channel.
Proposition 6 The interval obtained for the collecting fee is always a non-empty set.

∗∗
Setting ξ ∗∗ within the interval R = [ξmin ∗∗
, ξmax ] not only improves the supply chain profitability but also satisfies the
individual requirements of the members as well and consequently both members benefit from implementing the collecting
fee agreement.
There are different ways to determine a fixed optimum value for coordination parameter (ξ ∗∗ ) in the literature on supply
chain coordination (Shang and Yang 2015). The point is that the profit obtained by centralisation should be fairly shared
among both members (Ebrahimi, Hosseini-Motlagh, and Nematollahi 2019). The Nash bargaining model (Nash Jr 1950) is
a popular profit allocation scheme that has been used in different coordination mechanisms including profit sharing (Yan
2011), quantity discounts (Kohli and Park 1989), and cooperative advertising (Li et al. 2002). According to Nash Jr (1950),
Nash bargaining solution may be regarded as all anticipations of fair bargains that the two sides (bargainers) might agree
on. Nash bargaining solution is defined by a set of axioms (i.e. Independence of irrelevant alternatives, Invariant to affine
transformations, Symmetry and Pareto efficiency) under determined fairness (Nash Jr 1950; Touati, Altman, and Galtier
2006). Nash Jr (1950) showed that Nash bargaining model leads to a unique solution that satisfies the mentioned axioms
focusing on the expected profit under specified solution methods. In the Nash bargaining cooperative game model the
objective function, which is the product of the bargainers’ benefit, must be maximised (Panda et al. 2015). Each bargainer’s
benefit is the difference between the profit after cooperation and that of the decentralised decision-making system (Panda
et al. 2015). According to Rachmilevitch (2011), the Nash bargaining solution reconciles fairness and efficiency in profit
division.2 In the current paper, we apply the Nash bargaining model to obtain the optimum ξ ∗∗ assuming that both members
are risk-neutral (Li, Zhu, and Huang 2009). The following cooperative game model represents the profit allocation scheme
under the Nash bargaining model. We obtain the optimum ξ ∗∗ by solving the following model.
MaxZ =(E(π3PL )coo − E(π3PL )dec )(E(πM )coo − E(πM )dec ) (19)
ξ ∈R
Equation (19) can be rewritten as:

SII
T2 ∗∗ ∗∗ ∗∗ ∗ ∗ ∗
MaxZ = [(ξ − e − c)e − (ξ − e − c)e ] e∗∗ (p − a − bS − ξ ∗∗ )f (S)dS
ξ ∈R emax2 0
SI 1
+ e∗∗ (X − a − bS − ξ ∗∗ + GII )f (S)dS − e∗∗ (d + ξ ∗∗ − GI )f (S)dS
SII SI
SII SI
− e∗ (p − a − bS − ξ ∗ )f (S)dS − e∗ (X − a − bS − ξ ∗ + GII )f (S)dS
0 SII
1
+ e∗ (d + ξ ∗ − GI )f (S)dS (20)
SI
In order to solve the above-mentioned game model, first the concavity of Z with respect to the collecting fee is proved and
then, the optimum ξ ∗∗ is derived based on first order partial derivative of Z with respect to ξ ∗∗ (i.e. ∂Z/∂ξ ∗∗ ). Proposition 7
represents the optimum coordinator parameter (ξ ∗∗ ), which is derived from solving Equation (19).
Proposition 7 The Nash bargaining model (Z) is concave with respect to ξ ∗∗ and the optimum collecting fee that
maximises Z and coordinates the chain is obtained as follows:

SII SI 1
1
ξ ∗∗ = (p − a − bS)f (S)dS + (X − a − bS + GII )f (S)dS − (d − GI )f (S)dS + c
4 0 SII SI
ξ∗ 3e∗
+ + (21)
2 4
Considering Propositions 4–7, the PSC achieves its best performance by applying ξ ∗∗ and e∗∗ while both members
benefit from the coordination model as well.
5. Results and discussions

In this section, we analytically investigate the performance of the developed model. Table 2 indicates the first order partial
derivatives of e∗ and ξ ∗ with respect to the primary parameters and analyses the influences of changing the parameters on
the optimal decisions. Note that ‘N’ is a dummy variable representing the optimal decisions or profits in Tables 2 and 4.
The following results are concluded intuitively from Table 2:
A higher operation cost in the pharma-manufacturer’s side (both modification and disposing cost) leads to a lower
incentive in the 3PL’s side. This happens because increasing the pharma-manufacturer’s operation costs lessens his ability
to spend more money on the 3PL’s collecting fee; therefore, the 3PL would make lower effort to collect medications and
offer a lower incentive. Accordingly, the collection amount is lower and the pharma-manufacturer incurs more penalty
for uncollected medications. Increasing tax exemption of the pharma-manufacturer (X ) or salvage value of the modified
medications (p) improves the pharma-manufactures revenue and his ability to invest in collecting more medications.
On the other hand, if the penalty imposed on the pharma-manufacturer increases (GI , GII ), the incentive offered by the
3PL grows. This shows that the pharma-manufacturer prefers to invest more in collecting rather than paying the penalty
when the penalty is high; therefore, he is willing to pay more collecting fee to the 3PL. Moreover, under the decentralised
system, the absolute rates of changes are lower than those of the centralised one (|∂e∗ /∂x| < |∂e∗∗ /∂x| where x represents
any parameter in the model). Furthermore, the changing rates of e∗∗ and ξ ∗ with respect to all parameters except c are the
same.
Table 2. Sensitivity analysis on the optimal decisions by changing the model parameters.
e∗ e∗∗ ξ∗

∂N 1 SII S 1 SII SI 1 SII S
− f (S)dS + SIII f (S)dS − ∫
f (S)dS + f (S)dS − f (S)dS + SIII f (S)dS
∂a 4 0 2 0 SII 2 0
∂N 1 SII SI 1 SII SI 1 SII SI

− Sf (S)dS + Sf (S)dS − Sf (S)dS + Sf (S)dS − Sf (S)dS + Sf (S)dS
∂b 4 0 SII 2 0 SII 2 0 SII
∂N
1 SII
1 SII
1 SII
f (S)dS f (S)dS f (S)dS
∂p 4 0 2 0 2 0
∂N 1 SI 1 SI 1 SI
∂X 4 SII 2 SII 2 SII
∂N 1 SI 1 SI 1 SI
∂GII 4 SII 2 SII 2 SII
∂N 1 1 1 1 1 1
∂GI 4 SI 2 SI 2 SI
∂N 1 1 1 1 1 1
− SI f (S)dS − SI f (S)dS − SI f (S)dS
∂d 4 2 2
∂N 1 1 1
− −
∂c 4 2 2
Table 3. Changes of the decision variables when

the model parameters increase.
Parameter e∗ ,e∗∗ ξ∗
T↑ No Change No Change
emax ↑ No Change No Change
a↑ ↓ ↓
b↑ ↓ ↓
p↑ ↑ ↑
X ↑ ↑ ↑
GII ↑ ↑ ↑
GI ↑ ↑ ↑
d↑ ↓ ↓
c↑ ↓ ↑
Finally, if the 3PL’s transformation cost (c) increases, the incentive lessens and the 3PL demands a higher collecting fee;
therefore, the conflict of interests between the PSC members increase. The above-mentioned results obtained from Table 2
are summarised in Table 3.
In order to go deeper, we provide Table 4 that indicates the changes in the optimal decentralised and centralised profits
of the members and whole PSC with respect to the parameters.
where:
SII SI
A= (p − a − bS)f (S)dS + (X − a − bS + GII )f (S)dS
0 SII
1
− (d − GI )f (S)dS − c (22)
SI
and
SI 1
B = GII f (S)dS + GI f (S)dS (23)
SII SI
The following results are concluded from Table 4:

The absolute rates of changes for E(πPSC )cen with respect to the parameters (except T) are higher than E(πM )dec , and
similarly the absolute rates of changes for E(πM )dec are greater than E(π3PL )dec . Furthermore, if the operational costs
Table 4. Sensitivity analysis on optimal profits by changing model parameters.

E(π3PL )dec E(πM )dec E(πPSC )cen
∂N TA SII SI TA SII SI TA SII SI
− f (S)dS + f (S)dS − f (S)dS + f (S)dS − f (S)dS + f (S)dS
∂a 8emax 0 SII 4emax 0 SII 2emax 0 S II
∂N −TA SII SI TA SII SI TA SII SI

Sf (S)dS + SII Sf (S)dS − max 0 Sf (S)dS + SII Sf (S)dS − max 0 Sf (S)dS + SII Sf (S)dS
∂b 8emax 0 4e 2e
∂N TA SII TA SII TA SII
∂p 8emax 0 4emax 0 2emax 0
∂N TA SI TA SI TA SI
f (S)dS f (S)dS ∫ f (S)dS
∂X 8emax SII 4emax SII 2emax SII

∂N TA S TA S TA SI
− T SIII f (S)dS − T SIII f (S)dS − T SII f (S)dS
∂GII 8emax 4emax 2emax

∂N TA 1 TA 1 TA 1
− T SI f (S)dS − T SI f (S)dS − T SI f (S)dS
∂GI 8emax 4emax 2emax
∂N TA 1 TA 1 TA 1
− max SI f (S)dS − max SI f (S)dS − max SI f (S)dS
∂d 8e 4e 2e
∂N TA TA TA
− max − max − max
∂c 8e 4e 2e
∂N TA2 TA2 TA2
−B −B
∂T 16emax 8emax 4emax
∂N TA2 TA2 TA2
− − −
∂emax 16(emax )2 8(emax )2 4(emax )2
of PSC members (a, b, d, c) increase, both the optimal profits and the incentive decrease (see Table 2); accordingly, the
collection amount decreases. Increasing the salvage value of the modified medications (p) or tax exemption of the pharma-
manufacturer (X ) improves the optimal profits under the certain rates shown in Table 4. Besides, the incentive (see Table 3)
and the collection amount improve. Of course, due to market or government policies, these parameters could not be
significantly varied.
The rise of the government penalties (GI ,GII ) increases E(π3PL )dec if (A/8emax ) > 1, increases E(πM )dec if
(A/4emax ) > 1, and improves E(πPSC )cen if (A/2emax ) > 1. Therefore, we conclude that increasing the government’s penalty
for each uncollected unit of defective medications could be even beneficial for the whole PSC and each member under the
mentioned conditions. Note that when (A/8emax ) > 1, the other conditions are satisfied; hence, if the 3PL benefits from
increasing (GI ,GII ), he tries to collect more medications and the pharma-manufacturer benefits as well. Although changing
emax has no effect on the optimal decisions (see Table 3), increasing emax decreases the optimal profits.
Moreover, increasing the total amount of defective medications (T) raises E(π3PL )dec , increases E(πM )dec when
(TA2 /8emax ) > B, and improves E(πPSC )cen when (TA2 /4emax ) > B; note that B depends on (GI ,GII ). Hence, we conclude
that when the government’s penalties (GI ,GII ) are adequately low, the PSC and the pharma-manufacturer benefit from
increasing T. Because, the augmentation of their revenue by enhancing T is higher than the decreasing effect of govern-
ment’s penalties on their profitability. If the mentioned conditions are not satisfied, the effect of government’s penalties on
the pharma-manufacturer and the PSC profitability is higher than their revenue augmentation, when T enhances. In addi-
tion, since the 3PL does not pay any penalties under the decentralised model, he always benefits from increasing T. Note
that changing T has no effect on the optimal decisions (see Table 3). In other words, when the government’s penalties
are adequately low, the PSC and the pharma-manufacturer benefit from increasing T. Because, the rise of their revenue by
enhancing T is higher than the decreasing effect of government’s penalties on their profitability.
6. Applicability evaluation of the model

In this section, a real pharmaceutical company, namely SD is investigated in order to examine the efficiency and applicability
of the proposed model. Note that we use the abbreviation of the company’s name for the sake of confidentiality. In order
to implement effective recall management, SD tends to cooperate with a 3PL and he aims to find the optimal collecting fee
offered to the 3PL. Likewise, the 3PL adjusts his incentive, which determines the collection rate, based on the collecting
fee. The data obtained from SD Company is represented in Table 5. Note that SI and SII are estimated based on the experts’
opinions.
Table 5. The data of the studied case.

Parameters Value Parameters Value Parameters Value
p 22 $/unit GI 25 $/unit emax 10 $/unit
X 16 $/unit GII 20 $/unit T 1000 Units/year
c 2 $/unit SI 0.7 – a 2 $/unit
d 3 $/unit SII 0.4 – b 5 $/unit
Figure 2. The distribution of product defect severity f (S) ∼ β(2, 5).
Table 6. The results of running the model.

Variable Decentralised Centralised Coordinated
e 4.93 9.87 9.87
ξ 11.87 – 15.64
E(πM ) 154.15 – 1307.79
E(π3PL ) 2437.21 – 3720.78
E(πPSC ) 2591.37 5028 5028
Recall effectiveness 0.49 0.98 0.98
Moreover, in the investigated case study, f (S) is estimated by beta distribution β(2, 5), which is generalisable to any
continuous distribution between [0, 1]. Beta distribution, as a versatile distribution over a finite interval, is one of the most
common distributions in risk analysis (Johnson 1997). For instance, Giri, Bardhan, and Maiti (2016) used beta distribution
to show the randomness in production quantity. Note that beta distribution precisely supports the interval [0,1], which is
required for product defect severity in this model. Additionally, underβ(2, 5), the frequency of product defect with intense
severities are less than product defect with low severities, which is perfectly rational in the pharmaceutical sector (Nagaich
and Sadhna 2015). Figure 2 shows the graph of β(2, 5), which fits the case’s data and represents the frequency of product
defect for all severities. Note that S = 1 represents an extremely severe defect, which leads to producing poisonous and fatal
products and has a very low frequency.
Table 6 indicates the results of applying the proposed model under the decentralised, centralised, and coordinated
systems.
∗∗
In the investigated case study, the optimal lower bound of ξ under the coordinated system (ξmin ) is equal to 14.34 and
∗∗
the optimal upper bound of ξ under the coordinated model (ξmax ) is 16.81. Table 6 reveals the following results:
Both the developed mechanism and Nash-bargaining model are capable of coordinating the investigated PSC (ξ ∗∗
belongs to its feasible interval), in a way that both members benefit from centralisation (i.e.E(π3PL )coo > E(π3PL )dec and
E(πM )coo > E(πM )dec ). In addition, the recall effectiveness remarkably improves by implementing the coordinated scheme
(changes from 0.49–0.98), which not only protects patients from unsafe products but also reduces the governmental penal-
ties imposed on the pharma-manufacturer. Moreover, the coordinated system achieves the best performance of the PSC and
improves the PSC profitability (changes from 2591.37–5028). Despite increasing the collecting fee under the coordinated
Figure 3. Changes of beta distribution by increasing shape parameter β, when α = 2.
model in comparison with that of the decentralised one, the pharma-manufacturer’s profit considerably improves (changes
from 154.15–1307.79); since the recall effectiveness grows and the pharma-manufacturer pays less penalties. In other words,
the proposed collecting fee agreement remarkably improves the profitability of the entire PSC and both members. Hence,
the PSC achieves the perfect performance in a way that both members’ profits are guaranteed.
Figure 3 illustrates the effect of changing parameter β on beta distribution when α = 2. As β reduces, the frequency of
products with high severity (Class I and 2) increases. In such a case, the pharma-manufacturer’s costs grow; because (i) he
must dispose the hazardous products (Class I) rather than reselling them and (ii) his modification costs are high for Class II
products. Having that in mind, we conclude that when β reduces, the frequency of Class I and Class II products increases,
the pharma-manufacturer incurs more loss, and implementing the collecting fee agreement is necessary as a risk-sharing
strategy. The best condition for the pharma-manufacturer can be obtained inβ = 7; when the frequency of disruptions with
low product defect severity (Class III) is higher than that under Class I and Class II.
Figure 4 depicts the effect of changing shape parameterα on beta distribution when β = 5. It is observed that by increas-
ing α the frequency of products with high severity grows. Under such a case, the pharma-manufacturer has to dispose of
all defective products, which have a severity higher than 0.7 (Class I). Having that in mind, we conclude that the pharma-
manufacturer incurs more loss by increasing α; because the probability of producing Class I products with high defect
severity increases and the pharma-manufacturer faces a serious risk in case of disruption. Additionally, if the product defect
severity takes a value between 0.4 and 0.7 (Class II), the pharma-manufacturer has to pay more cost on modification and the
frequency of products in Class II grows by increasingα. Therefore, growing product defect severity increases the pharma-
manufacturer’s risk and the need for coordination as a risk-sharing strategy. The best condition for the pharma-manufacturer
can be achieved in α = 2; since the frequency of disruptions with low product defect severity (Class III) is more than that
under Class II and Class I.
Figure 5 indicates the effect of changing (SII , SI ) on the pharma-manufacturer’s profit under the decentralised and coor-
dinated systems. As illustrated in Figure 4, for any (SII , SI ) the pharma-manufacturer’s profit under the coordinated model is
higher than that of the decentralised one. In addition, under the decentralised system, the pharma-manufacturer incurs more
loss by increasing (SII , SI ) compared to the coordinated one; therefore, in the coordinated model, the pharma-manufacturer
has more adaptability in case of changing (SII , SI ) by FDA. Besides, under a lower amount of SII , the difference between
the pharma-manufacturer’s coordinated profit and that of the decentralised one grows; hence, the effectiveness of the col-
lecting fee agreement is higher under such a case. Note that points A and B show the pharma-manufacturer’s profit in the
investigated case under the decentralised and coordinated models, respectively.
6.1. Managerial insights

This section represents major managerial insights of this study’s analytical and numerical results.
• The manager of the supply chain can benefit from the proposed coordination scheme as it is capable of improving
the profitability of the entire PSC and both members, remarkably. Hence, the PSC achieves the perfect performance
Figure 4. Changes of beta distribution by increasing shape parameter α, when β = 5.
Figure 5. The pharma-manufacturer profit changing by increasing (SII , SI ).
in a way that both members’ profits are guaranteed (see Table 6). Moreover, the Nash-bargaining model applied in
the coordination model successfully shares the surplus profit between parties in a way that both the 3PL and the
pharma-manufacturer enjoy from a win-win collaboration (see Table 6).
• The collecting fee agreement is highly beneficial from the pharma-manufacturer’s perspective. Under the coordi-
nated system, the pharma-manufacturer is able to deal with the uncertainty of product defect severity in a much
more effective way in comparison with the decentralised model. This is because under the coordination model, not
only his profit improves but also the collection rate grows, and his reputation is protected.
• The pharma-manufacturer’s adaptability to drug recall uncertainties improves by applying the collecting fee agree-
ment in comparison with the decentralised structure (see Figure 5). Moreover, the pharma-manufacturer incurs a
lower loss in case of changing FDA standards (maximum acceptable product defect severity for reprocessing in
Class I (SI ) and maximum acceptable product defect severity for reprocessing in Class II (SII )).
• The managers of the pharmaceutical companies could gain both economic and social advantages from the proposed
coordination model since it leads to a remarkable rise in recall effectiveness, which not only protects patients from
unsafe products but also reduces the governmental penalties imposed on the pharma-manufacturer (see Table 6).
• Implementing the proposed coordination scheme is completely necessary from the pharma-manufacturer view-
point; especially when the shape parameter β is low (kurtosis of the distribution is low and the data are light-tailed)
(see Figure 3) and the shape parameter α is high (skewness of the distribution is close to 0 and the data are
mainly distributed in Class II) (see Figure 4). Eventually, uncertainty in the manufacturing process, which leads
to producing defective items with a varied range of severities, could be handled through the channel coordination
strategy.
• The collecting fee agreement convinces the 3PL to offer higher incentives to customers and consequently to
increase collection amount compared to the decentralised model. Hence, the coordination model increases the
3PL’s revenue from delivering the collected items to the pharma-manufacturer and decreases the number of
defective medications in the market.
Moreover, the following insights are provided for industry practitioners:
• Collecting fee agreement between manufacturers and 3PLs results in a win-win situation, from an economic per-
spective. It also helps manufacturers better handle the logistical challenges of the recalls, government penalties,
and uncertainty in their production system.
• As product recalls can harm a company’s profitability, reputation, and brand integrity (Cheah, Chan, and Chieng
2007), an effective recall programme is crucial for firms. The proposed model helps manufacturers better deal with
social challenges of disruption since it considerably improves the recall effectiveness.
In real cases, drug recall is a costly process. Due to the costs associated to lost sales, collection and modification, gov-
ernment penalties, and lawsuits, an unexpected production disruption can lead to a multi-billion dollar loss (Nagaich and
Sadhna 2015). However, according to the above-mentioned managerial insights, implementing the proposed coordination
mechanism could be remarkably useful for pharmaceutical companies in preventing substantial losses in case of a drug
recall. Not only that but companies, from a more general perspective, could hedge against the uncertain production disrup-
tion that leads to producing defective items, as the model is devised to mitigate the risk of disruption and share it among the
SC members.
7. Model extension and analysis3

In the previously proposed models, we assumed that the collection rate is determined based on customers’ willingness to
return, which is affected by the incentive provided to customers and the maximum incentive from customers’ viewpoint;
however, there are different ways to increase the collection amount in real world situations. For instance, in some cases
collectors would make a collection investment that affects the customers’ enthusiasm to cooperate in the collection process
(Savaskan, Bhattacharya, and Van Wassenhove 2004). In this section, the proposed models are extended, considering the
collection
√ rate similar to that of Savaskan, Bhattacharya, and Van Wassenhove (2004). We define the new collection rate
τ = I/CL , as a function of the 3PL’s collection effort, i.e. the whole amount of investment he makes to encourage
customers to cooperate in the collection process (I). Note that CL is a scaling parameter. This formulation is widely used
and accepted in advertising, operations, marketing, and acquisition management studies (Savaskan, Bhattacharya, and Van
Wassenhove 2004). In the following, the decentralised and centralised structures are considered first and, then, the collecting
fee agreement scheme is presented. Recall effectiveness in this model is equal to τ , i.e. collection rate.
7.1. Decentralised decision-making structure

Similar to the decentralised decision-making model investigated in Sub-Section 4.2, it is assumed that the pharma-
manufacturer as a leader determines collecting fee-based on the 3PL’s best response and, then, the 3PL as a follower
specifies the collection rate. The 3PL’s expected profit function can be formulated as:
E(π3PL (τ )) = (ξ − c)τ T − CL τ 2 (24)
Note that the total cost of collection is a function of return rate and is given by CL τ 2 + τ Tc = I + τ Tc, where τ T is the total
number of collected items and c is the shipping cost of each returned unit or in other words c is the variable unit cost of
collecting (Savaskan, Bhattacharya, and Van Wassenhove 2004).
Proposition 8 The 3PL’s expected profit function is concave with respect to τ and the best response of the 3PL under the
decentralised model is calculated as:
(ξ − c)T
τ= (25)
2CL
The pharma-manufacturer’s expected profit under the decentralised model is as follows:

SII
E(πM (ξ )) = τ T(p − a − bS − ξ )f (S)dS
0
SI
+ (τ T(X − a − bS − ξ ) − GII (T − τ T))f (S)dS
SII
1
− (τ T(d + ξ ) + GI (T − τ T))f (S)dS (26)
SI
Using backward induction, we replace the 3PL’s best response in the pharma-manufacturer’s expected profit and calculate
the optimum collecting fee. In this case, the pharma-manufacturer’s expected profit would be:

SII SI
(ξ − c)T 2
E(πM (ξ )) = (p − a − bS − ξ )f (S)dS + (X − a − bS − ξ + GII )f (S)dS
2CL 0 SII
1 SI 1
− (d + ξ − GI )f (S)dS − GII T f (S)dS − GI T f (S)dS (27)
SI SII SI
According to Proposition 9, the optimum value of collecting fee under the decentralised model is similar to that of Sub-
Section 4.2.2.
Proposition 9 The pharma-manufacturer’s expected profit function is concave with respect to ξ and the profit maximising
collecting fee under the decentralised model is formulated as:

SII SI 1
∗ 1
ξ = (p − a − bS)f (S)dS + (X − a − bS + GII )f (S)dS − (d − GI )f (S)dS + c (28)
2 0 SII SI
Accordingly, using Equations (25) and (28), the optimum value of the collection rate is obtained as follows:

SII SI 1
T
τ∗ = (p − a − bS)f (S)dS + (X − a − bS + GII )f (S)dS − (d − GI )f (S)dS − c (29)
4CL 0 SII SI
7.2. Centralised decision-making structure

Similar to the centralised structure presented in Sub-Section 4.3, the expected profit of the whole chain is formulated as
follows. In order to derive the centralised optimum collection rate, Proposition 10 is proposed.

SII SI
E(πPSC (τ )) = τ T (p − a − bS)f (S)dS + (X − a − bS + GII )f (S)dS
0 SII
1 SI 1
− (d − GI )f (S)dS − c − GII T f (S)dS − GI T f (S)dS − CL τ 2 (30)
SI SII SI
Proposition 10 The PSC’s expected profit function is concave with respect to τ , and the optimum collection rate is
calculated by Equation (31).

SII SI 1
∗∗ T
τ = (p − a − bS)f (S)dS + (X − a − bS + GII )f (S)dS − (d − GI )f (S)dS − c (31)
2CL 0 SII SI
Similar to the findings in Proposition 4, Proposition 11 states that not only the centralised optimum collection rate is
twice that of the decentralised one, but also the whole PSC benefits from centralisation.
Proposition 11 The collection rate of the 3PL under the centralised system is twice that of the decentralised one, and the
PSC’s profit improves under the centralised system compared to that of the decentralised one.
For the model to make sense, the collection rate in both decision-making structures should be less than or equal to 1.
Since the centralised collection rate is twice that of the decentralised one, if the centralised collection rate is less than or
equal to 1, the decentralised collection rate is less than 1, as well. From this condition, we conclude that parameter CL
defined in the collection rate, is large enough such that τ ∗∗ ≤ 1. More specifically, the minimum amount of CL is denoted
by Equation (32).

SII SI 1
T
CL ≥ (p − a − bS)f (S)dS + (X − a − bS + GII )f (S)dS − (d − GI )f (S)dS − c (32)
2 0 SII SI
7.3. Supply chain coordination

Using collecting fee agreement contract, we coordinate the chain and induce the 3PL to adopt the globally optimal collection
rate instead of the locally optimal collection rate. In this case, the members’ coordinated profits would be as follows:

SII SI
E(πM (ξ ))coo = τ ∗∗ T (p − a − bS − ξ ∗∗ )f (S)dS + (X − a − bS − ξ ∗∗ + GII )f (S)dS
0 SII
1 SI 1
− (d + ξ ∗∗ − GI )f (S)dS − GII T f (S)dS − GI T f (S)dS (33)
SI SII SI
E(π3PL (τ ))coo = (ξ ∗∗ − c)τ ∗∗ T − CL τ ∗∗ 2 (34)

As mentioned before, in order to achieve channel coordination, the optimum collecting fee should be acceptable to both
members. Here, we obtain a feasible interval for the collecting fee, which is acceptable to both members. Proposition 12 indi-
cates the minimum and maximum amounts of the interval, which are determined by the 3PL and the pharma-manufacturer,
respectively.
Proposition 12 Equations (35) and (36) illustrate the minimum and maximum values of the acceptable collecting fee
determined by the 3PL and the pharma-manufacturer, respectively.
∗∗ (ξ ∗ − c) 3CL τ ∗
ξmin = + +c (35)
2 2T

SII SI 1
∗∗ 1 ∗ ∗ ∗
ξmax = (p − a − bS − ξ )f (S)dS + (X − a − bS − ξ + GII )f (S)dS − (d + ξ − GI )f (S)dS (36)
2 0 SII SI
∗∗ ∗∗
The channel coordination is achievable, and both members participate in the centralisation when the interval [ξmin , ξmax ]
is non-empty. Proposition 13 proves that the interval is always non-empty and consequently, there is always a feasible
collecting fee for coordinating the channel.
Proposition 13 The interval obtained for the collecting fee is always a non-empty set.

Table 7. The results of running the model.

Variable Decentralised Centralised Coordinated
τ 0.48 0.97 0.97
ξ 11.87 – 15.64
E(πM ) 105.89 – 1248.11
E(π3PL ) 2413.08 – 3683.94
E(πPSC ) 2518.97 4932.06 4932.06
Recall effectiveness 0.48 0.97 0.97
∗∗
Setting ξ ∗∗ within the interval R = [ξmin ∗∗
, ξmax ] not only improves the supply chain profitability but also satisfies the
individual requirements of the members as well and consequently both members benefit from implementing the collecting
fee agreement. Similar to Sub-Section 4.4, we use the Nash bargaining game model to obtain the exact value of optimum
collecting fee. Proposition 14 demonstrates the optimum collecting fee under collecting fee agreement scheme.
Proposition 14 We obtain the optimum ξ ∗∗ by solving the Nash bargaining cooperative game model, i.e.
Max Z =(E(π3PL )coo − E(π3PL )dec )(E(πM )coo − E(πM )dec ), as follows:
ξ ∈R

∗∗ 1 SII SI 1
ξ∗ 3CL τ ∗
ξ = (p − a − bS)f (S)dS + (X − a − bS + GII )f (S)dS − (d − GI )f (S)dS + c + + (37)
4 0 SII SI 2 4T
Proof Computations are similar to those of Proposition 7.
Using the data from Table 5 and considering CL = 10100, we obtain the following results from running the model,
which are quite similar to those from Table 6.
According to Table 7, we observe a remarkable raise in recall effectiveness by implementing the proposed collecting fee
agreement contract. In such a case, the pharma-manufacturer pays much lower penalties to the government, since almost
no defective medication is remained unmanaged in the market. Therefore, the pharma-manufacturer’s costs considerably
decrease, and the patients’ health is protected from unsafe medications, as well. Furthermore, the proposed coordination
scheme improves profits of all PSC members compared to those of the decentralised structure. These results imply that the
collecting fee agreement is of high efficiency and applicability as it can benefit customers, the 3PL and pharma-manufacturer.
Moreover, the proposed coordination mechanism can achieve channel coordination in both models with different collection
strategies. To go deeper in the models, we provide Table 8 to compare the results of previous model and the extended model.
According to Table 8, we observe that (i) e∗ = (CL τ ∗ /T) and e∗∗ = (CL τ ∗∗ /T), (ii) the decentralised collecting fees
in both models are exactly similar and (iii) the centralised collection fees are also similar considering e∗ = (CL τ ∗ /T).
Therefore, in both models (i.e. the previous model and extended model), the proposed mechanism can coordinate the PSC
and remarkably enhance the performance of members and the entire chain. Choosing the collection strategy depends on the
customers’ preference and the proposed scheme achieves channel coordination under both collection strategies.
8. Concluding remarks
Occurring disruption during the manufacturing process mainly causes an unsafe or defective product, which is a serious
problem in the pharmaceutical sector. Due to the sensitivity of pharmaceuticals and their effect on the public health, defective
products should be immediately recalled from the market. Therefore, it is of high significance to implement an effective drug
recall in case of need. Motivated by this real issue, in this paper, we address the issue of pharmaceutical recall management
through channel coordination mechanism considering the product defect severity as a source of uncertainty. The product
defect severity determines the hazard type of medications, which can be classified into three classes (i.e. Class I, Class II and
Class III) based on the hazard type. The models are developed considering a linear relationship between the modification cost
and the product defect severity. The higher is the product defect severity, the more are the modification costs of the affected
items. In the investigated pharmaceutical supply chain (PSC), a pharma-manufacturer faces production disruption and he
is willing to recall the defective products by the help of a third party logistics provider (3PL). The pharma-manufacturer
pays the 3PL a collecting fee for each collected medication and the 3PL collects the medications from the market by
offering incentives to the customers and compensate their probable loss due to shortage of recalled items. The 3PL decides
on the incentive based on the collecting fee he earns from the pharma-manufacturer. Under such a case, the incentive of
the 3PL determines the collection amount, which in turn determines the pharma-manufacturer’s penalty for uncollected
Table 8. Optimum decision variables in both models.

Variable Previous model Extended model
SI SI
ξ∗
SII SII
0 (p − a − bS)f (S)dS + SII (X − a − bS + GII ) 0 (p − a − bS)f (S)dS + SII (X − a − bS + GII )
1 1
2 2
1 1
f (S)dS − SI (d − GI )f (S)dS + c f (S)dS − SI (d − GI )f (S)dS + c
SI SI
ξ ∗∗
SII SII
0 (p − a − bS)f (S)dS + SII (X − a − bS + GII ) 0 (p − a − bS)f (S)dS + SII (X − a − bS + GII )
1 1
4 4
1 ∗ ∗ 1 ∗ ∗
f (S)dS − SI (d − GI )f (S)dS + c + ξ2 + 3e4 f (S)dS − SI (d − GI )f (S)dS + c + ξ2 + 3C4TL τ
SI
τ∗
SII
0 (p − a − bS)f (S)dS + SII (X − a − bS + GII )
T
– 4CL
1
f (S)dS − SI (d − GI )f (S)dS − c
SI
τ ∗∗
SII
T
– 2CL
1
S
e∗
SII
1
4 0 (p − a − bS)f (S)dS + SIII (X − a − bS + GII ) –
1
SI
e∗∗
SII
1
2 –
1
medications. Hence, the pharma-manufacturer’s and the 3PL’s decisions affect one another and these decisions need to be
coordinated. The optimal decisions and profits of the mentioned parties are derived analytically, under the decentralised
and centralised systems, using Stackelberg game structure. Then, a collecting fee agreement is proposed to coordinate the
channel. We analytically explore how the changes in the model parameters would affect the optimal decisions and profits.
Under the proposed coordination scheme, both members agree to determine a collecting fee within a specified range and
shift the customer incentive to its centralised value. We analytically prove that the mentioned interval is always feasible and
participation in the coordination mechanism is beneficial for both members. The numerical experiments justify our analytical
findings and product defect severity is estimated by beta distribution, which is generalisable to any continuous distribution
between [0, 1]. Moreover, the main managerial insights of the paper are carried out to help the industries. The results
indicate that the collecting fee agreement is an effective way to improve PSC performance under disruption uncertainty and
manage the drug recall. In addition, under the coordinated system, efforts of the pharma-manufacturer and the 3PL enhance
the recall effectiveness, remarkably. In such a case, not only the patients are protected from unsafe medications but also the
chain avoids substantial governmental penalties. Furthermore, we extend the models considering another collection strategy,
where the 3PL makes a collection investment instead of offering incentives to customers and then we compare the results
of both models. In this case also, the proposed coordination model is able to achieve the best performance of the chain and
each member, simultaneously.
Like other studies, this paper is not without limitations. Further studies could concentrate simultaneously on the impacts
of supply disruption and demand disruption on pharmaceutical supply chains. Likewise, the researchers could take into
account the disruption occurrence in producing both raw materials and final products. The effect of competition on the PSC
performance is an interesting issue to investigate, as well. Moreover, the forward flow of pharmaceuticals could be studied
along with the reverse flow of defective products.
Notes
1. BoardVitals Company (2017).
2. For detailed discussion see Nagarajan and Sošić (2008).
3. We sincerely thank an anonymous reviewer, who motivated us to include this extended model in the paper and improve the quality
of this paper.
Acknowledgments
We are very grateful to the associate editor and the two anonymous reviewers for their helpful comments and suggestions, which helped
us improve the current paper.
Disclosure statement
No potential conflict of interest was reported by the author(s).
ORCID
Seyyed-Mahdi Hosseini-Motlagh http://orcid.org/0000-0003-2568-187X
Nazanin Nami http://orcid.org/0000-0003-0880-3636
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Appendix
Proof of Proposition 1 To prove the concavity of E(π3PL (e)), we derive
∂ 2 E(π3PL (e)) T
= −2 max .
∂e2 e

Since the second derivative of E(π3PL (e)) with respect to e is negative, E(π3PL (e)) is concave and the optimal incentive that
maximises the 3PL’s profit is calculated from
∂E(π3PL (e)) T
= max (ξ − 2e − c) = 0,
∂e e
as Equation (4). The proof is complete.
Proof of Proposition 2 From Equation (7), we derive

∂ 2 E(πM (ξ )) T
= − max < 0,
∂ξ 2 e
which shows E(πM (ξ )) is concave and the optimum collecting fee is obtained by
SI 1
∂E(πM (ξ )) T SII
= max (p − a − bS)f (S)dS + (X − a − bS + GII )f (S)dS − (d − GI )f (S)dS − 2ξ + c = 0.
∂ξ 2e 0 SII SI
Therefore, the optimum collecting fee is calculated using Equation (8) and the proof is complete.
Proof of Proposition 3 To prove the concavity of E(πPSC (e)), we derive

∂ 2 E(πPSC (e)) 2T
= − max < 0.
∂e2 e

Since the second derivative of E(πPSC (e)) with respect to e is negative, E(πPSC (e)) is concave. The optimal incentive that maximises
the PSC’s profit is calculated from
SI 1
∂E(πPSC (e)) T SII
= max (p − a − bS)f (S)dS + (X − a − bS + GII )f (S)dS − (d − GI )f (S)dS − 2e − c = 0,
∂e e 0 SII SI
Proof of Proposition 4 Comparing Equations (9) and (13), we observe that the analytical closed form expression of the optimum cus-
tomer incentive under the decentralised system is half that of the centralised one (e∗∗ = 2e∗ ). Moreover, analysing E(πPSC (e))cen ≥
E(πPSC (e))dec , we derive the condition
SI 1
SII
∗∗
(e − e) (p − a − bS)f (S)dS + (X − a − bS + GII )f (S)dS − (d − GI )f (S)dS − c − e∗∗ 2 + e2 ≥ 0,
0 SII SI
which is equal to (1/4) > (3/16) considering Proposition 4. Since the condition always holds, the PSC profit under the centralised
structure is higher than that of the decentralised one. The proof is complete.
Proof of Proposition 5 The 3PL’s profit function under the coordinated structure should be higher than that under the decentralised one
(E(π3PL )coo ≥ E(π3PL )dec ). Therefore, we have
e∗∗ e∗
(ξ ∗∗ − e∗∗ − c)max
T ≥ (ξ − e∗ − c) max T,
e e
which is equal to ξ ∗∗ ≥ (1/2)(ξ − c − e∗ ) + e∗∗ + c. The pharma-manufacturer’s profit function under the coordinated scheme should
be more than that under the decentralised one (E(πM )coo ≥ E(πM )dec ). Hence, using Equations (10) and (15), we derive
SI 1
1 SII
∗∗ ∗
ξ ≤ (p − a − bS)f (S)dS + (X − a − bS + GII )f (S)dS − (d − GI )f (S)dS + ξ .
2 0 SII SI
The proof is complete.
Proof of Proposition 6 Putting ξ ∗∗ min ≤ ξ ∗∗ max , we have

SII SI 1
2e∗∗ − e∗ ≤ (p − a − bS)f (S)dS + (X − a − bS + GII )f (S)dS − (d − GI )f (S)dS − c.
0 SII SI
Simplifying this equation leads to (3/4) ≤ 1, which is always true.
Proof of Proposition 7 Since

∂ 2Z T 2 e∗∗ 2
= −2 <0
∂ξ ∗∗ 2 emax2
is always negative, Z is concave with respect to ξ and the optimum coordinator parameter (ξ ∗∗ ) is derived by setting (∂Z/∂ξ ∗∗ ) = 0, as
∗∗
Equation (21). The proof is complete.

∂ 2 E(π3PL (τ ))
= −2CL < 0
∂τ 2
is always negative, the 3PL’s expected profit function is concave with respect to τ and the optimum amount of τ is derived by solving
∂E(π3PL (τ ))
= (ξ − c)T − 2CL τ = 0,
∂τ
Proof of Proposition 9 The second order partial derivative of E(πM (ξ )) with respect to ξ ,
∂ 2 E(πM (ξ )) T2
=− ,
∂ξ 2 CL
is always negative. Therefore, the pharma-manufacturer’s expected profit function is concave with respect to ξ and the profit maximising
collecting fee under the decentralised model is obtained by solving
SI 1
∂E(πM (ξ )) T2 SII
= (p − a − bS)f (S)dS + (X − a − bS + GII )f (S)dS − (d − GI )f (S)dS − 2ξ + c = 0,
∂ξ 2CL 0 SII SI


∂ 2 E(πPSC (τ ))
= −2CL < 0
∂τ 2
is always negative, the PSC’s expected profit function is concave with respect to τ and the optimum amount of τ under the centralised
system is derived by solving
SI 1
∂E(πPSC (τ )) SII
=T (p − a − bS)f (S)dS + (X − a − bS + GII )f (S)dS − (d − GI )f (S)dS − c − 2CL τ = 0,
∂τ 0 SII SI
Proof of Proposition 11 Comparing Equations (29) and (31), we observe that the analytical closed form expression of the optimum
collection rate under the decentralised system is half that of the centralised one (τ ∗∗ = 2τ ∗ ). Moreover, setting E(πPSC (τ ))cen >
E(πPSC (τ ))dec , we have
SII SI 1
3CL τ ∗
(p − a − bS)f (S)dS + (X − a − bS + GII )f (S)dS − (d − GI )f (S)dS − c > ,
0 SII SI T
which is equal to 1 > (3/4). The proof is complete.
Proof of Proposition 12 The 3PL’s profit function under the coordinated structure should be higher than that under the decentralised
one (E(π3PL )coo ≥ E(π3PL )dec ). Therefore, we have (ξ ∗∗ − c)T − CL τ ∗∗ 2 ≥ (ξ ∗ − c)T − CL τ ∗ 2 , which is equal to
(ξ ∗ − c) 3CL τ ∗
ξ ∗∗ ≥ + + c.
2 2T
Moreover, the pharma-manufacturer’s profit function under the coordinated scheme should be more than that under the decentralised one
(E(πM )coo ≥ E(πM )dec ). Hence, using Equations (33) and (27), we derive
SI 1
1 SII
∗∗ ∗ ∗ ∗
ξ ≤ (p − a − bS − ξ )f (S)dS + (X − a − bS − ξ + GII )f (S)dS − (d + ξ − GI )f (S)dS .
2 0 SII SI
The proof is complete.
Proof of Proposition 13 Putting ξ ∗∗ min ≤ ξ ∗∗ max , we have

SI
SII 1 3CL τ ∗
(p − a − bS)f (S)dS + (X − a − bS + GII )f (S)dS − (d − GI )f (S)dS > .
0 SII SI T
Simplifying this equation leads to (3/4) ≤ 1, which is always true.

Drug Recall Management and Channel Coordination Under Stochastic Product Defect Severity: A Game-Theoretic Analytical Study

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International Journal of Production Research

ISSN: (Print) (Online) Journal homepage: https://www.tandfonline.com/loi/tprs20

Drug recall management and channel

Seyyed-Mahdi Hosseini-Motlagh, Mohammadreza Nematollahi & Nazanin

To cite this article: Seyyed-Mahdi Hosseini-Motlagh, Mohammadreza Nematollahi & Nazanin

To link to this article: https://doi.org/10.1080/00207543.2020.1723813

Published online: 12 Feb 2020.

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© 2020 Informa UK Limited, trading as Taylor & Francis Group

2.1. Channel coordination scheme under uncertainty

2.2. Production disruption and coordination

2.3. Pharmaceutical supply chain coordination

2.4. Product recall management

Figure 1. Comparison between existing researches and the current study.

2.5. Research gaps and contributions

Table 1. Papers reviewed in this study.

e Incentive offered to customers by the 3PL

Notations of the extended model

4.2. Decentralised decision-making structure

4.2.1. 3PL profit function

E(π3PL (e)) = (ξ − e − c)WT (2)

4.2.2. Pharma-manufacturer profit function

Proof See the Appendix.

Meanwhile, the 3PL’s profit function is as follows:

4.3. Centralised decision-making structure

E(πPSC (e)) = E(πM (ξ )) + E(π3PL (e))

Proof See the Appendix.

Proof See the Appendix.

4.4. Supply chain coordination

Meanwhile, the 3PL’s profit function is formulated as:

Proof See the Appendix.

Proof See the Appendix.

Equation (19) can be rewritten as:

Proof See the Appendix.

5. Results and discussions

∂N 1 SII SI  1 SII SI  1 SII SI 

Table 3. Changes of the decision variables when

The following results are concluded from Table 4:

Table 4. Sensitivity analysis on optimal profits by changing model parameters.

∂N −TA SII SI  TA SII SI  TA SII SI 

6. Applicability evaluation of the model

Table 5. The data of the studied case.

Figure 2. The distribution of product defect severity f (S) ∼ β(2, 5).

Table 6. The results of running the model.

Figure 3. Changes of beta distribution by increasing shape parameter β, when α = 2.

6.1. Managerial insights

Figure 4. Changes of beta distribution by increasing shape parameter α, when β = 5.

Figure 5. The pharma-manufacturer profit changing by increasing (SII , SI ).

7. Model extension and analysis3

7.1. Decentralised decision-making structure

The pharma-manufacturer’s expected profit under the decentralised model is as follows:

Proof See the Appendix.

7.2. Centralised decision-making structure

Proof See the Appendix.

Proof See the Appendix.

7.3. Supply chain coordination

E(π3PL (τ ))coo = (ξ ∗∗ − c)τ ∗∗ T − CL τ ∗∗ 2 (34)

∂N 1 SII SI 1 SII SI 1 SII SI

∂N −TA SII SI TA SII SI TA SII SI