Inventory and Supply Chain Management with Carbon Emissions

Abstract

Although the literature on carbon emissions, from fields such as environmental economics, public policy, and industrial ecology among others, is quite extensive, the literature in supply chain management is relatively limited. Moreover, in addressing concerns about carbon emissions, much of the focus has been on technological fixes (e.g., more carbon-efficient technologies and alternative sources of energy). Much less attention has been paid to the potential of reducing carbon emissions via adjustments in supply chain design and operation. This research, utilizing optimization, game theory, deterministic and stochastic modeling, and mechanism design, aims to bridge this gap. The first part of the study, using the economic order quantity (EOQ) model framework, suggests that it is possible to reduce emissions by modifying order quantities, and provides conditions under which the relative reduction in emissions is greater than the relative increase in cost. The second part examines the extent to which penalizing the emission of harmful pollutants can successfully reduce overall emissions in decentralized supply chains, and shows that requiring each firm to pay for the emissions for which it is directly responsible can paradoxically lead to higher overall supply chain emissions and for this emission to increase in the price of emissions. The third part includes preliminary results including the impact of price variability as well as consumers' preferences for low emission products on the ways firms manage their inventory and the corresponding emissions.