Channel Coordination In Supply Chains Under Carbon Emission Considerations

An increasing number of firms are integrating carbon emission concerns into their operational decision-making. Some of these actions are motivated by individual initiatives towards corporate environmentalism. While some other are driven by environmental regulation pressures. Policies such as carbon caps under the Kyoto Protocol and carbon tax have been introduced in many countries as mechanisms to induce firms to adopt the low carbon society. In this setting, we present a model for analyzing the impact of carbon emission considerations on the coordination between two/or more different business entities. In the absence of carbon emission considerations, channel coordination has been widely studied in the supply chain management literature. It has been shown that both entities are often better off under the coordinated channel. Several mechanisms and contracts have been then studied to settle down such coordination under different scenarios. The purpose of this research is to investigate these traditional (cost driven) results under carbon emissions considerations. In other terms our objective is to illustrate how the incentives for the coordination are affected by the presence of carbon emission firms' concerns. In our initial analysis we consider traditional buyer-vendor coordination by associating carbon emission parameters with ordering and holding decision variables. We examine how the values of these parameters as well as the considered regulatory emission control policies affect cost and emissions. The corresponding carbon emissions are incorporated into the model through the consideration of various regulatory policies that include : (1) strict emission caps: both of the supplier and the buyer are subject to mandatory caps on the amount of carbon they emit, (2) carbon tax policy: the supplier and the buyer are taxed on the amount of emissions they emit and (3) cap and trade system: the supplier and the buyer are subject to carbon caps but are rewarded /penalized for emitting less/more than their caps. Under carbon emission considerations, the centralized solution remains profit-optimal but not necessarily emission-optimal. This means that the joint profit is often increased when the channel is coordinated. However, the amount of total carbon emissions may be higher than what could be emitted by the retailer and the supplier when they work individually. We identify conditions on cost and emission parameters under which the joint policy is both profit and emission optimal. We also show that the outcome of the coordination is very sensitive to the type of the regulatory policy, for instance some policies are providing greater incentives than others for coordination.