Stochastic Lot Sizing for Shareholder Wealth Maximisation under Carbon Footprint Management

Abstract

There is a growing consensus that human beings must cut greenhouse gas emissions to mitigate global warming and the resultant impacts on the environment. However, production optimisation has rarely taken this issue into consideration, often leading to environmentally unsustainable operation decisions. This paper presents a lot sizing batch optimisation model for a stochastic make-to-order production environment under the carbon emission trading mechanism—currently the most effective market-based carbon emission controlling system, with an aim to maximise the long-term sustainable interests of corporate owners, well-known as the shareholder wealth. To more closely reflect the real-world manufacturing environment, the proposed model adopts general distributions, instead of unrealistic theoretical assumptions, for random variables. We apply the model to investigate the impacts of the carbon emission trading mechanism on shareholder wealth, and test its hedging capability against a series of risk factors. The analytical results provide insights into production optimisation with carbon footprint management.