Production and Low-carbon Investment Analysis in Make-to-stock Supply Chain

Abstract

Carbon emission has grown into a pressing issue around the world, arousing customer green awareness about emission in production of merchandise. As a major source of emission, the manufacturing supply chain has obligations and needs to reduce emission substantially. Indeed, reducing emission per product item enhances the green image of the product brand which is vital to the product sustainability in the market. Nevertheless, such endeavours require increasing low-carbon investment by the manufacturers and cooperation with the retailers, in addition to their traditional order quantity decisions. In this paper, we analyse the decision behaviour of manufacturers and retailers under the impacts of customer green awareness, with an aim to provide analytical and management insights into a profitable and sustainable supply chain. We propose three EOQ-based supply chain models, namely the centralised, decentralised and coordinated models, in which a manufacturer and a retailer make decisions for optimality of product sustainability and order quantity correspondingly. The centralised model is analysed as an ideal benchmark. While in the decentralised model, the decision route is assumed to be a classical Stackelberg Game, with the retailer being the leader and the manufacturer as the follower. Analytical solutions and properties are proposed for them respectively. After revealing the performance disparities and value loss in the decentralised supply chain, a cost-sharing contract of low-carbon investment is designed to help coordinate the supply chain. Numerical experiments validate that the coordinated supply chain can bring about win-win benefits with a dramatical increase in product sustainability. Moreover, increased market demand, wholesale price, and cost-sharing percentage all jack up the product sustainability. Several management insights are proposed to guide supply chain’s decisions. It is found that a decentralised supply chain with coordination can enhance business sustainability and profitability close to an ideal, centralised one.