Vendor Managed Inventory Coordination Under Contractual Storage Agreement and Carbon Regulation Policies

Abstract

In essence, the extent of collaboration among supply chain (SC) members, via practical mechanisms such as Vendor Managed Inventory (VMI), shall look beyond economic gains to strive for curbing the environmental impact of their logistics activities. This aligns well with the recently imposed sustainability related targets set by many legislative authorities. In this paper, we address a realistic SC problem wherein a single vendor serves multiple retailers under a VMI partnership. In order to deter the vendor from shipping larger batches downstream, the contractual agreement stipulates an upper limit on the inventory level held at each retailer's location where the vendor is penalized upon exceeding this level. In this context, economic and environmental as well as combined models are developed, with the latter employing carbon cap and carbon tax policies. Upon exploiting the structure of the developed models, computationally-efficient exact solution algorithms are devised. The conducted numerical analysis suggest that minor operational adjustments could lead to substantial carbon footprint reduction at the expense of a slight increase in the operational cost. Based on a novel use of the Lagrange multiplier, this work provides decision makers with a useful tool that aids with the selection of the most-suited carbon policy to embrace.INDEX TERMS Sustainable supply chain, vendor managed inventory, carbon policies, exact solution procedures, single vendor, multiple retailers

A Single-Vendor Multi-Retailer VMI Partnership Under Individual Carbon-Cap Constraints

“…They established the production quantity and maximum shortage level for each buyer that minimize the total cost while adopting the carbon cap policy. Recently, Hariga et al [13] developed economic, environmental and integrated economic and environmental models for the single product SV-MB system, while imposing an upper limit on the inventory levels at the buyers' premises. The authors adopted carbon tax and carbon cap policies, and further utilized the idea of the Lagrange multiplier to help with the selection of the most-suited policy.…”

“…In their recent work, Hariga et al [13] developed economic, environmental, and integrated economic and environmental models under the above assumptions. The latter model was formulated under the carbon-cap regulation policy, whereby the overall carbon footprint generated by the ordering and storage activities of the vendor and the retailers does not surpass the allowable overall carbon cap, C. Their integrated mathematical model under overall carbon cap (OCC) restriction is as follows:…”

“…The following 5-retailer example will be used as an illustrative example to the mathematical models presented in this paper. In addition, the solution to VMI_OCC problem of Hariga et al [13] for this example will serve as a benchmark to assess the performance of the mathematical models developed hereafter. The problem parameters are shown in Table 1.…”

“…To guard against the vendor's opportunistic practice of pushing more inventory to buyers and to avoid any potential conflicts between SC members, the VMI contract typically stipulates a restriction on the maximum inventory level at the buyers' premises. The vendor is then penalized on a perunit basis upon exceeding this limit (see Fry et al [10]; Darwish and Odah [11]; Hariga et al [7]; Verma and Chetterjee [12], Hariga et al [13]). It is important to point out that while focusing exclusively on the potential operational and financial gains associated with VMI partnership may have made sense in a pure commercially-driven business framework, such an approach could have unintended negative consequences for the environment.…”

“…Such synchronized policy is simple to implement and continues to be adopted in many practical situations since it is appealing from both economic and environmental standpoints, as detailed in Section III. Recently, Hariga et al [13] tackled this problem in the literature by considering a carbon cap constraint on the total emissions, meaning that the total carbon emitted by all SC members should not exceed a stipulated predetermined level. However, in reality, the vendor and the retailers are independent entities that may operate under different environmental legislations with distinct carbon caps.…”