Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Download
Standard view
Full view
of .
Save to My Library
Look up keyword
Like this
2Activity
0 of .
Results for:
No results containing your search query
P. 1
Supply Chain Design Gerard Cachon

Supply Chain Design Gerard Cachon

Ratings: (0)|Views: 95 |Likes:

More info:

Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

11/18/2012

pdf

text

original

 
Supply Chain Design and the Cost of GreenhouseGas Emissions
Gérard P. CachonThe Wharton SchoolUniversity of PennsylvaniaPhiladelphia PA, 19104cachon@wharton.upenn.eduopim.wharton.upenn.edu/~cachonAugust 25, 2011
Abstract
The design of a supply chain not only in‡uences a retailer’s cost, it in‡u-ences its customers’ costs - with stores few and far between, consumers musttravel a long distance to shop, whereas their shopping trips are short witha dense network of stores. This supply chain design problem is the combi-nation of two well studied problems: the Traveling Salesmen problem andthe
k
-median problem. A solution is provided and the following question isasked: what is the consequence of failing to charge the full externality cost of greenhouse gas emissions? A bound is derived on the “carbon penalty”, thegap between realized costs and minimal costs. A key measure in this boundis the carbon e¢ciency of the vehicles used in the supply chain, where car-bon e¢ciency is the ratio of the carbon emitted per kilometer to the variableoperating cost per kilometer. Given current estimates of carbon e¢ciency,it is found that the carbon penalty is small
(0
:
1%)
. Thus, the supply chaindesign problem is robust to misspeci…cations in its inputted parameters -even if the potentially costly cost of carbon emissions is ignored, the chosensupply chain design may nevertheless yield a total cost (including emissioncosts) that is nearly as small as possible.
Keywords
: Sustainability, k-median, traveling salesman problem
The author thanks seminar participants for their comments at The University of Mary-land, The Kellogg Operations Management Workshop, Stanford University, Harvard Uni-versity, New York University, NSF Sponsored Symposium on Low Carbon Supply Chains,and the University of Chicago. Thanks is also extended to the following for their help-ful discussions: Dan Adelman, Saif Benjaafar, Mark Daskin, Erica Plambeck, LawrenceRobinson, Sergei Savin, Michael To¤el, Beril Toktay, and Senthil Veeraraghavan. Financialsupport was provided by the Fishman-Davidson Center, University of Pennsylvania.
 
1 Introduction
The combustion of fossil fuels is believed to contribute to climate change by adding carbon dioxideand other greenhouse gases to the atmosphere (IPCC 2007). Transportation is a major sourceof emissions - approximately one third of U.S. emissions (EPA 2011). Factors that in‡uencethe emissions output of a transportation network include the fuel e¢ciency of the vehicles used,the size of the loads they carry and the distances they travel. The latter is in‡uenced by thedesign of the supply chain. We focus on the downstream supply chain - the portion that includesinbound replenishments to retail stores and the “…nal mile” segment between the retail stores andconsumers’ homes. As the number of stores increases, consumers …nd themselves closer to somestore, so they need not travel as far to purchase what they need. However, with more stores, theretailer must travel farther to replenish its stores. It is not
a priori 
clear whether it is best to havea sparse network (which reduces the distance the retailer travels) or dense retail network (whichreduces the distance consumers’ travel).We consider the supply chain design that minimizes several costs: mileage related variablevehicle operating costs, fuel consumption costs and emission costs. Emission costs are the ex-ternalities associated with adding greenhouse gases to the atmosphere, thereby leading to climatechange, ocean acidi…cation, sea level rise and other environmental changes that have potentialeconomic consequences (EPA 2009a). While there is ample scienti…c evidence that greenhouse gasemissions are linked to these externalities, there is no consensus as to the true cost of greenhousegas emissions (e.g., Cline, 1992; Shelling 1992). Nevertheless, they exist and may be substantial.A model of the downstream supply chain is developed that accounts both for the distanceconsumers must travel to a retail store as well as the distance the retailer must travel to replenishthose stores. Consumers and the retailer use di¤erent types of vehicles that have di¤erent operatingcosts, fuel consumption, and load size. We ask the following question: how poorly does a supplychain design perform if it is not optimized given the true cost of emissions? In other words,compare a supply chain designed to minimize non-emission costs and ask how much worse doesit perform relative to the supply chain that minimizes all costs, including emission costs. Next,under what conditions is this emissions penalty substantial? And more precisely, do we expect theemission penalty to be substantial given current vehicle technology? If failing to account for thecost of emissions leads to a poor supply chain design (in the sense that the design’s true costs aresubstantially greater than necessary) then this provides a justi…cation for some mechanism, suchas a carbon tax, to provide incentives for proper supply chain design choices.
11
We do not consider how the mechanism should be implemented, as this is a non-trivial issue. For1
 
2 The Supply Chain Design Problem
The supply chain design problem in this paper focuses on a retailer’s downstream supply chain.The retailer’s task is to choose
n
store locations in a single (polygon) region of area
a
. Consumerslive uniformly throughout the region. They incur a cost
t
c
per unit of distance travelled per unitof product purchased, and they travel a straight line (i.e., the Euclidian norm,
L
2
) to shop at thenearest store from their home. Let
d
c
be the average round-trip distance a consumer travels to astore. Thus, the average travel cost per consumer per unit purchased is
t
c
d
c
:
The retailer has a single warehouse where it receives goods from an outside supplier. Thewarehouse is collocated with one of the
n
stores. The retailer has a single truck that is used totransport goods from the warehouse to the stores - all deliveries must start at the warehouse andend at the warehouse. Furthermore, the truck travels in straight lines between stores, delivers toall
n
stores on each route, and completes its route instantly (i.e., fast enough such that transit timeis not a major issue). The retailer incurs a cost of 
t
r
per unit of distance the truck travels per unitof product delivered. Let
d
r
be the length of the truck’s route, so the retailer’s transportationcost per unit sold is
t
r
d
r
:
The cost of inbound deliveries to the retailer is not considered.There are several components included in the transportation costs of vehicle type
t; t
2f
c;r
g
,where “
c
” denotes the consumer’s vehicle and “
r
” denotes the retailer’s vehicle:
t
t
=
v
t
+
t
(
 p
t
+
c
t
e
)
t
where
v
t
is the non-fuel variable cost to transport the vehicle per unit of distance (e.g.,
$
km
1
);
t
is the amount of fuel used to transport the vehicle per unit of distance (e.g.,
l km
1
)
;
p
t
is thecost of fuel per unit of fuel (e.g.,
$
l
1
)
;
c
t
is the amount of emission released by the consumptionof one unit of fuel (e.g.,
kg
);
e
is the price of emissions per unit released (e.g.,
$
kg
1
);
and
t
is the average load carried by the vehicle (e.g.,
kg
)
. The variable cost,
v
t
;
includes depreciationon the vehicle, maintenance (such as tire replacement) and other costs that can be linked to thedistance the vehicle is driven. Fuel usage,
t
;
is measured at the average load of the vehicle, whichyields and accurate measure of true fuel usage when fuel usage is linear in the vehicle’s load (whichis approximately true), the vehicle always carries the same amount per trip, the vehicle makesdeliveries at a constant rate (e.g., the stores on the route are equally distant from each other),and the vehicle travels at the same speed during the trip. The price of emissions,
e;
is assumedexample, even if the externality associated with emissions is known, the appropriate tax maynot merely equal the externality when other taxes are used to fund government expenditures(see Baumol, 1972; Pearce 1991; and Bovenberg and de Mooij 1994).2

You're Reading a Free Preview

Download
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->