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PII: S0307-904X(17)30133-6
DOI: 10.1016/j.apm.2017.02.037
Reference: APM 11625
Please cite this article as: Arindam Ghosh , J.K. Jha , S.P. Sarmah , Optimal Lot-Sizing under Strict
Carbon Cap Policy Considering Stochastic Demand, Applied Mathematical Modelling (2017), doi:
10.1016/j.apm.2017.02.037
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Highlights
Develop model for a supply chain considering strict carbon cap policy.
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Offer managerial insights with numerical examples and sensitivity analysis.
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Optimal Lot-Sizing under Strict Carbon Cap Policy Considering Stochastic Demand
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Department of Industrial and Systems Engineering,
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Indian Institute of Technology Kharagpur,
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Kharagpur - 721 302, India
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*Corresponding author. Email: arindamiitan@gmail.com
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Phone: +91-9734578470
Abstract
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Due to stringent laws and increasing awareness of customers, organizations are becoming environmental
conscious and looking beyond conventional cost minimization/profit maximization approach and striving
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to curb carbon emission. In this article, we have considered strict carbon cap policy to determine the
optimal order quantity, reorder point and number of shipments in a two-echelon supply chain under
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stochastic demand considering partial backorders. All the major sources of emission such as production,
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inventory, and transportation have been considered. The objective is to minimize the total expected
supply chain cost while satisfying the carbon emission constraint. A numerical example is given to
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illustrate the solution procedure. Further, an extensive sensitivity analysis is carried out to get insight
about how with operational adjustment cost and emission could be controlled.
Keywords: Supply chain; carbon emission; strict carbon cap; stochastic demand.
1. Introduction
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Environment pollution is a burning issue in recent era. Continuous emissions of greenhouse gases
(GHGs) into the atmosphere have raised the threat to environment and existence of human civilization.
Scientists have revealed that over the past 100 years, the average temperature of the earth has raised by
0.75°C. It is anticipated that between 2030 and 2050, approximately 250000 deaths will take place
annually due to weather change. Melting glaciers, rising sea levels, extreme weather conditions are the
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results of global warming [1]. Therefore, governments, business houses, NGOs, and even customers pay a
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great deal of attention to reduce GHGs associated with industrialization. The Kyoto protocol, an
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international agreement linked to the United Nations framework convention on climate change, targeted
to reduce emission by 8% by 2012 from 1990 levels. Scientists have suggested more aggressive reduction
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target of 25% of emission from 1990 level by 2020 [2]. Among all GHGs, carbon dioxide (CO2) is
considered as most important because it contributes 60% of enhanced the greenhouse effect [3]. As CO2
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is the predominant component of GHG, and so GHG emission is calculated in units of tones of CO2
To reduce carbon emission, governments and different regulatory bodies have started
implementing different carbon policies and initiated different carbon trading schemes. The existing
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carbon policies can primarily be grouped under three categories: carbon cost/tax, carbon cap-and-trade,
and strict carbon cap. In this paper, we consider a strict carbon cap policy. Under this policy, regulatory
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bodies allow organizations to emit CO2 to a certain threshold limit which is known as cap, and the penalty
for exceeding the cap is infinitely large [5]. Therefore, organizations are forced to manage their emission
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within the given limit. According to environmentalists, it is most effective policy to curb carbon emission.
Different countries, which are major emitters of CO2, are seriously considering adopting this policy across
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different industries. Barack Obama, the president of the United States of America set a strict limit for car
industry [6]. Similar type of policy is also likely to be extended for the power plants [7]. Some serious
discussion is going on that China may also implement this policy [8]. Apart from environmentalists and
governments, this policy has also become popular among the common people. A recent poll conducted by
Yale University found that 64% people support imposing strict carbon cap on existing power plant [9].
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Due to stringent laws, customer awareness, and stiff competitions, companies are also striving to
bring sustainable practices into their operational planning. Earlier, all the environmental initiatives were
organization-centric. But in the current scenario, companies cannot compete solely as individual entities
as today's businesses are supply chain oriented. All the big business houses are part of one or more supply
chains, and 50% of the industrial added values are derived from supply chain [10]. In recent years, the
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number of standalone business houses is getting eroded [11]. So incorporation of environmental aspects
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into supply chain management (SCM) has become essential for sustainable business. Organizations like
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Walmart, Tesco, and Unilever, which run supply chain oriented businesses, are taking serious initiatives
to implement sustainable practices across their supply chains [12-14]. Integration of environment oriented
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thinking into SCM including product design, material sourcing, manufacturing processes, delivery of the
product to the customers, and end-of-life management of the product after its use can be defined as green
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supply chain management (GSCM) [15]. GSCM can be considered as combination of different activities
such as green purchasing, green manufacturing, green distribution/marketing, and reverse logistics [16].
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The perceptive of green supply chain has changed from a burden to a competitive unique selling
proposition [17]. Saadany et al. [11] confirmed with their model that incorporation of environmental
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related initiatives can even increase the profitability of the firms and also conceived that environment
quality of products do influence demand. Battini et al. [18] proposed a sustainable EOQ model
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considering the environmental impact of transportation and inventory. Recently, Jawed et al. [19]
proposed an exergetic version of the EPQ model to compute the cost of inventory in terms of energy units
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instead of monetary units using the thermodynamic concepts to derive a new exergetic sustainability
supply chain. Therefore, the issue of carbon emission should not be ignored while taking operational
decisions. In recent years, many authors considered different carbon policies for optimizing production-
inventory models in supply chains. Bonney and Jaber, Hua et al., Bouchery et al., Toptal et al., and Chen
et al. [20-23, 5] derived optimal ordering/production decisions in a single-stage inventory model under
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different carbon policies. All of them considered constant demand and redesigned classical EOQ models
under different settings. Bouchery et al., Wahab et al., and Jaber et al. [22, 24-25] developed models
considering deterministic demand to minimize the total cost of the supply chain considering various
carbon policies. Wahab et al. [24] incorporated screening and holding cost of defective items in their
model. Bouchery et al. [22] redesigned classical EOQ type model as a multi-objective problem
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considering sustainability criteria. Jaber et al. [25] considered different carbon policies and possible
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combination of these policies to develop mathematical models. Dobos, Absi et al., Li and Gu, Li, and
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Benjaafar et al. [26-30] all considered single stage inventory models in a finite planning horizon under
different carbon policies. Benjaafar et al. [30] considered constant demand, while others considered time
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dependent deterministic demand. Dobos [26] reckoned production as the source of carbon emission and
expressed emission rate as a function of production rate. Absi et al. [27] formulated lot sizing problems
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considering periodic, cumulative, global and rolling carbon emission constraints separately. Li and Gu
[28] incorporated carbon banking and borrowing option under carbon cap-and-trade policy. Li [29]
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extended the basic Arrow-Karlin model for deteriorating items with tradable emission permit. Benjaafar
et al. [30] developed four EOQ like models under different carbon policies and also extended their work
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Rosič and Jammernegg [31] extended the dual sourcing model based on the basic newsvendor
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model incorporating the environmental impact of transportation. Zhang and Xu [32] developed the multi-
item newsvendor production planning problem with carbon cap and trade mechanism assuming a
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common capacity constraint and carbon emission quota to produce multiple items. Swami and Shah [33]
and Dong et al. [34] developed single period models in two-echelon supply chain considering stochastic
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demand. Swami and Shah [33] focused on coordination between two players in a green supply chain,
where both the manufacturer and retailer put efforts for the greening of their operations. Dong et al. [34]
presented profit maximization models for both centralized and decentralized supply chain with carbon
considering both carbon cap and carbon tax policies with lead time constraint in a supply chain. Koca et
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al. [36] developed a stochastic lot sizing problem with controllable processing time and service level
constraint in a finite planning horizon and discussed the usefulness of convex compression cost function
with respect to carbon emission. Zanoni et al. [37, 38] developed deterministic models with different
emission policies. While Zanoni et al. [37] considered both emission cost and penalty, but Zanoni et al.
[38] considered only penalty due to emission. Bazan et al. [39] conceived the idea of multi-level emission
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taxes and considered emissions from production and transportation while modifying two optimization
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models for a two-echelon vendor-buyer supply chain with deterministic demand and showed that
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environmental orientation can also be financially beneficial. Gurtu et al. [40] considered a deterministic
model for analyzing the impact of variation in fuel prices and infliction of carbon tax on batch sizes and
In Table 1, we have summarized the research articles dealing with production-inventory models
in infinite planning horizon considering carbon policies to highlight recent advances in this area. It
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confirms that papers with stochastic demand are sparse, and in spite of our sincere efforts we could not
find any paper which has considered both stochastic demand and carbon cap policy. In the seminal work
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of Benjaafar et al. [30], it is nicely pointed out that strict emission cap can be considered on a supply
chain if it were possible for firms to share their carbon emission caps. Further, they stated that such
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sharing might be possible either the firms are different divisions of a single large firm, carbon trading
between members of the same supply chain is allowed, or the cap is voluntary and the objective for the
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supply chain is to eventually certify that the end-product has a carbon foot print that does not exceed a
certain threshold.
Taking the cue from the work of Benjaafar et al. [30], we have considered that the buyer and
vendor are two separate divisions of a single organization. In this research, we investigate a strict carbon
cap policy in a two-echelon vendor-buyer supply chain under stochastic demand with partial backorder.
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The parent organization takes centralized decisions to optimize the total expected cost of the supply chain
under the strict carbon cap imposed on the parent organization. The stochastic demand during lead time
follows normal distribution. It is frequently conceived that the demand for the fast moving item
constitutes a large number of smaller demands from individual customers, so from the central limit
theorem, the resulting demand follows normal distribution [41]. When shortage takes place at the buyer,
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some of the loyal customers may wait till the orders get fulfilled in the next replenishment cycle while the
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other customers may go somewhere else to satisfy their demand. In reality, it will be more generic to
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assume a combination of these two situations, where some of the demands are backordered and the rest
are lost during the stock out period [42]. Emissions from production, inventory, and transportation have
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been taken into account to develop the model. We assume that the vehicle used for the transportation is
owned by the parent organization. Therefore, all the emissions we have considered as either Scope 1
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emissions or Scope 2 emissions. Scope 1 emissions are the emissions that arise directly from the sources
that are owned by the organization and Scope 2 emissions come from consumption of purchased
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electricity (electricity consumption for warehousing the inventory). In reality, organizations can measure
and mitigate only Scope 1 and Scope 2 emissions. The structures for modeling of emissions from
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inventory and production are assumed similar to Chen et al. [5] and Benjaafar et al. [30]. Intuitively, it
seems that there is a convex relationship between transportation emissions and vehicle velocity. However,
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if the item is transported using a truck, for which the velocity varies within a normal operating range of
50-100 km/hour, the convex relationship may not be reflected. In this study, the emission from
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transportation is modeled based on the work of Bonney and Jaber [20] and Hua et al. [21]. Bonney and
Jaber [20] considered that the emission cost from transportation is directly proportional to transportation
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time, which is expressed as the ratio of distance and velocity. On the other hand, Hua et al. [21]
considered emissions from loaded and empty vehicles differently. We adopted these two distinct features
The rest of the paper is organized as follows. Section 2 presents notation and assumptions.
Section 3 deals with the model formulation and solution technique. Section 4 presents a numerical
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example and sensitivity analysis. Finally, conclusions and some potential future directions are outlined in
Section 5.
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Notation
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D average demand rate on the buyer
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S the vendor’s setup cost per production setup
L
the buyer’s ordering cost per order
η(r) expected demand shortage at the end of each cycle of the buyer
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x the lead time demand which follows normal distribution with finite mean DL and standard
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deviation L , where L denotes the standard deviation of demand during lead time, L L
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hb the buyer’s holding cost per unit item per unit time
hv the vendor’s holding cost per unit item per unit time
tQ transportation cost per unit item per unit time when the vehicle is loaded
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b carbon emission per unit item per unit time due to inventory at the buyer
v carbon emission per unit item per unit time due to inventory at the vendor
0 carbon emission per unit time due to transportation when the vehicle is empty
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Q
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carbon emission per unit item per unit time due to transportation when the vehicle is loaded
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Decision Variables
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number of shipments from the vendor to the buyer per production cycle (a positive integer)
Assumptions
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(i) There is a single vendor and single buyer, and they deal with a fast moving item.
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(ii) The buyer orders a lot of size Q and the vendor produces mQ units with a finite production rate P
(P>D) in one production setup but ships in quantity Q to the buyer over m times as shown in Fig. 1.
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The buyer reviews inventory continuously, and an order is placed whenever the inventory level drops
(iii) Any demand not met from stock is partially backordered during the stock out period.
(v) Transportation emission is assumed inversely proportional to truck velocity and the truck will not
speed.
3. Model formulation
In this section, a mathematical model is formulated to find the optimal order quantity and reorder point of
the buyer, and the number of shipments between the vendor and buyer by minimizing the total expected
cost of the supply chain while satisfying the carbon emission constraint. The model is derived based on
approximate approach which parallels several such models in the literature including Hadley and Whitin
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[43]. The buyer places an order after every Q demands at the average interval of time Q/D. On the other
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hand, the vendor produces mQ units in each production cycle in order to reduce the total production setup
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cost, and so the expected production cycle length of the vendor is given by mQ/D.
Fig.1 depicts the production, shipment and inventory variation patterns at the vendor and the
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buyer. The buyer orders a lot of size Q, the vendor produces the item in a lot of size mQ with a constant
production rate P in each production cycle and ships to the buyer in m lots each of size Q. The first lot of
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size Q is ready for shipment after Q/P units of time after the start of the production, and then the vendor
continues the delivery on average every Q/D units of time. The total expected cost per unit time for the
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supply chain comprises of the expected costs per unit time for the buyer and the vendor.
The total expected cost per unit time of the buyer is the sum of ordering cost, inventory holding
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AD Q D (1 b) D
TCb Q, r hb r DL (1 b) r r 0 r . (1)
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Q 2 Q Q
When the lead time demand follows normal distribution, the expected shortage per cycle can be obtained
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as [44]
r DL r DL
(r ) x r f x dx = L f DL r G
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, (2)
r L L
where f(x) and G(x) are the standard normal density function and the complimentary cumulative
Next, the total expected cost per unit time of the vendor comprises of setup cost, production cost,
inventory holding cost and transportation cost. The vendor’s average inventory is evaluated from Fig.1 as
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the difference of the vendor’s accumulated inventory and the buyer’s accumulated inventory, which is
developed based on the approach proposed by Joglekar [45]. Therefore, the average inventory of the
Q Q m 2Q 2 Q 2 D Q D 2D
1 2 m 1 m 1 1
P
mQ m 1 .
P D 2P D mQ 2 P
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Since the expected production cycle length of the vendor is mQ/D, and so the total expected cost
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per unit time for the vendor can be expressed as
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SD Q D 2D t0 dD tQ dD
TCv Q, m pD hv m 1 1 . (3)
mQ 2 P P vQ v
Therefore, the total expected cost per unit time for the supply chain can be expressed as
TC Q, m, r
Q
AD
pD
mQ
Q
2
SD US Q D
r DL 1 b r hv m 1 1
hb
2 P
2D
P
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(4)
t dD tQ dD D (1 b) D
0 r 0 r .
vQ v Q Q
Now, the major sources of carbon emissions are considered from production, inventory at the
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buyer and vendor, and transportation. Accordingly, the total expected carbon emission per unit time from
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Q Q D 2D
D b r DL 1 b r v m 1 1
fD
TE Q, m, r
mQ 2 2 P P .
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(5)
dD Q dD
0
vQ v
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As we are considering strict carbon cap policy, so the total expected carbon emission per unit
time should not exceed the specified limit Ĉ . Then, the carbon emission constraint can be written as
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Q Q D 2D 0 dD Q dD ˆ .
D b r DL 1 b r v
fD
m 1 1 C (6)
mQ 2 2 P P vQ v
Thus, the problem is to find the optimal order quantity Q, reorder point r and the number of
shipments m in each production cycle that minimize the total expected cost in Eq. (4) and satisfies the
The problem formulated in the previous section is a cost minimization constrained non-linear
programming problem. Before solving the problem, we have first proved the convexity of the total
expected cost equation TC(Q, m, r) with respect to Q, m and r. To do so, we have shown that the Hessian
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matrix of TC(Q, r) is positive definite at point (Q, r) for fixed m (see Appendix A). Next, in order to
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check the convexity of TC(Q, m, r) with respect to m, we temporarily relax the integrality requirement on
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m and take the first and second derivatives of TC(Q, m, r) with respect to m for fixed (Q, r). We get
TC Q, m, r SD Q D
2 hv 1 (7)
m mQ 2 P
and
2TC Q, m, r 2 SD
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3 0. (8)
m2 mQ
Now, initially we ignore the carbon constraint and derive the optimal value of Q and r for fixed m
as (see Appendix B)
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1/2
S t0 d
2D A r 0 1 b r
Q0 m v (9)
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D 2D
hb hv m 1 1
P P
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and
r DL Qhb
G . (10)
L Qhb 1 b D 0 1 b D
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Thus, r can be found using the following equation (please see Eq. (B.7) in Appendix B).
Qhb
r DL NORMSINV 1 L . (11)
Qhb 1 b D 0 1 b D
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To get the optimal value of Q and r, we have used the iterative procedure of Hadley and Whitin [43],
So far, we have not considered the carbon constraint for determining the order quantity Q0 and r,
and this may violate the carbon constraint. So we need to determine an optimal value of Q and r for fixed
m that satisfies the carbon constraint. For the purpose, we have adopted the method proposed by Chen et
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al. [5]. Now, the carbon constraint in Eq. (6) can be written as
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fD
mQ
D b r DL 1 b r v m 1
2
Q
Q
2
D
P
1
2 D 0 dD Q dD ˆ
P vQ
v
C 0. (12)
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The roots of the corresponding quadratic equation of the above inequality are given by
1/ 2
US dD ˆ
2
b r DL 1 b r D Q C
Q dD
b r DL 1 b r
v
Cˆ D
2 m 1 D 1 2 D fD 0 dD
v
b v
P m v
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P
Q1 (13)
D 2D
b v m 1 1
P P
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and
1/ 2
Q dD ˆ
2
b r DL 1 b r D
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C
Q dD
b r DL 1 b r
v
Cˆ D
2 m 1 D 1 2 D fD 0 dD
v
b v
P
P m v
Q2
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. (14)
D 2D
b v m 1 1
P P
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Where Q1 and Q2 are the lower and upper bounds, respectively, for the feasible range of Q, and they are
Now, for fixed m, the optimal Q will be obtained at Q̂ as given below in Eq. (15), which will
Qo , if Q1 Q0 Q2
Qˆ Q1 , if Qo Q1 . (15)
Q2 , if Qo Q2
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Selecting the appropriate value of Q̂ from Eq. (15) and putting in Eq. (11) as Q Qˆ , one can get the
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value of r for fixed m. Since Q and r are interdependent, so it will be difficult to derive the value of one
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variable explicitly, without knowing the other one. Therefore, we assume deterministic demand for
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initialization and set L 0 in Eqs. (9), (13) and (14) and get an initial value of Q0, Q1, and Q2 as
1/ 2
S td
2D A 0
Q
0
m v ,
h h m 1 D 1 2 D
b v P
P
US (16)
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1/2
dD dD ˆ 2 D fD 0 dD
2
D
Cˆ D Q D Q C 2 b v m 1 1
v v P P m v
Q1
(17)
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D 2D
b v m 1 1
P P
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and
1/2
Q dD Q dD ˆ 2 D fD 0 dD
2
ˆ D
C D D C 2 b v m 1 1
P m v
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v v P
Q2 . (18)
D 2D
b v m 1 1
P P
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Using the value of Q0, Q1 and Q2 obtained from Eqs. (16), (17) and (18), respectively, we select an initial
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value of Q̂ satisfying the condition given in Eq. (15). Next, using the value of this Q̂ in Eq. (11), we find
the initial value of r. This r in turn is used in Eqs. (9), (13) and (14) to determine the new value of Q0, Q1,
and Q2, and then the condition given in Eq. (15) to find the new value of Q̂ . We repeat this iterative
Till this point, we have discussed the procedure to find the optimal value of Q and r for fixed m.
Further, it has been shown that TC(Q, r, m) is convex with respect to m by relaxing the integrality
requirement on m. Based on these properties, the following algorithm is developed to determine the optimal
Q, r and m.
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Algorithm
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Step 0: Set m=1
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Step 1: Compute initial Q0 , Q1 and Q2 from Eqs. (16), (17) and (18), respectively.
Step 5: Repeat Steps 3 and 4 until no change occurs in the value of Q̂ and r.
Step 6: Set Qˆ ( m) Qˆ and r m r . Thus, Qˆ ( m ) , r( m) is the optimal solution for fixed m and compute
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TC Qˆ ( m) , r( m) , m using Eq. (4).
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Step 7: Set m m 1 and repeat Steps 1 to 6 to get new TC Qˆ( m) , r( m) , m .
Step 8: If TC Qˆ m , r m , m TC Qˆ m 1 , r m 1 , m 1 go to Step 7; otherwise go to Step 9.
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Step 9: Set TC Q* , r * , m* TC Qˆ( m1) , r( m1) , m 1 , then Q* , r * , m* is the optimal solution.
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Using the above stepwise procedure, the optimal order quantity, reorder point and number of
shipments per production cycle can be obtained. Further, the total expected cost and the total expected
carbon emission can be determined using Eqs. (4) and (5), respectively. In the next section, we have
illustrated the model through a numerical example and examined the impact of some key parameters.
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To illustrate the proposed model and solution procedure, a two-echelon supply chain is considered with
the following data [24, 40, 30, 46]: D = 600 units per year, P = 2000 units per year, A = $200 per order, S
= $1500 per setup, θ = $50 per unit, θ0 = $65 per unit, d =100 km, v =50 km per hour, p = $200 per unit,
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hb = $5 per unit per year, hv = $2 per unit per year, t0 = $10 per hour, tQ = $5 per unit per hour, b = 0.80
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Ton per unit per year, v = 0.80 Ton per unit per year, f = 20 Ton per setup, = 2 Ton per unit, 0 = 0.03
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Ton per hour, Q = 0.004 Ton per unit per hour, b = 0.6, = 1 unit per day, L = 7 days, Ĉ = 1550 Ton.
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Now, using the proposed solution procedure, we determine the optimal value of Q, r and m.
Subsequently, the corresponding value of TC and TE are found by putting the optimal value of decision
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variables in Eqs. (4) and (5), respectively. The procedure for finding the optimal solution for the base case
numerical example is summarized in Table 2. For the base case, we get m* = 4, Q* = 241.56, r* = 16.64,
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Next, sensitivity analysis is carried out with respect to some key parameters to draw certain
managerial insights. In most of the cases (except sensitivity analysis for Ĉ), we have varied the value of
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each key parameter within a range such that the carbon constraint remains active, i.e. TE is always equal
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to Ĉ. In the sensitivity analysis, we have not shown emission from production, as it is independent of the
Fig. 3 indicates that as v or b increases, TC increases at faster rate with respect to v compared to
b . Further, Tables 3(a) and 3(b) show that the buyer’s expected cost decreases first and then increases as
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long as the number of shipments (m) during each production cycle remains unchanged with increase in
v or b , whereas the vendor’s cost increases. When these inventory emission parameters increase,
order quantity decreases as long as m remains unchanged and the vendor is required to produce in smaller
lot size (mQ) in order to reduce the average inventory level. Due to smaller production lot size, the
production setup and transportation related costs increase significantly, which in turn increases the total
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expected cost of the vendor, so the total expected cost.
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4.2. Effects of hb
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< Table 4 is supposed to be inserted here>
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The results for the variation of hb are summarized in Table 4, and Fig. 4 shows the carbon emissions from
inventory at the buyer’s end and at the vendor’s end with hb. When there is no change in m with hb, we
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find a negligible change in Q, and so the emissions due to inventory at the buyer and at the vendor remain
unchanged. With increasing hb if m increases, the buyer should order in a smaller lot size and the average
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inventory at the buyer reduces, which decreases the emission due to inventory at the buyer. On the other
hand, production lot size (mQ) increases with increase in hb, which results in higher average inventory at
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the vendor, and so increased emission at the vendor due to inventory. It can be observed from Table 4 that
the total expected cost and the expected cost of the buyer increase with hb. Also, the vendor’s expected
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cost increases if the number of shipments (m) increases with hb, but decreases slightly if m remains
constant.
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Fig. 5 depicts how the total expected cost (TC) and the emission from transportation change with velocity
(v) of the vehicle (truck). As discussed earlier, we have varied the value of v in such a way that the total
expected emission (TE) remains constant and always equals to Ĉ. It is clearly observed from Fig. 5 that
both TC and emission from transportation will come down with increase in v, as both of them are
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inversely related to v. The variations in decision variables with v are shown in Table 5. We observe that
when v increases, order quantity and the buyer’s expected cost do not change much, but the vendor’s cost
comes down significantly as the transportation cost decreases and this leads to decrease in TC.
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<Fig. 6 is supposed to be inserted here>
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Fig. 6 shows the variation of TC and TE with Ĉ. In strict carbon cap policy, organizations cannot emit
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carbon beyond the allotted carbon limit. But if the constraint due to carbon cap is relaxed, organizations
can minimize their cost by optimizing their decisions without bothering about the carbon emissions.
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Therefore, when the carbon constraint is active with increase in Ĉ, TC can be reduced by fully exhausting
the allotted carbon limit. But beyond a certain threshold level of Ĉ, the constraint becomes inactive and
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organizations do not need to emit more to reduce the cost. Now, to explain the behavior of the model
when the carbon constraint remains active, the results are presented in Table 6 for the various values of Ĉ.
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Table 6 shows that the number of shipments increases with increase in Ĉ, and the vendor tends to ship in
larger lot size if m remains unchanged with Ĉ. As far as emission is concerned, with increasing Ĉ initially,
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emissions at the buyer and the vendor increase as the order quantity Q increases and leads to increase in
emission due to inventory holding at the buyer and at the vendor. If m increases with further increase in
PT
Ĉ, Q decreases, and so the emission at the buyer decreases. On the other hand, production lot size (mQ)
The results for effect of production rate is presented in Table 7, and Fig. 7 shows the variation patterns of
carbon emissions from inventory at the buyer and at the vendor with increase in P. When P increases, m
remains initially unchanged with decrease in Q, which decreases the emission from the inventory at the
buyer. But as P increases, the vendor produces the production lot quickly, and the average inventory and
ACCEPTED MANUSCRIPT
the emission from the inventory at the vendor increase. At a threshold level, increase in P leads to
decrease in m and mQ but with increased value of order lot size Q. Due to increase in Q, the emission
from inventory at the buyer will increase, but the emission at the vendor from the inventory decreases as
the production lot size mQ decreases. This pattern of sudden change in emissions from the inventory at
the buyer and the vendor repeats whenever m decreases with P. But when m remains constant, the
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emissions from the buyer and the vendor will exhibit the earlier pattern.
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Table 7 shows that with increase in P when m remains constant, Q decreases, and so the average
CR
inventory level at the buyer falls down and thereby decreases the expected cost of the buyer. But the
average inventory level at the vendor and the expected cost of the vendor increase when m remains
US
constant with increase in P. Now, if m decreases with increase in P, the buyer needs to order in a larger
lot size and thereby it increases the total expected cost of the buyer mainly due to increased inventory
AN
holding cost of the buyer. But when m reduces with increase in P, the expected cost of the vendor
increases due to increase in production setup cost, though it reduces inventory holding cost of the vendor.
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< Fig. 8 (a) and Fig. 8 (b) are supposed to be inserted here>
From Table 8, it can be seen that the order quantity Q decreases with increase in emission from setup f.
PT
As a result, the emission from the inventory both at the buyer and at the vendor decreases. The emission
from transportation is inversely related with order quantity Q, and so the decrease in Q with increase in f
CE
also increase the transportation related emission. But due to increase in setup related emission at the
vendor, there is overall increase in emission at the vendor including transportation (See Fig. 8(a)).
AC
Further, Fig. 8(b) shows that TC increases with f, because the ordering, transportation and setup cost
5. Conclusions
ACCEPTED MANUSCRIPT
In this paper, a two-echelon supply chain consisting of a single-vendor and a single-buyer is considered.
In practice this model is useful for a firm having two separate divisions that are trying to optimize the
total expected cost by integration of their operations considering carbon emission constraint. We have
considered infinite planning horizon and emissions from all the major sources in the two-echelon, namely
production, inventory, and transportation. The total expected cost of the vendor–buyer integrated system
T
is minimized by simultaneously optimizing the ordering quantity, reorder point and the number of
IP
shipments from the vendor to the buyer in each production cycle in a stochastic demand environment
CR
under strict carbon cap policy.
This model will help organizations to determine the optimal production-inventory policy.
US
Sensitivity analysis has revealed that organization needs to be more careful about emission due to
inventory at the vendor’s end as compared to emission due to inventory at the buyer’s end, since latter has
AN
less effect on TC. Therefore, organization should take more precautionary measures at the vendor level to
check emission. The sensitivity analysis also reveals how with changing different parameters, emissions
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from different sectors change and balance each other. We have shown the effect of allotted carbon cap (Ĉ)
on TC and TE. It is shown that after a certain level, carbon constraint becomes inactive. Therefore, at the
ED
time of allocating carbon cap, regulatory bodies should take this thing into account. This work will help
both industries and regulatory bodies in implementing strict carbon cap policy quite effectively and
PT
efficiently. We have also shown that how TC and emission varies with v. Both TC and emission from
transportation come down with increasing velocity, so an investment to improve vehicle’s velocity is
CE
worthy for the organization. Our study also reveals that emission from set up has a sound impact on TC,
In future, the paper can be extended in many directions. We have considered a two-echelon
supply chain. A more complex model with multi-echelon or reverse supply chain can be explored. In this
paper, we have considered normal items. But as emissions from different sources are product dependent, a
significant change can be witnessed in sensitivity analysis if one considers perishable product. Further,
ACCEPTED MANUSCRIPT
one can consider finite planning horizon problem. A reverse supply chain with defective and waste item
Appendix A
To prove the convexity of TC(Q, m, r) with respect to Q and r, we need to show that the Hessian matrix
T
of TC(Q, m, r) is positive definite at point (Q, r) for fixed m. The Hessian matrix H is given by
IP
2TC 2TC
Q 2 Qr
H 2 , where TC TC Q, m, r .
CR
TC 2TC
rQ r 2
2TC
Q 2
2D
3
Q m v
A 0 0 1 b ( r ) 0 ,
S td
US
AN
2TC r DL
hb 1 b
D
0 1 b f 0
r L
2
Q
M
and
2TC 2TC D r DL
2 0
1 b G .
Qr rQ L
ED
Also, we have
PT
f A
Q3 L m v Q
D2 r DL r DL
2
4 0 1 b 2 (r ) f
0
2
G
AC
Q
L L
2
r DL r DL r DL
since 2 (r ) f G 0 for (r ) 0 and f 0 (see Ouyang et al. [46]) .
L L L
Appendix B
AD SD Q r DL r DL Q D 2D
TC Q, m, r pD h r DL (1 b) L f DL r G hv m 1 1
Q mQ b 2 L L 2 P P . (B.1)
t0 dD tQ dD D r DL r DL 0 (1 b) D r DL r DL
f DL r G L f DL r G
vQ v Q L L L Q L L
T
Taking the first order derivatives of Eq. (B.1) with respect to Q and r for fixed m, we get
IP
TC Q, m, r AD SD hb hv D 2 D t0 dD
m 1 1
Q Q2 mQ 2 2 2 P P vQ 2 (B.2)
CR
D (1 b) D r DL r DL
2 0 2 L f DL r G
Q Q L L
and
TC Q, m, r
r
hb hb 1 b
US
D 0 1 b D r DL
G .
(B.3)
AN
Q Q
S t0 d
2D A r 0 1 b r
Q m v (B.4)
D 2D
hb hv m 1 1
ED
P P
and
PT
r DL Qhb
G . (B.5)
L Qhb 1 b D 0 1 b D
CE
Using the inbuilt function “NORMSINV” of Microsoft EXCEL for finding the cumulative distribution
r DL Qhb
NORMSINV 1 . (B.6)
L Qhb 1 b D 0 1 b D
Qhb
r DL NORMSINV 1 L . (B.7)
Qhb 1 b D 0 1 b D
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Appendix C
1/ 2
Q dD ˆ
2
b r DL 1 b r D C
Q dD
b r DL 1 b r
v
Cˆ D
2 D fD 0 dD
2 b v m 1 1
v D
T
P P m v
Q1 (C.1)
IP
D 2D
b v m 1 1
P P
CR
and
1/ 2
Q dD ˆ
2
b
US
r DL 1 b r D C
Q dD
b r DL 1 b r
v
Cˆ D
2 b v m 1 1
v D 2 D fD dD
0
P P m v
Q2 . (C.2)
AN
D 2D
b v m 1 1
P P
Cˆ
fD
mQ
D b r DL 1 b (r ) v m 1
2
Q
Q
2
D
P
1
P vQ
2 D 0 dD Q dD
v
0. (C.3)
ED
Cˆ D
Q dD
v
b r DL 1 b r b v m 1
Q
2
Q
2
D
P
1
P mQ
2 D fD 0 dD
vQ
. (C.4)
PT
Since, v
Q
2
m 1
D
P
1
2D
P
0,for m 1 and P D .
CE
Q dD D 2D
Therefore, Cˆ D b r DL 1 b r and b v m 1 1 will always be
v P P
AC
positive.
Q dD
2
D 2 D fD 0 dD
Now, if b r DL 1 b r D Cˆ 2 b v m 1 1 0
v P P m v
Cˆ D
Q dD
v
b r DL 1 b r b v m 1
Q
2
Q
2
D
P
1
2 D fD 0 dD
P mQ
vQ
. (C.5)
Q dD
2 2
ˆ Q Q D 2 D fD 0 dD
C D b r DL 1 b r b v m 1 1 . (C.6)
v 2 2 P P mQ vQ
T
Q Q D 2 D fD 0 dD
On subtracting 4 b v m 1 1 from both sides, we obtain
2 2 P P mQ vQ
IP
2
ˆ Q dD Q Q D 2 D fD 0dD
b r DL 1 b r 4 b v m 1 1
CR
C D
v 2 2 P P mQ vQ
2
. (C.7)
Q Q D 2 D fD 0dD Q Q D 2D fD 0dD
b v m 1 1 4 b v m 1 1
2 2 P P mQ vQ 2 2 P P mQ vQ
On simplification, we have
Q dD ˆ
2
US D 2 D fD 0 dD
AN
b r DL 1 b r D C 2 b v m 1 1
v P P m v
2
. (C.8)
Q Q D 2 D fD 0 dD
b v m 1 1
2 2 P P mQ vQ
M
2
Q Q D 2 D fD 0 dD
Since b v m 1 1 0 .
ED
2 2 P P mQ vQ
Q dD
2
D 2 D fD 0 dD
Hence, b r DL 1 b r D Cˆ 2 b v m 1 1 0.
P m v
PT
v P
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Production cycle
Production and shipment Shipment
mQ
Vendor’s accumulated
inventory level
Vendor’s stock
T
Q
IP
Q
Q
CR
Q
Q Q
mQ/P USQ/D
mQ/D
Q/D Time
AN
Buyer’s stock
M
ED
Buyer’s accumulated
Q
inventory level
Q
PT
r Q Q Reorder point
Q Q Q Q Q Q
CE
L Q/D
Time
(m-1)Q/D
AC
Fig. 1: The inventory pattern for the vendor and the buyer.
ACCEPTED MANUSCRIPT
T
IP
Total Cost
Total Cost
Total Cost
CR
Q1 Q0 Q2
(i) Q̂ Q0
US Q0
(ii) Q̂ Q1
Q1 Q2 Q1 Q2 Q0
(iii) Q̂ Q2
AN
Fig. 2: Illustration of optimal order quantity Q̂ for fixed m for all possible cases.
M
ED
PT
CE
AC
T
IP
CR
US
Fig. 4: Variation of emission due to inventory at the buyer and the vendor with hb.
AN
M
ED
PT
CE
AC
T
IP
CR
US
Fig. 6: Variation of TC and TE with carbon cap.
AN
M
ED
PT
CE
AC
Fig. 7: Variation of emission due to inventory at the buyer and the vendor with production rate.
ACCEPTED MANUSCRIPT
T
IP
CR
US
AN
Fig. 8(a): Variation of emissions with f.
M
ED
PT
CE
AC
Reorder point
Deterministic
Stochastic
Author(s)
Others
T
IP
Wahab et al. [23] √ √ √ √
CR
Bouchery et al. [21] √ √ √ √
Jaber et al. [24] √ √ Production rate √ √
Zanoni et al. [36]
This paper √ √ √ √ √
ED
m Q0 Q1 Q2 Q r TC TE
T
IP
CR
Table 3(b). Variation of decision variables and costs with αv.
αv (Q, r, m) TC TCb TCv
0.80
0.90
(241.56, 16.64, 4)
(221.13, 16.74, 4)
128692.23
128729.09
US 1131.36
1126.62
127560.87
127602.47
AN
1.00 (203.77, 16.83, 4) 128781.96 1129.85 127652.11
1.10 (243.06, 16.63, 3) 128828.85 1132.02 127696.83
1.20 (227.68, 16.71, 3) 128884.64 1127.24 127757.40
M
ED
Table 4. Variation of decision variables, production lot size, and costs with hb.
PT
T
100 (243.45, 16.63, 4) 125665.33 1132.19 124533.14
IP
CR
Table 6. Variation of decision variables, total cost, and emissions with Ĉ.
Ĉ
1400
(Q, r, m)
(151.97, 17.14, 3)
TC
129513.88
US TE
1400.00
Emission at the
buyer
65.30
Emission at the
vendor and from
transportation
1334.70
AN
1450 (204.85, 16.82, 3) 129000.73 1450.00 86.20 1363.80
1500 (202.92, 16.83, 4) 128785.17 1500.00 85.44 1414.56
M
Table 7. Variation of decision variables, production lot size, and costs with P.
P (Q, r, m) mQ TC TCb TCv
1500 (216.95, 16.76, 5) 1084.74 128619.18 1126.72 127492.46
1600 (212.59, 16.78, 5) 1062.95 128641.61 1127.26 127514.35
1700 (249.65, 16.60, 4) 998.612 128657.38 1135.32 127522.06
1800 (246.59, 16.62, 4) 986.378 128670.18 1133.70 127536.48
T
1900 (243.92, 16.63, 4) 975.674 128681.74 1132.40 127549.34
IP
2000 (241.56, 16.64, 4) 966.228 128692.23 1131.36 127560.87
CR
128701.79
2100 (239.46, 16.65, 4) 957.832 1130.51 127571.28
US
Table 8. Variation of decision variables, costs, and emissions with f.
AN
Emission at Emission at the vendor and
f (Q, r, m) TC TCb TCv
the buyer from transportation
10 (246.22, 16.62, 4) 128686.99 1133.52 127553.47 102.59 1447.41
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