Term II: Supply Chain Management (SCM)

Session 17: Green Supply Chain

(Incorporating Eco-friendly Practices in SCM)

Rohit Gupta
Operations Management Area
IIM Ranchi
Email: rohit.gupta@iimranchi.ac.in
Motivation
What is Green Supply Chain?

Green Supply Chain Management (GSCM) aims to integrate environmental thinking into supply
chain management. This includes product design, material sourcing and selection, the manufacturing
process, delivery of the final product to consumers, and end-of-life product management.

Green purchasing and procurement

It involves the selection and acquisition of products and services to minimise any negative impacts
over product lifecycles associated with manufacturing, transportation, usage, and recycling.

Green manufacturing

It uses production processes that have relatively low environmental impacts, are highly efficient, and
generate little waste or pollution.
 Patagonia Black Classic Retro X Mens Patrik Ervell, Altuzarra, Louis Vuitton
Thick Pile Fleece Jacket (1990) (2015)

1. Patagonia, a California (U.S.A.) based clothing company, established in 1972, which over the years has made giant
strides in greening its products and processes.
2. Patagonia's environmental activism is widely known and appreciated today.
3. As a part of its initiative named “The Footprint Chronicles”, in 2008, a team of 10 employees in Patagonia were
assigned the task to track five products from their design stage to the raw material procurement stage till Patagonia's
distribution center at Nevada.
1. Out of their several findings, one was the production of a product called Eco Rain Shell Jacket which
was found to contain perfluoro-octanoic acid (PFOA)—a chemical that accumulates in the
bloodstream of consumers when used.
2. Patagonia decided to stop the use of PFOA and substitute the jacket with polyester and polyurethane.
3. Although this sounded easy, the company analysed that in order to substitute PFOA it needed to
revamp its solvent recovery system and bring changes to its product design and manufacturing.
4. Patagonia needed to collaborate with its suppliers in order to bring changes to the material used for
design and manufacture of Rain Shell Jacket.
5. Meanwhile, customers demanded a more “Eco” version of the Rain Shell Jacket to substitute the
existing product form.
6. Over the years Patagonia collaborated with its trusted suppliers in order to bring out a more eco-
friendly version of the Rain Shell Jacket.
7. Detailed information about the supplier activities, manufacturing processes and carbon footprint
measurements are displayed today on the Patagonia website for consumers to evaluate its various
products including the Rain Shell Jacket.
Another giant manufacturer and global brand, Adidas also took steps to reduce its environmental impact.
Over the years, the manufacturer has reduced harmful substances from the materials used in manufacturing, as well as
reduced wastes in the packaging materials.
Through eco-friendly technologies like MMVEA and Eco-Grip, it hopes to benefit the environment as well as its
consumers.
Adidas has incorporated a four point sustainability agenda for its sourcing and procurement decisions:

1. Standards and guidelines: Adidas has developed supplier code of conduct covering greening, material and
workplace standards.
2. Capacity building and outreach: Adidas trains its suppliers so that they understand the importance of establishing
and maintaining management systems.
3. Monitoring and verification: The company has a dedicated team of auditors, which monitors suppliers'
performance against set Standards.
4. Rating and sourcing decision: Suppliers are audited based on their performance and sourcing decisions are based
on these ratings.
Incorporating Eco-friendly Initiatives in the Supply Chain
 1. Green initiatives by both apparel manufacturer and retailer:
From a supply chain perspective, the apparel industry cases reveal that greening is initiated by large
retailers and suppliers who enjoy sufficient power in the channel.
Therefore, in an apparel supply chain several power structures might be at play within the supply
chain network (e.g. one game in which the retailer is the market leader, another game in which the
manufacturer is the leader and third, in which none of the supply chain agents is a leader)
 2. Co-operative practices adopted by supply chain players during greening:
Cooperative practices are often adopted by the apparel players during greening.
This necessitates the study of cooperative processes and their impact on the supply chain and its
players.
Additionally, differing strategies of players within each channel structure also beget further analysis.
 3. Changing consumer preferences towards green apparels:
Apparel players like Patagonia foresees opportunities in the fashion and apparel industry with
increasingly changing preferences of consumers towards green apparels.
Hence, greening initiatives are largely driven to cater to this demand.
Eco-friendly/ Green Product Supply Chain Design
1. The demand faced by the retailer is a linear function of retail price p (established in micro economics
literature) and the level of green innovation θ (assumption: adoption of greening strategies would
increase demand of the product).
2. Thus, we model the retailer’s demand function as: q = a – bp + αθ
3. In the above equation, a represents the market potential, b represents the sensitivity of demand to
price changes and α represents the demand expansion effectiveness coefficient of the greening
innovation.
4. Observation 1:The demand function reflects a “green” conscious consumer base such that the
demand for the apparel is linearly increasing in the “level of green innovation” achieved and
decreasing in the price of the apparel.
5. Observation 2: This approach captures the dependence of demand on both price and level of greening
in a tractable form of deterministic linear expression.
6. w denotes the manufacturer’s wholesale price
7. m denotes the retailer’s margin on the product
8. c denotes the manufacturer's marginal cost of production
9. Therefore, retail price can be expressed as: p = w + m.
10. Thus, the demand function can be expressed as: q = a – b(w + m) + αθ
Eco-friendly/ Green Product Supply Chain Design (contd.)
The profit function of the manufacturer (without considering the greening effort):  M  w  cq
The profit function of the retailer (without considering the greening effort):  R   p  wq  mq
The cost of greening effort: C    I 2
As the manufacturer takes the “greening” effort, therefore her profit is modified as follows (as
incorporating the cost):
 M  w  c q  I 2  w  c a  bp     I 2
The retailer’s profit function:   mq  ma  bp   
R

Overall supply chain profit function:

 SC   M   R   p  cq  I 2  w  m  c {a  b(w  m)  }  I 2   p  ca  bp     I 2
In a vertically integrated supply chain, the optimization problem of the central planner is:
max ( SC )  max[ p  c a  bp     I 2 ]
p , p ,

Note: In the case of centralized supply chain, the independent decision variables are: (1) Retail
Price (p) and (2) Level of greening (θ)
Eco-friendly/ Green Product Supply Chain Design (contd.)
The optimal solution for the centralized supply chain is:
 SC
 a  bp    b p  c   0
p
 SC
   p  c   2I  0

By simultaneously solving these two equations we obtain:
2I a  bc  a  bc
p*  c  * 
4bI   2 4bI   2
Decentralized Green Supply Chain
Manufacturer Stackelberg Game:
1. Manufacturer (who drives the green initiative) acts as a Stackelberg Leader
2. Retailer acts as a Stackelberg Follower
3. Therefore, while solving the game, the retailer’s optimization is solved first and subsequently the
manufacturer solves her optimization problem.
The retailer’s optimization problem: max ( R )  max mq   max m{a  bw  m   }
m m m
 R a  bw  
The first order condition yields:  a  2bm  bw    0  mw,  
m 2b
The manufacturer’s profit function optimization problem is expressed as follows:
max ( M )  max[w  c a  bw  m     I 2 ]
w, w,

Using the expression of m(w, θ), the manufacturer’s profit function can be rewritten as:
1 
max ( M )  max  w  c a  bw     I 2 
w, w,
2 
Decentralized Green Supply Chain (contd.)
The first order conditions yield:  M
 bw 
1
a  bc     0
w 2
 M 1
 w  c   2 I  0
 2

By simultaneously solving these two equations we obtain:

4 I a  bc  a  bc
w *
c  MS
*

MS
8Ib   2 8Ib   2
Therefore, the optimal margin is calculated as: a  bwMS
*
 MS
*
2 I a  bc
*
mMS  
2b 8Ib   2

The optimal retail price of the product is calculated as: 6 I a  bc

*
p MS c
8Ib   2