Analyzing the Impact of Carbon Regulatory Mechanisms on Supply Chain Management

PI: Sandra Eksioglu, Ph.D., Mississippi State University

Co-PI: Joseph Geunes, Ph.D. University of Florida

Final Report

UTC Project Information

Abstract
The objective of this proposal is to develop a toolset for designing and managing cost efficient and environmentally friendly supply chains. The goal is to provide insights and direction to guide companies on making sustainable logistics management and transportation decisions.

The models we propose minimize transportation and inventory holding costs in the supply chain, while accounting for carbon emissions due to transportation and other logistics or management-related activities. These models are extensions of the classical Economic Lot-Sizing (ELS) model. The classical ELS model is used to identify an inventory replenishment schedule for a fixed planning horizon with deterministic and time-varying demand. We add a new dimension to this classical problem: analyzing the impact of carbon emission costs and regulations on replenishment decisions.

This study will investigate the following extensions of ELS models with carbon emission considerations:

(a) The classical model assumes that one supplier and one transportation mode is used to
replenish inventories. Replenishment costs are of fixed-charge plus variable cost form.
Our model will allow for multiple suppliers and transportation modes. Each supplier and
transportation mode has its own cost structure and emissions rate. Emissions are
represented using functions containing a fixed charge form as well. Transportation costs
consist of a sum of a setup function and a linear cost per unit shipped. Although these
functions correspond to the structure of actual transportation costs, the corresponding
optimization models are challenging and difficult to solve.

(b) The classical ELS model considers non-perishable inventories. We will analyze the
impact of carbon regulatory mechanisms on replenishment schedules for perishable
products. We will consider products which have a fixed shelf life, as well as products that
deteriorate gradually. We will use these models to understand the trade-offs that exist
between transportation costs, emissions, lead time, and remaining shelf life for perishable
products.

(c) The classical ELS model assumes that inventories of a single item are replenished. We
will analyze the impact of carbon regulatory mechanisms on joint replenishment
decisions for multiple product types that may be shipped via different modes.

We anticipate that by using these models we will gain insights on the impacts potential carbon regulatory policies, such as carbon caps, carbon taxes, carbon cap-and-trade, and carbon offsets have on transportation mode selection decisions and overall emissions levels in the supply chain. More specifically, the results from the numerical analysis will help us (a) make important observations with respect to the tradeoffs that exist between costs and emissions; (b) analyze the implications that carbon regulatory mechanisms have on supply chain-related costs and performance; (c) identify the mechanism that has the greatest impact in greenhouse gas (GHG) emission reductions in the supply chain.

The benefits from using these models are twofold. First, policy makers can use these models to evaluate the potential impact on emissions for each regulatory policy. Second, environmentally conscious companies can use these models and the corresponding solution algorithms as submodules within their MRP systems for requirements planning when multiple modes, multiple products, perishable products, and multiple supplier replenishment options are available.