LOW CARBON LOGISTICS PROVIDER

Indo-US Workshop on Designing Sustainable Products, Services and Manufacturing Systems

August 18 - 20, 2009, Indian Institute of Science, Bangalore

1

LOW CARBON LOGISTICS PROVIDER

N VISWANADHAM and S KAMESHWARAN

Centre for Global Logistics and Manufacturing Strategies

Indian School of Business, Hyderabad, INDIA [email protected], [email protected]

Green initiatives by businesses mitigate ill effects of carbon emissions in the supply chain by using

environment friendly inputs, processes, and re-cycling. Regulators, on the other hand, reduce carbon

emissions in the supply chain using carbon pricing: either through trading in carbon markets or by carbon

tax. We argue that, the end-to-end holistic view of carbon emissions at various stages of the supply chain

can help companies leverage the above mechanisms by making informed decisions in design,

manufacturing, sourcing, and distribution. In this view, we introduce the notion of low carbon logistics

provider, a company that creates value through an alliance of supply chain competencies, by exploiting

information flows and goods flows in the supply chain to simultaneously optimize costs and carbon

emissions. The low carbon logistics provider essentially acts as an orchestrator in coordinating the supply

chain stake holders, along with the carbon regulators and key players from the ecosystem. The design of

green supply chain is modeled as a mixed integer linear program that considers emissions and carbon

pricing in addition to the traditional supply chain cost parameters. The proposed model can be generalized

to include the entire supply chain from procurement through retailing and is applicable to various sectors

like manufacturing, food, and service.

Keywords: Green supply chain, low carbon logistics provider, orchestrator, carbon awareness, carbon

trading, mixed integer linear program.

1. Introduction

Design, modeling, and analysis of the traditional supply chain has primarily focused on

optimizing the procurement of raw materials from suppliers, manufacturing of the

products, and the distribution of finished products to customers. A supply chain design

problem comprises the decisions regarding the number and location of production

facilities, the amount of capacity at each facility, the assignment of each market region to

one or more locations, supplier selection for sub-assemblies, components and materials,

number of echelons, and distribution network (Chopra and Meindl, 2004). The primary

performance criteria are cost and customer satisfaction (measured in terms of quality,

lead time, service, etc). In the last two decades, supply chains expanded globally,

especially in automobile, computer, consumer electronics, food, and apparel industries. In

a global supply chain, suppliers, production facilities, distribution centers, and markets

are dispersed globally. The connecting infrastructure for globalization consisting of


August 18 - 20, 2009, Indian Institute of Science, Bangalore 2

trains, trucks, ships, aircrafts, and warehouses are major sources of green house gas

emissions. In addition, sourcing from low cost countries with poor technology and non-

stringent regulations contribute to the increasing green house gas emissions.

The Intergovernmental Panel on Climate Change has identified six primary

greenhouse gases that impacts climate change in the atmosphere: Carbon dioxide,

methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride.

The common sources of the above gases are fossil fuel combustion, production of cement

and aluminum, semiconductor industry, refrigeration gases, and electrical transmissions.

With increasing pressure from governments, environmentalists, and customers, green

initiatives are no more a corporate social responsibility for companies. The supply chain

should be green in order to claim its product as green. There is no unique definition of

green supply chain. A popular notion is the extended or closed loop supply chain that

includes waste disposal and collection at end-of-life, which are then re-manufactured and

re-used (B. M. Beamon, 1999). Our approach to green supply chain is based on a

commonly and widely accepted notion of greenness called as carbon footprint. A carbon

footprint is the total set of greenhouse gas emissions caused directly and indirectly by an

individual, organization, event or product, expressed as carbon dioxide equivalenta.

Equivalent carbon dioxide (CO2e) is the concentration of carbon dioxide that would cause

the same level of radiative forcing as a given type and concentration of greenhouse gas.

The full footprint of an organization encompasses a wide range of emissions sources,

from direct use of fuels to indirect impacts such as employee travel or emissions from

other organizations within the supply chain.

For example, consider the carbon footprint of a tomato ketchup from Sweden, studied

by Andersson et al (1998). The supply chain of the ketchup is globally dispersed. Tomato

is cultivated and processed into tomato paste in Italy, packaged and transported to

Sweden with other ingredients to make tomato ketchup. The aseptic bags used to package

the tomato paste were produced in the Netherlands and transported to Italy; the bagged

tomato paste was placed in steel barrels, and moved to Sweden. The five-layered red

bottles were either made in the UK or Sweden with materials from Japan, Italy, Belgium,

the USA and Denmark. The polypropylene screw cap of the bottle and plug were

produced in Denmark and transported to Sweden. Additional low-density polyethylene

shrink-film and corrugated cardboard were used to distribute the final product. Other

ingredients such as sugar, vinegar, spices and salt were also imported. The bottled

product was then shipped through the wholesale retail chain to shops, and bought by

households, where it is stored refrigerated from one month to a year. The carbon footprint

for 1 kg tomato ketchup, measured as CO2e in kg was estimated to be 2290.

Our approach to green supply chain considers the CO2 equivalent emissions as a

performance measure for the supply chain. With the growing concern over the

environmental degradations due to carbon emissions, a fundamental paradigm shift is

required in designing and analyzing supply chains, spanning across the strategic, tactical,

a http://www.carbontrust.co.uk/solutions/CarbonFootprinting/ (accessed October 2009)



and operational decisions. This work proposes one such shift in reducing carbon

emissions using the notion of low carbon logistics provider (LCLP). LCLP can be

defined as a company that creates value through an alliance of supply chain

competencies, by exploiting information flows and goods flows in the supply chain to

optimize costs and carbon emissions.

The rest of the chapter is organized as follows. We categorize various approaches for

mitigating carbon emissions and affirmative action in the following three sections:

Emissions reduction (Section 3), carbon awareness (Section 4), and carbon pricing

(Section 4). Synthesizing the mechanisms of these approaches, we develop our proposed

notion of low carbon logistics provider in Section 5. Finally we conclude the chapter in

Section 6.

2. Emissions Reduction

In this section we outline some of the green supply chain initiatives that directly reduce

the green house gas emissions.

2.1 Substitution in the Supply Chain

The obvious way of reducing emissions is to substitute carbon-intensive input factors

with low-carbon alternatives. For example in the electricity sector, using natural gas

instead of coal for power generation can reduce carbon emissions by about 50% per unit

of electricity produced (Neuhoff, 2008). Renewable energy sources can provide near-zero

emissions during operation of the plants. Similarly for logistics, one can substitute with

low-emission vehicles and transportation modes.

Walkers crisps from PepsiCo in UK used following substitutionsb:

(i) Using only British potatoes and cutting down food miles;

(ii) Improving production efficiency by moving to more efficient production line;

(iii) Reducing the weight of packaging;

(iv) Running delivery lorries on biodiesel and using fuel efficient driving

With additional initiatives like recycling of waste, Walkers has reduced 4800 tonnes

of CO2 in two years since 2007 (7% reduction).

Another approach is to examine the entire supply chain and identify the substitution

opportunities. For example, Walkers learned that storing potatoes in humid conditions to

soften the skin increases their water content. Further, water content is the main weight

contributor to potato, thus favoring farmers to humidify the potatoes. However, prior to

frying to make crisps, potatoes had to be dried to remove the excess water content, which

consumes lot of energy. A gain in money for one agent in the supply chain affects

adversely on the emissions in a different segment of the chain. The solution here is to

provide farmers incentives for dry content of the potato (rather than its weight), thereby

creating a win-win scenario.

b http://www.walkerscarbonfootprint.co.uk/walkers_carbon_trust.html (accessed October 2009)

http://www.walkerscarbonfootprint.co.uk/walkers_carbon_trust.html



Similar observations were also made for clinker, a main component in cement.

Clinker is produced by heating lime stone, which undergoes a chemical transformation

releasing carbon. Although carbon emissions can be reduced by using renewable energy

sources for heating, the majority of the emissions is due to the chemical transformation

that cannot be avoided. After milling, clinker is mixed with other substances to make

cement. Walker and Richardson (2006) observed that the main scope for reducing

emissions is via the substitution of some of the clinker with other materials suitable for

cement production.

2.2 Supply Chain Coordination

The above approach of substituting a function with a low-carbon alternative at times can

lead to wrong conclusions. For example, consider buying a rose in UK with two

alternatives: One grown in Netherlands and the other from Kenya. At the outset, flower

from Netherlands will be more eco-friendly as it would have travelled less food-miles

than from Kenya. However, research by Williams (2007) reveals that 12,000 cut stems of

roses from Kenya emitted 2,200 Kg CO2, whereas that of a Dutch operation emits 35,000

Kg CO2. Roses from the Netherlands required artificial light, heat and cooling over the

eight to 12-week growing cycle, whereas the natural weather of Kenya favored the roses

without any temperature regulators. Thus a holistic analysis of end-to-end supply chain

can lead to better reduction in emissions.

Supply chain encompasses different functional entities, possibly owned by different

companies. Even with a single ownership, the various functions within the supply chain

like procurement, manufacturing, and distribution, tend to work with their own

objectives, constraints, and payoffs. Coordination among the entities in the supply chain

can result in pursuit of achieving system wide objectives. Low carbon emission is one

such objective. With a target of carbon emission cap on the entire supply chain (with

other traditional objectives), various entities in the supply chain will collaborate and

coordinate in the pursuit of the above objectives.

Another possibility of coordination is that of among the competitors in a particular

stage of the supply chain. For example, consider the automobile supply chain of India.

The Indian auto logistics, largely made up of finished vehicle distribution, is estimated at

INR34.71 billion in 2006–07 and has been growing at a rate of 18.31% during 2001–02

and 2006–07 (Cygnus, 2007). The auto industry in India is clustered in and around the

cities of Chennai (south), Mumbai (west), Jamshedpur (east), and Gurgaon (north). The

demand is distributed across the entire nation. The finished vehicle logistics of moving

the finished vehicles from the factories to the retailers is usually done by the companies

in isolation without any coordination with the competitors. A truck carrying finished

vehicles from a factory in the south to a retailer in the north of India, usually returns

empty or less than truckload carrying some other cargo. The emissions and cost could be

optimized if the truck carries in the return journey vehicles from a factory in the north to

a retailer in the south. India has a vast and well established railway network, which can



be leveraged for the nationwide vehicle distribution with reduced emissions. However,

this demands a central player who can coordinate the competitors and execute the

distribution at less cost and low emissions.

3. Carbon Awareness

Businesses and individuals are generally aware of the negative impacts of emissions on

climate change. However, contribution of green house gas emissions in their own

production and consumption activities is largely overlooked. From the supply chain

perspective, we can categorize carbon awareness as producer awareness and consumer

awareness.

The producer awareness is about the knowledge of the carbon footprint of a product

along the entire supply chain, right from raw materials to final packing and delivery. In

the tomato ketchup case study from Sweden (Andersson et al, 1998), the 2290 CO2e for 1

kg of ketchup was contributed by the following activities in the supply chain:

Agriculture (190);

Processing (500);

Packaging (1275);

Transport (130);

Shopping (195);

Once the producer or manufacturer is aware of this aggregate carbon footprint and the

constituent break-ups, the possibilities for innovation arise. In particular, emissions

become a performance metric or criterion in evaluating or re-designing the supply chain.

Aankhen, Inc. creates supply chain visibility providing new source of information and

data on carbon footprint using RFID and GPS technologies (Aankhen Inc., 2008). The

emissions visibility identifies the opportunities for continuous carbon footprint reduction

and cost improvement by exposing existing supply chain inefficiencies. It creates a

surprising “I didn’t know we did that!” awareness followed by “What is the impact of

changing that?” resulting in action with “Let’s change that.”

The consumer awareness is about the knowledge of the carbon footprint of the

product consumed. For example, if the consumer is aware of the carbon footprints of the

alternate ketchups, then it becomes an additional attribute in the selection decision along

with the traditional attributes like price, taste, brand, etc. Carbon labeling or declaring the

carbon footprint of product provides the necessary information for the consumer.

Labeling has proved to be successful in other business ill practices like child labor and

animal torture. In India, when the awareness of child labor was wide spreading among the

public, businesses started labeling apparels and fire crackers as No Child Labor (used in

the production of the product). This acted as an incentive for the child labor aware

consumers to buy such products, which in-turn provided incentive for other producers to

follow the practice. In the near future, one can expect such scenario in carbon labeling.

In a survey among UK consumers (L.E.K. Consulting, 2007), a majority of 56%

stated that they would value the information regarding carbon footprint of the products.



Also, 44% of consumers would switch to a product or service with a lower carbon

footprint, even if it was not their first preference. This is further demonstrated by the fact

that 20% were willing to travel to a less convenient retailer in order to obtain a low

carbon product and 15% were willing to pay more for a less carbon product. The research

reveals the growing carbon awareness among consumers and thereby emphasizing

businesses the need for including the carbon footprint in their supply chain design.

However, the dichotomy of child labor and no child labor does not exist for carbon

labeling. Rather it is a continuous metric, which also provides scope for progressive

improvements in order to outperform the competitors. Further, as the demand for the

product is also a function of the carbon footprint, it naturally provides a benchmark or

baseline target of the emissions for the businesses.

4. Carbon Pricing

Pricing carbon has become widely acknowledged as a significant catalyst in international

efforts to reduce greenhouse gas emissions. It is essentially based on the theory of

internalizing the externalities. The green house gas emissions are negative externalities

caused in production and transportation of products through the supply chain. In order to

internalize the negative externalities, the environmental costs are factored in to the supply

chain costs in the form of carbon pricing.

The rationale for using carbon pricing is as follows (Neuhoff, 2008): It creates

incentives for the use and innovation of more carbon efficient technologies, and induces

substitution towards lower carbon fuels, products and services by industry and final

consumers. The price signal feeds into individual decisions that would be difficult to

target with regulation. It also makes it profitable to comply with carbon-efficiency

regulations, thus facilitating their implementation. There are two mechanisms for

delivering carbon prices: carbon tax and cap and trade schemes. In the following, we

briefly discuss the above two mechanisms. For more detailed discussions, see Neuhoff

(2008).

4.1 Carbon Tax

Carbon tax levies a fee on the production, distribution or use of fossil fuels based on how

much carbon their combustion emits. The government sets a price per ton on carbon,

which is translated into a tax on electricity, natural gas or oil. Taxing basically

discourages the usage of high carbon emitting fuels thereby encouraging businesses and

individuals to reduce consumption and increase energy efficiency. It is an indirect tax that

is based on transactions, rather than direct taxes that are based on incomes. Carbon tax

schemes were introduced in Sweden in 1991 and subsequently in Denmark, Finland,

Netherlands, and Norway.

Carbon tax can be levied at different points of the supply chain. Some taxes target the

transaction between producers (coal mines and oil wells) and suppliers (coal shippers and

oil refiners). Some taxes affect only distributors like the oil companies and utilities. There



are also taxes that charge consumers directly through electric bills. Thus, it is a price

based mechanism – the carbon price is fixed, but the quantity of emissions is not.

4.2 Cap and Trade Scheme

The cap and trade scheme is a dual to carbon tax where the quantity of emissions is

fixed, but the carbon price is determined by the market. Cap and trade schemes have four

basic components (Neuhoff, 2008):

(i) Governments set a cap on the total volume emissions of a pollutant and create the

corresponding volume of allowances.

(ii) These allowances are distributed for free or sold to firms and individuals.

(iii) The allowances can then be traded in the carbon market. This creates in principle

economic efficiency. Firms that would face high costs to reduce their emissions will

buy allowances from firms with lower costs, thus reducing the total costs of

emissions reductions.

(iv) Emissions are monitored and reported, and at the end of the accounting year, firms

either have to surrender allowances proportional to the volume of their emissions to

government or can bank them to the following year.

In contrast to carbon tax, cap and trade scheme fixes the quantity of emissions and allows

the market to determine the price. The largest carbon market is the European Union

Emissions Trading Scheme valued at US$50 billion with a volume of 2061 MtCO2e,

followed by New South Wales (US$224 million with a volume of 25 MtCO2e) and

Chicago Climate Exchange (US$72 million with a volume of 23 MtCO2e) in 2007

(Capoor and Ambrosi, 2008). Developing countries have not capped their emissions, and

therefore do not have cap and trade schemes. They participate in emissions trading via

the clean development mechanism (CDM). Under CDM, certified projects in developing

countries can sell credits from emissions reductions to developed countries that accept

these credits within their cap and trade schemes. Thus linkages created by emissions

trading can put a price on carbon even in countries that have not capped their emissions.

The producers in developing countries do not pay for carbon-intensive production but

they are paid for investments to reduce emissions. Thus their production costs and

competitive product prices do not increase to reflect the carbon price (Neuhoff, 2008). To

the contrary, where the allowance price exceeds the costs of implementing measures to

reduce carbon emissions, this provides a subsidy to carbon intensive activities.

For supply chain design, the carbon pricing offers three alternatives for locating a

manufacturing facility or an emissions intensive process:

(i) Locate in a region that offers cap and trade scheme with a allowance on the quantity

of emissions; Additional emission requirements can be bought from the market or

the excess allowance can be traded or saved for future use.

(ii) Locate in a carbon taxable region, paying tax as per the usage with no upper limits

on emissions;



(iii) Locate in a developing country with neither tax nor cap on the emissions;

For a global supply chain with many facilities, one can judiciously choose the facilities in

different regions such that the emissions can be traded among subsidiaries by balancing

carbon reductions with economic justifications.

5. Low Carbon Logistics Provider

From the above discussions, one can infer the following requirements for mitigating

carbon emissions:

(i) Emissions can be reduced by choice of right partners like suppliers and logistics

providers in isolation. Further, a win-win scenario with both cost and emission

reduction can be achieved by optimally selecting the partners across the entire supply

chain.

(ii) Carbon awareness is increasing among the consumers. Even if regulators can be

bypassed by producing in developing countries with no emissions cap and tax,

companies need to be accountable for the consumers.

(iii) Carbon offsets among the different subsidiaries of the supply chain can be done cost

effectively with the use of carbon markets and taxes.

(iv) A supply chain channel master or leader is required to coordinate the entire supply

chain;

(v) The leader should possess deep knowledge of supply chain entities and also the

ecosystem consisting of regulators, carbon markets, emission standards, etc.

In view of the above observations, we propose here the notion of a low carbon

logistics provider (LCLP). LCLP can be defined as a company that creates value through

an alliance of supply chain competencies, by exploiting information flows and goods

flows in the supply chain to optimize costs and carbon emissions. LCLP essentially acts

as an orchestrator. The orchestrator is a management literature metaphor to describe the

role of a player who organizes and manages a set of activities in a network, by ensuring

value-creation opportunities in the system and value appropriation mechanisms for each

player (Dhanraj and Pharke, 2006). Orchestration brings about and manages whole set of

tangible and intangible elements starting from design to distribution. Unlike outsourcing,

orchestrators manage a network of contributors who have a stake in the outcome. In the

domain of logistics, there are related notions of orchestrators: IBM global trade

orchestrator (Wedan, 2006) and integrated knowledge-based logistics providers

(Viswanadham and Gaonkar, 2009). For example, in the case of finished vehicle

distribution of Indian auto logistics, Indian Railways is a potential orchestrator.



5.1 LCLP as Orchestrator

Two popular orchestrators in the domain of computers and apparels are Medion AG

and Li & Fung, respectively. Medion AG (Germany) orchestrates the entire value chain

from the initial product to after-sales services of computers and peripherals for its retail

customers (Ordanni et al, 2006). Li & Fung (Hong Kong) is a trading company that

provides its clients with a virtual company for manufacturing apparels and toys

(O‟Connell, 2006; Fung & Wind, 2007).

In order to understand the requirements and capabilities of orchestrators, let us

consider the case of Li & Fung in detail. The clients, usually from US and Europe,

approach Li & Fung with demand for certain items. Li & Fung primarily operates as an

agent, finding suppliers to manufacture items according to customers‟ specifications. The

items include garments, toys, household items, sporting goods, handicrafts, and fashion

accessories. The company is divided into several dozen independent divisions, each of

which concentrates on orchestrating for one category of products and serves one or few

customers. The company has an international sourcing network with thousands of

suppliers in over dozens of countries. Different countries offer different combinations of

manufacturing capabilities, quality standards, and cost. The international sourcing

network is not a formally constituted entity but consists of two intangible assets:

relationships with the service providers and knowledge of the manufacturing capabilities,

special skills, business practices, and regulations pertaining to each country and each

supplier. The knowledge also includes the hidden costs like tariffs, duties, taxes, quotas,

customs declaration processes, security requirements, and interfacing with government

authorities. Further, all these are frequently subject to change. Li & Fung‟s business

depends on these assets which leverage the international differences in labor costs and

manufacturing capabilities to provide products that closely match the customers‟

requirements with respect to price, quality, and delivery time. Li & Fung owns no

factories or hard capacities and all the activities in the value creation, except for

coordination, are performed by other service providers.

LCLPs can similarly be viewed as an orchestrator. They are the next stage in the

evolution of 2PLs and 3PLs. Similar to Li & Fung, the primary strengths of the LCLP are

the knowledge and the relationships. The knowledge comprises of:

the end-to-end supply chain emission requirements;

requirements of stake holders;

capabilities of service providers;

innovation possibilities;

emission regulations;

carbon market information;

customers‟ carbon awareness;

The second asset is the relationships with the key players and potential partners from

the eco-system:

service providers (suppliers, contract manufacturers, 3PLs);



regulators;

carbon markets;

low carbon enablers (like Carbon Trust of UKc);

project based activities like clean development mechanism (CDM) and joint

implementation (JI);

Using the above two intangible assets, LCLP can optimize carbon emissions without

compromising on cost. LCLP acts as an orchestrator in design, planning, and

coordination of the entire supply chain. With the knowledge of the differential

capabilities of the various service providers in terms of cost and emissions, the LCLP can

optimally choose a set of service providers, who can achieve the emission target of the

entire supply chain. Further with the use of carbon markets, LCLP can configure the

supply chain with optimal plant locations and right choice of service providers such that

carbon offsets can be exchanged among the stakeholders at minimal cost. The LCLP as

orchestrator is shown in figure 1.

5.2 Design of Green Supply Chain

In the following, we illustrate the functionality of LCLP using a green supply chain

design example. For brevity, we assume a single product being manufactured. The

demand zones or customer locations and the required demand for the product at each of

c http://www.carbontrust.co.uk/ (accessed October 2009)

2PLs/3PLs

Supply Chain

Design

Emissions

Reduction

Carbon

Trading

Suppliers Plants/

Facilities

Contract

Manufacturers

Supply Chain

Coordination

Low Carbon Logistics Provider

Regulators Carbon

Markets CDM & JI

Low Carbon

Enablers

Fig. 1. Low carbon logistics provider as orchestrator

Customers



the demand zone are known. After initial analysis and collection of data, LCLP shortlists

a potential set of suppliers, plant locations, warehouse locations, transportation modes are

identified. This information is represented as a graph with nodes and arcs.

The nodes consists of suppliers ( ), manufacturing facilities ( ),

warehouses ( ), and customers ( ). The arcs denote the possible paths for flow of

goods. There are alternate modes of transportation or fuels with different costs and

emissions between a pair of nodes. The graph depicts the potential locations, facilities,

and feasible paths, from which a supply chain has to be designed. Only the set that

denotes demand zones or end-customers are fixed. The design problem is to choose a

subset of nodes from and feasible paths, such that the demands at are

satisfied subject to various constraints. The design problem is mathematically modeled as

the mixed integer linear programming problem.

Notation

Set of suppliers/sub-contractors

Set of manufacturing facilities

Set of warehouses/distribution centers

Set of customers/retailers

Set of transportation modes/alternate fuel types

Supply chain network; ;

Data

The data required are capabilities, requirements, costs, and emissions of the various

service providers. In addition to the traditional cost parameters like fixed costs, variable

costs, and transportation costs, the LCLP estimates the greenhouse gas emissions factor

per unit of the product at all possible nodes and transportation modes. The LCLP handles

the carbon emissions at two levels:

(i) An upper bound on the total emissions for the entire demand is targeted.

(ii) Carbon taxes or trading for the subsidiaries .

The target is for the carbon labeling to declare the per product carbon footprint.

It includes carbon emissions from suppliers and shipping. If costs of operation and

production favor the choice of developing companies (that have no carbon tax or

emissions cap), the will factor in the emissions thus balancing both cost and

emissions. The carbon pricing also allows internal carbon offsetting between the different

facilities of the supply chain in terms of both emissions and costs. The data required for

the design are summarized as follows:

, Fixed cost of opening facility or supplier

development cost of

, Per unit purchasing cost from supplier or production/



processing cost at facility

, Supply capacity

, Facility capacity

, Demand

, Shipping cost for transport alternative from node to

node

, Cap on allowable emissions under cap and trade scheme

for facility (= 0, for carbon tax)

, Carbon price under cap and trade scheme for trading from

facility or carbon tax

, Greenhouse gases emissions factor per product (raw

material/sub-assembly/semi-finished/finished/storage) at

, Greenhouse gases emissions factor per product for

shipping using transport alternative from node to

Upper bound on greenhouse gases emissions factor per

product across the entire supply chain

For brevity, we denote all the quantity processed at all nodes ( , , ) in the

equivalent units of the demand ( ). For example, if two units of a component are

required in the final product then the two components are counted as one unit. This can

be obtained using the bill of materials. The is the deterministic value for carbon tax,

but for cap and trade scheme, it is a deterministic estimate (like expectation) of the

volatile carbon price.

Decision Variables

The decision variables in the design problem are selection of suppliers, the procurement

quantity from the selected suppliers, selection of facilities, production quantity at the

facilities, and shipping volume between the selected suppliers and facilities.

, , if facility is open or supplier is

chosen;

, otherwise.

, Number of units of the product equivalent procured from

supplier or processed at facility

, Number of units of product equivalent shipped from node

to node using the transportation alternative

Optimization Model

We present below the mixed integer linear programming formulation for the optimization

problem. The objective of the optimization problem is to minimize the total cost of

procurement, production, transportation, and carbon costs.



(1)

subject to

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

(10)

The objective function (1) includes the fixed cost, variables cost, shipping cost and also

the carbon costs. Note that the term for carbon costs allows negative values (decrease in

cost) for cap and trade schemes when the facility does not utilize all the allowances. This

excess quantity can essentially be traded in the market. The demand (for ) and supply

(for ) constraints are given in (2) and (3), respectively. Constraints (4) and (5) impose

the flow constraints at each node and also determine the production quantity. The

traditional constraint of imposing zero production for closed facility and capacity

constraint for open facility is given by (6). The supply chain wide upper bound on

emissions, including the emissions from suppliers and due to transportation, is given by

(7). The problem can be solved using commercial optimization solvers like CPLEX. One

can also create scenarios and perform if-then analysis by considering different values for

and its effect on the overall cost.

6. Conclusions

In this work, we introduced the notion of low carbon logistics provider (LCLP), who can

synthesize the various emissions mitigation approaches and mechanisms in the design of

low carbon supply chains. LCLP essentially acts as an orchestrator that creates value

through an alliance of supply chain competencies, by exploiting information flows and

goods flows in the supply chain to optimize costs and carbon emissions. We also

illustrated the capability of the LCLP in designing green supply chains with a mixed



integer linear programming model. The model used the various emissions reduction

mechanisms:

Supply chain coordination;

Substitution of inputs;

Carbon awareness (by using carbon footprint as a constraint);

Carbon pricing (carbon tax and carbon markets);

The proposed LCLP concept can be extended to other sectors like food supply chains

and service industry. There are several perspectives along which this research could be

furthered. For a given vertical, identifying the functionalities (in terms of knowledge and

relationships) of an LCLP is the first and a challenging work. Also, is the design of

infrastructural and information backbone to support an LCLP. Proceeding further, one

can identify and evaluate the potential players in the ecosystem for evolving into an

LCLP. In this work, we illustrated the functionality of LCLP with a design of green

supply chain. There are other decision and coordination problems that LCLP faces at

strategic, tactical, and operational levels:

Carbon trading decisions: Whether to sell the extra allowance in market or bank

them for future? Should the additional carbon be bought or offset by investing in

a project based activity in a developing country?

Carbon footprint tradeoffs: The effect of carbon footprint on brand, price, and

ultimately the demand of the product.

Network updating and restructuring: The primary assets of LCLP as

orchestrator are knowledge and relationships, which needs continual updating

and restructuring. The network of service providers needs to be – expanded,

pruned, and repositioned – according to the market conditions and emissions

standards. Analytics are required to assist the LCLP in determining which

service provider to upgrade, which emission technology to invest in, the exit and

entry options in terms of geography, etc.

References

Aankhen Inc., “Carbon footprint reduction by Aankhen Inc.,” Supply & demand Chain

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