Supply chain analysis under green sensitive consumer demand and cost sharing contract

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Abstract

In this paper, we explore supply chain coordination issues arising out of green supply chain initiatives and explore the impact of cost sharing contract on the key decisions of supply chain players undertaking green initiatives. Our motivation comes from firms conducting pioneering work in the area of carbon footprint reduction in their supply chains through product redesign. Through a game theoretic approach we show how product greening levels, prices and profits are influenced by cost sharing contract within the supply chains. We study two models of cost sharing – one in which the retailer offers a cost sharing contract and the other in which the retailer and manufacturer bargain on the cost sharing contract. We also study the impact of greening costs and consumer sensitivity towards green products. Our key contribution lies in modelling cost sharing contract and analysing its impact on a green supply chain. Our study contributes to the burgeoning field of green supply chains and collaboration between channel partners.

Introduction

While the increasing complexity of supply chains globally, have led most organizations fretting and working towards solving supply chain issues; the growing concerns on the environmental impact of supply chains have added another dimension to this complexity. This has resulted in unique challenges in areas of inventory management, product lifecycle decisions, carbon footprint measurement, reverse logistics systems design, conflict between channel partners and coordination issues among other areas (Klassen and McLaughlin, 1996, O׳Brien, 1999, Sroufe, 2003, Corbett and Klassen, 2006, Kumar and Putnam, 2008, Ghosh and Shah, 2012, Swami and Shah, 2013). In this paper, we study supply chain coordination issues arising out of green supply chain initiatives and explore the impact of cost sharing contract on key decisions of supply chain players undertaking green initiatives.

Our problem is particularly motivated by the initiatives of giant retailer; Walmart which over the last several years has strived hard to sell products that sustain Walmart׳s resources and the environment (Plambeck, 2007). The retailer has invested heavily into procurement of organic cotton from its suppliers in order to introduce organic cotton clothing through its stores (Plambeck, 2007). Walmart mandates its suppliers to participate in carbon disclosure projects and largely sources from suppliers who have undergone requisite environmental certifications. There are several benefits out of these initiatives. In addition to improvement in brand image, Walmart also receives a price premium for its range of green products from its customers; organic cotton clothing being one such example (Plambeck and Denend, 2011). Thus, in order to take advantage of the green conscious consumer market, Walmart has actively worked with its suppliers to initiate green product and process changes. The impact of green sensitive consumer demand on supply chain players and collaboration between them provides an interesting area of study. These aspects are captured in our model.

In another example, one of the largest technological manufacturers of the world, Dell has set an ambitious target of 40% absolute emission reduction by 2015 based on 2007 levels. Dell realized that to achieve this; it has to increasingly collaborate with its suppliers who are an integral part of Dell׳s supply chain. By 2009, eighty percent of Dell׳s suppliers met its environmental requirements and had also been mandated by Dell to participate in Carbon Disclosure project (a first of its kind initiative to measure and disclose carbon emissions of leading global organizations). Dell׳s collaboration with its suppliers to reduce carbon footprint of its supply chain and bring in greener products into the market is an important consideration in our model (Carbon Disclosure Project Supply Chain Report, 2011). World׳s largest beverage company Coca-Cola has made significant efforts in measuring and reducing its carbon footprints. In emerging economies like India, Coca-Cola has tied up with third party recyclers for processing and recycling PET bottle wastes. The firm is innovatively leveraging the network of rag pickers for collection of waste bottles while incentivizing them through monetary pay outs, leading to a first of its kind incentive mechanism for recycling bottle wastes (www.articles.economictimes.indiatimes.com).

While such efforts of large players in supply chain greening and reduction of carbon footprints are laudable, widespread efforts in restructuring supply chains for greening have been less in number. The primary reason cited is the cost of going green. For many firms, while quick and easy improvements in the processes have been achieved (capturing the low-hanging fruits first), subsequent changes have been costlier and more difficult to achieve (Walley and Whitehead, 1994). Additionally, large players often require their suppliers to undertake green initiatives, but the cost burden falls upon the suppliers making it challenging for them to undertake those initiatives. To overcome this, players like Walmart have adopted innovative supply chain strategies. For example, in case of procurement of organic cotton, Walmart committed to Tier-1 suppliers of procuring organic cotton over a five year period reflecting a long-term sourcing commitment (Plambeck and Denend, 2011). In another example, in order to acquire personal computers that were compliant with the EU Restrictions on Hazardous Substances (RoHS) Directive, Walmart made a commitment to Toshiba to buy 12 week׳s worth of inventory as opposed to its more typical four-week commitment (Plambeck, 2007). Coca-Cola׳s incentive structure to make rag pickers participate in the reverse logistics channel is another example of collaboration between vendors and focal firms.

Section snippets

Problem description

From the above discussion, several interesting observations can be made.

  • (1)

    Green conscious consumer demand and carbon footprint reduction effort by global firms: It is observed that different global firms are actively pursuing environmental friendly activities within their supply chains. Studies have outlined numerous factors which drive firms towards greening. Some of them are environmental regulations, brand value, price premium potential from greening, etc. (Saunders and McGovern, 1993, Hanna

Literature review

In this paper, we review literature spanning across three streams, based on our modelling approach. The first section addresses literature on greening issues in operations management. The review primarily observes the recent analytical work addressing various issues arising out of greening initiatives of firms. The second section discusses work addressing channel coordination in operations management and marketing streams. The third section discusses cooperative bargaining framework as applied

The model

In this section, we first discuss the modelling assumptions and related results for decentralized and integrated channels in order to motivate cost sharing contract framework and analysis. We assume that the demand (q) faced by the supply chain players is a linear function of retail price ‘p’ and product greening improvement level ‘θ ’, where θ is a continuous variable. The demand function is given asq=abp+αθwherea>bp,α,b>0In this equation,

a=the total market potential
b=the price sensitivity

Numerical analysis

In this section, we present numerical analysis to explain some of the results obtained above. The following values were assumed: a=1000,b=50,c=6,α=40. The value of I was varied from 9 to 21, a range derived from the condition α2/(4b)I((5+33)/16)(α2/b). This ensures that we work within the feasible region. We study the impact of greening cost on the decisions variables and compare and contrast the various values. Following this, we illustrate the impact of consumer sensitivity to greening on

Conclusion

Pioneering efforts of firms to undertake carbon footprint measurement and bring about changes in products and processes are being increasingly studied globally. While these efforts have yielded results, there is a need for clear understanding of impact of green initiatives on firms and supply chains. The current study focuses on an important aspect, namely, cost sharing contracts in the context of green supply chains. The study aims to explain why players in a green supply chain enter into cost

Acknowledgments

The authors are thankful to the Editor and anonymous referees for their valuable suggestions which helped improve the paper. A part of this research was supported by the EADS-SMI Chair for Sourcing and Supply Management at Indian Institute of Management, Bangalore.

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