Low-carbon supply chain coordination through dual contracts considering pareto-efficiency

ABSTRACT

Considering the growing green awareness and increasingly stringent emission regulations, heavy-emitting supply chains are required to re-schedule their operations for environmental responsibility. Although coordination helps the supply chains overcome the decentralised disadvantages to achieve desirable profits, literature considering option contracts under emission constraints, especially combining warehousing contracts, remains scarce. This paper fills this research gap with the novelty in the dual-contract-coordinated decision analysis for achieving profit maximum and emission reduction targets considering customers’ green awareness through option and warehousing contracts, based on the originality of using the Lagrange-Stackelberg optimisation method, which overcomes the difficulty in expressing the first-mover’s decisions and simplifies the problem-solving process. Analytical and numerical results show that Pareto-efficient coordination can be fully achieved by the option contract if the warehousing contract ensures the same inventory costs before and after coordination. Otherwise, partial coordination also raises insiders’ profitability only through the option contract. Purchasing extra emissions with green investment is the best in most cases. The contract-maker should deliberate its contract settings including the option and wholesale prices, as well as warehousing, to develop Pareto-efficient coordination. Sustainability comes at a cost, but coordination raises profitability and emission mitigation in a well-built ETS market.

KEYWORDS:

• SDG 17
• partnerships for the goals
• low-carbon supply chain
• pareto-efficient coordination
• dual contracts

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

Data available within the article or its supplementary materials.

Additional information

Funding

The authors would like to acknowledge partial financial supports from funding sources, including HKSAR RGC TRS Project (T32-707-22-N), the 2019 Guangdong Special Support Talent Program – Innovation and Entrepreneurship Leading Team (2019BT02S593), 2018 Guangzhou Leading Innovation TeamProgram (201909010006).

Notes on contributors

Shuyi Wang

Shuyi Wang is a Lecturer at Department of Management Science and Engineering, University of Science and Technology Beijing. She received the B. Eng. Mgt from Beijing Jiaotong University; and PhD in Industrial and Manufacturing Systems Engineering from The University of Hong Kong. Since 2020, she has been a Post-doc Fellow at the Department of Industrial and Manufacturing Systems Engineering at the University of Hong Kong, and then she joined School of Economics & Management USTB, in 2023. Her research interests are supply chain, sustainability, digital twins, and operations strategy.

S.H. Choi

S.H. Choi obtained both his B.Sc. and Ph.D. degrees at the University of Birmingham. Prior to joining the University of Hong Kong, Dr. Choi had worked in computer industry as a CADCAM consultant. His current research interests include rapid prototyping and virtual manufacturing, RFID, and advanced manufacturing systems.

Jianhua Xiao

Jianhua Xiao received the Ph.D. degree in system engineering from the Huazhong University of Science and Technology, China, in 2008. He is currently a Professor with the Research Centre of Logistics, Nankai University, Tianjin, China. His current research interests include combinatorial optimisation, bio-inspired computation, and logistics system optimisation.

George Q. Huang

George Q. Huang is Chair Professor of Smart Manufacturing at Department of Industrial and Systems Engineering, The Hong Kong Polytechnic University. He gained BEng and PhD in Mechanical Engineering from Southeast University (China) and Cardiff University (UK) respectively. He has conducted research projects in areas of Smart Manufacturing, Logistics, and Construction Systems Analytics through IoT-enabled Cyber-Physical Internet with substantial government and industrial grants exceeding HK$120M. He collaborated closely with industries through joint projects and start-up companies. He has published extensively and his works have been widely cited by research communities. He serves as associate editors and editorial members for several international journals. He is Chartered Engineer (CEng), Fellow of IEEE, IISE, ASME, CILT, HKIE, and IET.