Vendor Managed Inventory Coordination Under Contractual Storage Agreement and Carbon Regulation Policies

In essence, the extent of collaboration among supply chain (SC) members, via practical mechanisms such as Vendor Managed Inventory (VMI), shall look beyond economic gains to strive for curbing the environmental impact of their logistics activities. This aligns well with the recently imposed sustainability related targets set by many legislative authorities. In this paper, we address a realistic SC problem wherein a single vendor serves multiple retailers under a VMI partnership. In order to deter the vendor from shipping larger batches downstream, the contractual agreement stipulates an upper limit on the inventory level held at each retailer’s location where the vendor is penalized upon exceeding this level. In this context, economic and environmental as well as combined models are developed, with the latter employing carbon cap and carbon tax policies. Upon exploiting the structure of the developed models, computationally-efficient exact solution algorithms are devised. The conducted numerical analysis suggest that minor operational adjustments could lead to substantial carbon footprint reduction at the expense of a slight increase in the operational cost. Based on a novel use of the Lagrange multiplier, this work provides decision makers with a useful tool that aids with the selection of the most-suited carbon policy to embrace.