Inventory placement with carbon cap-and-trade in guaranteed service supply chains

In this paper, we explore the impact of carbon trading on the safety stock placement optimization in multi-echelon supply chains. The carbon emission in each stage of the supply chain is measured through a function of the service time quoted by the stage as a key variable. Adopting the guaranteed service time modelling framework, we develop a safety stock placement model under the carbon cap-and-trade policy to study the complex trade-off among the carbon cap, the carbon price, and the service time. Based on the different relationship between the unit purchasing and selling carbon prices, we derive the tractable formulations of the proposed model using successive mixed-integer programming approximations. A series of observations through the model implementation on a real-world chain data from Willems (2008) are summarized to understand how the carbon cap and price can affect a firm’s safety stock placement and carbon emissions.